Franklin Covey Reports 2016 Fourth Quarter and Fiscal Year Financial Results
Wednesday, November 09, 2016 4:25:00 PM ET --Considering Strong Fourth Quarter Results, Cumulative Adjusted EBITDA, the Increase in Deferred Revenue, and Adjusting for Foreign Exchange, the Company’s Adjusted EBITDA for Fiscal 2016 Fell Within the Original Guidance Range for the Year
--Cash Flows from Operating Activities Increase 25% to a Record $32.7 Million for Fiscal 2016
--Company Purchases Over 2.5 Million Shares in Fiscal 2016--Returning Over $43 Million to Shareholders
--The Number of Client Partners Increases to 204 at August 31, 2016
Franklin Covey Co. (FC ), a global performance improvement company
that creates and distributes world-class content, training, processes,
and tools that organizations and individuals use to transform their
results, today announced financial results for its fiscal fourth quarter
and full fiscal year ended August 31, 2016.
Fiscal 2016 Fourth Quarter Financial Results
--
All Access Pass: In late January 2016,
the Company introduced the All Access Pass intellectual property
license. The AAP allows the Company’s clients to obtain a license to
access and use a broad range of the Company’s intellectual property in
their training and personnel development programs for a specified
period--typically one year. The Company invoices AAP clients at the
inception of the contract and collects these receivables within normal
terms. During the fourth quarter of fiscal 2016, the Company invoiced
$13.7 million of new AAP contracts and related products compared with
$6.0 million in the third quarter of fiscal 2016. Based on applicable
accounting standards, the Company deferred $4.2 million of AAP amounts
invoiced during the fourth quarter, which will be recognized over the
remaining contractual periods of the arrangements. Including the
recognition of previously deferred AAP revenues, the Company
recognized $9.5 million of AAP sales during the fourth quarter of
fiscal 2016. While the Company is currently optimistic about the
future of the AAP and believes that it will provide additional
revenues in future periods from new contracts and from recognition of
amounts previously deferred, the transition to this business model has
significantly impacted fiscal 2016 as the Company defers a portion of
revenues that under previous contracts (such as for facilitator
sales), were fully recognized as the transaction was completed.
Accordingly, sales performance during this transition period has been
impacted by the deferral of a portion of AAP invoiced amounts. The
Company had $20.8 million of deferred revenue on its consolidated
balance sheet at August 31, 2016 compared with $12.8 million at August
31, 2015.
--
Revenue: Consolidated revenue for the
fourth quarter was $64.8 million compared with $67.4 million in the
fourth quarter of fiscal 2015. However, the Company invoiced $73.1
million during the fourth quarter of fiscal 2016 compared with $70.7
million during the fourth quarter of fiscal 2015. Education practice
sales increased 15% over the fourth quarter of fiscal 2015 and
international licensee revenues increased 7% compared with the prior
year. These increases were insufficient to offset the impact of AAP
deferrals (as described above), and decreased sales from the Company’s
United Kingdom office, Customer Loyalty practice, and government
services office.
--
Gross profit: Fourth quarter gross profit
was $45.7 million, compared with $46.5 million in the fourth quarter
of fiscal 2015, even excluding the $8.3 million increase in high gross
margin deferred revenue during the fourth quarter. Consolidated gross
margin increased to 70.4% of sales compared with 69.0% in the fourth
quarter of fiscal 2015, primarily due to a change in the mix of sales
that featured more sales of intellectual property licenses, including
the AAP, and less onsite presentations.
--
Operating Income: The Company’s operating
income increased to $13.6 million compared with $13.3 million in the
fourth quarter of the prior year. The improvement was due to a $0.3
million reduction in selling, general, and administrative expenses,
decreased restructuring and impairment charges, a $0.3 million
decrease in depreciation expense, and a $0.2 million decrease in
amortization expense.
--
Net Income: Net income for the quarter
was consistent with the prior year at $7.7 million, reflecting the
factors noted above.
--
Diluted EPS: Diluted EPS for the fourth
quarter of fiscal 2016 was $.55 per share compared with $.46 per share
in the fourth quarter of fiscal 2015. The improvement was due to the
decreased number of shares outstanding during the fourth quarter of
fiscal 2016 compared with the fourth quarter of fiscal 2015.
--
Adjusted EBITDA: Fourth quarter Adjusted
EBITDA was $16.2 million, compared with $17.3 million in the fourth
quarter of fiscal 2015, excluding the $8.3 million increase in high
gross margin deferred revenue during the fourth quarter. Adjusted
EBITDA margin was 25.0% compared with 25.6% in the fourth quarter of
the prior year.
