Franklin Covey Co. — Form 10-Q summary
Reporting period: Fiscal third quarter and first three quarters ended May 26, 2012; comparisons are with the periods ended May 28, 2011. The company provides performance training, consulting, related products, and leasing services. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Three quarters FY2012 | Three quarters FY2011 |
|---|---|---|---|---|
| Revenue | $41.3 | $40.9 | $119.4 | $115.8 |
| Gross profit | $26.1 | $25.8 | $77.7 | $74.0 |
| Gross margin | 63.3% | 63.0% | 65.0% | 63.9% |
| Operating income | $3.4 | $2.9 | $9.9 | $7.8 |
| Net income | $1.6 | $0.7 | $4.4 | $1.8 |
| Diluted EPS | $0.09 | $0.04 | $0.24 | $0.11 |
- Quarterly revenue rose 1%; year-to-date revenue rose 3%. Training and consulting revenue was up 2% in both comparisons. Product revenue fell 23% in Q3 but increased 22% year to date; leasing revenue increased in both periods.
- Q3 SG&A increased $0.4 million year over year, while depreciation and amortization fell by approximately $0.3 million each. Year-to-date SG&A increased $2.8 million, including higher share-based compensation, marketing, and personnel costs.
- Operating cash flow was $8.7 million for the first three quarters, versus $6.2 million a year earlier. Investing activities used $3.2 million; financing activities used $2.0 million. Cash increased to $6.5 million from $3.0 million at August 31, 2011.
- At May 26, current assets were $55.1 million and current liabilities $28.9 million; management reported net working capital of $26.3 million, up from $16.7 million at fiscal year-end.
- Debt included $3.3 million outstanding on the term loan and no balance on the revolving credit line. The financing obligation related to the corporate campus lease totaled $29.7 million, including current and long-term portions.
Material changes and management commentary
- Management called this the strongest third quarter ever for the company’s current business, while noting that growth was less pronounced than the prior year’s substantial sales increase.
- Q3 growth came from several channels, including national account practices, international operations, and regional offices. Year-to-date U.S./Canada direct sales were affected by a $5.0 million decline in government services revenue; contracts were renewed in Q3, and management expected delivery over the next 12 months at levels similar to fiscal 2012.
- Japan sales improved versus the prior-year period, which had been affected by the earthquake and related disruptions. Lower speaking and publication revenues weighed on self-funded marketing sales.
- The effective tax rate was approximately 42% in Q3 and 45% year to date, compared with approximately 67% and 69%, respectively, in the prior-year periods. The comparison reflects foreign tax credits recognized in FY2012; management expects cash taxes to remain below tax expense while tax assets are used.
Outlook, liquidity, and risks
- After quarter-end, the company amended its credit agreement to extend the $10 million revolving facility’s maturity to March 31, 2015. The rate remains LIBOR plus 2.50%; the unused fee increased from 0.25% to 0.33%. Covenants include funded debt to EBITDAR below 3.00:1, fixed-charge coverage above 1.5:1, and an annual capital-expenditure limit of $8 million, excluding capitalized curriculum development. Management reported covenant compliance at May 26, 2012.
- The board authorized repurchases of up to $10 million of common stock, to be funded with available cash exceeding $10 million and subject to the company having no revolving-credit balance. No shares were repurchased during the quarter.
- Management estimated FY2012 depreciation expense of approximately $2.9 million and amortization expense of approximately $2.5 million. It stated that existing capital resources should be adequate for at least the next 12 months, subject to sales, cost control, capital spending, collections, and other factors.
- Risks include economic and competitive pressures, customer and sales-mix changes, execution of new offerings, and potential disruption to outsourced information systems and fulfillment services. The company also remains secondarily liable for certain retail leases assigned to FC Organization Products, LLC, in which it holds an approximately 19% interest. Collection of management stock-loan receivables is another stated risk.
- Management identified estimation-sensitive areas including share-based compensation, receivable and inventory reserves, asset impairment, and income taxes. The filing reports no material change in market-risk disclosures and no use of currency or interest-rate derivatives in the period.
Important facts for investors to verify
- Whether renewed government contracts sustain the expected service levels and how government-related revenue trends develop.
- Whether revenue growth converts into sustained operating cash flow given seasonal bonus and commission payments and other working-capital movements.
- Compliance with credit covenants and the terms and availability of the extended revolving facility.
- Whether the proposed share repurchase proceeds, and its cash threshold and no-revolver-balance conditions remain applicable.
- Exposure to FC Organization Products lease obligations, management stock-loan collections, and the assumptions underlying tax assets and share-based compensation.