Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 27, 2010 (First Quarter of Fiscal 2011)
Business Overview: A global provider of execution, leadership, and personal-effectiveness training and consulting services. The company operates through regional sales offices, wholly-owned subsidiaries, and licensee partners in over 140 countries.
Key Financial Metrics
| Metric | Q1 FY2011 (Nov 27, 2010) |
Q1 FY2010 (Nov 28, 2009) |
|---|---|---|
| Net Sales | $39.4 million | $31.9 million |
| Gross Profit | $25.1 million | $20.6 million |
| Gross Margin | 63.6% | 64.6% |
| Income from Operations | $3.4 million | $1.4 million |
| Net Income | $0.8 million | $0.2 million |
| Diluted EPS | $0.05 | $0.01 |
| Cash and Equivalents | $1.7 million | $1.1 million |
| Net Working Capital | $7.9 million | $4.6 million |
| Line of Credit Outstanding | $11.3 million | $9.5 million |
| Long-term Financing Obligation | $30.2 million | $31.1 million |
Cash Flow: Net cash used in operating activities was $2.1 million, compared to $1.6 million provided in the prior year. This was primarily due to an increase in accounts receivable and payments of accrued liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23% ($7.5 million) driven by a 24% increase in training and consulting services. Growth was led by government services contracts ($6.1 million recognized) and improved sales in Japan and U.S./Canada direct offices.
- Profitability: Operating income more than doubled to $3.4 million. Net income increased to $0.8 million, excluding discontinued operations which contributed $0.1 million in the prior year.
- Margin Compression: Gross margin declined slightly to 63.6% due to a shift in the mix of training delivery methods (more onsite training vs. higher-margin facilitator-led training).
- Tax Provision: The effective tax rate was approximately 71%, significantly higher than statutory rates, due to foreign withholding taxes and taxable interest income on a management stock loan program.
- Working Capital: Accounts receivable increased by $5.2 million, largely due to timing of collections on government contracts.
Outlook, Risks, and Management Commentary
- Liquidity and Debt: The company's $13.5 million revolving Line of Credit expires in March 2011. Management is negotiating a renewal but has outlined contingency plans (deferring capital purchases, reducing salaries, deferring executive compensation) if renewal fails.
- Future Tax Impact: Management anticipates discrete tax items will add approximately $2.3 million to the income tax provision for the full fiscal year 2011.
- Pipeline: The booking pace is improving, with the pipeline of booked days and awarded revenue approximately $11.0 million higher than the prior year period.
- Risks: Key risks include the potential inability to renew the Line of Credit, delays in U.S. federal budget approvals affecting government services revenue, and the collectability of accounts receivable.
- Discontinued Operations: The Japan product sales component was sold in fiscal 2010; results are presented as discontinued operations for the prior year comparison.
Investor Verification Checklist
- Line of Credit Renewal: Verify the status of negotiations for the credit facility expiring March 2011 and the company's ability to meet covenants (Funded Debt/EBITDAR < 3.0).
- Government Contract Collections: Monitor the collection cycle for the $6.1 million in government services revenue recognized in Q1, which drove the increase in accounts receivable.
- Tax Rate Normalization: Assess the impact of the 71% effective tax rate on future earnings and the timeline for utilizing net operating loss carryforwards.
- Contingency Plans: Review the specific cost-cutting measures (salary reductions, deferred payments) that would be triggered if financing is not secured.
- Discontinued Operations: Ensure comparisons of net income exclude the $0.1 million from discontinued operations present in the prior year but absent in the current year.