Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 28, 2015 (First Quarter of Fiscal 2016)
Business Overview: A global company focused on individual and organizational performance improvement through training, consulting, and products. Key offerings include "The 7 Habits of Highly Effective People" and "The Leader in Me."
Key Financial Metrics
| Metric | Q1 2016 (Nov 28, 2015) | Q1 2015 (Nov 29, 2014) |
|---|---|---|
| Net Sales | $45.2 million | $47.9 million |
| Gross Profit | $30.1 million | $31.2 million |
| Gross Margin | 66.5% | 65.2% |
| Income from Operations | $1.8 million | $3.6 million |
| Net Income | $0.8 million | $1.8 million |
| Diluted EPS | $0.05 | $0.11 |
| Operating Cash Flow | $7.1 million | ($1.9 million) used |
| Cash and Equivalents | $22.3 million | $7.6 million |
| Financing Obligation (Total) | $25.7 million | $26.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6% year-over-year. Primary drivers included a $2.7 million loss from a government contract not renewed in fiscal 2016, a $1.0 million adverse impact from foreign exchange rates, and a $0.6 million decrease in domestic regional sales due to soft economic conditions in the oil and gas sector.
- Profitability Compression: Operating income fell 51% to $1.8 million. While gross margin improved to 66.5% due to a shift toward higher-margin facilitator sales, operating expenses increased by $0.7 million, driven by investments in new sales personnel and higher share-based compensation.
- Cash Flow Improvement: Operating cash flow turned positive, increasing by $9.0 million compared to the prior year. This was primarily due to improved collections of accounts receivable and reduced payments of accrued liabilities.
- Segment Performance: The Education Practice division saw a 35% sales increase ($2.1 million growth), partially offsetting declines in Strategic Markets (down 27%) and Direct Offices (down 7%).
Guidance, Outlook, and Risks
- Capital Allocation: On December 8, 2015, the Board approved a modified Dutch auction tender offer to repurchase up to $35.0 million of common stock at a price range of $15.50 to $17.75 per share. Financing is expected to come from available cash and a potential new $20.0 million term loan.
- Outlook: Management anticipates continued growth in the Education Practice, though most growth is expected in the fourth fiscal quarter. They expect depreciation to total approximately $4.3 million and amortization to total $3.3 million for fiscal 2016.
- Risks and Contingencies:
- Foreign Exchange: A strengthening U.S. dollar continues to adversely impact international sales and licensee royalties.
- Government Contracts: Uncertainty remains regarding the renewal of federal agency contracts, which may lead to further revenue declines in Strategic Markets.
- Contingent Liabilities: The fair value of the contingent earn-out liability from the NinetyFive 5 acquisition increased by $0.1 million to $2.6 million during the quarter.
- FCOP Receivables: The company holds a $4.8 million receivable from FC Organizational Products, a related party, with collection dependent on FCOP's seasonal cash flows.
Investor Verification Checklist
- Tender Offer Status: Verify the final terms and completion status of the $35.0 million Dutch auction tender offer announced in December 2015.
- Government Contract Renewals: Monitor updates on the status of the federal agency contract that caused a $2.7 million revenue drop; determine if it will be reopened for bidding.
- Foreign Exchange Exposure: Assess the ongoing impact of the strengthening U.S. dollar on international licensee royalties and direct office sales.
- FCOP Collectability: Review the financial health of FC Organizational Products to ensure the $4.8 million receivable remains collectible.
- Capital Expenditures: Track actual spending against the projected $7.0 million for property/equipment and $4.2 million for curriculum development, noting potential increases due to ERP software replacement.