Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 26, 2011 (Second Quarter of Fiscal 2011)
Business Overview: Franklin Covey is a global provider of execution, leadership, and personal-effectiveness training. The company operates through direct offices in the U.S., Canada, Australia, Japan, and the U.K., as well as through licensee partners in over 140 countries. Revenue is derived primarily from training and consulting services, products, and leasing.
Key Financial Metrics
| Metric (in thousands) | Q2 2011 | Q2 2010 | 2 Quarters 2011 | 2 Quarters 2010 |
|---|---|---|---|---|
| Net Sales | $35,478 | $29,751 | $74,895 | $61,677 |
| Gross Profit | $23,111 | $19,301 | $48,187 | $39,919 |
| Gross Margin | 65.1% | 64.9% | 64.3% | 64.7% |
| Operating Income | $1,488 | ($1,117) | $4,935 | $292 |
| Net Income (Loss) | $305 | ($381) | $1,101 | ($133) |
| Diluted EPS | $0.02 | ($0.03) | $0.06 | ($0.01) |
| Cash from Operations (2Q) | $8,308 (vs. $3,805 prior year) | |||
| Cash & Equivalents (End of Period) | $1,266 | |||
| Line of Credit Balance | $1,492 (vs. $9,532 at Aug 31, 2010) | |||
| Total Debt (Financing Obligation) | $30,743 (Current + Long-term) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% ($5.7M) for the quarter and 21% ($13.2M) for the two-quarter period compared to the prior year. Growth was broad-based across U.S./Canada direct offices, international direct offices, and licensee royalties.
- Profitability Turnaround: The company returned to profitability, reporting operating income of $1.5M for the quarter compared to a loss of $1.1M in the prior year. This was driven by sales growth outpacing expense increases.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased $1.4M quarter-over-quarter due to commissions and new personnel, but as a percentage of sales, SG&A declined from 62.1% to 56.1%.
- Liquidity Improvement: Net working capital increased significantly to $10.9M from $4.6M at the end of the prior fiscal year. The company aggressively reduced its line of credit balance from $9.5M to $1.5M.
- Tax Rate Volatility: The effective tax rate for the two quarters was approximately 69%, significantly higher than statutory rates due to foreign withholding taxes and deemed dividends where foreign tax credits could not be utilized.
Outlook, Risks, and Unusual Items
- Guidance & Outlook: Management notes an improved booking pace with a pipeline of booked days and awarded revenue approximately $12.3M higher than the prior year. They anticipate adequate liquidity for the next 12 months.
- Subsequent Financing: Subsequent to the period end, the company entered a new credit agreement providing a $10M revolving line of credit and a $5M term loan.
- Subsequent Earnout Payment: In March 2011, the company paid $5.4M in contingent earnout payments related to the CoveyLink acquisition.
- Risk Factors:
- Japan Disasters: The Tokyo office was slightly damaged by recent earthquakes. While associates were unharmed, disruptions to transportation and radiation concerns may adversely impact operations and sales in Japan for the remainder of fiscal 2011.
- Geopolitical Instability: Civil unrest in countries like Egypt and Bahrain may affect licensee performance.
- Government Contracts: Sales through the government services group are subject to U.S. federal budget approval and funding issues.
- Unusual Items: The prior year included a $1.0M non-recurring cost related to CEO travel reimbursement and bonuses for management stock loan forgiveness, which did not repeat in the current period.
Investor Verification Checklist
- Japan Exposure: Verify the specific financial impact of the natural disasters on the Japan subsidiary's revenue and operations for the remainder of fiscal 2011.
- Government Contract Sustainability: Assess the risk of delayed or reduced revenue from U.S. government contracts due to federal budget constraints.
- Tax Provision Normalization: Monitor future quarters to determine when the effective tax rate normalizes after the utilization of domestic net operating loss carryforwards.
- Debt Covenants: Confirm continued compliance with the new credit agreement covenants, specifically the funded debt to EBITDAR ratio and minimum net worth requirements.
- Licensee Performance: Review the stability of international licensee revenue streams in regions experiencing civil unrest.