Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 29, 2010 (Third Quarter of Fiscal 2010)
Business Overview: A global provider of execution, leadership, and personal-effectiveness training and consulting services. The company operates through regional sales offices, wholly-owned subsidiaries, and licensee partners in over 100 countries.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | YTD 3Q 2010 | YTD 3Q 2009 |
|---|---|---|---|---|
| Net Sales | $30.5 million | $29.5 million | $92.2 million | $89.7 million |
| Gross Profit | $19.2 million | $18.7 million | $59.1 million | $56.8 million |
| Gross Margin | 63.0% | 63.3% | 64.1% | 63.3% |
| Operating Income (Loss) | $(0.2) million | $(1.0) million | $0.1 million | $(6.2) million |
| Net Income (Loss) | $0.1 million | $(5.1) million | $0.0 million | $(6.3) million |
| Cash & Equivalents | $2.2 million | $1.7 million (Aug 2009) | $2.2 million | $1.2 million (May 2009) |
| Working Capital | $(0.4) million | $(3.2) million (Aug 2009) | $(0.4) million | N/A |
| Line of Credit Outstanding | $9.3 million | $12.9 million (Aug 2009) | $9.3 million | N/A |
| EBITDA (Consolidated) | $1.7 million | $1.0 million | $5.9 million | $(0.6) million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 3% year-over-year for the quarter and 3% for the nine-month period. Growth was driven by U.S./Canada direct sales (+8% QoQ) and National Account Practices (+14% QoQ), partially offset by declines in International Direct sales (-12% QoQ) due to weakness in Japan.
- Profitability Improvement: The company narrowed its operating loss significantly, moving from a $1.0 million loss in Q3 2009 to a $0.2 million loss in Q3 2010. For the nine-month period, the company achieved a slight operating profit of $0.1 million compared to a $6.2 million loss in the prior year.
- Discontinued Operations: The company sold the product sales component of its Japan subsidiary. Results for this division are now reported as discontinued operations. The sale closed June 1, 2010, for approximately $3.4 million.
- Cost Reduction: Selling, General, and Administrative (SG&A) expenses decreased by $0.1 million in the quarter and $4.1 million year-to-date, driven by restructuring initiatives, reduced headcount, and lower advertising spend.
- Acquisition Payment: The company paid $3.3 million in cash during the quarter as the first of five contingent earnout payments to the former owners of CoveyLink Worldwide, LLC.
Guidance, Outlook, and Risks
- Outlook: Management notes an improved booking pace and the awarding of significant training contracts expected to strengthen sales in Q4 2010 and Q1 2011. The company anticipates existing capital resources will be adequate for the next 12 months.
- Liquidity: The company maintains a $13.5 million line of credit (reducing to $10.0 million in Dec 2010) with a maturity extended to March 2011. Management believes it is in compliance with financial covenants, though a temporary non-compliance regarding a Japan loan was waived.
- Tax Position: The effective tax rate for the nine-month period was 98% due to a tax benefit based on anticipated full-year pre-tax income and the expiration of statutes of limitations on uncertain tax positions. The expected annual effective rate is approximately 88%.
- Risks:
- Secondary Liability: The company remains secondarily liable for retail store leases assigned to Franklin Covey Products (in which it owns ~19%). Default by that entity could adversely affect cash flows.
- Asset Impairment: Significant declines in share price or future cash flow forecasts could trigger impairment charges on goodwill and the "Covey" trade name.
- Market Conditions: Continued economic weakness in Japan and the U.S. West region impacts sales performance.
Investor Verification Checklist
- Japan Sale Closing: Verify the final closing of the Japan product sales division and the receipt of the remaining 20% of the purchase price.
- Debt Covenants: Monitor compliance with the Funded Debt to EBITDAR and Fixed Charge Coverage ratios required by the line of credit facility.
- Japan Economic Recovery: Assess whether sales in Japan can recover from the impact of weak economic conditions and the loss of the one-time IP sale from the prior year.
- Franklin Covey Products: Review the financial health of the affiliate holding the retail store leases to gauge the risk of secondary liability.
- Booking Pace: Validate management's assertion of improved booking pace and the conversion of these bookings into Q4 revenue.