Franklin Covey Co. — Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2014; the filing also reports fourth-quarter results. Amounts are in U.S. dollars.
Business context
Franklin Covey provides performance-improvement training, consulting, content, and related products to organizations and individuals. It operates as one business segment, with direct operations in the U.S./Canada, Australia, Japan, and the U.K., and licensees in more than 165 countries and territories. Fiscal 2014 sales were $205.2 million; no customer accounted for more than 10% of revenue.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $205.2 million | $190.9 million |
| Gross profit / margin | $138.3 million / 67.4% | $129.0 million / 67.6% |
| Operating income / margin | $24.8 million / 12.1% | $21.6 million / 11.3% |
| Net income | $18.1 million | $14.3 million |
| Diluted EPS | $1.07 | $0.80 |
| Cash from operating activities | $18.1 million | $15.5 million |
| Cash and cash equivalents at year-end | $10.5 million | $12.3 million |
| Net working capital | $50.1 million | $38.2 million |
Revenue rose 7%; training and consulting services, 94% of sales, grew 8%. Operating expenses increased 6% to $113.5 million, largely reflecting sales-force investment, higher commissions and marketing, the full-year inclusion of NinetyFive 5, and higher amortization. The effective tax rate fell to approximately 17% from 26%, principally due to a $4.2 million benefit from claiming foreign tax credits for prior years. Management expects the rate to be closer to statutory rates in fiscal 2015 and beyond.
Investing activities used $17.4 million, including $7.8 million for capitalized curriculum development, $6.2 million for acquisitions, and $3.5 million for property and equipment. Financing activities used $2.4 million. The company had no revolving-credit borrowings at year-end and had $10.0 million available under its facility, which matures in March 2016. Long-term obligations were $36.9 million, primarily the $27.4 million corporate-campus financing obligation; this is distinct from revolving debt. The company reported total liabilities of $78.5 million.
Fourth-quarter sales were $68.1 million, up 11% from $61.6 million a year earlier; quarterly net income was $12.5 million versus $7.7 million. The filing notes that the fourth quarter is typically the strongest due to Education activity and facilitator sales.
Material changes and notable items
- National account practice sales grew 31%, led by Education, Sales Performance, and Customer Loyalty. Education revenue increased 27%; more than 1,900 schools were using The Leader in Me program, compared with more than 1,500 a year earlier.
- International licensee revenue rose 10%; international direct revenue fell 3%, including a $1.8 million adverse foreign-exchange effect on Japan sales. U.S./Canada direct sales increased 2%, partly offset by lower government-services revenue due to contract-renewal timing.
- The re-created 7 Habits Signature Program launched during the year and was a major driver of sales growth. The company acquired Red Tree for approximately $0.5 million and completed payments relating to CoveyLink and NinetyFive 5.
- Operating cash flow improved, but cash declined by $1.8 million as investing and financing outflows exceeded operating inflows. Accounts receivable increased $9.5 million, mainly with higher fourth-quarter sales.
- The company recorded a $0.4 million impairment charge related to receivables from FC Organizational Products (FCOP), in addition to a $0.6 million discount adjustment. FCOP-related receivables totaled $6.1 million, net of discounts, at year-end; collection depends on FCOP’s future cash flows.
- The $1.6 million reduction in the estimated NinetyFive 5 earn-out liability reduced SG&A expense. The liability was $2.5 million at year-end; total potential earn-out payments may reach $8.5 million.
Outlook, risks, and contingencies
Management described the U.S./Canada sales pipeline and fiscal 2015 growth outlook as encouraging, and expects continued growth in Education and benefits from refreshed content and sales-force expansion. These are expectations, not guaranteed guidance. Fiscal 2015 planned spending includes approximately $5.0 million for capitalized curriculum, $3.8 million for property and equipment, and $4.3 million of depreciation; a planned ERP replacement could raise capital spending.
Key risks include competition and client training-budget sensitivity; hiring and productivity of sales personnel; seasonality; currency movements; government-contract renewal and funding; client collection risk; and the ability to protect intellectual property and deliver services reliably. FCOP collectability, contingent acquisition payments, potential impairment of goodwill and intangible assets, tax exposures, and compliance with credit-facility covenants are also relevant. The company disclosed $3.5 million of unrecognized tax benefits for which payment timing could not be reliably estimated. Routine legal matters were not expected to materially affect results. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
The company paid no dividends in fiscal 2014 or 2013. It stated that available funds would be retained for obligations, growth, and potential share repurchases. A separate $10.0 million repurchase authorization had $9.225 million remaining at year-end; repurchases under that plan were subject to cash and credit-facility conditions.
Important facts for investors to verify
- Whether fiscal 2015 revenue growth is sustained, particularly in national accounts and Education, and whether the fourth-quarter seasonal pattern masks weaker underlying demand.
- Collection and valuation of FCOP receivables, including the effect of subsequent FCOP sales and cash-flow performance.
- The durability of earnings excluding the $4.2 million prior-year foreign-tax-credit benefit and the $1.6 million earn-out liability reduction.
- Receivables growth, cash conversion, and planned curriculum, ERP, acquisition, and other capital spending.
- Renewal of the revolving credit facility before its March 2016 maturity, covenant compliance, and total fixed campus-lease obligations.
- Progress of the 7 Habits relaunch, Education program adoption, and integration/performance of acquisitions, including contingent earn-out outcomes.