FC

Franklin Covey Co. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Franklin Covey Co. for the period ended February 25, 2006. The company provides integrated consulting, training, and performance enhancement solutions, including the well-known "7 Habits" curriculum and FranklinCovey Planners. The company operates two primary segments: the Consumer and Small Business Unit (CSBU) and the Organizational Solutions Business Unit (OSBU).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total sales decreased 5% ($4.2 million) for the quarter and 1% ($1.0 million) for the two-quarter period compared to the prior year. Product sales declined 8% due to fewer retail stores (97 vs. 121) and reduced technology product sales. Training and consulting services sales increased 1% for the quarter and 8% for the two-quarter period, driven by international growth.
• Profitability: Income from operations increased 33% to $10.6 million for the quarter. Net income available to common shareholders increased 65% to $8.1 million, significantly aided by reduced preferred stock dividend obligations.
• Expenses: Selling, General, and Administrative (SG&A) expenses decreased 9% ($3.5 million) for the quarter, primarily due to reduced retail store costs, lower stock-based compensation, and a $0.3 million recovery of legal expenses.
• Legal Settlement: The company recorded a one-time gain of $0.9 million from the settlement of a legal case against World Marketing Alliance, Inc. (WMA).
• Liquidity: Cash and cash equivalents decreased from $51.7 million to $36.4 million, largely due to the redemption of $20.0 million in Series A preferred stock during the first two quarters of fiscal 2006.

Guidance, Outlook, and Risks

• Preferred Stock Redemption: The company redeemed $10.0 million of preferred stock in the quarter and $20.0 million for the two-quarter period. Shareholders approved an extension of the redemption deadline to December 31, 2007, contingent on further redemptions. This strategy reduces annual dividend obligations by $5.0 million.
• Stock Repurchase: The Board authorized a $10.0 million common stock repurchase program. The company purchased 210,200 shares for $1.6 million during the quarter.
• Store Closures: The company closed eight retail stores during the quarter and three additional stores subsequently. Management continues to evaluate underperforming locations.
• Outsourcing Agreement: Subsequent to the quarter end, the company amended its IT outsourcing agreement with EDS, reducing minimum annual payments by $84.2 million over the contract life.
• Risks: Key risks include foreign currency exchange fluctuations (notably the Japanese Yen), the ability to maintain sales growth in a competitive environment, and the realization of deferred tax assets given a history of operating losses.

Investor Verification Checklist

• Preferred Stock Reduction: Verify the impact of the $50.0 million total preferred stock redemption on future dividend obligations and net income available to common shareholders.
• Retail Footprint: Assess the long-term impact of closing retail stores (down to 97) on product sales volume versus cost savings.
• Legal Settlement: Confirm the non-recurring nature of the $0.9 million gain from the WMA settlement when analyzing core operating performance.
• Stock-Based Compensation: Review the adoption of SFAS 123R and the new Long-Term Incentive Plan (LTIP) to understand future expense recognition trends.
• Working Capital: Monitor the decrease in net working capital ($49.9M to $40.7M) and the company's ability to generate positive operating cash flow to fund future redemptions and repurchases.