Franklin Covey Co. — FY2020 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended August 31, 2020, including the fourth quarter; it is not a standalone Q4 report. Franklin Covey provides organizational performance and leadership training through its Enterprise and Education divisions, including All Access Pass (AAP) and Leader in Me subscriptions. Financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $198.5 million | $225.4 million |
| Gross profit / margin | $145.4 million / 73.3% | $159.3 million / 70.7% |
| Operating income | $3.1 million | $2.7 million |
| Pre-tax income | $0.8 million | $0.6 million |
| Net loss / diluted loss per share | $(9.4) million / $(0.68) | $(1.0) million / $(0.07) |
| Adjusted EBITDA | $14.3 million | $20.6 million |
| Cash from operating activities | $27.6 million | $30.5 million |
- Cash and cash equivalents were $27.1 million at year-end, versus $27.7 million a year earlier. The company had no revolver borrowings and $15.0 million of available revolving capacity.
- Term-loan principal was $20.0 million; the corporate-campus financing obligation was $16.6 million. Total liabilities were $146.0 million, shareholders’ equity was $59.5 million, and total current assets and liabilities were $101.7 million and $102.5 million, respectively.
- Subscription revenue grew 16% to $86.5 million. Deferred subscription revenue was $60.6 million; total remaining performance obligations were $100.2 million, including contracted but unbilled amounts.
Material changes versus the prior comparable period
- Sales fell 12% year over year as COVID-19 disrupted the third and fourth quarters, postponing or canceling in-person training, coaching, and school events. First-half sales had grown 8% through February 29, 2020.
- Enterprise Division sales declined 13%; Direct Offices fell 11% and International Licensees fell 34%. Education Division sales declined 11%. Corporate and other revenue increased 17%.
- Despite lower gross profit dollars, gross margin increased to 73.3% from 70.7%, primarily reflecting a higher mix of subscription and digital delivery revenue and lower onsite delivery costs.
- Operating expenses decreased $14.3 million, including lower SG&A and stock-based compensation, partly offset by $1.6 million of restructuring costs. Operating income improved modestly, but net loss widened substantially.
- The effective tax rate was unusually high because the company recorded $11.3 million of additional tax expense from a valuation allowance on deferred tax assets. Management cited cumulative recent pre-tax losses and uncertainty about pandemic recovery as factors.
- Operating cash flow decreased to $27.6 million. Investing cash outflow increased to $11.9 million, including $5.1 million of curriculum development and a $2.6 million note purchase; financing cash outflow was $16.6 million, including $14.0 million of treasury-stock purchases and related share withholding activity.
Outlook, commentary, risks, and unusual items
- Management expressed optimism about recovery and continued subscription demand, but said recovery depended on reopening, client conditions, and other factors outside its control. AAP sales grew 15% in Q3 and Q4 year over year, with FY2020 revenue retention above 90%. Leader in Me subscription revenue grew 11%; nearly 2,200 schools renewed and 320 new schools joined.
- The filing gives no specific FY2021 revenue, earnings, or EPS guidance. It anticipates approximately $4.5 million of curriculum-development spending, $2.8 million of property and equipment purchases, $6.5 million of depreciation, and $4.5 million of amortization in FY2021.
- A July 2020 credit-facility modification established temporary liquidity and Adjusted EBITDA tests through May 2021, capped annual capital expenditures at $8.5 million, and restricted dividends and open-market repurchases until the company meets prior covenants for two consecutive quarters. The company reported covenant compliance at August 31, 2020; noncompliance could permit acceleration of debt.
- Management identified COVID-19 and client spending, the pace of in-person recovery, international operations and currency exposure, competition, subscription renewals, cybersecurity and data privacy, and debt covenant compliance as material risks. It reported no litigation expected to have a material adverse effect and no goodwill impairment at year-end.
- Other notable items include $1.2 million of restructuring costs accrued for payment in FY2021 and a $10.1 million related-party share purchase from Knowledge Capital in December 2019. The filing states there were no common-stock dividends in FY2020 or FY2019.
Important facts for investors to verify
- Whether AAP and Leader in Me subscription renewals, retention, and contracted-but-unbilled obligations convert into revenue and cash as expected.
- FY2021 sales and cash-flow recovery, particularly in international operations, education, and in-person training.
- The company’s progress against modified credit covenants, upcoming debt service, and any resulting restrictions on capital returns.
- The assumptions supporting the $11.3 million deferred-tax valuation allowance and the potential for future tax-asset realization or further adjustments.
- The composition and comparability of Adjusted EBITDA, a non-GAAP measure, and the effects of restructuring, stock-compensation reversals, and other unusual items.
- The scope of FY2020 share repurchases: the $14.0 million cash-flow figure includes the Knowledge Capital purchase and shares withheld for taxes, while only 5,000 shares for $0.2 million were purchased under the new $40 million repurchase authorization.