Franklin Covey Co. — FY2013 Form 10-K
Business context and reporting period. Franklin Covey provides organizational performance-improvement training, consulting, content and related products across seven practice areas. This 10-K covers the fiscal year ended August 31, 2013; the fourth fiscal quarter ended August 31, 2013. The company operates directly in the U.S., Canada, Australia, Japan and the U.K., with licensees serving more than 140 other countries and territories.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $190.9 million | $170.5 million |
| Gross profit / margin | $129.0 million / 67.6% | $112.7 million / 66.1% |
| Operating income / margin | $21.6 million / 11.3% | $17.6 million / 10.3% |
| Net income | $14.3 million | $7.8 million |
| Diluted EPS | $0.80 | $0.43 |
| Cash from operations | $15.5 million | $15.6 million |
| Cash and cash equivalents at year-end | $12.3 million | $11.0 million |
| Net working capital | $38.2 million | $27.5 million |
FY2013 sales rose 12%; operating income increased 23% and net income 83%. Gross-margin improvement reflected greater facilitator, intellectual-property-license and international royalty sales. SG&A rose 13%, principally from commissions, bonuses, hiring and marketing investment. Operating cash flow was nearly unchanged as higher earnings were offset by working-capital use, including a $15.2 million increase in accounts receivable.
Fourth-quarter sales were $61.6 million, up 21% year over year and the strongest quarterly sales under the company’s current business model. Fourth-quarter net income was $7.7 million versus $3.4 million in the prior-year quarter. Management notes that Q4 is typically stronger because of Education practice and facilitator sales.
Liquidity, debt and capital allocation
- Current assets were $81.1 million and current liabilities $42.9 million at August 31, 2013. Cash included $3.9 million held by foreign subsidiaries.
- The company repaid its remaining bank term loan in August 2013 and had no bank borrowings outstanding at year-end. A $10.0 million revolving facility, priced at LIBOR plus 2.50%, was extended to March 2016; the company reported covenant compliance.
- Long-term obligations include a $28.5 million corporate-campus financing obligation, with payments extending through 2025. This is separate from bank debt.
- Investing activities used $9.6 million, including $4.2 million for acquisitions and $3.2 million for curriculum development. Financing activities used $3.8 million, including debt principal payments and share repurchases.
- There were no dividends in FY2013 or FY2012. The board’s $10.0 million repurchase authorization had $9.2 million remaining at year-end; purchases are conditioned on cash exceeding $10.0 million and no revolving-credit balance.
Material changes and notable items
- Sales growth was broad-based, led by U.S./Canada operations, up 14%, and national account practices, up 35%. Education revenue increased $9.0 million, or 64%; more than 1,500 schools used The Leader in Me program.
- International reported sales increased 5%, but currency translation reduced reported sales by $3.4 million. Management expected foreign exchange, particularly the Japanese yen, to remain a headwind through December 2014 compared with the prior year.
- Self-funded marketing sales fell 30%, partly because FY2012 book and audio royalty receipts did not recur. Product sales fell 4%.
- The company acquired substantially all assets of NinetyFive 5, LLC, a sales-success training provider, in March 2013. Purchase consideration included $4.2 million cash and possible earnouts up to $8.5 million; the estimated contingent consideration was $4.1 million at year-end and may change with future performance.
- The effective tax rate was approximately 26%, compared with 43% in FY2012, including a $2.4 million benefit from claiming foreign tax credits for prior years. Management expected the FY2014 full-year rate to be lower than statutory combined rates, but estimated approximately 40% for the first three quarters pending the fourth-quarter tax-credit assessment.
Outlook, risks and contingencies
Management said existing cash, operating cash flow and available financing should cover foreseeable operating needs. It expected FY2014 property-and-equipment purchases of approximately $2.3 million and curriculum development spending of $7.0 million, primarily for a revised 7 Habits Signature Program scheduled for release in March 2014. No specific revenue or earnings guidance was provided.
- Government business: Sequestration and delayed renewal of a large government contract reduced FY2013 government-services sales by $2.1 million. A partial FY2014 renewal was subsequently won; further renewal remained uncertain and subject to government operating conditions.
- Related-party exposure: Receivables from FC Organizational Products (FCOP), in which Franklin Covey owns 19.5%, totaled $7.8 million, up from $7.1 million. Collection depends on FCOP’s financial condition; failure to collect could harm cash flow and results.
- Leasing: A significant corporate-campus lease expired in August 2013. Management was seeking new tenants and expected lease revenue to be lower in FY2014 until the space is re-leased.
- Other risks: Competition and client training budgets; foreign exchange and international compliance; collection of receivables; reliance on HP for IT, warehousing and distribution; potential impairment of substantial intangible assets and goodwill; and compliance with credit-facility covenants.
- FY2013 financial statements and internal controls received unqualified audit opinions; management and the auditor concluded internal control over financial reporting was effective. The filing described routine legal matters and a disputed software-license claim that management expected to settle for an immaterial amount.
Important facts for investors to verify
- Whether the government contract received further renewals and the level and timing of related work orders.
- FCOP’s ability to repay the $7.8 million receivable, including the timing and assumptions underlying the discounted long-term portion.
- Progress in leasing the campus space whose significant lease expired, and the resulting FY2014 revenue impact.
- Actual NinetyFive 5 performance, earnout payments and their effect on operating expenses and cash requirements.
- Whether the projected FY2014 curriculum spending and program launch occur as planned, and whether the investment produces expected demand.
- Receivables collection and working-capital trends after the substantial year-end increase in accounts receivable.
- Use of the revolving facility, covenant headroom and the distinction between bank debt and the continuing campus financing obligation.