Franklin Covey Co. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2019; fiscal year ends August 31. Amounts below are in U.S. dollars unless noted. The company provides leadership, training, consulting, education, and subscription-based learning solutions, including All Access Pass (AAP) and The Leader in Me.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $50.4m | $46.5m | $104.2m | $94.5m |
| Gross profit / margin | $35.4m / 70.2% | $32.7m / 70.3% | $72.1m / 69.3% | $65.6m / 69.4% |
| Operating loss | ($3.6m) | ($5.1m) | ($4.2m) | ($8.4m) |
| Net loss | ($3.5m) | ($2.7m) | ($4.9m) | ($5.1m) |
| Loss per share, basic and diluted | ($0.25) | ($0.20) | ($0.35) | ($0.37) |
| Operating cash flow | — | $13.4m | $9.4m |
- Quarterly sales increased 8% reported, or 10% excluding $0.7m of unfavorable foreign exchange. Six-month sales grew about 10% reported. Subscription and subscription-related revenue rose 26% in Q2.
- Quarterly operating loss narrowed by $1.6m, but net loss widened by $0.8m, mainly reflecting a much smaller income tax benefit than in the prior-year quarter, which included a $1.2m tax benefit related to U.S. tax reform.
- For the six months, the operating loss improved by $4.2m and net loss improved by $0.3m. The reported six-month net loss includes a $3.1m after-tax reduction to opening retained earnings from adopting ASC 606; this was an accounting transition adjustment, not a current-period operating expense.
- Quarterly Adjusted EBITDA, a non-GAAP measure, was $1.0m versus negative $0.7m; six-month Adjusted EBITDA was $4.1m versus negative $0.1m.
- Six-month operating cash flow increased to $13.4m, supported in part by a $21.2m reduction in accounts receivable. Investing cash use was $3.5m and financing cash use was $7.0m. Cash rose to $13.1m from $10.2m at August 31, 2018.
Financial position and liquidity
- At February 28, 2019, cash was $13.1m; current assets were $79.4m and current liabilities $79.3m. The company reported $21.6m available on its revolving credit facility.
- Borrowings included $8.4m on the line of credit and $9.7m of term notes. The corporate-campus financing obligation was $20.1m, including current and long-term portions. The company said it complied with its credit covenants.
- Cash and cash equivalents included $11.7m held by foreign subsidiaries. Management expected existing resources to support operations for at least the next 12 months, subject to sales, collections, costs, capital spending, and financing availability.
- Deferred revenue was $48.4m, including $39.6m from subscriptions. Remaining performance obligations were $64.5m, approximately 75% expected to be recognized within 12 months. The company also reported $25.0m of unbilled deferred subscription revenue.
Material changes, outlook, and notable items
- ASC 606: Adopted September 1, 2018 under the modified retrospective method. It defers certain international initial license fees over contract terms and changed subscription revenue accounting. Adoption increased reported Q2 revenue by $0.5m and six-month revenue by $1.5m versus the prior accounting; comparative periods were not restated. Management cautioned that timing changes may cause quarter-to-quarter revenue fluctuations.
- GSA acquisition: In December 2018, the company acquired its former Germany, Switzerland, and Austria licensee for $0.2m cash plus forgiveness of $0.8m of amounts owed. The new direct office contributed $0.5m of Q2 sales and a $0.2m operating loss. Approximately $0.8m of additional severance, legal, and related costs were expected to be expensed as incurred.
- Business outlook: Management said subscription growth momentum continued and expected Education practice growth to resume later in FY2019, with most Education sales growth typically occurring in Q4. No specific consolidated revenue or earnings guidance was provided. FY2019 estimates included approximately $5.7m of property and equipment purchases, $5.5m of curriculum development spending, $6.7m of depreciation, and $5.0m of amortization.
- Tax and currency: The six-month effective tax benefit rate was 6.0%, adversely affected by GILTI tax, nondeductible expenses, and higher foreign tax rates. Foreign exchange reduced Q2 sales by $0.7m and operating results by $0.5m.
- Other exposures: Variable-rate debt carried a 4.4% effective rate; management estimated a 1 percentage-point increase would add about $0.1m of interest expense over 12 months. The company reported contingent consideration liabilities of $4.3m. Its 19.5% investment in FC Organizational Products had $0.7m of receivables outstanding, all classified current; Q2 included $0.2m of accelerated discount accretion after receiving $1.4m cash from FCOP.
- Accounting outlook: The company expected to adopt the new lease standard on September 1, 2019, which it expected to increase reported assets and liabilities; the full impact was not yet determined.
Most important facts for investors to verify
- Whether AAP and other subscription growth converts into durable sales, cash collections, renewals, and margins; assess the impact of ASC 606 timing on comparisons.
- Whether operating losses narrow and Education growth resumes, especially given seasonality and the expiration of a charitable funding commitment that reduced first-half Education revenue by $0.7m.
- Whether liquidity, receivable collections, and covenant compliance remain adequate as the company services debt, financing obligations, and contingent consideration.
- Whether tax benefits and cash tax payments differ materially from current expectations, including the effects of GILTI and foreign tax credits.
- Whether the GSA direct-office transition delivers the anticipated growth and whether acquisition-related costs stay near estimates.
- How the lease-standard adoption affects balance-sheet obligations, and whether foreign exchange, competition, cybersecurity, or macroeconomic conditions materially affect results.