Franklin Covey Co. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2021; comparisons are with the quarter and six months ended February 29, 2020. The company sells performance-improvement content and services, including All Access Pass (AAP) and Leader in Me subscriptions, training, consulting, and licensing. Results continued to be affected by COVID-19 disruptions to workplaces, schools, travel, and in-person training.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $48.2 million | $53.7 million | $96.5 million | $112.4 million |
| Gross profit / margin | $37.3 million / 77.5% | $38.7 million / 71.9% | $73.7 million / 76.4% | $80.7 million / 71.8% |
| Operating income (loss) | $0.8 million | ($0.4 million) | $0.7 million | ($0.5 million) |
| Net income (loss) | ($46,000) | $1.1 million | ($0.9 million) | $0.6 million |
| Adjusted EBITDA | $5.1 million | $4.1 million | $8.8 million | $9.0 million |
| Cash from operating activities | — | $21.9 million | $17.4 million |
Q2 diluted loss per share was effectively $0.00; first-half loss per share was $0.07. SG&A fell $2.5 million in Q2, mainly from lower travel, marketing, and associate costs and pandemic-related savings. First-half investing cash outflow was $2.2 million, including $1.3 million of curriculum development; financing cash outflow was $6.8 million.
Balance sheet and liquidity
At February 28, 2021, cash and cash equivalents were $40.3 million, compared with $27.1 million at August 31, 2020; $13.5 million was held at foreign subsidiaries. Current assets were $100.3 million and current liabilities were $101.1 million. Term notes totaled $17.5 million, including $5.0 million current; the corporate-campus financing obligation totaled $15.4 million. The company had no borrowings on its $15.0 million revolving credit facility. Operating cash flow increased 26% year over year, and cash rose by $13.2 million during the first half.
The company reported compliance with its amended credit agreement covenants at February 28, 2021. Temporary covenants included minimum liquidity of $13 million through February 28, 2021 and minimum rolling four-quarter Adjusted EBITDA of $5 million at that date. The agreement restricted dividends and open-market repurchases until specified covenant compliance conditions were met. Management stated that existing cash, operating cash flows, and available external funding should cover operations for at least 12 months, subject to business and economic conditions.
Changes versus prior period
- Q2 sales declined 10%; first-half sales declined 14%. AAP sales rose 13% in Q2 and 14% in the first half, while annual AAP revenue retention remained above 90%.
- Subscription revenue growth improved gross margin, but did not offset lower materials sales, fewer education coaching and consulting days, canceled education symposiums, and reduced international revenue.
- Direct Offices Q2 sales fell $2.2 million, while segment Adjusted EBITDA rose to $6.1 million from $4.7 million. Education Q2 sales fell $2.4 million, though its Adjusted EBITDA loss narrowed to $0.9 million from $1.1 million.
- First-half International Licensees sales fell $1.4 million; lower royalties were partly offset by growth in AAP-related revenue. Education first-half Adjusted EBITDA loss widened to $3.1 million from $2.2 million.
- The first-half net loss contrasted with prior-year net income, despite higher operating cash flow and improved operating results. The tax provision was $0.5 million on a pretax loss of $0.4 million, producing an unusually high 138% effective tax rate, driven in part by a valuation allowance and nondeductible expenses.
Outlook, commentary, and risks
Management cited improving international sales, recovery in U.S./Canada bookings, stronger education renewal trends, and the ability to deliver services online. It expected previously contracted education coaching and consulting days to be delivered in the second half and anticipated further recovery as economies and schools reopened. Management was optimistic that subscription offerings would support improved earnings and cash flows versus the prior year, but did not provide specific revenue or earnings guidance.
For FY2021, the company estimated depreciation of approximately $6.5 million, amortization of $4.5 million, curriculum-development spending of $3.7 million, and property-and-equipment purchases of approximately $2.6 million. These are estimates, not guarantees.
COVID-19 remained a material uncertainty: the duration and severity of disruption, customer demand and payment capacity, school and workplace conditions, travel restrictions, and the pace of economic recovery could affect results and liquidity. Other disclosed risks include competition, customer and product mix, foreign exchange, cybersecurity, and execution of strategic plans. The company also reported modification of performance-based LTIP awards, $0.2 million of government COVID-19 assistance and a $0.2 million insurance-settlement gain in the first half, and CEO exercise of remaining stock options in January 2021.
Investor verification priorities
- Track AAP sales, retention, deferred subscription revenue ($58.5 million at quarter-end), and whether subscription growth converts to recognized revenue and cash.
- Verify recovery in Education and international operations, including delivery of postponed services and the return of in-person activity.
- Monitor cash generation, debt and financing-obligation payments, and compliance with credit covenants, particularly the May 2021 minimum Adjusted EBITDA threshold of $15 million.
- Assess the sustainability of cost reductions and gross-margin gains, and the effect of the unusually high effective tax rate and deferred-tax valuation allowance.
- Compare management’s spending estimates and recovery expectations with subsequent results; COVID-19 impacts remained difficult for the company to quantify.