Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 1998 (Second Quarter of Fiscal Year 1998)
Context: The Company was formed by the merger of Franklin Quest Co. and the Covey Leadership Center effective June 2, 1997. Results for the prior year periods do not include Covey's operations. The Company operates retail stores, sells products (primarily planners), and provides training and printing services.
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 1998 | Six Months Ended Feb 28, 1998 |
|---|---|---|
| Sales | $138,564,000 | $282,483,000 |
| Gross Margin | $85,068,000 (61.4%) | $172,337,000 (61.0%) |
| Income from Operations | $22,568,000 | $47,203,000 |
| Net Income | $12,462,000 | $23,993,000 |
| Diluted EPS | $0.49 | $0.94 |
| Cash and Equivalents | $24,026,000 (Balance Sheet) | $24,026,000 (Balance Sheet) |
| Operating Cash Flow | N/A | $38,721,000 |
| Debt (Line of Credit) | $86,000,000 | $86,000,000 |
| Working Capital | $95,439,000 | $95,439,000 |
Note: All figures in thousands except per share data. Working Capital calculated as Current Assets ($152,963) minus Current Liabilities ($57,524).
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 31% ($32.6M) for the quarter and 36% ($74.1M) for the six months compared to the prior year. This growth is primarily attributed to the merger with Covey, increased retail store count (117 stores vs. 95 in prior year), and higher seminar participation.
- Segment Performance: Training sales surged 99% for the quarter and 110% for the six months, driven by the merger. Product sales grew 14% (quarter) and 17% (six months), with retail store sales contributing significantly.
- Profitability: Gross margin improved to 61.4% (quarter) and 61.0% (six months) from 59.4% and 58.6% respectively, due to higher-margin Covey products and favorable revenue mix.
- Operating Expenses: Operating expenses as a percentage of sales increased to 45.1% (quarter) and 44.3% (six months) from 39.1% and 37.8%. This reflects higher expenses from acquired entities (Covey, Premier) and increased amortization of intangible assets.
- Accounting Change: A cumulative effect of an accounting change (EITF 97-13) resulted in a $2.08M charge (net of tax) in the quarter, reducing net income. This related to the write-off of previously capitalized business reengineering costs.
Guidance, Outlook, and Risks
- Outlook: Management expects training sales as a percentage of total sales to decline in the future as product sales (specifically planner renewals) grow at a faster rate.
- Liquidity: The Company holds $24.0M in cash and has $14.0M in available, unused lines of credit. Management believes cash flows are sufficient to meet working capital needs.
- Capital Allocation: The Company repurchased 260,800 shares for $5.8M during the six-month period. The Board approved an expansion of the stock repurchase program to 3,000,000 shares in March 1998.
- Risks:
- Year 2000: Systems are compliant, but risks exist regarding vendor systems.
- Integration: Risks associated with integrating acquired businesses (Covey, Premier).
- Market Factors: Dependence on product acceptance, competition, and customer order volumes.
Investor Verification Checklist
- Merger Impact: Verify the sustainability of the 99% training sales growth driven by the Covey merger versus organic growth.
- Expense Ratios: Monitor if operating expense ratios stabilize as the integration of acquired entities matures.
- Debt Utilization: Confirm the utilization of the $86M line of credit and the $14M available credit facility.
- Accounting Adjustments: Review the impact of EITF 97-13 on future capitalization of IT and reengineering costs.
- Retail Expansion: Assess the performance of the 22 new retail stores opened in the past year.