Business context and reporting period
Franklin Covey provides organizational performance and training content through direct offices, international licensees, and its Education practice. This Form 10-Q covers the quarter and first three quarters of fiscal 2020 ended May 31, 2020; amounts below are in millions unless stated otherwise.
COVID-19 closures of workplaces and schools sharply reduced in-person training, coaching, and consulting. The company shifted more delivery online, including through All Access Pass and Leader in Me subscriptions.
Financial performance
| Metric | Quarter ended May 31, 2020 | Prior-year quarter | Three quarters ended May 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Net sales | $37.1 | $56.0 | $149.5 | $160.2 |
| Gross profit | $26.8 | $39.7 | $107.5 | $111.8 |
| Gross margin | 72.3% | 70.8% | 71.9% | 69.8% |
| Operating loss | $(0.1) | $(1.9) | $(0.7) | $(6.1) |
| Net loss | $(11.0) | $(2.0) | $(10.4) | $(6.9) |
| Loss per diluted share | $(0.79) | $(0.14) | $(0.75) | $(0.49) |
| Adjusted EBITDA | $(3.6) | $3.1 | $5.4 | $7.2 |
Quarterly sales fell about 34%; nine-month sales fell about 7%. Subscription revenue increased 18% year over year in the quarter to $22.3 million, supporting the higher gross margin despite much lower total sales. Nine-month operating loss improved, but net loss worsened, primarily because of a substantial income-tax charge.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $37.0 million at May 31, 2020, versus $27.7 million at August 31, 2019; $11.6 million was held by foreign subsidiaries. Current assets were $92.0 million and current liabilities $80.4 million.
- Operating cash flow for the first three quarters was $18.7 million, compared with $18.6 million a year earlier. Strong receivable collections helped; management expected significant cash use to support operations in fiscal Q4.
- Investing cash outflow was $9.4 million and financing cash inflow was $0.2 million. Financing included $14.9 million drawn on the revolving facility and $5.0 million of additional term borrowing, partly offset by $13.8 million of treasury-stock purchases and debt-related payments.
- At May 31, term notes totaled $21.25 million and the revolving credit balance was $14.87 million. A separate corporate-campus financing obligation totaled $17.26 million. The company reported compliance with its then-applicable credit covenants at May 31.
- On July 8, 2020, the company amended its credit agreement. It agreed to repay the revolver draw and to temporary liquidity and Adjusted EBITDA covenants through May 2021; the amendment also restricts certain buybacks and dividends until specified covenant compliance is achieved. Borrowing costs increased.
Material changes, outlook, and risks
- Management attributed the quarter’s sales decline to COVID-19 closures and postponed or canceled in-person programs. Online delivery helped reschedule some work, but the timing and pace of recovery remained uncertain and depended on economic reopening and client demand.
- Direct Office quarterly sales fell to $26.8 million from $40.4 million; International Licensee sales fell to $0.7 million from $3.0 million; Education sales fell to $8.2 million from $11.1 million. Education renewals and new-school additions showed signs of improvement early in fiscal Q4, but management noted that school budget pressure could constrain renewals.
- Operating expenses benefited from cost reductions, lower travel and variable compensation, a $5.1 million stock-based compensation credit after certain performance awards were judged unlikely to vest, and a $0.9 million insurance gain. The stock-compensation reversal is unusual and should not be treated as recurring operating performance.
- The company recorded $10.2 million of additional income-tax expense from a valuation allowance against deferred tax assets, citing cumulative losses and uncertainty about future taxable income. No impairment charge was recorded after third-quarter testing of goodwill and other long-lived assets.
- Management expected fiscal 2020 spending of approximately $5.0 million on curriculum development and $4.0 million on property and equipment. It stated that cash, operating cash flow, and external funding sources should support operations for at least 12 months, while cautioning that COVID-19 disruption, collections, sales trends, and financing availability could affect liquidity.
- Deferred subscription revenue was $43.9 million at May 31, 2020; unbilled deferred revenue was $33.4 million. Remaining performance obligations were $77.3 million. These balances indicate contracted activity but do not eliminate renewal, delivery, or collection risks.
Important facts for investors to verify
- Whether online sales, subscription growth, and postponed training recover enough to offset continuing weakness in in-person and education-related business.
- Cash use after May 31, the repayment of the revolver draw, and the company’s ability to meet the amended liquidity and Adjusted EBITDA covenants.
- How the $10.2 million deferred-tax valuation allowance and the unusual stock-compensation credit affect comparability of reported earnings.
- Whether subscription renewals, unbilled deferred revenue, and receivable collections convert into revenue and cash as expected.
- How planned capital spending aligns with the amended credit agreement’s $8.5 million annual cap on capital expenditures, including capitalized development costs.