Franklin Covey Co. — FY2015 Form 10-K
Reporting period: Fiscal year ended August 31, 2015. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Franklin Covey is a global performance-improvement company selling training, consulting, educational programs, related products, and leasing services. It serves organizations and individuals through direct offices and licensees operating in more than 150 countries and territories. The company reported one operating segment and approximately 810 employees.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net sales | $209.9 | $205.2 | Up 2%; management cited $5.2 million of adverse foreign-exchange impact. |
| Gross profit / margin | $138.1 / 65.8% | $138.3 / 67.4% | Gross profit was nearly flat; margin declined 1.6 percentage points. |
| Operating income / margin | $19.5 / 9.3% | $24.8 / 12.1% | Down 21%. |
| Income before taxes | $17.4 | $21.8 | Down 20%. |
| Income tax provision / effective rate | $6.3 / about 36% | $3.7 / about 17% | FY2014 included a $4.2 million foreign-tax-credit benefit; FY2015 included $0.6 million. |
| Net income / diluted EPS | $11.1 / $0.66 | $18.1 / $1.07 | Net income down 38%; tax-rate comparison was a significant factor. |
| Cash from operations | $26.2 | $18.1 | Up 45%; helped by FCOP collections, a tax refund, and lower inventory. |
| Cash and working capital | $16.2 cash; $55.8 working capital | $10.5 cash; $50.1 working capital | Improved year over year; $10.3 million of cash was held at foreign subsidiaries. |
| Revolver and financing obligation | No revolver borrowings; $26.1 campus financing obligation | No revolver borrowings; $27.4 campus financing obligation | $30 million revolving facility, due March 2018; company reported covenant compliance. |
Fourth-quarter sales were $67.4 million versus $68.1 million a year earlier; operating income was $13.3 million versus $14.3 million, and net income was $7.7 million versus $12.5 million. The fourth quarter is typically the company’s strongest, partly due to Education and facilitator sales.
Training and consulting services generated $198.7 million, up 3%; products generated $6.9 million, down 8%; and leasing generated $4.4 million, up 11%. U.S./Canada direct and national account practices grew, while international direct sales declined 5% as reported, substantially affected by currency translation. Education practice sales increased 8%, and more than 2,500 schools used The Leader in Me program.
Material changes, outlook, and risks
- Operating expenses rose $5.1 million, including higher sales and support staffing costs, $1.3 million of impaired-asset charges, $0.6 million of restructuring costs, and higher depreciation. Impairments included FCOP receivables, discontinued curriculum, prepaid royalties, and an investment in an unconsolidated entity.
- The company realigned U.S./Canada sales regions and closed its northeastern Pennsylvania office. Most of the $0.6 million severance and closure costs were paid by year-end.
- Management described the sales pipeline as strong and its growth outlook as encouraging, but gave no formal numerical FY2016 revenue or earnings guidance. It cautioned that a large federal contract recognized in FY2015 might not be reopened for renewal bids during FY2016, potentially reducing government-services revenue.
- Management expected Education practice sales to continue growing. It forecast approximately $7.0 million of FY2016 property-and-equipment purchases and $4.2 million of capitalized curriculum spending; replacement of the enterprise resource planning system could increase capital spending.
- Management expected future effective tax rates to be closer to statutory rates. Foreign tax credit carryforwards were expected to be used by the end of FY2017; cash taxes could rise thereafter.
- FCOP, in which Franklin Covey owns 19.5%, owed the company $4.0 million net of discount at year-end. Collection depends on FCOP’s future earnings and cash flows. Separately, a contracting partner on a large federal contract had financial difficulties; after year-end, Franklin Covey received $1.8 million and was discussing conversion of the remaining $2.8 million receivable into a three-year note at 5% interest.
- Key risks include competition and client training budgets, foreign-exchange movements, slower collections—especially from government and education clients—pricing and consultant utilization, dependence on key personnel and new offerings, government-contracting exposure, and impairment risk for goodwill and intangible assets. The filing also discusses data-protection and cross-border transfer risks following an October 2015 European court ruling.
- Other notable obligations include a $2.6 million estimated NinetyFive 5 earn-out liability, with payments dependent on performance targets, and $36.9 million of future minimum campus lease payments. The filing identifies no material expected liability from routine legal proceedings. Auditors issued unmodified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether FY2015 revenue growth can continue after the adverse currency impact and the unusually strong prior-year launch of the refreshed 7 Habits program.
- How much FY2016 government-services revenue is exposed to the federal contract that may not be reopened for bids.
- Whether receivables from FCOP and the federal-contracting partner are collected on the revised expected terms, and whether slower collections continue.
- Whether gross margin and operating profitability stabilize after FY2015 declines, added staffing, impairments, and restructuring.
- Whether the company maintains liquidity and compliance with credit covenants while funding repurchases, curriculum investment, and the planned ERP replacement.