Business Context and Reporting Period
Company: FranklinCovey Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 31, 2010
Business Overview: FranklinCovey is a global provider of execution, leadership, and personal-effectiveness training. Following the sale of its Consumer Solutions Business Unit (CSBU) in fiscal 2008, the company operates as a single segment focused on training, consulting, and assessment services for organizational clients. The company also sold the product sales component of its Japanese subsidiary in fiscal 2010, which is now reported as discontinued operations.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Net Sales | $136.9 million | $123.1 million | +11% |
| Gross Profit | $89.1 million | $77.9 million | +14% |
| Gross Margin | 65.1% | 63.2% | +1.9 pts |
| Income from Operations | $4.0 million | ($11.8 million) | Improvement |
| Net Income (Loss) | ($0.5 million) | ($10.8 million) | Improvement |
| Cash and Equivalents | $3.5 million | $1.7 million | +106% |
| Working Capital | $4.6 million | ($3.2 million) | Positive Turnaround |
| Line of Credit Outstanding | $9.5 million | $12.9 million | Reduced |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 11% to $136.9 million, driven by a 13% increase in training and consulting services. Growth was broad-based across U.S. regional offices, government services, and international licensees, partially offset by a decline in Japan due to economic conditions and the non-repetition of a specific intellectual property sale.
- Profitability Recovery: The company returned to operating profitability ($4.0 million) compared to an operating loss of $11.8 million in 2009. This was achieved through increased sales, improved gross margins, and a significant reduction in operating costs.
- Cost Reductions: Operating costs decreased by $4.7 million year-over-year. This included a $3.6 million decrease in impaired asset charges (none in 2010 vs. $3.6 million in 2009) and a $2.0 million decrease in restructuring costs.
- Discontinued Operations: The sale of the Japan product sales component generated a pre-tax gain of $1.1 million. Results for this division are presented as discontinued operations.
- Effective Tax Rate: The effective tax rate on continuing operations was approximately 210% due to foreign withholding taxes and disallowed executive compensation, though cash tax payments were lower due to net operating loss carryforwards.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management expects improved financial results in fiscal 2011, citing stabilized economic conditions and a pipeline of booked days and awarded revenue that is approximately $11.5 million higher than the prior year. The company anticipates spending approximately $1.0 million on property/equipment and $2.9 million on curriculum development in fiscal 2011.
Key Risks and Contingencies:
- Liquidity and Debt: The company's $13.5 million line of credit matures in March 2011. While management believes renewal is likely, failure to secure it would require aggressive cost-cutting measures (e.g., salary reductions, deferred capital purchases) to pay down the balance.
- Franklin Covey Products (FCP) Exposure: The company retains a 19% interest in FCP (the buyer of the CSBU) and is secondarily liable for retail store leases. FCP's financial position has deteriorated, leading to a $3.6 million impairment charge in 2009 on a promissory note. There is a risk FCP may default on lease obligations or fail to reimburse operating costs.
- Legal Proceedings: The company is a defendant in a breach of contract lawsuit filed by Moore Wallace North America against FCP, alleging alter ego liability. Potential liability is currently not estimable.
- Asset Impairment: The company holds significant intangible assets ($65.2 million) and goodwill. Future declines in cash flows or stock price could trigger impairment charges.
Investor Verification Checklist
- Credit Facility Renewal: Verify the status of the line of credit renewal prior to the March 2011 maturity date.
- Franklin Covey Products Solvency: Monitor the financial health of FCP regarding its ability to pay the promissory note and fulfill retail lease obligations.
- Government Contract Sustainability: Assess the long-term impact of the new government services contract awarded in Q4 2010 on future revenue stability.
- Japan Operations: Review the performance of the remaining Japanese training operations post-product division sale.
- Intangible Asset Valuation: Evaluate the assumptions used for goodwill and indefinite-lived intangible asset impairment testing given the company's historical volatility.