Franklin Covey Co. — FY2019 Form 10-K
Business context and reporting period. Franklin Covey provides organizational performance-improvement training, consulting, subscriptions and educational programs. This annual report covers the fiscal year ended August 31, 2019; the fourth quarter ended that date. The Enterprise Division comprises Direct Offices and International Licensees; the Education Division centers on the Leader in Me program.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $225.4 million | $209.8 million |
| Gross profit / margin | $159.3 million / 70.7% | $148.3 million / 70.7% |
| Operating income (loss) | $2.7 million | $(3.4) million |
| Pre-tax income (loss) | $0.6 million | $(5.5) million |
| Net income (loss) / diluted EPS | $(1.0) million / $(0.07) | $(5.9) million / $(0.43) |
| Cash from operating activities | $30.5 million | $16.9 million |
| Cash and cash equivalents at year-end | $27.7 million | $10.2 million |
| Total assets / liabilities | $224.9 million / $142.9 million | $213.9 million / $133.4 million |
- Sales rose 7% reported, or 8% in constant currency; unfavorable foreign exchange reduced sales by about $2.0 million. Subscription and subscription-related revenue grew 23%.
- Direct Offices sales increased 8% to $157.8 million; International Licensees declined 3% to $12.9 million; Education sales increased 8% to $48.9 million.
- Gross margin held at 70.7%. Operating expenses rose $5.0 million, but SG&A declined as a share of revenue to 64.5% from 67.3%.
- The effective tax rate was approximately 273%, reflecting low pre-tax income and tax items including GILTI, nondeductible expenses and foreign tax-rate differences. The $1.6 million tax provision contributed to the net loss despite positive pre-tax income.
- Investing activities used $6.9 million, including $4.2 million of property and equipment purchases and $2.7 million of capitalized curriculum development. Financing activities used $5.9 million.
- Year-end debt included $20.0 million of term notes ($5.0 million current and $15.0 million long-term); there were no revolver borrowings. A separate corporate-campus financing obligation totaled $19.0 million. The company reported $19.9 million of available borrowing capacity under its new facility.
Material changes and unusual items
- FY2019 operating results improved by $6.0 million year over year and operating cash flow increased 81%. Net loss narrowed, but the company remained unprofitable on a GAAP net-income basis.
- Deferred revenue rose to $65.8 million from $52.9 million; unbilled deferred revenue, which is contracted but not recorded on the balance sheet, rose to $29.9 million from $24.5 million. Remaining performance obligations were $88.1 million, approximately 75% expected to be recognized within 12 months.
- ASC 606 adoption in FY2019 reduced opening retained earnings by $3.1 million after tax, primarily due to deferring upfront international license fees. The reported FY2019 net loss was $0.1 million lower than it would have been without adoption.
- The company acquired its former Germany, Switzerland and Austria licensee for $0.2 million cash plus forgiveness of $0.8 million in liabilities, and transitioned the operation to direct ownership. Acquisition-related costs were $0.5 million. It also licensed Multipliers leadership content, with courses expected to launch in fall 2020.
- FY2019 SG&A included a $1.3 million increase in contingent-consideration fair value, primarily associated with prior acquisitions. No goodwill impairment was recorded.
- In August 2019, the company replaced its prior credit agreement with a facility providing up to $25 million of term loans and a $15 million revolving line, maturing in August 2024. It borrowed $20 million to repay prior debt; interest is LIBOR plus 1.85%, and financial covenants apply.
- Fourth-quarter sales were $65.2 million, operating income $8.7 million and net income $5.9 million. Management says Q4 is typically seasonally stronger, partly because of education activity and year-end incentive programs.
Outlook, risks and other disclosures
- No formal FY2020 revenue or earnings guidance is provided in the supplied filing text. Management identifies subscription sales and renewals, expansion of the client-partner sales force, content investment and client loyalty as growth priorities.
- Management estimated FY2020 property-and-equipment spending of approximately $5.8 million, curriculum-development spending of $5.0 million, depreciation of $6.7 million and intangible amortization of $4.6 million. It expected cash, operating cash flow and facility availability to support operations and planned investment.
- Principal risks include competition; execution of the subscription-model transition and contract renewals; technology investment, cybersecurity and data-privacy compliance; economic conditions and client training budgets; foreign-exchange, geopolitical and regulatory exposure; staffing and retention; and debt covenant, refinancing and liquidity risks.
- Contractual obligations totaled an estimated $55.9 million, including corporate-campus lease payments, bank term-loan payments, acquisition contingent consideration, operating leases and purchase commitments. Legal proceedings were described as routine, with no matter then believed likely to have a material adverse effect.
- Related-party disclosures include royalties and speaking fees paid to Stephen M.R. Covey and a November 2019 transaction involving FC Organizational Products: the company exchanged approximately $3.2 million of receivables, including $2.6 million used to purchase FCOP bank debt, for an amended 30-year license with minimum royalties of approximately $1.3 million annually.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether subscription growth, renewals and deferred-revenue conversion support sustained revenue and operating profitability.
- Whether strong operating cash flow is repeatable and how much reflects deferred-revenue billings, collections and working-capital movements.
- The effect of the unusually high effective tax rate, tax-asset realization and the $1.9 million of uncertain tax positions.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the obligations tied to the headquarters financing arrangement.
- Assumptions underlying contingent consideration, customer receivable allowances, goodwill and intangible-asset valuations.
- Expected royalties and credit exposure related to the FCOP transaction, as well as the terms and implications of other related-party arrangements.