Franklin Covey Co. — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018. The filing also reports fourth-quarter results; “2018 Q4” is not the annual reporting period. Amounts below are U.S. dollars.
Business context
Franklin Covey provides organizational performance training, consulting, content, and related services. Its strategy centers on subscription offerings, particularly the Enterprise Division’s All Access Pass (AAP) and the Education Division’s Leader in Me online service. Fiscal 2018 included investments in platform technology, content, implementation staff, and the integration of 2017 acquisitions Robert Gregory Partners and Jhana Education.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $209.8 million | $185.3 million |
| Gross profit / margin | $148.3 million / 70.7% | $122.7 million / 66.2% |
| Operating income (loss) | $(3.4) million | $(8.9) million |
| Pre-tax income (loss) | $(5.5) million | $(10.9) million |
| Income tax benefit (expense) | $(0.4) million expense | $3.7 million benefit |
| Net income (loss) / diluted EPS | $(5.9) million / $(0.43) | $(7.2) million / $(0.52) |
| Cash from operating activities | $16.9 million | $17.4 million |
- Sales increased 13%; subscription and subscription-related revenue grew 36%. Deferred revenue was $52.9 million at year-end, up from $41.5 million; an additional $24.5 million of contracted, unbilled deferred revenue was not on the balance sheet.
- Direct Offices revenue rose 19% to $145.9 million; Education Practice revenue rose 3% to $45.3 million; International Licensees revenue declined 3% to $13.2 million. China direct offices generated $12.3 million in sales.
- Fourth-quarter sales were $64.8 million versus $59.5 million a year earlier. Q4 gross profit was $47.8 million, operating income $7.6 million, net income $1.8 million, and diluted EPS $0.13. The company notes that Q4 is typically its strongest quarter.
- Investing cash outflow was $10.6 million; financing cash outflow was $4.7 million. Capital spending included $6.5 million for property and equipment and $3.0 million for curriculum development.
- Cash was $10.2 million, including $8.9 million held outside the U.S.; net working capital was $5.3 million. Bank debt comprised $11.3 million outstanding on the revolving line and $12.8 million of term loans. The company reported $18.7 million of remaining revolving availability and a separate $21.1 million corporate-campus financing obligation.
Material changes versus prior year
- Revenue and gross margin improved, largely as prior-period deferred subscription revenue was recognized and new contracts contributed. Higher-margin subscriptions increased as a share of sales.
- Operating expenses increased $20.1 million to $151.7 million, principally from investment in personnel, commissions, technology, and content, as well as acquisition-related amortization and contingent consideration adjustments. The higher gross profit narrowed the operating loss.
- The Education Division’s growth was constrained by the expiration of a six-year charitable foundation funding commitment, reducing fiscal 2018 revenue by $2.8 million and gross profit by about $1.6 million.
- Operating cash flow was slightly lower year over year, while deferred revenue increased $11.6 million. The company attributes cash-flow pressure partly to working-capital changes; subscription contracts are generally invoiced and collected at inception while revenue is recognized over time.
Outlook, risks, and unusual items
- Management identified subscription sales and renewals, Education, and productivity in Direct Offices and International Licensees as growth priorities. It expected the Education Division to resume strong growth in fiscal 2019, and cited expanded AAP language availability and China operations as opportunities. The filing does not provide a clear numerical full-year sales or earnings forecast.
- For fiscal 2019, the company anticipated approximately $6.0 million of property-and-equipment purchases, $5.5 million of curriculum-development spending, $6.7 million of depreciation, and $4.8 million of intangible-asset amortization.
- Fiscal 2018 included a $3.0 million valuation allowance against a foreign tax credit carryforward, contributing to tax expense despite a pre-tax loss. The 2017 U.S. tax law also produced a reported $1.7 million tax benefit. The company expected to adopt the new revenue standard on September 1, 2018, estimating a $2–$4 million reduction to opening retained earnings, with no expected operating-cash-flow impact.
- Key risks include the disruptive shift to subscription revenue recognition and the need for continued technology investment; competition and client training budgets; cyber and data-privacy exposure, including GDPR compliance; foreign currency and geopolitical risks; and credit-facility covenant compliance. A 1% interest-rate increase on year-end term and revolving borrowings was estimated to add about $0.2 million of fiscal 2019 interest expense.
- The company carried $1.5 million of net receivables from FC Organizational Products, an entity in which it owns 19.5%; collection depends on that company’s financial condition. Management reported no legal proceeding expected to have a material adverse effect. Deloitte issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Subscription sales, renewal rates, deferred revenue, and collections—particularly how reported growth translates into recognized revenue and operating cash flow.
- Whether operating expenses and investment spending can be supported by revenue growth sufficiently to restore operating profitability.
- Education Division performance following the funding commitment’s expiration and the company’s fiscal 2019 growth expectations.
- Liquidity, debt maturities, borrowing availability, covenant headroom, and the company’s ability to refinance or renew its credit facility.
- Realizability of tax credit carryforwards, collectability of FCOP receivables, and the estimated effects of the new revenue and lease accounting standards.