Business context and reporting period
Franklin Covey Co. is a global content and intellectual-property company providing training, consulting, products, and related services focused on individual and organizational performance. This unaudited Form 10-Q covers the fiscal second quarter and first two quarters ended February 25, 2012; comparisons are with the corresponding 2011 periods. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Quarter ended Feb. 25, 2012 | Prior-year quarter | Six months ended Feb. 25, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $38.6 | $35.5 | $78.2 | $74.9 |
| Gross profit | $25.0 | $23.1 | $51.5 | $48.2 |
| Gross margin | 64.7% | 65.1% | 65.9% | 64.3% |
| Operating income | $2.8 | $1.5 | $6.5 | $4.9 |
| Income before taxes | $2.2 | $0.9 | $5.2 | $3.6 |
| Net income | $1.2 | $0.3 | $2.8 | $1.1 |
| Diluted EPS | $0.06 | $0.02 | $0.16 | $0.06 |
| Operating cash flow | — | $9.2 | $8.3 |
Quarterly revenue growth was 9%; six-month growth was 4%. Training and consulting services remained the largest revenue source. Six-month sales growth included products (+69%) and leasing (+19%), while training and consulting grew 2%. The quarter’s gross margin slipped year over year, while the six-month margin improved.
- Cash and liquidity: Cash was $8.2 at February 25, 2012, versus $3.0 at August 31, 2011. Working capital was $22.2, up from $16.7.
- Cash flows: Six-month operating cash flow was $9.2; investing used $2.7, including $1.7 for curriculum development and $1.0 for property and equipment; financing used $1.3. Cash increased $5.2 during the period.
- Debt and obligations: The company reported $4.0 outstanding on its term loan and no revolver balance at February 25. It also had a long-term campus financing obligation of approximately $30.0, including its current portion.
- Taxes and costs: The effective tax rate was approximately 46% for both the quarter and six-month period. Six-month cash taxes paid were $1.1. Interest expense was $1.3 for the six months.
Material changes versus prior comparable periods
- Quarterly sales increased across primary delivery channels and nearly all practices and product lines. International direct sales benefited from Japan, while national-account sales rose on new contracts and demand in sales performance and education.
- Six-month U.S./Canada direct sales declined 6%, principally because government-services sales fell $4.4 million as work under certain contracts had largely been delivered in prior periods. Excluding those expected government-service reductions, regional office sales increased 8%.
- Operating income and net income improved in both comparison periods. Six-month SG&A rose $2.4 million, including higher associate costs, share-based compensation, and advertising and promotion; lower legal, rent, and professional-services costs partly offset the increases.
- Share-based compensation expense rose to $2.2 million for the six months from $0.8 million a year earlier, primarily reflecting performance awards and other grants. The filing notes this expense depends in part on estimates of whether performance conditions will be met.
- Management attributed the lower current-period tax rate partly to foreign tax credits; the prior-year rate did not include those credits based on the company’s then-current expectations.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expected fiscal 2012 depreciation of approximately $2.8 million and amortization of approximately $2.5 million.
- Management said existing capital resources should be adequate for at least the next 12 months, subject to sales, cost control, capital spending, receivable collections, economic conditions, and competition. Results are seasonal; the December-February quarter may have fewer training programs and consulting arrangements.
- After quarter-end, the company extended its $10.0 million revolving credit facility to March 31, 2013, at LIBOR plus 2.50%. Financial covenants include funded debt to EBITDAR below 3.00:1, fixed-charge coverage above 1.5:1, an $8.0 million annual capital-expenditure limit (excluding capitalized curriculum development), and minimum net worth of $67.0 million. The company said it believed it was in compliance at February 25; covenant breaches may allow the lender to accelerate repayment.
- After quarter-end, the board authorized a new share-repurchase plan of up to $10.0 million, with no expiration date and no obligation to repurchase shares. Management said it intended to use available cash exceeding $10.0 million for purchases.
- The company remains secondarily liable for certain retail-store leases assigned to FC Organizational Products, LLC (FCOP), in which it owns approximately 19%. If FCOP cannot meet those obligations and the company cannot obtain adequate remedies, results and cash flows could be adversely affected. The company is also a creditor under management stock loans; failure to collect could harm financial position and cash flows.
- A contract dispute naming the company and FCOP was settled in December 2011; FCOP paid the settlement amount. The company recorded a $0.4 million reimbursement of previously expensed legal costs during the quarter.
- Other disclosed risks include government-contract run-off, dependence on existing offerings and acceptance of new products, competition, possible impairment of goodwill or intangible assets, and variability in tax estimates. Management reported no material changes in market-risk disclosures and no use of foreign-currency or interest-rate derivatives in the period.
Important facts for investors to verify
- Whether growth in international, national-account, and product sales can offset continuing reductions in government-services work and the effect of seasonality.
- Whether operating cash generation and receivable collections remain sufficient to support operations, debt service, curriculum investment, and any repurchases.
- Compliance with the renewed credit facility’s covenants and the timing and terms of repayment of the term loan and campus financing obligation.
- The extent of dilution and expense from performance-based awards, and whether their EBITDA and Productivity Practice sales targets are achieved.
- Collectibility of management stock loans and FCOP obligations, including the company’s contingent exposure on assigned leases.
- The actual pace and funding of the newly authorized repurchase plan; authorization does not require purchases.