--
Balance Sheet and Cash Flows: The
Company’s cash totaled $10.5 million at August 31, 2016, with no
borrowings on its $40.0 million line of credit facility, compared with
$16.2 million of cash at the end of fiscal 2015. Cash flows from
operating activities for fiscal 2016 increased to $32.7 million
compared with $26.2 million in fiscal 2015.
--
Common Shares Repurchased: During the
quarter ended August 31, 2016, the Company purchased 395,709 shares of
its common stock for $6.1 million under the terms of the January 2015
share repurchase plan that was expanded to $40.0 million. Since
January 2015, the Company has purchased 1,291,347 shares of its common
stock for $22.3 million under the terms of this purchase plan. The
Company also completed a tender offer in the second quarter of fiscal
2016, which purchased 1,971,832 shares of common stock for $35.2
million.
Bob Whitman, Chairman and Chief Executive Officer of Franklin Covey,
commented, "Fiscal 2016 was a solid year of growth and progress in our
business, including record operating cash flows and the return of over
$43 million to our shareholders through purchases of stock. The growth
of the All Access Pass exceeded our expectations for the fourth quarter
and for fiscal 2016. We are pleased that reported Adjusted EBITDA,
combined with the embedded Adjusted EBITDA within the increase in our
deferred revenue, was within our original guidance for the fiscal year.
As we continue to expand the All Access Pass offering, we are confident
that the lifetime value of our customers will increase and provide
growth in future periods."
Full Fiscal Year 2016 Financial Results
Consolidated revenue during fiscal 2016 was $200.1 million compared with
$209.9 million in the prior year. The decrease from fiscal 2015 was
primarily due to the combined impact of the following factors: (1) the
transition to the AAP business model and the corresponding deferral of a
portion of AAP contract amounts as the Company’s deferred revenues
increased $8.1 million compared with August 31, 2015; (2) the non-repeat
during fiscal 2016 of $6.6 million in revenue ($3.9 million of operating
income) from a federal government agency contract which was not opened
for renewal in fiscal 2016; and (3) a $0.9 million reduction in revenue
due to the year-over-year impact of changes in foreign exchange rates.
Partially offsetting these decreases was a 22%, or $7.2 million,
increase in Education practice revenues and a $0.5 million increase in
international licensee revenue.
Gross profit for fiscal 2016 was $135.2 million, compared with $138.1
million in the prior year, even excluding the $8.6 million increase in
high gross margin deferred revenue. The decrease in gross profit was
primarily due to fiscal 2016 sales activity as described above.
Consolidated gross margin increased to 67.6 percent compared with 65.8
percent in fiscal 2015. The improvement was primarily due to a change in
the mix of sales, which produced increased intellectual property sales,
including All Access Pass sales, and decreased onsite presentations.
The Company’s operating expenses increased $2.7 million compared with
fiscal 2015 primarily due to a $4.8 million increase in selling,
general, and administrative expenses, which was partially offset by a
$1.3 million decrease in impaired asset charges, a $0.5 million decrease
in depreciation expense, and a $0.5 million decrease in intangible asset
amortization expense. The increase in selling, general, and
administrative expenses was primarily related to the addition of new
sales and sales support personnel; a $1.5 million increase in the
contingent consideration liability from a previous business acquisition;
and $0.6 million of increased non-cash stock-based compensation expense.
At August 31, 2016 the Company had 204 client partners compared with 180
at August 31, 2015.
Consolidated income from operations for fiscal 2016 reflected the
factors noted above and was $13.8 million, compared with $19.5 million
in the prior year. Pre-tax income was $11.9 million for fiscal 2016
compared with $17.4 million in fiscal 2015. The Company’s effective
income tax rate was approximately 41 percent in fiscal 2016 compared
with approximately 36 percent in fiscal 2015. During fiscal 2015, the
Company finalized the calculations relating to the amendment of
previously filed U.S. federal income tax returns to realize foreign tax
credits previously treated as expired under the tax positions taken in
the original returns. The income tax benefit recognized from these
foreign tax credits totaled $0.6 million in fiscal 2015. The Company’s
consolidated income tax provision was $4.9 million in fiscal 2016
compared with $6.3 million in the prior year. Net income for fiscal 2016
was $7.0 million, or $.47 per diluted share, compared with $11.1
million, or $.66 per diluted share, in fiscal 2015.
Adjusted EBITDA for fiscal 2016 was $26.9 million, excluding the $8.6
million increase in high gross margin deferred revenue, compared with
$31.9 million and $2.5 million of deferred revenue in the prior year and
reflected the items noted above. Adjusted EBITDA margin was 13.4 percent
in fiscal 2016 compared with 15.2 percent in fiscal 2015.
