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Franklin Covey Co. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: July 7, 2011 02:49PM
Franklin Covey Co. (FC) filed Quarterly Report for the period ended 2011-05-28.
Highlight of Business Operations:
Our third quarter of each fiscal year includes the months of March, April, and May. The quarter ended May 28, 2011 was our fourth consecutive quarter of significantly improved sales and operating income over prior year results. For the quarter ended May 28, 2011, our consolidated sales increased $10.4 million, or 34 percent, to $40.9 million compared to $30.5 million in the third quarter of the prior year. Improved sales produced corresponding improvements in our operating results as we recognized income from operations of $2.9 million compared to a loss from operations of $0.2 million in the same quarter of fiscal 2010. For the quarter ended May 28, 2011, we recognized pre-tax earnings from continuing operations of $2.2 million compared with a loss from continuing operations before taxes of $0.9 million in the prior year. Including the impact of income taxes, we recognized net income of $0.7 million ($.04 per diluted share) for the quarter ending May 28, 2011 compared with net income of $0.1 million ($.01 per diluted share) for the quarter ending May 29, 2010.
Selling, General and Administrative – Our selling, general, and administrative (SG&A) expenses increased $3.5 million compared to the prior year. However, as a percent of sales, our SG&A expenses declined to 51.4 percent for the quarter ended May 28, 2011 compared with 57.5 percent of sales in the prior year. The increase in SG&A expenses was primarily due to 1) a $2.4 million increase in associate costs primarily resulting from increased commissions and bonuses on improved sales and operating results compared to the prior year; 2) a $0.6 million increase in salaries and related costs resulting primarily from newly hired associates; 3) a $0.2 million increase in travel costs; 4) a $0.1 million increase in share-based compensation costs; and 4) a $0.1 million increase in associate health insurance premiums.
Selling, General and Administrative – Our SG&A expenses increased $7.4 million compared to the prior year. However, as a percent of sales, SG&A expenses declined to 52.4 percent compared to 57.8 percent of sales in the first three quarters of fiscal 2010. The increase in SG&A expenses was primarily due to 1) a $4.0 million increase in commissions and bonuses resulting from improved sales and operating results compared to the prior year; 2) a $1.7 million increase in salaries and related costs resulting primarily from the addition of new personnel; 3) a $0.9 million increase in conference costs from our sales and delivery conference, which has been previously held on a smaller scale; 4) a $0.6 million increase in travel expenses; 5) a $0.5 million increase in share-based compensation costs; a 6) $0.3 million increase in research and development costs related to the maintenance and development of training programs and curriculum; and 7) a $0.2 million increase in health insurance premiums. These increases were partially offset by reductions in costs resulting from the prior year reimbursement of airfare costs previously paid by the Company s CEO for business travel pursuant to a change in policy approved by the Board of Directors, and bonuses for the income tax consequences resulting from the forgiveness of certain management stock loans. These costs, which totaled $1.0 million, did not repeat during fiscal 2011.
At May 28, 2011 we had $1.1 million of cash and cash equivalents compared to $3.5 million at August 31, 2010, and our net working capital (current assets less current liabilities) increased to $11.5 million at May 28, 2011 compared to $4.6 million at August 31, 2010. During the first three quarters of fiscal 2011, we used the majority of our available cash to pay contingent business acquisition costs resulting from the acquisition of CoveyLink LLC in fiscal 2009 and to make payments on the outstanding obligation from our line of credit facility, which was contractually reduced to $10.0 million at December 31, 2010.
Our cash provided by operating activities totaled $6.2 million for the three quarters ended May 28, 2011 compared to $5.5 million during the first three quarters of fiscal 2010. The improvement was primarily due to improved operating income compared to the prior year. Our primary source of cash from operating activities was the sale of services and goods to our customers in the normal course of business. The primary uses of cash for operating activities were payments for direct costs necessary to conduct training programs, payments for selling, general, and administrative expenses, and payments to suppliers for materials used in products sold. Our primary uses of cash for working capital included $3.7 million to fund growth in our accounts receivable and $4.5 million of cash used primarily to pay accrued bonuses and commissions from seasonally high amounts at August 31. As previously mentioned, we have recognized significant sales from contracts obtained through our government services group. We did not receive any payments on these sales during the quarter ended May 28, 2011, which significantly increased our accounts receivable balance at May 28, 2011. However, subsequent to May 28, 2011 we received $2.2 million on these receivables and we expect to collect the entire remaining receivable balance in future periods, which should favorably affect our cash flows from operating activities in those periods.
Net cash provided by financing activities during the three quarters ended May 28, 2011 totaled $0.9 million. Our primary sources of financing cash were $3.7 million of proceeds drawn from our new term loan facility, as described above, and $0.2 million of cash received from participants in the employee stock purchase plan to purchase shares of our common stock. These sources of cash were partially offset by a $2.4 million net reduction on our revolving line of credit and $0.5 million for principal payments primarily on our financing obligation.