Franklin Covey Co. — FY2012 Form 10-K
Reporting period: Fiscal year ended August 31, 2012. The filing also reports fourth-quarter results; fiscal Q4 sales were $51.0 million, the company’s strongest quarterly sales under its then-current business model. Unless noted, amounts below are in U.S. dollars.
Business context
Franklin Covey provides organizational training, consulting, related products, and leasing services. Its programs address leadership, productivity, trust, execution, sales performance, education, and customer loyalty. The company reported approximately 630 employees, more than 4,200 organizational clients, and delivery through directly operated offices and licensees in more than 140 countries and territories. It operates as one reportable segment.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $170.5 million | $160.8 million |
| Gross profit / margin | $112.7 million / 66.1% | $103.5 million / 64.3% |
| Operating income / margin | $17.6 million / 10.3% | $11.1 million / 6.9% |
| Income before tax | $13.7 million | $8.4 million |
| Net income | $7.8 million | $4.8 million |
| Diluted earnings per share | $0.43 | $0.27 |
| Cash from operating activities | $15.6 million | $15.6 million |
Sales grew 6%; training and consulting services, which accounted for $158.8 million of sales, grew 5%. Product sales rose 13% to $8.5 million and leasing revenue rose 36% to $3.2 million. Gross-margin improvement reflected a greater contribution from higher-margin license royalties, facilitator sales, and intellectual-property licenses. SG&A increased $4.2 million, mainly due to personnel, commissions, advertising, and share-based compensation, but declined as a percentage of sales.
Cash and cash equivalents rose to $11.0 million from $3.0 million; working capital increased to $27.5 million from $16.7 million. Operating cash flow was nearly unchanged as higher earnings were offset in part by working-capital use, including a $5.8 million increase in accounts receivable. Investing activities used $4.4 million, including $2.3 million for property and equipment and $2.1 million for curriculum development. Financing activities used $3.2 million, principally for loan and financing-obligation payments and share repurchases.
At year-end, the company had $2.7 million outstanding on its term loan and no revolver borrowings; its revolving credit facility provided up to $10.0 million and matured March 31, 2015. The company also reported a $29.5 million corporate-campus financing obligation, with a 7.7% imputed rate and payments extending through 2025. Total liabilities were $73.5 million. The term loan and revolver are subject to financial covenants; management said it was in compliance at year-end.
Material changes versus the prior year
- Sales growth moderated to 6%, versus 17% in FY2011. U.S./Canada sales rose 6% and international sales rose 5%.
- Education practice sales increased $4.2 million, while international licensee sales grew 14%. Japan sales recovered following the 2011 earthquake and tsunami; Australia sales fell $1.1 million.
- Government-services sales declined $3.4 million as prior contract phases had generated higher FY2011 revenue. The company renewed the relevant contracts during FY2012 and expected service levels through the first three quarters of FY2013 to be similar to the corresponding FY2012 periods.
- Operating income increased 58% and net income increased 63%. Adjusted EBITDA, a non-GAAP measure defined by the company, increased to $27.1 million from $21.2 million.
- Cash from operations remained approximately flat, while cash increased substantially due in part to lower investing outflows than in FY2011.
Outlook, commentary, risks, and unusual items
- Management expected FY2013 capital spending of approximately $2.2 million for property and equipment and $3.4 million for curriculum development. It expected depreciation of about $2.8 million and intangible-asset amortization of about $2.5 million. No formal revenue or earnings guidance was provided.
- Management said existing capital resources should support operations for at least the next 12 months, subject to sales trends, economic conditions, cost control, capital spending, and timely receivables collection. It described booked days and awarded revenue as exceeding the prior year at August 31, 2012.
- Hurricane Sandy and subsequent storms occurred after year-end; management estimated that related cancellations could reduce FY2013 first-quarter sales by approximately $0.3 million to $0.4 million, with postponed programs expected to be rescheduled in future periods.
- Receivables from FC Organizational Products (FCOP), an investee in which Franklin Covey owns 19.5%, totaled $7.1 million at year-end, up from $5.7 million. Franklin Covey advanced working capital to FCOP despite no obligation to do so and recorded a $1.4 million discount charge on the long-term portion using a 15% rate. Management expected collection based on FCOP’s improved results and forecasts, but warned nonpayment could harm liquidity and results. Franklin Covey also remained secondarily liable for $0.3 million of FCOP retail-store lease obligations.
- Other risks include training-budget sensitivity to economic conditions, intense competition, contract-renewal uncertainty, foreign-currency and regulatory exposure, reliance on outsourced services, and potential impairment of substantial intangible assets and goodwill. The company held $59.2 million of intangible assets and $9.2 million of goodwill at year-end.
- The company authorized up to $10.0 million of share repurchases, subject to maintaining adequate liquidity and having no revolver balance; it repurchased 41,085 shares for $0.4 million in FY2012. No dividends were paid.
- The company reported a disputed software-licensing claim, with any potential settlement considered immaterial, and other routine legal matters not expected to materially affect its financial position or results. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also assessed controls as effective.
Important facts for investors to verify
- Whether FCOP makes scheduled payments on the $7.1 million receivable and whether further advances, discounts, or impairment charges are needed.
- Renewal and performance of government-services contracts, alongside the timing and scale of other customer contract renewals.
- Whether sales momentum, gross margins, and the strong fourth-quarter seasonal pattern continue into FY2013.
- Cash conversion and collection trends, especially the increase in trade receivables and the concentration of cash held at foreign subsidiaries ($3.5 million).
- Compliance with credit covenants, repayment of the term loan, and the company’s capacity to fund repurchases while meeting operating and campus-lease obligations.
- Potential dilution: 4.3 million common-stock warrants with an $8.00 exercise price were outstanding at August 31, 2012 and were due to expire in March 2013; a subsequent net-settlement exercise was disclosed.