Franklin Covey Co. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017; fourth-quarter results are also summarized. Franklin Covey provides organizational performance training, consulting, content and related products through direct offices, education offerings and international licensees.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $185.3 million | $200.1 million |
| Gross profit / margin | $122.7 million / 66.2% | $135.2 million / 67.6% |
| Operating income (loss) | $(8.9) million | $13.8 million |
| Pre-tax income (loss) | $(10.9) million | $11.9 million |
| Net income (loss) | $(7.2) million | $7.0 million |
| Diluted EPS | $(0.52) | $0.47 |
| Cash from operating activities | $17.4 million | $32.7 million |
- Fourth-quarter sales were $59.5 million, versus $64.8 million in the prior-year quarter; fourth-quarter FY2017 operating income was $7.5 million.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $7.7 million, down from $26.9 million.
- Cash and cash equivalents were $8.9 million at year-end, including $7.3 million held abroad. Net working capital was $11.2 million, compared with $35.7 million a year earlier.
- Bank borrowings comprised $19.1 million of term loans and $4.4 million outstanding on the revolving line. The company reported $25.6 million of remaining credit availability. Separately, its corporate-campus financing obligation was $22.9 million.
- Current assets were $91.8 million and current liabilities were $80.6 million. Total liabilities were $125.7 million; shareholders’ equity was $85.1 million.
Material changes and unusual items
- Reported sales fell 7% year over year. Management attributed much of the decline to the transition toward the All Access Pass (AAP): substantially all new AAP contract revenue is deferred and recognized over the contract term. AAP and add-on amounts invoiced rose to $63.1 million from $23.2 million in FY2016.
- Deferred revenue on the balance sheet increased $20.7 million to $41.5 million. The company also disclosed $16.5 million of contracted, unbilled multi-year AAP revenue, excluded from the balance sheet.
- Education sales increased 8% to $44.1 million; Strategic Markets fell 23% to $23.0 million. Direct Offices sales declined 7% to $96.7 million, while International Licensees declined 21% to $13.6 million.
- Gross margin was 66.2%, or 67.4% excluding the $2.1 million inventory write-off associated with exiting Japan’s publishing business.
- Operating expenses increased $10.2 million, including higher sales, China-office, software and AAP investment costs, $1.5 million of contract termination expense and $1.5 million of restructuring expense. The company also recorded a $1.9 million reduction in contingent consideration expense related to an earlier acquisition.
- Investing cash outflow was $21.7 million, including $7.2 million for property and equipment, $6.5 million for curriculum development, $7.3 million for acquisitions and $0.8 million for intellectual-property license rights. Financing cash flow was positive $3.1 million.
Outlook, commentary and risks
- Management described FY2018 as a potential financial inflection point, expecting results to improve as previously deferred AAP sales are recognized, renewals continue and new clients are added. This is an expectation, not quantified earnings guidance.
- The upgraded AAP portal and additional language versions, along with a new ERP system, were expected to launch or be completed in FY2018. Management estimated FY2018 property-and-equipment purchases of about $5.0 million, curriculum development spending of about $6.4 million, depreciation of about $5.5 million and intangible amortization of about $5.4 million.
- RGP, a coaching firm, and Jhana Education, a digital learning-content business, were acquired in FY2017. Management expects their offerings to support consulting and AAP growth. Three China sales offices opened during the year; management reported $11.0 million in sales from them.
- Key risks include execution and market acceptance of the AAP transition, longer sales cycles and revenue deferral, cybersecurity and data-protection exposure, intense competition, client training-budget sensitivity, foreign-exchange and international operating risks, and the ability to retain personnel and collect receivables. Failure to meet credit-facility covenants could permit acceleration of amounts owed.
- The company reported compliance with its credit covenants at August 31, 2017. Routine legal matters were not expected to materially affect its financial position, liquidity or results. Management and the auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Track AAP bookings, renewals, deferred revenue recognition and the difference between invoiced, unbilled and reported revenue.
- Assess whether the FY2018 portal, ERP and language launches occur on schedule and whether AAP demand supports management’s expected improvement.
- Monitor operating cash flow, working capital, debt balances, available revolving credit and covenant compliance as the company funds its investment program.
- Evaluate the performance and contingent-payment obligations of RGP and Jhana, and the sales trajectory of the Education and China operations.
- Review the impact of the Japan publishing exit and restructuring, as well as future margins and costs during the business-model transition.