Business Context and Reporting Period
Company: FranklinCovey Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 31, 2008
FranklinCovey Co. is a worldwide leader in providing integrated learning and performance solutions focused on leadership, strategy execution, and productivity. Historically, the company operated two segments: the Consumer Solutions Business Unit (CSBU), focused on retail and direct product sales, and the Organizational Solutions Business Unit (OSBU), focused on training and consulting. During the fourth quarter of fiscal 2008, the company completed the sale of substantially all CSBU assets to Franklin Covey Products, LLC, a new entity controlled by Peterson Partners. Following this transaction, the company's business primarily consists of training, consulting, and assessment services.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Net Sales | $260.1 million | $284.1 million |
| Gross Profit | $161.8 million | $175.1 million |
| Gross Margin | 62.2% | 61.6% |
| Income from Operations | $16.8 million | $18.1 million |
| Net Income | $5.8 million | $7.6 million |
| Net Income Available to Common Shareholders | $5.8 million | $5.4 million |
| Diluted EPS | $0.29 | $0.27 |
| Cash and Cash Equivalents (End of Period) | $15.9 million | $6.1 million |
| Net Working Capital | $5.8 million | $8.9 million |
| Long-term Debt & Financing Obligations | $32.3 million | $33.0 million |
Note: Fiscal 2008 results include a $9.1 million gain on the sale of CSBU assets. Operating cash flow was $7.8 million.
Material Changes vs. Prior Period
- Strategic Divestiture: The sale of the CSBU in Q4 2008 resulted in a significant reduction in product sales ($122.0 million in 2008 vs. $146.4 million in 2007) but increased the proportion of higher-margin training and consulting services to 53.1% of total sales.
- Revenue Decline: Consolidated net sales decreased 8% to $260.1 million, driven by the CSBU sale and declining product sales prior to the transaction. Training and consulting services sales remained relatively flat, increasing slightly by $0.4 million.
- Restructuring and Impairment: The company incurred $2.1 million in restructuring costs related to office closures and a $1.5 million impairment charge for an interactive training program.
- Share Repurchase: Using proceeds from the CSBU sale, the company completed a tender offer to purchase 3.0 million shares of common stock for approximately $28.2 million. This created a current liability at year-end which was paid shortly after the fiscal year close.
- Preferred Stock: All Series A preferred stock was redeemed in fiscal 2007, eliminating preferred dividends in fiscal 2008 and increasing net income available to common shareholders despite lower overall net income.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management expects quarterly sales to be less seasonal in future periods due to the removal of product sales. The company anticipates a decline in consolidated operating expenses in fiscal 2009 compared to 2008. Capital expenditures for fiscal 2009 are estimated at $2.3 million for property and equipment and $1.4 million for curriculum development.
Key Risks and Contingencies:
- Economic Sensitivity: Results are susceptible to economic downturns which may cause clients to defer training spending.
- Intangible Asset Impairment: The company holds $72.3 million in intangible assets. Significant declines in cash flows could trigger impairment charges.
- Government Contracting: Risks include funding cuts, audits, and political changes affecting government clients.
- Foreign Currency: International sales represented 24% of total sales; a strengthening dollar could adversely affect reported revenues.
- Liquidity: The company relies on a $25.0 million revolving line of credit (reducing to $15.0 million in June 2009) and cash flows from operations. Compliance with financial covenants is required.
Investor Verification Checklist
- CSBU Transition: Verify the ongoing royalty revenue stream and contingent license fees from the new Franklin Covey Products, LLC entity.
- Intangible Asset Valuation: Review the assumptions used to value the $72.3 million in intangible assets, particularly the "Covey trade name," given the shift away from product sales.
- Restructuring Completion: Monitor the execution of the $2.1 million restructuring plan and the associated cost savings in fiscal 2009.
- Debt Covenants: Confirm continued compliance with the Modified Credit Agreement financial ratios, especially as the credit facility capacity reduces in mid-2009.
- Shareholder Dilution/Accretion: Assess the impact of the $28.2 million tender offer liability payment on cash balances and the remaining $2.4 million authorization for future stock purchases.