China Sales Office Opening
On September 1, 2016, the Company opened three directly owned sales
offices in China. Prior to fiscal 2017, the Company’s offerings were
sold in China through an independent licensee. The Company was able to
hire many of the previous licensee’s sales and administrative personnel
in the transition from a licensee to a directly owned operation. The
Company believes that there are substantial opportunities for growth and
expansion of its offerings in China.
Fiscal 2017 Outlook
Based upon the success of All Access Pass during fiscal 2016, the
Company has decided to modify its business practices to make the AAP
experience even better for its customers. The Company expects that
future changes may include adding content from thought leaders outside
the Company, localizing content, including additional assessments and
related tools, and developing supplementary webcasts for pass holders.
These future business practices may require a significantly larger
portion of invoiced amounts to be deferred over the term of the
underlying contracts and agreements. Accordingly, the Company’s deferred
revenue on its consolidated balance sheet is expected to grow
significantly in fiscal 2017. Once the Company is past the transition
period, the Company believes there will be some advantages to this
method of accounting for AAP arrangements, including better
predictability of future results and less seasonality in the Company’s
quarterly earnings.
To provide guidance for fiscal 2017, the Company considered both the
expected amount of reported Adjusted EBITDA and the expected change in
deferred revenue (less applicable costs) as recorded on the balance
sheet. For example, in fiscal 2016, the Company reported $26.9 million
of Adjusted EBITDA and an increase in deferred revenue, less applicable
costs of $7.5 million. The sum of these two items is $34.4 million. The
Company cannot currently accurately predict the mix of recorded sales
versus deferred sales in fiscal 2017, but the Company expects that the
sum of reported Adjusted EBITDA and the increase in deferred revenue in
fiscal 2017 will grow from $34.4 million to between $35 million and $38
million, excluding the impact of foreign exchange rates. The Company
expects that the amount of reported Adjusted EBITDA in fiscal 2017 to
decrease significantly, and the amount of deferred revenue on the
balance sheet to increase significantly. For instance, in fiscal 2016,
the Company deferred $8.6 million of its invoiced amounts. In fiscal
2017, on the same invoiced amounts, the Company may have to defer $21
million. Additionally, the change in business practices could require
the Company to defer all or a part of its facilitator sales.
Earnings Conference Call
As previously announced, on Wednesday, November 9, 2016, at 5:00 p.m.
Eastern time (3:00 p.m. Mountain time) Franklin Covey will host a
conference call to review its financial results for the quarter and full
fiscal year ended August 31, 2016. Interested persons may participate by
dialing 888-771-4371 (International participants may dial 847-585-4405),
access code: 43679289. Alternatively, a webcast will be accessible at
the following website: http://www.media-server.com/m/p/tdqgu2tr .
A replay will be available from November 9 (7:30 p.m. ET) through
November 16, 2016 by dialing 888-843-7419 (International participants
may dial 630-652-3042), access code: 43679289#. The webcast will remain
accessible through November 16, 2016 on the Investor Relations area of
the Company’s website at: http://investor.franklincovey.com/phoenix.zhtml?c=102601&p=irol-IRHome .
Forward-Looking Statements
This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
including, among others, those statements related to the Company’s
future results and profitability; expected Adjusted EBITDA in fiscal
2017; amounts of deferred revenue in fiscal 2017; expected sales of All
Access Pass services; expected growth and sales opportunities in China;
other anticipated future sales; and goals relating to the growth of the
Company. Forward-looking statements are based upon management’s current
expectations and are subject to various risks and uncertainties
including, but not limited to: general economic conditions; renewal of
AAP contracts; the expected number of booked days to be delivered;
market acceptance of new products or services and marketing strategies;
the ability to achieve sustainable growth in future periods; and other
factors identified and discussed in the Company’s most recent Annual
Report on Form 10-K and other periodic reports filed with the Securities
and Exchange Commission. Many of these conditions are beyond the
Company’s control or influence, any one of which may cause future
results to differ materially from the Company’s current expectations,
and there can be no assurance that the Company’s actual future
performance will meet management’s expectations. These forward-looking
statements are based on management’s current expectations and the
Company undertakes no obligation to update or revise these
forward-looking statements to reflect events or circumstances subsequent
to this press release.
Non-GAAP Financial Information
Refer to the attached table for the reconciliation of a non-GAAP
financial measure, "Adjusted EBITDA," to consolidated net income, the
most comparable GAAP financial measure. The Company defines Adjusted
EBITDA as net income or loss excluding the impact of interest expense,
income tax expense, amortization, depreciation, share-based compensation
expense, impaired asset charges, restructuring costs, adjustments to
contingent earn out liabilities, and certain other items. The Company
references this non-GAAP financial measure in its decision making
because it provides supplemental information that facilitates consistent
internal comparisons to the historical operating performance of prior
periods and the Company believes it provides investors with greater
transparency to evaluate operational activities and financial results.
