Educational Development Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended February 28, 2017, compared with the year ended February 29, 2016. The filing also reports fourth-quarter results; this is an annual filing, not a standalone quarterly report. EDC distributes Usborne children’s books in the U.S. and owns Kane Miller Book Publishers. Its two channels are Usborne Books & More (UBAM), direct sales through independent consultants, and EDC Publishing, wholesale sales to retailers.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net revenue | $106.6 million | $63.6 million | +$43.0 million, about 67.6% |
| Gross margin | $78.0 million; 73.2% | $43.1 million; 67.8% | Margin +5.4 percentage points |
| Operating expenses | $74.1 million | $39.8 million | +$34.3 million |
| Earnings before income taxes | $4.6 million | $3.5 million | +$1.1 million |
| Net earnings / diluted EPS | $2.9 million / $0.70 | $2.1 million / $0.52 | Net earnings +35.0% |
| Operating cash flow | $(1.6) million | $6.7 million | Decreased $8.2 million |
| Capital expenditures | $2.5 million | $24.9 million | Lower; FY2016 included facility investment |
| Cash at year-end | $0.7 million | $1.2 million | Decreased $0.5 million |
Net margin was 2.7%, versus 3.3% in FY2016. Interest expense rose to $1.03 million from $0.24 million. Income tax expense was $1.75 million, with a 38.0% effective tax rate.
Segments and material changes
- UBAM: Net revenue increased to $97.6 million from $52.8 million; it represented 92% of company revenue, versus 83%. Gross sales rose 84%. Active consultants increased 32% to 25,800 at year-end, and order count rose 111%; average sales per order fell 20%, partly reflecting a shift from larger home parties to individual online orders. Segment earnings before tax increased to $15.4 million from $7.3 million.
- EDC Publishing: Net revenue declined 16.8% to $9.0 million. Management attributed the decline largely to retail order cancellations during the fall selling season after shipping lead times lengthened amid UBAM growth. Segment earnings before tax fell to $2.6 million from $3.3 million.
- Inventory more than doubled to $34.4 million current and noncurrent, from $17.6 million. The $16.8 million inventory increase was the main operating cash-flow burden; management cited growth needs and three-to-four-month product lead times.
- Gross margin improved, but selling and operating costs and commissions increased substantially with growth. Operating and selling expenses rose to $35.4 million from $19.4 million; commissions rose to $34.0 million from $18.1 million.
Liquidity, debt, and capital allocation
- Current assets were $39.0 million and current liabilities $30.1 million at year-end, for a current ratio of approximately 1.30. Cash was $0.7 million, while accounts payable was $17.6 million.
- Total reported borrowings—revolving credit plus current and long-term term debt—were approximately $27.4 million, versus $21.9 million a year earlier. The $7.0 million revolving facility had $4.9 million drawn and $2.1 million available at year-end.
- EDC increased its revolving line from $4.0 million to $7.0 million and added a $4.0 million term loan during FY2017 to support working-capital needs. Loan agreements include financial-ratio requirements and restrictions on debt, capital expenditures, distributions, and other actions; the filing says the agreement suspends dividends and stock buybacks.
- Financing cash flow was $3.6 million, including $4.0 million in term-loan proceeds and $1.6 million in net revolving borrowings. The company announced on February 16, 2017 that it was suspending dividends to fund growth.
Outlook, risks, contingencies, and unusual items
- The filing gives no numerical revenue or earnings guidance. Management emphasized consultant recruitment and retention, inventory availability, timely order fulfillment, and working-capital financing as important to performance.
- In the fourth quarter, EDC abandoned a third-party-developed direct-sales order system after concluding it did not meet program needs, and recorded a $1.1 million impairment. Consultants reverted to the company’s proprietary web-based system.
- Shipping delays contributed to lost EDC Publishing orders and highlight execution risk as UBAM scales. Other stated risks include competition, supplier availability and long lead times, recruiting and retaining consultants, and access to adequate financing.
- Purchases are concentrated with Usborne, the company’s largest supplier: FY2017 purchases were approximately $34.8 million, and year-end payable to Usborne was $13.9 million. Outstanding inventory purchase commitments were approximately $6.0 million, due in FY2018.
- Management reported that disclosure controls and internal control over financial reporting were effective at year-end. It also disclosed a material weakness identified in the third quarter and said it implemented additional monthly review and reconciliation controls over deferred revenue and cash. The auditor did not provide an attestation on internal control.
- No material pending legal proceedings or subsequent events were reported. The company owns its Tulsa facilities and leases a portion of one building to a third party; future minimum rental income under that lease was $20.4 million.
Important facts for investors to verify
- Reconcile the dividend disclosures: Item 5 says quarterly dividends totaled $0.36 per share in FY2017, while the earnings statement reports $0.27 per share. Confirm the amounts and timing, including the dividend suspension and lender restrictions.
- Assess whether inventory growth, supplier payments, and the consultant-led sales expansion can be funded without renewed negative operating cash flow or greater borrowing.
- Review the revolving facility’s June 15, 2017 expiration, covenant compliance and subsequent refinancing or amendments; the filing provides year-end capacity but not later outcomes.
- Track fulfillment performance and EDC Publishing order trends, and confirm that the replacement consultant order system operates effectively after the impairment.
- Reconcile FY2017 cash dividends paid of $1.47 million in the cash-flow statement with the $1.10 million shown as dividends paid in the shareholders’ equity statement; clarify the period and classification differences.