Franklin Covey Co. 10-Q Summary
Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 28, 2009 (First Quarter of Fiscal 2010)
Business Overview: A global provider of execution, leadership, and personal-effectiveness training. The company operates through domestic sales offices, wholly-owned subsidiaries (Australia, Japan, UK), and licensee partners in over 150 countries. Primary offerings include training services, consulting, and products based on "The 7 Habits of Highly Effective People."
Key Financial Metrics
| Metric | Q1 FY2010 (Nov 28, 2009) | Q1 FY2009 (Nov 29, 2008) |
|---|---|---|
| Net Sales | $33.9 million | $35.1 million |
| Gross Profit | $21.5 million | $21.7 million |
| Gross Margin | 63.5% | 61.8% |
| Operating Income | $1.9 million | ($0.7) million loss |
| Net Income | $0.2 million | ($0.6) million loss |
| EPS (Diluted) | $0.01 | ($0.04) |
| Cash from Operations | $1.6 million | ($1.7) million used |
| Cash & Equivalents (End of Period) | $1.1 million | $3.5 million |
| Line of Credit Outstanding | $11.2 million | $12.9 million |
| Total Debt (Line of Credit + Financing Obligation) | $42.7 million | $44.7 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability, reporting $1.9 million in operating income compared to a $0.7 million operating loss in the prior year. This was driven by a $2.9 million reduction in Selling, General, and Administrative (SG&A) expenses.
- Revenue Mix: Total sales declined 3% to $33.9 million. Domestic sales increased 5% due to improved performance curriculum and government program sales. Conversely, international sales dropped 16%, primarily due to economic conditions in Japan and lower licensee royalties.
- Expense Reduction: SG&A expenses decreased significantly due to restructuring, headcount reductions, reduced marketing spend, and lower travel costs.
- Tax Provision: The effective tax rate was approximately 79%, significantly higher than statutory rates, due to foreign withholding taxes and deemed dividends from foreign subsidiaries where tax credits could not be utilized.
Outlook, Risks, and Contingencies
- Liquidity and Debt Covenants: The company's $13.5 million line of credit expires in March 2010. Management identified a risk of non-compliance with financial covenants (funded debt-to-earnings and fixed charge coverage ratios) for the current and next quarter. A modification agreement was reached in November 2009 to relax these covenants, though it increased the interest rate to LIBOR + 3.5%.
- Renewal Negotiations: The company is negotiating to renew or extend the line of credit. If unsuccessful, the company plans to implement severe cost-cutting measures, including deferring executive compensation, reducing associate salaries, and deferring capital purchases.
- Contingent Liabilities: The company retains obligations for retail store leases assigned to "Franklin Covey Products" (an entity in which Franklin Covey owns ~19%). If that entity defaults, Franklin Covey must fulfill the lease obligations, which could adversely affect cash flows.
- Subsequent Event: Post-period, the company secured a short-term unsecured loan of approximately $1.1 million from a bank in Japan.
Investor Verification Checklist
- Line of Credit Renewal: Verify the status of negotiations to renew the $13.5 million credit facility expiring March 2010.
- Covenant Compliance: Monitor future quarterly reports for continued compliance with the modified debt covenants.
- International Exposure: Assess the impact of ongoing economic conditions in Japan on future international sales and royalties.
- Contingent Lease Obligations: Review the financial health of "Franklin Covey Products" to gauge the risk of assuming retail lease liabilities.
- Cash Burn vs. Generation: Track operating cash flow to ensure it remains sufficient to service debt without requiring immediate equity dilution or asset sales.