The Company does not provide forward-looking GAAP measures or a
reconciliation of the forward-looking Adjusted EBITDA to GAAP measures
because of the inability to project certain of the costs included in the
calculation of Adjusted EBITDA.
About Franklin Covey Co.
Franklin Covey Co. (FC ) (www.franklincovey.com)
is a global provider of training and consulting services in the areas of
leadership, productivity, strategy execution, customer loyalty, trust,
sales performance, government, education and individual effectiveness.
Over its history, Franklin Covey has worked with 90 percent of the
Fortune 100, more than 75 percent of the Fortune 500, and thousands of
small and mid-sized businesses, as well as numerous government entities
and educational institutions. Franklin Covey has more than 40 direct and
licensee offices providing professional services in over 150 countries.
FRANKLIN COVEY CO.
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Condensed Consolidated Income Statements
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share amounts, and unaudited)
Quarter Ended Fiscal Year Ended
-------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------
August 31, August 31, August 31, August 31,
2016 2015 2016 2015
------------------------------------------------- ------------------------------------------------- -------------------------------------------------- --------------------------------------------------
Net sales $ 64,831 $ 67,444 $ 200,055 $ 209,941
Cost of sales 19,164 20,897 64,901 71,852
-------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- ------- -------------------- -------------------- ------- --------------------
Gross profit 45,667 46,547 135,154 138,089
Selling, general, and administrative 30,069 30,327 113,589 108,802
Restructuring costs 400 587 776 587
Impairment of assets - 220 - 1,302
Depreciation 868 1,158 3,677 4,142
Amortization 721 909 3,263 3,727
-------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- ------- -------------------- -------------------- ------- --------------------
Income from operations 13,609 13,346 13,849 19,529
Interest expense, net (523 ) (470 ) (1,938 ) (1,754 )
Discount on related party receivable - - - (363 )
-------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- ------- -------------------- -------------------- ------- --------------------
Income before income taxes 13,086 12,876 11,911 17,412
Income tax provision (5,360 ) (5,207 ) (4,895 ) (6,296 )
-------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- ------- -------------------- -------------------- ------- --------------------
Net income $ 7,726 $ 7,669 $ 7,016 $ 11,116
==================== ====== ==================== ==================== ====== ==================== ==================== ======= ==================== ==================== ======= ====================
Net income per common share:
Basic $ 0.55 $ 0.47 $ 0.47 $ 0.66
Diluted 0.55 0.46 0.47 0.66
Weighted average common shares:
Basic 13,998 16,449 14,944 16,742
Diluted 14,118 16,614 15,076 16,923
Other data:
Adjusted EBITDA(1) $ 16,219 $ 17,268 $ 26,894 $ 31,858
==================== ====== ==================== ==================== ====== ==================== ==================== ======= ==================== ==================== ======= ====================
(1 ) The term Adjusted EBITDA (earnings before interest, income taxes,
depreciation, amortization, share-based compensation, and certain
other items) is a non-GAAP financial measure that the Company
believes is useful to investors in evaluating its results. For a
reconciliation of this non-GAAP measure to the most comparable
GAAP equivalent, refer to the Reconciliation of Net Income to
Adjusted EBITDA as shown below.
FRANKLIN COVEY CO.
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Reconciliation of Net Income to Adjusted
EBITDA
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(in thousands and unaudited)
Quarter Ended Fiscal Year Ended
-------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------
August 31, August 31, August 31, August 31,
2016 2015 2016 2015
------------------------------------------------- ------------------------------------------------- ------------------------------------------------- -------------------------------------------------
Reconciliation of net income to Adjusted EBITDA:
Net income $ 7,726 $ 7,669 $ 7,016 $ 11,116
Adjustments:
Interest expense, net 523 470 1,938 1,754
Discount on related party receivable - - - 363
Income tax provision 5,360 5,207 4,895 6,296
Amortization 721 909 3,263 3,727
Depreciation 868 1,158 3,677 4,142
Share-based compensation 199 934 3,121 2,536
Restructuring costs 400 587 776 587
Impairment of assets - 220 - 1,302
Increase to contingent earnout liability 82 114 1,538 35
Other expense 340 - 670 -
-------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- ------ --------------------
Adjusted EBITDA $ 16,219 $ 17,268 $ 26,894 $ 31,858
==================== ====== ==================== ==================== ====== ==================== ==================== ====== ==================== ==================== ====== ====================
Adjusted EBITDA margin 25.0 % 25.6 % 13.4 % 15.2 %
FRANKLIN COVEY CO.
