Franklin Covey Co. — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included below where relevant. Amounts are in U.S. dollars unless noted.
Business context
Franklin Covey provides performance-improvement training, consulting, content and related products across leadership, execution, productivity, trust, sales, customer loyalty and education. It had approximately 870 employees and served clients directly and through licensees in more than 150 countries. In FY2016 it launched the web-based All Access Pass (AAP); on September 1, 2016, it began operating three sales offices in China, previously served by a licensee.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $200.1 million | $209.9 million |
| Gross profit | $135.2 million | $138.1 million |
| Gross margin | 67.6% | 65.8% |
| Operating income | $13.8 million | $19.5 million |
| Income before taxes | $11.9 million | $17.4 million |
| Net income | $7.0 million | $11.1 million |
| Diluted EPS | $0.47 | $0.66 |
| Cash from operating activities | $32.7 million | $26.2 million |
Sales declined 4.7% and operating income fell 29.1%; net income declined 36.9%. Higher gross margin reflected a sales mix shift toward intellectual-property licensing, including AAP, and away from onsite presentations. Operating expenses rose 2.3%, chiefly due to selling and support hiring, higher contingent acquisition consideration, software costs and bad-debt expense. The effective tax rate was approximately 41%, versus 36%.
Fourth quarter: Reported sales were $64.8 million, down from $67.4 million in FY2015 Q4. Operating income was $13.6 million versus $13.3 million, and net income was $7.7 million versus $7.7 million. Management noted that Q4 sales are typically higher due to education activity and facilitator sales. The company invoiced $73.1 million in Q4 FY2016, compared with $70.7 million a year earlier; invoicing is not the same as recognized revenue.
Liquidity and debt: Cash was $10.5 million at year-end, down from $16.2 million; working capital was $35.7 million, down from $55.8 million. Current assets were $89.7 million and current liabilities $54.1 million. Operating cash flow increased 24.7% to $32.7 million. There were no borrowings on the revolving credit line at year-end. Term-note principal was $14.1 million, and the corporate-campus financing obligation was $24.6 million. The revolving facility was increased to $40 million and extended to March 2019; the term loan bears interest at LIBOR plus 1.85%. A further $5 million term loan was obtained after year-end.
Material changes and business drivers
- AAP contracts invoiced in FY2016 totaled $23.2 million, of which $15.9 million was recognized as sales; approximately $7.3 million remained deferred at year-end.
- Education sales increased 22% to $40.4 million, supported by The Leader in Me, used by more than 3,000 schools.
- Strategic Markets sales fell 20%, primarily because a $6.6 million federal contract recognized in FY2015 did not recur and Customer Loyalty sales declined.
- Direct Offices sales declined 8%; International Licensees rose 3%. Foreign exchange reduced consolidated sales by $0.9 million and operating income by $0.8 million.
- The company repurchased $43.6 million of stock in FY2016, including a $35.3 million tender offer. It paid no dividends.
Outlook, risks and contingencies
Management expects reported FY2017 revenue and operating results to be significantly lower than FY2016 as new AAP contracts are accounted for as subscriptions, with substantially all contract amounts recognized over the contract period. Management expects invoicing at contract inception to limit the cash-flow impact of this deferral. It also expects the China offices to increase direct sales, while licensee revenue will decrease as China moves from the licensee channel to direct operations. These are forward-looking expectations, not guarantees.
Key risks include competition and client training-budget reductions; AAP adoption, renewals, platform security and revenue timing; foreign exchange, Brexit and international regulatory exposure; slower collections, particularly from government and education clients; and compliance with credit-facility covenants. The company had $3.2 million in net receivables from FC Organizational Products (FCOP), in which it owns 19.5%; collection depends on FCOP’s future cash flows. A further contingent payment of approximately $2.2 million related to the NinetyFive 5 acquisition was considered possible, subject to performance. Routine legal proceedings were not expected to materially affect the company. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Track AAP bookings, recognized revenue, deferred revenue, renewal rates and cash collections; assess the scale of the expected FY2017 reporting decline.
- Check whether Education growth and the new China offices offset weakness in other sales channels and the lost federal contract.
- Monitor operating expenses, bad-debt trends and collection timing, including FCOP’s ability to repay the $3.2 million receivable.
- Review term-loan repayments, subsequent borrowing, available revolver capacity and covenant compliance alongside the substantial FY2016 share repurchases.
- Reconcile gross-profit disclosures: the selected financial data table reports FY2016 gross profit of $133.154 million, while the audited income statement and MD&A report $135.154 million. The filing text does not explain this discrepancy.