Franklin Covey Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended May 30, 2015; year-to-date results cover the three quarters ended May 30, 2015. Comparatives are the quarter and three quarters ended May 31, 2014. Dollar amounts are in millions unless noted.
Business context and financial results
Franklin Covey provides performance-improvement training, consulting, and related products and licensing. It reports as one operating segment, with U.S./Canada, international, and corporate activities shown for comparability.
| Metric | Q3 FY2015 | Q3 FY2014 | Three quarters FY2015 | Three quarters FY2014 |
|---|---|---|---|---|
| Revenue | $48.3 | $47.1 | $142.5 | $137.1 |
| Gross profit / margin | $30.3 / 62.7% | $29.9 / 63.4% | $91.5 / 64.2% | $91.3 / 66.6% |
| Operating income | $1.4 | $3.0 | $6.2 | $10.4 |
| Net income | $1.2 | $1.9 | $3.4 | $5.6 |
| Diluted EPS | $0.07 | $0.11 | $0.20 | $0.33 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $15.4 | $9.3 |
Third-quarter operating margin was approximately 2.9%, versus 6.4% a year earlier; year-to-date operating margin was approximately 4.3%, versus 7.6%. Adjusted EBITDA, a non-GAAP measure, was $4.9 million for Q3 and $14.6 million year to date, compared with $5.1 million and $17.8 million, respectively.
Liquidity, debt, and cash flow
- Cash was $13.8 million at May 30, 2015, up from $10.5 million at August 31, 2014; $5.3 million was held at foreign subsidiaries. Working capital was $53.0 million, versus $50.1 million.
- There were no borrowings on the revolving credit line. The company had a $30 million facility, extended to March 31, 2018, with interest at LIBOR plus 1.85%; it reported compliance with covenants. A new covenant limits line borrowings to 150% of consolidated receivables.
- Long-term financing obligation related to the corporate campus was $26.4 million, including its current portion, versus $27.4 million at August 31, 2014. This is separate from the undrawn revolving facility.
- Year-to-date operating cash flow of $15.4 million included seasonal receivables collections, $2.8 million collected from FC Organizational Products (FCOP), and a $1.7 million foreign tax refund. Investing outflow was $3.5 million; financing outflow was $8.3 million, including $7.9 million of treasury-stock purchases.
Changes versus prior comparable periods
- Q3 revenue rose 2.5% despite an estimated $1.3 million adverse foreign-exchange impact. Management described it as the company’s highest third-quarter revenue for its current business. Year-to-date revenue increased about 4%.
- National Account Practices grew 12% in Q3, led by Education; year to date, Education increased 22% and Sales Performance 7%. U.S./Canada direct revenue rose modestly, while reported international direct and licensee revenue was reduced by currency effects.
- Profitability weakened: gross margin declined due to sales mix, higher costs in some offerings, and curriculum amortization. Operating expenses rose, including a $1.1 million impairment charge and higher sales, marketing, and personnel spending. Foreign-exchange remeasurement losses also weighed on Q3 operating results.
- Year-to-date cash from operations improved from $9.3 million to $15.4 million, while investing outflow fell from $14.9 million to $3.5 million. Treasury-stock purchases increased year over year.
Outlook, risks, and unusual items
- Management said the pipeline for Q4 FY2015 and Q1 FY2016 had improved significantly versus the prior year and expected conversion of some leads to produce strong revenue growth in Q4 and beyond. Education sales growth was expected to be concentrated in Q4. These are forward-looking expectations, not guarantees.
- Management expected existing capital resources to support operations for at least 12 months. FY2015 estimates included approximately $3.8 million of property and equipment purchases and $3.2 million of curriculum development spending; replacing the enterprise resource planning system could increase capital spending.
- Foreign-exchange exposure is a notable risk: a stronger U.S. dollar reduced reported international revenue, and continued currency strength or volatility could further affect sales and licensee royalties. The company used no foreign-currency or interest-rate derivatives during the period.
- Q3 included a $1.1 million asset impairment: $0.5 million related to discounted long-term receivables from FCOP and approximately $0.5 million of capitalized curriculum plus related prepaid royalties. The curriculum impairment followed a decision to discontinue an offering, including one affected by a third-party trademark issue.
- A $0.6 million tax benefit from realizing foreign tax credits contributed to the Q3 tax benefit and higher net income than pretax results alone imply. Management expected foreign tax credit carryforwards to be used by the end of FY2017, after which cash taxes were expected to approximate the tax provision.
- The FCOP relationship involves related-party receivables: $3.4 million net of discount was outstanding at May 30, 2015. The company also had a $2.5 million contingent earn-out liability related to its NinetyFive 5 acquisition, subject to remeasurement as performance targets are assessed.
- The board authorized repurchases of up to $40 million subject to liquidity conditions; 401,198 shares had been repurchased for $7.5 million through May 30, 2015. The plan may be changed or suspended and creates no obligation to repurchase shares.
Important facts for investors to verify
- Whether the improved sales pipeline converts into the forecast Q4 growth, particularly in Education, and how much reported growth is offset by foreign exchange.
- Whether gross margins and operating profitability recover as sales mix, curriculum costs, and investments in sales personnel evolve.
- Receivables collection trends, especially government, education, licensee, and longer-term contracts, and the collectability and timing of FCOP payments.
- Liquidity and covenant compliance as buybacks, capital investment, and any ERP replacement spending proceed; confirm the credit facility remains available on its stated terms.
- Potential changes in NinetyFive 5 earn-out estimates, tax-credit utilization, and implementation effects of the new revenue-recognition standard, whose impact the company had not yet determined.