Franklin Covey Co. — Form 10-Q Summary
Business context and period. Franklin Covey provides performance-improvement training, consulting, content and related products worldwide. This unaudited report covers fiscal 2014’s first quarter, ended November 30, 2013, compared with the quarter ended December 1, 2012. The current quarter had one fewer business day.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $43.42 million | $44.06 million |
| Gross profit / gross margin | $30.03 million / 69.2% | $29.56 million / 67.1% |
| Income from operations | $3.51 million | $5.29 million |
| Income before taxes | $2.95 million | $4.69 million |
| Net income | $1.72 million | $2.90 million |
| Diluted earnings per share | $0.10 | $0.15 |
| Consolidated Adjusted EBITDA | $6.02 million | $7.09 million |
Sales declined about 1.5%, while net income fell about 41%. Gross profit increased despite lower sales, reflecting the higher gross margin, including a large government-contract intellectual-property license component. Operating expenses rose $2.3 million, chiefly from added sales personnel, marketing and promotion, higher share-based compensation, and increased amortization.
Cash flow and liquidity. Operating cash use was $1.97 million, compared with $0.30 million a year earlier; investing cash use was $4.98 million and financing cash use was $3.36 million. Cash fell to $2.00 million from $12.29 million at August 31, 2013. Management attributed the seasonal cash decline in part to payments of bonuses and commissions, tax payments, investment in curriculum, and slower receivable collections. Net working capital was $36.1 million.
At quarter-end, the company had $28.24 million of financing obligations related to its corporate-campus lease and no borrowings on its $10 million revolving credit facility, which expires in March 2016. Management reported covenant compliance and expected existing resources to support operations for at least 12 months. Essentially all cash was held at foreign subsidiaries; the company said it routinely repatriates foreign cash.
Material changes and business drivers
- Training and consulting revenue increased slightly to $41.34 million; product revenue fell 32% to $1.33 million, and leasing revenue fell 28% to $0.76 million.
- National Account Practices sales rose 43% to $8.85 million, supported by Sales Performance and Education. U.S./Canada direct sales declined 4% overall, including a $1.2 million decline in government-services sales. International direct sales fell 26%, with Japan accounting for most of the reduction.
- International licensee sales increased 1%. The weaker Japanese yen reduced translated sales by about $1.0 million; management expected an adverse currency effect to continue into the next quarter.
- Consolidated Adjusted EBITDA declined about 15%. Share-based compensation expense increased to $1.26 million from $0.47 million.
Outlook, commentary and risks
- Management described the U.S./Canada regional-office pipeline as its best-ever first-quarter-end pipeline and characterized the remainder-of-year outlook for that channel as encouraging. It expected postponed training under a renewed government contract to shift into the second and third quarters, but recovery of other government-related business depends on federal operating conditions; an extended contract renewal was not assured.
- The company planned to open a direct office in South Korea and expected continued growth from international licensees. It anticipated fiscal 2014 depreciation of approximately $3.3 million, amortization of $3.9 million, capitalized curriculum spending of $7.0 million, and property-and-equipment purchases of $3.0 million. It scheduled a revised 7 Habits Signature Program for release in March 2014. The filing does not provide clear consolidated full-year revenue or earnings guidance.
- Cash used in operations was affected by slower collections, including higher receivables from a charitable foundation funding The Leader in Me programs and government contracts. Management expected collections to improve, but timing and realization remain uncertain.
- The company held $6.5 million in current and long-term receivables from FC Organizational Products (FCOP), in which it owns 19.5%; management identified collectability as dependent on FCOP’s future cash flows. The long-term portion is discounted at 15%.
- NinetyFive 5 acquisition consideration included a $3.6 million contingent earnout liability, subject to recurring fair-value reassessment; a $0.5 million liability reduction benefited current-quarter SG&A. The remaining $1.1 million initial purchase-price installment was paid in December 2013. A final CoveyLink earnout payment of approximately $3.5 million was expected in March 2014, subject to a preliminary calculation.
- Other disclosed risks include foreign-exchange movements, government-contract timing and renewal, competition and acceptance of new offerings, receivable collection, and the availability and cost of financing. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether government-contract training postponed during the shutdown is recovered and the large contract is extended.
- Whether receivables—particularly from the education-funding foundation, government customers, and FCOP—are collected as expected, and whether operating cash flow improves.
- Whether National Account growth and new sales hires offset continued weakness in Japan and foreign-currency translation.
- Actual launch timing, spending and sales performance for the revised 7 Habits program and other planned curriculum investments.
- Final amounts and payment timing for the NinetyFive 5 and CoveyLink acquisition-related obligations, and the company’s liquidity after seasonal cash outflows.