Franklin Covey Co. — Q1 FY2015 10-Q
Reporting period: Quarter ended November 29, 2014; comparison is the quarter ended November 30, 2013. The company provides performance-improvement training and consulting, related products, and leasing. The quarter had one fewer business day than the prior-year quarter.
Financial results and liquidity
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $47.9 million | $43.4 million | +10% |
| Gross profit / margin | $31.2 million / 65.2% | $30.0 million / 69.2% | Profit +4%; margin down 4.0 percentage points |
| Operating income | $3.6 million | $3.5 million | +$0.1 million |
| Net income | $1.8 million | $1.7 million | +$0.1 million |
| Diluted EPS | $0.11 | $0.10 | +$0.01 |
| Operating cash flow | $(1.9) million | $(2.0) million | Cash use improved slightly |
| Cash and cash equivalents | $7.6 million | $10.5 million at August 31, 2014 | Down $2.9 million |
Revenue growth was led by training and consulting services, up 10% to $45.5 million. Products were roughly flat at $1.3 million; leasing revenue rose 44% to $1.1 million. U.S./Canada direct sales increased 12%, international direct sales 11%, international licensee revenue 4%, and national account practices 10%.
Operating expenses rose 4% to $27.6 million, including SG&A of $25.7 million, up 4%. The filing reports consolidated Adjusted EBITDA, a non-GAAP measure, of $5.9 million versus $6.0 million. The effective tax rate was approximately 40%, compared with 42%.
At quarter-end, current assets were $82.3 million and current liabilities $28.4 million, producing working capital of $53.9 million. Total liabilities were $64.0 million. The financing obligation related to the corporate campus lease was $27.1 million, including $1.3 million current. There were no borrowings on the $10 million revolving credit line; $3.5 million of cash was held at foreign subsidiaries.
Material changes and management commentary
- Management described the quarter as the strongest first-quarter sales result for the current business and attributed growth to gains across major channels, notably government services (+$2.0 million), the U.K. office (+$1.6 million), and Education (+$1.0 million).
- Gross margin fell from 69.2% to 65.2%, despite higher gross profit. Management cited sales mix, increased on-site programs and lower facilitator revenue, $0.4 million of additional curriculum amortization, and underutilization of consultants and newly hired coaches.
- A renewed large government contract supported U.S./Canada sales. The U.K. office signed a $1.0 million contract. Japan sales were affected by a slowing economy and currency movements; Australia sales also declined.
- Foreign exchange reduced sales by approximately $0.7 million and contributed $0.4 million of transaction losses in SG&A. Management noted continued currency and international-market volatility as potential headwinds.
- Operating cash flow was negative, which management described as typical for the first fiscal quarter due to seasonal payments of year-end commissions, bonuses, and payables. Collections improved year over year, but remained slower than expected for government and Education customers, licensees, and some contracts.
Outlook, risks, and unusual items
- Management said the outlook was bright and cited strong sales pipelines; it did not provide specific revenue or earnings guidance. It expects Education growth, with most of that practice’s sales growth typically occurring in the fourth fiscal quarter.
- Management expects fiscal 2015 property and equipment purchases of approximately $3.8 million and curriculum-development spending of $5.0 million. Replacing the enterprise resource planning system later in the year could increase capital spending. Expected depreciation and amortization are approximately $4.3 million and $3.8 million, respectively.
- The company expects existing resources to support operations for at least 12 months, subject to sales, cost control, capital spending, receivable collections, and other factors. The credit facility expires in March 2016; management said it expected to renew it. The filing states the company was in compliance with its financial covenants at quarter-end.
- The company held a $5.7 million receivable from FC Organizational Products, net of a $2.1 million discount, and said lower estimated FCOP cash flows could limit recognition of future receivables. The company owns 19.5% of FCOP and is not its primary beneficiary.
- A contingent earn-out liability from the NinetyFive 5 acquisition had a fair value of $2.5 million; potential payments are tied to earnings targets and could total up to $8.5 million. Timing and amount remain uncertain.
- The company had repurchased 73,320 shares for $0.8 million under its $10 million repurchase authorization through the quarter; no shares were purchased under the public plan during this quarter. A separate registration statement for 3.2 million shares held by Knowledge Capital was filed, with effectiveness anticipated during the following quarter; two directors, including the CEO, had equity interests in that entity.
- The company had not determined the adoption method or financial impact of the new revenue-recognition standard. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales momentum converts to sustained operating-profit growth, given the decline in gross margin and lower Adjusted EBITDA.
- Progress on receivable collections, especially government and Education accounts, licensees, and the FCOP balance.
- Foreign-exchange effects and performance in Japan, Australia, and the U.K., as well as renewal and execution of major contracts.
- Actual capital needs for the ERP replacement and curriculum investment, and renewal terms for the revolving credit facility.
- Future earn-out payments related to NinetyFive 5 and any effect of the Knowledge Capital share registration.