Business Context and Reporting Period
Company: FranklinCovey Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 31, 2009
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 organizational training, consulting, and assessment services. The company serves over 4,100 organizational clients in North America and operates globally through direct offices and licensee partners.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Net Sales | $130.1 million | $259.2 million | (50%) |
| Gross Profit | $80.4 million | $161.0 million | (50%) |
| Gross Margin | 61.8% | 62.1% | -0.3 pts |
| Operating Income (Loss) | $(11.4) million | $16.0 million | N/A |
| Net Income (Loss) | $(10.8) million | $5.5 million | N/A |
| Cash and Equivalents | $1.7 million | $15.9 million | (89%) |
| Working Capital | $(3.2) million | $5.3 million | Deficit |
| Line of Credit Outstanding | $12.9 million | $0 | New |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated sales dropped 50% primarily due to the sale of the CSBU (which accounted for $107.2 million of the decline) and a 15% decline in the remaining Organizational Solutions Business Unit (OSBU) driven by the global economic downturn.
- Operating Loss: The company reported an operating loss of $11.4 million compared to income of $16.0 million in the prior year. This shift was driven by lower sales, restructuring costs of $2.0 million, and a $3.6 million impairment charge on a promissory note receivable from Franklin Covey Products, LLC.
- Liquidity Position: Cash balances decreased significantly to $1.7 million. The company utilized proceeds from the CSBU sale to fund a $28.2 million tender offer for its own stock, which was paid in fiscal 2009. Net working capital turned negative.
- Cost Reductions: Selling, General, and Administrative (SG&A) expenses decreased by $63.4 million, largely due to the elimination of CSBU costs and reduced variable compensation.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued improvement in corporate spending in fiscal 2010 but does not expect a return to pre-recession sales levels until fiscal 2011 or later.
- Liquidity Risks: The company faces significant liquidity constraints. It is currently in negotiations to renew its line of credit, which expires in March 2010. A third modification to the credit agreement was obtained in November 2009 to relax financial covenants, though at a higher interest rate (LIBOR + 3.5%).
- Contingencies: The company recorded a $3.6 million impairment on a note receivable from Franklin Covey Products due to the buyer's deteriorating financial position. There is a risk that remaining receivables from this entity ($2.0 million) may not be collected.
- Key Risks: Risks include the inability to secure additional financing, further declines in client training budgets due to economic conditions, and the potential for additional asset impairments if cash flows decline further.
Investor Verification Checklist
- Debt Covenants: Verify the status of the line of credit renewal and compliance with the modified financial covenants (funded debt-to-earnings and fixed charge coverage ratios).
- Receivables Collectibility: Assess the likelihood of collecting the remaining $2.0 million receivable from Franklin Covey Products, LLC, given the prior impairment.
- Cash Burn Rate: Monitor operating cash flows and the ability to maintain operations with only $1.7 million in cash and a negative working capital position.
- Restructuring Progress: Track the completion of the restructuring plan and the realization of anticipated cost savings in fiscal 2010.
- Asset Impairment: Review the valuation of intangible assets (specifically the Covey trade name) and goodwill, as further declines in sales or stock price could trigger additional impairment charges.