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Additional Sales and Financial Information
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(in thousands and unaudited)
Quarter Ended Fiscal Year Ended
-------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------
August 31, August 31, August 31, August 31,
2016 2015 2016 2015
---------------------------- ---------------------------- ----------------------------- --------------------------------
Sales Detail by Division:
Direct offices $ 31,494 $ 35,701 $ 103,613 $ 113,087
Strategic markets 8,142 8,886 29,778 37,039
Education practice 18,210 15,879 40,361 33,128
International licensees 4,535 4,256 17,629 17,100
Corporate and other 2,450 2,722 8,674 9,587
-------------------- ------ -------------------- ------ -------------------- ------- -------------------- ----------
Total $ 64,831 $ 67,444 $ 200,055 $ 209,941
==================== ====== ==================== ====== ==================== ======= ==================== ==========
Sales Detail by Category:
Training and consulting services $ 61,915 $ 64,303 $ 189,661 $ 198,695
Products 1,884 2,039 6,009 6,885
Leasing 1,032 1,102 4,385 4,361
-------------------- ------ -------------------- ------ -------------------- ------- -------------------- ----------
64,831 67,444 200,055 209,941
-------------------- ------ -------------------- ------ -------------------- ------- -------------------- ----------
Cost of Goods Sold by Category:
Training and consulting services 17,375 19,303 59,158 66,370
Products 1,125 995 3,206 3,306
Leasing 664 599 2,537 2,176
-------------------- ------ -------------------- ------ -------------------- ------- -------------------- ----------
19,164 20,897 64,901 71,852
-------------------- ------ -------------------- ------ -------------------- ------- -------------------- ----------
Gross Profit $ 45,667 $ 46,547 $ 135,154 $ 138,089
==================== ====== ==================== ====== ==================== ======= ==================== ==========
FRANKLIN COVEY CO.
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Condensed Consolidated Balance Sheets
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(in thousands and unaudited)
August 31, August 31,
2016 2015
--------------------------------------------------- ---------------------------------------------------
Assets
--------------------------------------------------------------
Current assets:
Cash $ 10,456 $ 16,234
65,960 65,182
Accounts receivable, less allowance for doubtful accounts of
$1,579 and $1,333
Receivable from related party 1,933 2,425
Inventories 5,042 3,949
Deferred income taxes - 2,479
Prepaid expenses and other current assets 6,350 5,156
-------------------- -------- -------------------- -------------------- -------- --------------------
Total current assets 89,741 95,425
Property and equipment, net 16,083 15,499
Intangible assets, net 50,196 53,449
Goodwill 19,903 19,903
Long-term receivable from related party 1,235 1,562
Other assets 13,713 14,807
-------------------- -------- -------------------- -------------------- -------- --------------------
$ 190,871 $ 200,645
==================== ======== ==================== ==================== ======== ====================
Liabilities and Shareholders’ Equity
--------------------------------------------------------------
Current liabilities:
Current portion of financing obligation $ 1,662 $ 1,473
Current portion of term note payable 3,750 -
Accounts payable 10,376 8,306
Income taxes payable 4 221
Deferred revenue 20,847 12,752
Accrued liabilities 17,418 16,882
-------------------- -------- -------------------- -------------------- -------- --------------------
Total current liabilities 54,057 39,634
Term note payable, less current portion 10,313 -
Financing obligation, less current portion 22,943 24,605
Other liabilities 3,173 3,802
Deferred income tax liabilities 6,670 7,098
-------------------- -------- -------------------- -------------------- -------- --------------------
Total liabilities 97,156 75,139
-------------------- -------- -------------------- -------------------- -------- --------------------
Shareholders’ equity:
Common stock 1,353 1,353
Additional paid-in capital 211,203 208,635
Retained earnings 76,628 69,612
Accumulated other comprehensive income 1,222 192
Treasury stock at cost, 13,332 and 10,909 shares (196,691 ) (154,286 )
-------------------- -------- -------------------- -------------------- -------- --------------------
Total shareholders’ equity 93,715 125,506
-------------------- -------- -------------------- -------------------- -------- --------------------
$ 190,871 $ 200,645
==================== ======== ==================== ==================== ======== ====================
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SOURCE: Franklin Covey Co.
Franklin Covey
Investor Contact:
Steve Young, 801-817-1776
investor.relations@franklincovey.com
or
Media Contact:
Debra Lund, 801-817-6440
Debra.Lund@franklincovey.com
