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Franklin Covey Co. Reports Operating Results (10-Q)

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Jan 06, 2011
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Franklin Covey Co. (FC, Financial) filed Quarterly Report for the period ended 2010-11-27.

Franklin Covey Co. has a market cap of $147.9 million; its shares were traded at around $8.68 with a P/E ratio of 54.2 and P/S ratio of 1.1. FC is in the portfolios of Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

The first quarter of fiscal 2011 continued the favorable momentum that we experienced during the fourth quarter of fiscal 2010 as continued increases in government services revenues combined with increased U.S/Canada direct offices sales and improved sales in Japan produced significantly improved operating results compared to the prior year. For the first quarter of fiscal 2011, which ended on November 27, 2010, our consolidated sales were $39.4 million, a $7.5 million (or 23 percent) improvement over the first quarter of fiscal 2010. Our income from operations improved to $3.4 million compared to $1.4 million in the prior year. Our income from continuing operations before income taxes also improved to $2.7 million compared to $0.7 million in fiscal 2010. Following the provision for income taxes (refer to discussion below), our net income was $0.8 million, or $.05 per diluted share, compared to $0.2 million, or $.01 per diluted share, in the first quarter of fiscal 2010.

Selling, General and Administrative – Our selling, general, and administrative (SG&A) expenses increased $2.5 million compared to the prior year. However, as a percent of sales, SG&A expenses declined to 50.2 percent in the first quarter of fiscal 2011 compared to 54.1 percent of sales in the prior year. The increase in SG&A expenses was primarily due to 1) a $1.0 million increase in associate costs resulting from increased commissions on improved sales compared to the prior year; 2) a $0.8 million increase in conference costs for our annual sales and delivery conference, which was held on a greatly reduced scale in fiscal 2010; 3) a $0.2 million increase in associate costs resulting from the addition of new personnel; 4) a $0.2 million increase in share-based compensation costs; and 5) a $0.2 million increase in travel expenses.

At November 27, 2010 we had $1.7 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) totaled $7.9 million at November 27, 2010 compared to $4.6 million at August 31, 2010. During the first quarter of fiscal 2011, our cash balance decreased primarily due to the repatriation of the remaining proceeds from the sale of our Japan products division from Japan to the United States and the utilization of those proceeds to repay our Line of Credit and fund working capital requirements.

Our primary sources of liquidity are cash flows from the sale of services and products in the normal course of business and proceeds from our revolving Line of Credit facility. We may use the Line of Credit facility for general corporate purposes as well as for other transactions, unless prohibited by the terms of the Line of Credit agreement. The Line of Credit also contains customary representations and guarantees as well as provisions for repayment and liens. Our Line of Credit agreement expires in March 2011 and is therefore classified as a current obligation on our condensed consolidated balance sheet at November 27, 2010. We are currently in negotiations with our lender to renew the Line of Credit as described below in “Sources of Liquidity.” At November 27, 2010, we had $11.3 million outstanding on the Line of Credit and the available funding was contractually reduced to $10.0 million on December 31, 2010. We had $5.5 million outstanding on the Line of Credit on December 31, 2010.

Our primary source of cash from operating activities was the sale of goods and services to our customers in the normal course of business. The primary uses of cash for operating activities were payments for selling, general, and administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in products sold, and to fund working capital needs. Our cash used for operating activities totaled $2.1 million for the quarter ended November 27, 2010 compared to $1.6 million provided by operating activities during the quarter ended November 28, 2009. The decrease in cash flows from operating activities was primarily driven by changes in working capital compared to the prior year and was partially offset by improved income from operations. As previously mentioned, we have recognized significant sales through our government services channel during our fourth quarter of fiscal 2010 and the first quarter of fiscal 2011. As of November 27, 2010, we had not yet received payment for a significant amount of these sales and our accounts receivable were significantly higher than at year end. However, subsequent to November 27, 2010 we have received $9.8 million in payments on these sales and expect an improvement in the collection cycle for these receivables during fiscal 2011. We also used cash to pay our seasonally high August 31 accrued liabilities, which primarily consisted of year end commissions and bonuses. We believe that our continued efforts to improve working capital balances and improve income from operations will improve our cash flows from operating activities in future periods of fiscal 2011. However, the success of these efforts, and their eventual contribution to our cash flows, is dependent upon numerous factors, many of which are not within our control.

During the quarter ended November 27, 2010, we used $1.3 million of cash for investing activities. Our primary uses of cash for investing activities were additional spending on curriculum development and the purchase of property and equipment in the normal course of business. We spent $1.0 million during the first quarter of fiscal 2011 primarily to develop new productivity and leadership offerings. Our purchases of property and equipment, which totaled $0.3 million, consisted primarily of computer hardware and software items.

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