Franklin Covey Co. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first two quarters ended February 28, 2015; comparisons are with the quarter and two quarters ended March 1, 2014. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context and results
Franklin Covey provides training, consulting, and related products focused on individual and organizational performance. It reports as one operating segment, with U.S./Canada, international, and corporate information also presented. Management described quarterly revenue as the second-highest second-quarter sales for the company’s current business, despite foreign-exchange headwinds and a difficult comparison with the prior-year launch of its re-created 7 Habits Signature Program.
| Metric | Quarter | Two quarters |
|---|---|---|
| Revenue | $46.3 vs. $46.5; essentially flat | $94.2 vs. $89.9; up 5% |
| Gross profit / margin | $30.0 vs. $31.4; 64.8% vs. 67.5% | $61.2 vs. $61.4; 65.0% vs. 68.3% |
| Operating income | $1.2 vs. $3.9 | $4.8 vs. $7.4 |
| Net income | $0.4 vs. $2.0; diluted EPS $0.02 vs. $0.12 | $2.3 vs. $3.7; diluted EPS $0.13 vs. $0.22 |
| Adjusted EBITDA | $3.8 vs. $6.6 | $9.7 vs. $12.6 |
Quarterly training and consulting revenue was nearly flat at $43.5 million. For the quarter, national account practices grew 19% and international licensee revenue grew 10%, while U.S./Canada direct and international direct sales each declined 6%. Sales Performance grew 30% and Education 14%. For the first half, training and consulting revenue rose 5% overall; national account practices grew 16% and international licensees 7%.
Cash flow, liquidity, and balance sheet
- First-half operating cash flow was $12.2 million, compared with $8.3 million a year earlier. Investing cash use was $1.8 million and financing cash use was $2.2 million. Cash increased $8.1 million to $18.6 million.
- At February 28, cash was $18.6 million, current assets $84.1 million, and current liabilities $28.5 million; net working capital was $55.7 million. At August 31, 2014, cash was $10.5 million and net working capital $50.1 million. The company had no line-of-credit borrowings at quarter-end.
- Total liabilities were $63.8 million, including a $26.7 million financing obligation related to the corporate-campus lease. The balance sheet also included a $2.5 million long-term contingent earn-out liability for NinetyFive 5.
- First-half share repurchases and related financing activity included $1.9 million of treasury-stock purchases; principal payments on the financing obligation were $0.6 million.
Material changes, outlook, and risks
- Profitability pressure: Quarterly gross margin fell 2.7 percentage points. Management cited currency effects, increased curriculum amortization, higher costs for certain offerings, and sales mix. Operating expenses rose $1.3 million year over year, principally from marketing, promotional activity, and added sales staff. The company reported a $0.8 million adverse foreign-exchange impact on quarterly operating income, including $0.4 million in transaction losses; foreign exchange reduced translated quarterly sales by $1.2 million.
- Management outlook: The company expected Education practice sales to continue growing, with most of the practice’s annual growth typically occurring in the fourth fiscal quarter. It anticipated fiscal 2015 property and equipment purchases of about $3.8 million, curriculum-development spending of $5.0 million, depreciation of about $4.3 million, and intangible amortization of about $3.8 million. Replacing its ERP system later in fiscal 2015 could increase capital spending. Management believed existing resources would support operations for at least 12 months and expected operating cash flow to improve year over year.
- Credit facility: On March 31, 2015, after quarter-end, the company amended its facility, increasing the maximum commitment from $10 million to $30 million, extending maturity to March 31, 2018, and reducing pricing to LIBOR plus 1.85%. The amendment added a limit requiring line borrowings not to exceed 150% of consolidated accounts receivable. Existing financial covenants remained in place.
- Liquidity and collection risks: Collections remained slower than expected for government and Education sales, licensees, and some longer-term contracts. Management said these trends could persist in fiscal 2015, though it did not view them as indicating a significant increase in potentially uncollectible accounts. Liquidity depends in part on sales, cost control, capital spending, and collections; additional financing may not be available on acceptable terms.
- Foreign exchange and FCOP: A stronger U.S. dollar adversely affected reported international sales and expenses; management warned that further currency strength or international volatility could weigh on results. The company held a 19.5% interest in FC Organizational Products (FCOP) and had a $3.9 million receivable, net of discount, at quarter-end. Because of lower estimated FCOP cash flows, it did not recognize certain additional leasing and reimbursement revenue where collectability was not reasonably assured. The company received $2.3 million from FCOP during the quarter and another $0.6 million after quarter-end.
- Other contingencies and capital allocation: NinetyFive 5 earn-out payments depend on performance thresholds and will be remeasured. The board approved a $10 million repurchase authorization in January and increased it to $40 million in March, subject to a cash or financing condition; repurchases are discretionary. The company reported no material changes in market-risk disclosures and used no foreign-currency or interest-rate derivatives in the quarter.
Most important facts for investors to verify
- Whether revenue growth translates into a recovery in gross margin, operating income, and adjusted EBITDA.
- Whether the forecast improvement in operating cash flow materializes, particularly as receivable collections and seasonal working-capital movements continue.
- The effect of currency movements on reported sales, operating costs, and international operations.
- FCOP’s ability to repay the recorded receivable and the assumptions supporting its collectability.
- Use and availability of the expanded credit facility, compliance with its covenants, and the scale of any share repurchases.
- Progress toward the stated fiscal 2015 spending estimates and the potential additional cost of the ERP replacement.