Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 28, 1998 (First Quarter of Fiscal 1999)
Reporting Change: The Company adopted a modified 52/53-week reporting year, resulting in one fewer business day in this quarter compared to the prior year period.
Key Financial Metrics
| Metric | Q1 1999 (Nov 28) | Q1 1998 (Nov 30) |
|---|---|---|
| Sales | $140,362 | $143,919 |
| Gross Margin | $86,431 (61.6%) | $87,269 (60.6%) |
| Income from Operations | $20,975 | $24,635 |
| Net Income | $10,913 | $11,531 |
| Diluted EPS | $0.50 | $0.45 |
| Cash from Operations | $17,122 | $16,866 |
| Cash and Equivalents | $35,185 | $26,416 |
| Working Capital | $95,684 | $81,940 |
| Total Debt (Current + Long-term) | $148,735 | $130,763 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 2.5% to $140.4 million. This was driven by an 8% drop in Training and Education sales and a 22% drop in "Other" sales (due to the sale of the Institute of Fitness). These were partially offset by a 20% increase in International sales (driven by the King Bear acquisition) and flat Consumer Products sales.
- Margin Expansion: Gross margin percentage improved to 61.6% from 60.6% due to manufacturing process improvements, better inventory management, and increased internal production capacity.
- Expense Growth: SG&A expenses increased to 40.2% of sales (from 38.4%) primarily due to the King Bear acquisition and new retail store openings.
- Accounting Change: A cumulative effect of an accounting change (EITF 97-13 regarding IT implementation costs) reduced net income by $2.08 million in the prior year period, making year-over-year net income comparisons complex. Adjusted for this, operating income declined due to lower sales volume.
- Share Repurchases: The Company purchased 1.1 million shares of treasury stock for $20.8 million during the quarter.
Outlook, Risks, and Contingencies
- Year 2000 (Y2K) Compliance: The Company is actively addressing Y2K issues through a three-phase business transformation project. Phase 1 (Financial/Supply Chain) is complete; Phase 2 (Payroll/HR) became operational in January 1999; Phase 3 (Order to Collect) is expected to be completed through the year 2000. Total spend to date is $11.1 million, with $7.6 million in remaining commitments.
- Contingent Earnouts: Subsequent to the quarter end, the Company paid $14.9 million in contingent earnout payments to former owners of Premier Agendas and TrueNorth (Personal Coaching) based on performance metrics.
- Liquidity: The Company maintains $89.0 million in unsecured bank lines of credit, with $53.5 million outstanding. Management believes existing resources are sufficient for current operations and planned growth.
- Market Risks: Exposure exists regarding foreign currency exchange rates and potential service disruptions from third-party providers (telecommunications, banking, shipping) related to Y2K.
Investor Verification Checklist
- Y2K Readiness: Verify the timeline for Phase 3 completion of the "Order to Collect" system and the status of third-party service provider certifications.
- Acquisition Integration: Assess the financial performance of the King Bear acquisition (Japan) and the impact of contingent earnout payments on future goodwill amortization.
- Channel Mix Shift: Monitor the trend of declining catalog sales versus growth in mass market and internet channels to ensure long-term revenue stability.
- Debt Covenants: Confirm continued compliance with financial ratios required by the $85 million long-term notes and lines of credit.
- Share Count: Note the reduction in outstanding shares due to the $20.8 million buyback program and its impact on future EPS.