Franklin Covey Co. — Q3 FY2016 Form 10-Q
Reporting period: Quarter and first three quarters ended May 28, 2016; comparisons are to the periods ended May 30, 2015. Franklin Covey provides training, consulting, educational programs, products, and licensing services. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 FY2016 | Q3 FY2015 | First 3 quarters FY2016 | First 3 quarters FY2015 |
|---|---|---|---|---|
| Revenue | $44.7 | $48.3 | $135.2 | $142.5 |
| Gross profit / margin | $29.6 / 66.1% | $30.3 / 62.8% | $89.5 / 66.2% | $91.5 / 64.2% |
| Operating income (loss) | $(1.3) | $1.4 | $0.2 | $6.2 |
| Net income (loss) | $(1.1) | $1.2 | $(0.7) | $3.4 |
| Diluted EPS | $(0.07) | $0.07 | $(0.05) | $0.20 |
| Adjusted EBITDA | $1.8 | $4.9 | $10.7 | $14.6 |
Quarterly net margin was approximately negative 2.4%, versus positive 2.5% a year earlier. First-three-quarter operating cash flow was $21.9 million, up from $15.4 million, mainly reflecting stronger receivables collections and lower cash payments against accrued liabilities and payables. Investing cash use was $4.3 million; financing cash use was $25.2 million, primarily reflecting share repurchases.
At May 28, cash was $8.9 million, including $6.7 million held at foreign subsidiaries; working capital was $35.5 million. The company had a $15.0 million term loan and no revolving-credit borrowings. The revolving facility’s maximum was increased to $40 million. Financing obligations related to the corporate campus totaled approximately $25.0 million, including current and long-term portions. Total current liabilities were $37.7 million and current assets were $73.2 million.
Changes and business drivers
- Quarterly revenue fell 7%; revenue for the first three quarters fell 5%. Higher Education practice and licensee sales did not offset lower Direct Offices and Strategic Markets sales.
- A prior-year federal government contract contributed $2.1 million of quarterly revenue and $6.5 million in the first three quarters; it was not renewed and might not be reopened for bids during FY2016. Strategic Markets also faced weaker Customer Loyalty and Sales Performance sales.
- The All Access Pass (AAP), launched in U.S. and Canadian regional offices in late January, generated $3.0 million in new contract sales during Q3, with $2.0 million deferred; recognized Q3 AAP revenue, including previously deferred amounts, was $3.4 million. For the first three quarters, new AAP contracts totaled $4.8 million and $3.1 million was deferred. Management said early acceptance and the pipeline were encouraging, while warning that deferrals could depress reported sales during the transition.
- Education practice revenue increased 21% in Q3 and 28% year to date, supported by The Leader in Me and subscription revenue recognition. Management expects most Education practice growth to occur in Q4, consistent with seasonality.
- Gross margin improved despite lower sales, reflecting sales mix, including intellectual-property and licensee revenue, subscription recognition, and reduced online-offering costs. SG&A rose, including higher bad-debt expense, sales and marketing costs, personnel, share-based compensation, and ERP software costs.
Outlook, risks, and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management said existing resources should support operations for at least the next 12 months, subject to sales trends, cost control, collections, capital spending, and financing availability.
- Management estimated FY2016 property and equipment purchases of approximately $5.0 million, curriculum development spending of $3.0 million, depreciation of approximately $4.0 million, and definite-lived intangible amortization of $3.3 million. ERP replacement spending could differ from expectations.
- The company paid a $2.2 million NinetyFive 5 acquisition earn-out in Q3. Improved Sales Performance results increased the likelihood of another payment; the remaining liability was $1.9 million at quarter-end and further payments could occur in FY2017.
- A $0.4 million restructuring charge followed closure of Australian sales offices in Brisbane, Sydney, and Melbourne and related support reductions; $0.3 million remained accrued at quarter-end.
- Foreign exchange reduced first-three-quarter revenue by $1.5 million and operating income by $1.2 million. Other disclosed risks include slower collections, bad-debt exposure, competition, economic and currency conditions, and cyber/security risks related to the internet-based AAP.
- The May credit amendment added the $15.0 million term loan at LIBOR plus 1.85%, raised the revolver limit to $40 million, extended facility maturity to March 2019, and lowered the fixed-charge coverage covenant threshold to 1.15. The company reported covenant compliance at May 28, 2016.
Important facts for investors to verify
- Whether AAP sales growth translates into recognized revenue and renewals, and how much revenue remains deferred.
- Whether Education growth, government services, and Strategic Markets results offset the lost federal contract and weakness in other practices.
- Receivables quality and collection timing, particularly in Education, government, and licensee channels; assess the effect of the large Education account write-off.
- Cash generation, covenant headroom, debt service, and the company’s continued share repurchases given lower cash and the new term loan.
- Timing and amount of any additional NinetyFive 5 earn-out payment, and achievement of management’s capital-spending and cost expectations.