Franklin Covey Co. — Q2 FY2013 Form 10-Q
Reporting period: Quarter ended March 2, 2013; the six-month period is compared with the two quarters ended February 25, 2012. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. The company provides performance training, consulting, related products and leasing.
Financial results
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $40.4 | $38.6 | $84.5 | $78.2 |
| Gross profit / margin | $27.3 / 67.5% | $25.0 / 64.7% | $56.8 / 67.3% | $51.5 / 65.9% |
| Operating income | $3.3 | $2.8 | $8.5 | $6.5 |
| Net income | $1.6 | $1.2 | $4.5 | $2.8 |
| Diluted EPS | $0.08 | $0.06 | $0.23 | $0.16 |
- Quarterly revenue increased 5%; operating income rose 17% and net income rose 37%. Six-month revenue rose 8% and net income rose 59%.
- Quarterly SG&A increased $2.0 million, more than offsetting lower depreciation and amortization. Six-month SG&A increased $3.5 million; as a share of sales it edged up to 54.0% from 53.8%.
- Operating cash flow was $10.2 million for the first half, versus $9.2 million a year earlier. Investing used $2.5 million and financing used $2.9 million. Cash increased to $15.5 million from $11.0 million at August 31, 2012.
- At March 2, current assets were $59.9 million and current liabilities $27.4 million; working capital was $32.5 million. The company reported no line-of-credit borrowings. It had $1.25 million of current bank-note principal and a $29.0 million financing obligation, including current and long-term portions.
- The $10 million revolving credit facility carried interest at LIBOR plus 2.50%; it was amended after quarter-end to extend maturity to March 31, 2016. The company stated it was covenant-compliant at quarter-end and expected available capital resources to support operations for at least 12 months.
Material changes and management commentary
- Management described Q2 as the strongest second quarter under its current business model, with growth in most major delivery channels. U.S./Canada direct sales, international licensees, national accounts and campus leasing contributed; product sales and self-funded marketing declined.
- Higher-margin facilitator sales and international licensee royalties supported the gross-margin improvement. Education Practice sales increased, while Sales Performance Practice activity was affected by maturing contracts.
- Government Services sales were pressured by U.S. federal sequestration-related postponements and cancellations; management warned the impact could continue. Japan’s reported sales were adversely affected by yen translation, which management expected to remain a headwind.
- After quarter-end, the company acquired substantially all assets of NinetyFive 5 LLC for $4.2 million cash, assumed liabilities and potential earnouts up to $8.5 million based on cumulative EBITDA. Management said the sales-training business complements its Sales Performance Practice.
- FC Organizational Products (FCOP), in which Franklin Covey owns 19.5%, owed the company $4.6 million at March 2, down from $7.1 million at August 31. The long-term portion is discounted at 15%. Management noted that collection depends on FCOP’s financial condition and projected cash flows.
Outlook, risks and unusual items
- Management’s outlook was qualitative: it described the U.S./Canada sales pipeline as strong, anticipated continued growth from international licensees, and expected cash taxes to remain below the tax provision while tax credits and deferred tax assets are used. No quantified full-year revenue or earnings guidance is provided in the filing text.
- The company paid $1.8 million of cash income taxes in the first half against a $2.9 million provision; it expected cash taxes to remain lower through fiscal 2015 and foreign tax credits to be fully used by fiscal 2016.
- In Q2, 3.3 million management-loan shares held in escrow were transferred to treasury as repayment of the stock loans, with $0.5 million of share-based compensation expense recorded. Warrants with an $8 exercise price expired March 8, 2013 after substantial exercise.
- Other identified exposures include competition and acceptance of new offerings, execution and costs of the acquisition, receivable collection, foreign-exchange movements, and risks to liquidity from sales, working capital or capital needs. The company also disclosed that its results are seasonal and that Q2 training activity may be lower around holidays.
Important facts for investors to verify
- Whether revenue and gross-margin momentum continued, particularly in U.S./Canada direct sales, education, licensees and higher-margin facilitator delivery.
- The persistence and financial effect of federal sequestration and yen translation on Government Services and Japan.
- FCOP’s repayment progress and the assumptions supporting collection of the $4.6 million receivable.
- NinetyFive 5 acquisition performance, integration costs and any earnout obligations, alongside the $4.2 million initial cash outlay.
- Liquidity, covenant compliance and capital allocation, including share repurchases, term-note repayments and the amended revolving facility.