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

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Jul 08, 2010
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Franklin Covey Co. (FC, Financial) filed Quarterly Report for the period ended 2010-05-29.

Franklin Covey Co. has a market cap of $99.1 million; its shares were traded at around $5.84 with and P/S ratio of 0.8. FC is in the portfolios of Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

For the quarter ended May 29, 2010, our consolidated sales from continuing operations increased $1.0 million, or 3 percent, to $30.5 million compared to $29.5 million for the quarter ended May 30, 2009. Improved sales helped to produce improved operating results as our loss from operations for the quarter was $0.2 million compared to a loss of $1.0 million in the prior year. Our pre-tax loss from continuing operations improved to $0.9 million for the third quarter of fiscal 2010 compared to $1.9 million in the third quarter of fiscal 2009. Including the impact of income taxes, we recognized income from continuing operations of $0.3 million in the third quarter of fiscal 2010 compared to a $5.5 million loss in the prior year. Our net income for the quarter ended May 29, 2010 totaled $0.1 million, or $.01 per diluted share, compared to a net loss of $5.1 million, or $(.38) per diluted share in fiscal 2009.

Selling, General and Administrative – Our selling, general, and administrative (SG&A) expenses, (including the impact of a $0.8 million restructuring charge in fiscal 2009) decreased by $0.1 million compared to the prior year. The decrease in SG&A expenses was primarily due to continued benefits derived from our cost savings initiatives that were started in prior years and have affected nearly every aspect of our spending. These initiatives included a restructuring plan that reduced the number of our domestic regional sales offices, decentralized certain sales support functions, reduced our headcount, and made significant changes in the operation of our Canadian subsidiary. However, reduced SG&A expenses were partially offset by the increases in the following areas: 1) fluctuations in foreign currency exchange rates resulted in transaction losses of $0.2 million during the quarter compared to transaction gains of $0.4 million in fiscal 2009; 2) our associate costs increased $0.2 million primarily due to increased commissions on higher sales and investments in new personnel that are expected to contribute to sales growth in future periods; and 3) travel expenses increased by $0.1 million primarily resulting from increased training and consulting activity. We continue to design and implement new initiatives that are designed to streamline our processes, procedures, and operations that we believe will continue to provide improvements in our operating results compared to the prior year throughout the remainder of fiscal 2010. However, we cannot assure you that these initiatives will be successful.

Selling, General and Administrative – Our SG&A expenses decreased $4.1 million compared to the prior year (including the impact of $0.8 million of restructuring charges recorded in fiscal 2009). The decrease in SG&A expenses was primarily due to continued benefits derived from our cost savings initiatives and focused efforts on overall SG&A spending. Our restructuring plan and other cost-saving initiatives had the following significant impacts on our SG&A expenses during the three quarters ended May 29, 2010: 1) our advertising and promotional expenses decreased $2.1 million primarily due to the decision to reduce the number of public programs held and strategic reductions in our overall marketing expenses; 2) our associate expenses decreased $0.9 million primarily due to headcount reductions resulting from our restructuring activities, which were partially offset by increased commission on improved sales and new hires; 3) our spending on computer, office, and other related items declined by $0.5 million; and 4) our travel related expenses decreased by $0.1 million. Focused cost savings efforts also reduced our SG&A spending in various other areas of operations during the first three quarters of fiscal 2010.

Our income tax benefit for the three quarters ended May 29, 2010 totaled $2.0 million on a pre-tax loss of $2.1 million for an effective rate of 98 percent. The income tax benefit for the three quarters ended May 30, 2009 was $1.7 million on a pre-tax loss of $8.5 million for an effective rate of 20 percent. Our expected annual effective tax rate of approximately 88 percent is higher than statutory combined rates primarily due to foreign withholding taxes for which we cannot utilize a foreign tax credit, the accrual of taxable interest income on the management stock loan program, disallowed executive compensation, and actual and deemed dividends from foreign subsidiaries for which we also cannot utilize foreign tax credits. We anticipate that these items and other differences will add approximately $2.5 million to our annual income tax provision for fiscal

At May 29, 2010 we had $2.2 million of cash and cash equivalents compared to $1.7 million at August 31, 2009 and our working capital (current assets less current liabilities) deficit was $0.4 million at May 29, 2010 compared to a deficit of $3.2 million at August 31, 2009. During the first three quarters of fiscal 2010, we used the majority of our available cash to pay a required earnout payment to the former owners of CoveyLink and to make payments on the outstanding obligation from our line of credit facility, which was contractually reduced to $13.5 million at November 30, 2009.

Net cash used for financing activities in fiscal 2010 through May 29, 2010 totaled $3.3 million. Our uses of cash for financing activities primarily consisted of $3.7 million of cash used to reduce our line of credit balance, $0.6 million of cash used to repay a portion of an outstanding note payable to bank, and $0.5 million used for principal payments on our financing obligation. These uses were partially offset by $1.2 million of proceeds from a note payable to a bank in Japan, $0.2 million of cash received from participants in the employee stock purchase plan to purchase shares of our common stock, and $0.2 million of cash received from a management stock loan participant to repay their loan.

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