Franklin Covey Co. — FY2023 Form 10-K
Reporting period: Fiscal year ended August 31, 2023; comparisons are with fiscal 2022 unless noted. This is an annual report, not a standalone fourth-quarter report. Franklin Covey provides organizational performance training and consulting, primarily through the All Access Pass (AAP) and Leader in Me subscriptions.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $280.5 million | $262.8 million | +7% |
| Gross profit / margin | $213.5 million / 76.1% | $201.9 million / 76.8% | Profit +6%; margin -0.7 percentage points |
| Operating income / margin | $26.4 million / 9.4% | $23.7 million / 9.0% | Income +11% |
| Pre-tax income | $25.9 million | $22.1 million | +17% |
| Net income | $17.8 million | $18.4 million | -4% |
| Diluted EPS | $1.24 | $1.27 | -2% |
| Adjusted EBITDA (non-GAAP) | $48.1 million | $42.2 million | +14% |
| Operating cash flow | $35.7 million | $52.3 million | Down $16.5 million |
| Cash at year-end | $38.2 million | $60.5 million | Down $22.3 million |
- Revenue mix and growth: Enterprise revenue rose 6% to $205.7 million; Education rose 13% to $69.7 million. AAP subscription and subscription-services sales grew 9% to $158.0 million. Education added a record 791 Leader in Me schools; reported school retention was nearly 85%.
- Margins and costs: Gross margin eased as Education’s margin fell to 63.7% from 66.6%, reflecting higher travel costs and mix. SG&A increased $10.4 million, mainly from personnel, salaries, commissions, travel, and higher stock compensation. Consolidated SG&A was 63.6% of revenue, versus 64.0% in FY2022.
- Taxes: The effective tax rate rose to 31.3% from 16.5%. FY2022 benefited from a $2.8 million reduction in the deferred-tax valuation allowance; FY2023 tax expense included $0.9 million related to nondeductible executive compensation.
- Liquidity and debt: Current assets were $145.0 million and current liabilities $151.6 million (approximately 0.96 current ratio). Notes payable totaled $7.4 million, and the headquarters financing obligation was $8.0 million. The company had no revolver borrowings. Its March 2023 credit agreement provides up to $70 million, including a $62.5 million revolving facility, and matures in March 2028. The term loan rate was 6.9% at year-end; the company reported compliance with covenants.
- Cash use and contracted revenue: Financing activities used $44.2 million, including $35.6 million for share repurchases and share withholding; investing activities used $13.6 million, including $9.0 million of capitalized curriculum development. Deferred revenue was $111.2 million; remaining performance obligations, including unbilled contracted amounts, were $186.4 million, up 22%.
Material changes versus FY2022
- Revenue growth continued after FY2022’s 17% increase, with reported FY2023 growth partly offset by unfavorable foreign exchange; management reported constant-currency revenue of $284.5 million.
- Despite higher operating and pre-tax income, net income and diluted EPS declined, primarily reflecting the higher effective tax rate and a larger diluted share denominator.
- Operating cash flow fell to $35.7 million from $52.3 million, which management attributed mainly to working-capital movements, including payments of accounts payable and accrued liabilities and changes in deferred revenue.
- Education adjusted EBITDA declined to $7.4 million from $8.4 million despite revenue growth, reflecting higher delivery costs and operating expenses. Enterprise segment adjusted EBITDA increased.
- Stock-based compensation expense increased to $12.5 million from $8.3 million. The company also entered a new five-year credit agreement and authorized a new $50 million share-repurchase plan; $15.7 million remained authorized at year-end.
Outlook, risks, and other notable items
- Management expressed confidence in subscription growth and the benefit of contracted deferred revenue, while stating it expects to continue investing in content, technology, and personnel. Fiscal 2024 plans include refreshed 7 Habits and Speed of Trust offerings, further Impact Platform development, and additional Leader in Me content.
- Management estimated FY2024 curriculum-development spending of $7.1 million, property-and-equipment purchases of $8.0 million, depreciation of approximately $6.0 million, and amortization of $4.2 million. Property spending may vary with headquarters leasehold improvements. The filing does not provide a specific FY2024 earnings or revenue forecast.
- Management believes existing cash, operating cash generation, and available financing will be sufficient for at least the next 12 months. It expects operating cash flow to improve, but notes that liquidity depends on sales, collections, costs, capital spending, and economic conditions.
- Education faces potential pressure if funding from the federal ESSER program declines after its scheduled September 2024 expiration. Other cited risks include client training-budget reductions, competition, inflation, foreign exchange and geopolitical conditions, cybersecurity and privacy regulation, AI-related risks, and the ability to retain and recruit personnel.
- The company reported no litigation expected by management to materially affect its financial position, liquidity, or results. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. The filing identifies Leader in Me standalone selling-price estimates as a critical audit matter.
Important facts for investors to verify
- Whether AAP and Leader in Me subscription renewals, expansions, and new sales convert the $186.4 million of remaining performance obligations into recognized revenue and cash.
- Whether operating cash flow recovers after its FY2023 decline, and how cash balances evolve alongside share repurchases and investment spending.
- The effect of ESSER funding expiration on Education customer retention, new school additions, and segment profitability.
- Compliance with credit-facility leverage and fixed-charge coverage covenants, and the impact of variable interest rates and required debt payments.
- Whether planned FY2024 content, platform, and sales-force investments support growth without further material margin deterioration.