Franklin Covey Co. — Q1 FY2013 10-Q
Reporting period: Quarter ended December 1, 2012; comparative quarter ended November 26, 2011. The current quarter had four more business days. The company describes itself as a global content and intellectual-property business focused on individual and organizational performance.
Financial performance
| Metric | Q1 FY2013 | Prior year | Change |
|---|---|---|---|
| Net sales | $44.1 million | $39.5 million | +11% |
| Gross profit / margin | $29.6 million / 67.1% | $26.5 million / 67.1% | Margin unchanged |
| Operating income | $5.3 million | $3.7 million | Higher |
| Income before taxes | $4.7 million | $3.1 million | Higher |
| Net income | $2.9 million | $1.7 million | Higher |
| Diluted EPS | $0.15 | $0.09 | Higher |
| Operating cash flow | $(0.3) million | $0.6 million | Declined |
Training and consulting revenue rose 13% to $41.1 million; product sales declined 21% to $1.9 million; leasing revenue increased 52% to $1.1 million. By channel, U.S./Canada direct sales grew 18%, international direct 11%, international licensees 10%, and national account practices 13%; self-funded marketing fell 49%.
SG&A increased $1.6 million, mainly from sales-related hiring, commissions, and promotional spending, partly offset by lower share-based compensation. SG&A declined to 52.1% of sales from 54.1%. The effective tax rate was approximately 38%, versus 46% a year earlier.
Liquidity, debt, and cash flows
Cash was $7.3 million at December 1, down from $11.0 million at August 31, 2012; $3.5 million was held by foreign subsidiaries. Working capital was $30.1 million, up from $27.5 million. Operating cash use of $0.3 million reflected seasonal reductions in accrued liabilities and accounts payable. Investing used $1.5 million, including $1.0 million for property and equipment and $0.5 million for curriculum development. Financing used $1.9 million, including share repurchases and debt principal payments.
The company had no borrowings on its $10.0 million revolving credit line, which expires in March 2015, and reported compliance with its covenants. It had $2.1 million remaining on a term note and a corporate-campus financing obligation of $29.3 million, including current and long-term portions. Total liabilities were $64.8 million. Management said existing capital resources should be adequate for at least the next 12 months, subject to business and economic conditions.
Changes, outlook, and risks
Management called this the strongest first quarter under the current business model and said growth extended across major delivery channels. It cited a strong awarded-revenue pipeline and an encouraging outlook for continued U.S./Canada growth, and expected international licensee growth during FY2013. These are expectations, not formal earnings guidance. Management anticipated FY2013 depreciation of approximately $2.8 million and expected operating cash flow to improve, while noting that this depends on factors outside its control. The quarter’s results are not necessarily indicative of the full year.
FCOP, in which Franklin Covey owns 19.5%, owed the company $7.6 million at quarter-end, including amounts classified as current and long-term; the long-term balance is discounted at 15%. The company is not required to advance funds, but may do so, and collection depends on FCOP’s financial health. Franklin Covey also remained secondarily liable for $0.2 million of FCOP retail-store lease costs. Other risks include competition, sales and customer-order variability, execution of new offerings, collection of receivables, and possible impairment of goodwill or intangible assets.
Notable items included a benefit from previously unrecognized tax benefits after completion of a routine IRS audit, partly affecting the lower effective tax rate, and a $0.1 million discount charge on additions to the FCOP receivable. The company repurchased 32,235 shares under its buyback plan during the quarter; total purchases under the plan were 73,320 shares for $0.8 million through December 1. A warrant exercise also resulted in 340,877 treasury shares issued; remaining warrants were expected to be exercised before their March 2013 expiration.
Important facts for investors to verify
- Whether revenue growth and the awarded-revenue pipeline translated into sustained growth in subsequent quarters, accounting for the extra four business days in this comparison.
- Whether operating cash flow improved and cash remained adequate after seasonal working-capital payments, capital spending, debt service, and repurchases.
- FCOP’s repayment performance and the collectability and classification of the $7.6 million related-party receivable.
- The effect of remaining warrant exercises, equity awards, and share repurchases on diluted share count and cash.
- Whether management’s stated outlook and FY2013 depreciation estimate were subsequently achieved; the filing provides no quantified revenue or earnings guidance.