Franklin Covey Co. — Form 10-Q Summary
Reporting period: Third quarter and first three quarters of fiscal 2017, ended May 31, 2017; comparative periods ended May 28, 2016. Amounts below are in U.S. dollars. The company provides training, consulting, educational programs, and related products, and is shifting toward its All Access Pass (AAP) subscription model.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Three quarters FY2017 | Three quarters FY2016 |
|---|---|---|---|---|
| Net sales | $43.8 million | $44.7 million | $125.7 million | $135.2 million |
| Gross profit | $27.3 million | $29.6 million | $80.7 million | $89.5 million |
| Gross margin | 62.5% | 66.1% | 64.2% | 66.2% |
| Operating income (loss) | $(6.5) million | $(1.3) million | $(16.4) million | $0.2 million |
| Net income (loss) | $(4.5) million | $(1.1) million | $(11.8) million | $(0.7) million |
| Diluted loss per share | $(0.33) | $(0.07) | $(0.86) | $(0.05) |
Quarterly operating expenses rose $3.0 million year over year. Q3 net loss included $1.8 million to write off Japanese book inventory and $1.3 million of U.S./Canada restructuring costs. Excluding the Japan inventory charge, management reported Q3 gross margin of 66.6%; nine-month margin excluding that charge was 65.6%.
For the first three quarters, operating cash flow was $11.7 million, down from $21.9 million. Investing cash use was $12.8 million, including $5.1 million for property and equipment, $4.2 million for curriculum development, and $3.5 million for the RGP acquisition. Financing cash use was $1.0 million. Cash declined to $8.0 million from $10.5 million at August 31, 2016.
At May 31, 2017, current assets were $71.5 million and current liabilities $60.2 million, yielding working capital of $11.3 million, versus $35.7 million at fiscal year-end. The company had $0.6 million drawn on its revolving line of credit and $15.3 million of term notes payable ($5.0 million current and $10.3 million long term). The financing obligation related to its corporate campus totaled $23.4 million. Cash was substantially held at foreign subsidiaries. The company said it was in compliance with credit covenants and expected available capital resources to support operations for at least 12 months.
Material changes and business developments
- Revenue declined 2% in Q3 and 7% for the first three quarters. Training and consulting services fell 1% in Q3 and 6% year to date; product and leasing revenue also declined.
- AAP contract billings increased to $9.2 million in Q3 from $5.8 million, and to $22.0 million for the first three quarters from $9.3 million. Related services and materials were also invoiced. Most AAP contract revenue is deferred and recognized over contract terms, weighing on reported revenue during the transition.
- Education Practice revenue grew 14% in Q3 and 12% year to date. Direct-office Q3 revenue was broadly flat, with new China offices contributing $2.6 million; Strategic Markets and international licensee revenue declined.
- The company acquired corporate coaching firm Robert Gregory Partners (RGP) on May 15 for $3.5 million cash, plus up to $4.5 million contingent consideration. RGP generated $3.3 million revenue and $1.1 million operating income in calendar 2016, unaudited.
- The company exited Japanese publishing, writing off most book inventory, and restructured U.S./Canada direct operations to focus on AAP sales and client support. It also paid $1.5 million in Q2 to terminate a foreign education-content profit-sharing arrangement.
- The revolving credit facility maturity was extended to March 31, 2020. Maximum revolver availability was $35 million, subject to facility terms and covenants.
Outlook, commentary, and risks
- Management expects the AAP model to support larger client sales, retention, broader reach, and reduced seasonal revenue fluctuations over time, but cautioned that the transition—including longer sales cycles and revenue deferral—would significantly affect FY2017 results.
- Management expects most Education Practice growth to occur in Q4 and anticipates a Leader in Me membership renewal rate above 90% for FY2017. It also expects China offices to continue performing favorably and views RGP as a strategic coaching offering.
- FY2017 estimates included approximately $7.3 million of property and equipment purchases, $6.5 million of curriculum development spending, $3.9 million depreciation, and $3.3 million amortization of definite-lived intangibles, excluding future acquisitions. ERP replacement and AAP portal work could change spending.
- Risks include delayed customer collections, particularly from government and education clients and licensees; longer payment terms and higher collection risk; continued operating losses; execution of the AAP transition; and dependence on sales, cost control, capital spending, and financing availability. Deferred revenue increased to $28.6 million from $20.8 million at August 31, 2016.
- Potential contingent consideration for RGP depends on specified financial results and content delivery. The NinetyFive 5 earn-out liability was reduced to zero based on projected results. The company had not yet determined the full impact of new revenue-recognition and lease accounting standards.
Investor verification points
- Track AAP billings, renewals, deferred revenue, and the timing of recognition against reported sales and cash collections.
- Assess whether revenue growth and profitability recover, particularly in Direct Offices and Strategic Markets, and whether Education growth and China performance continue.
- Monitor receivable aging, allowance for doubtful accounts, cash held overseas, working capital, and operating cash flow.
- Review debt, covenant headroom, credit-facility availability, and any RGP contingent payments alongside capital spending and share repurchases.
- Confirm the realized savings and any additional costs from the restructuring and Japan publishing exit.