Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 31, 2011
Business Overview: Franklin Covey is a global provider of training and consulting solutions, delivering principle-based curriculums (e.g., "The 7 Habits of Highly Effective People") to organizations and individuals. The company operates as a single operating segment with regional sales offices in the U.S., wholly-owned subsidiaries in Australia, Japan, and the U.K., and licensee partners in over 140 countries.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net Sales | $160.8 million | $136.9 million |
| Gross Profit | $103.5 million | $89.1 million |
| Gross Margin | 64.3% | 65.1% |
| Operating Income | $11.1 million | $4.0 million |
| Net Income | $4.8 million | ($0.5 million) Loss |
| Diluted EPS | $0.27 | ($0.04) |
| Cash and Equivalents | $3.0 million | $3.5 million |
| Operating Cash Flow | $15.6 million | $7.0 million |
| Debt (Term Loan) | $5.0 million | $0 (Line of Credit only) |
| Working Capital | $16.7 million | $4.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 17% to $160.8 million, driven by broad-based improvements in training and consulting sales across U.S./Canada, international direct offices, and licensee royalties.
- Profitability Turnaround: The company returned to profitability with $4.8 million in net income, reversing a net loss of $0.5 million in the prior year. Operating income more than doubled to $11.1 million.
- Government Contracts: Sales from U.S. federal government contracts reached $16.8 million (over 10% of total revenue), a significant increase from the prior year.
- Cost Structure: Selling, General, and Administrative (SG&A) expenses increased by $7.7 million (to $85.3 million) due to higher commissions, salaries, and share-based compensation, though SG&A as a percentage of sales decreased to 53.0%.
- Discontinued Operations: The Japan product sales component was sold in fiscal 2010; results are presented as discontinued operations for prior periods.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates continued momentum from investments in curriculum development and sales force expansion. A new productivity course, "The 5 Choices to Extraordinary Productivity," was launched in Fall 2011.
- Liquidity & Debt: The company entered a new credit agreement in March 2011 with a $10 million revolving line of credit (maturing March 2012) and a $5 million term loan. The revolving line had a zero balance at period end, while the full $5 million term loan was drawn.
- Key Risks:
- FC Organizational Products (FCOP): Significant receivables ($5.7 million) are owed by FCOP, a related party that purchased the company's consumer business. FCOP's financial position has deteriorated, creating collection risk.
- Japan Operations: Natural disasters in Japan caused office closures and business interruptions, with lingering economic effects expected to impact future sales.
- Customer Concentration: Reliance on government contracts and large corporate clients exposes the company to budget cuts and political shifts.
- Competition: The training industry is highly fragmented with low barriers to entry.
- Unusual Items: The company paid $5.4 million in contingent earnout payments related to the 2009 acquisition of CoveyLink Worldwide, LLC.
Investor Verification Checklist
- FCOP Receivables: Verify the collectibility of the $5.7 million receivable from FC Organizational Products and the status of the related promissory note impairment.
- Government Contract Renewals: Assess the sustainability of the $16.8 million in federal government revenue and the risk of contract non-renewal.
- Debt Covenants: Confirm compliance with financial covenants (e.g., funded debt to EBITDAR ratio) required by the March 2011 credit facility.
- Japan Recovery: Monitor the financial impact of the 2011 natural disasters on the Japan subsidiary's future performance.
- Share-Based Compensation: Review the impact of variable performance awards and stock options on future expense volatility.