Franklin Covey Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first three quarters ended May 31, 2022. Comparisons are with the corresponding 2021 periods. Dollar figures below are in millions unless otherwise noted.
Business context
Franklin Covey provides organizational performance-improvement content, training, consulting and coaching. Its offerings include the All Access Pass (AAP) and Leader in Me subscriptions. Operations comprise Direct Offices, International Licensees and Education Practice, with corporate and other activities.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | First 3 quarters FY2022 | First 3 quarters FY2021 |
|---|---|---|---|---|
| Net sales | $66.2 | $58.7 | $184.0 | $155.2 |
| Gross profit | $51.1 | $45.9 | $142.8 | $119.6 |
| Gross margin | 77.3% | 78.2% | 77.6% | 77.1% |
| Operating income | $5.9 | $3.1 | $15.0 | $3.8 |
| Income before tax | $5.6 | $2.6 | $13.8 | $2.2 |
| Net income | $7.2 | $12.8 | $12.9 | $11.8 |
| Diluted EPS | $0.51 | $0.90 | $0.90 | $0.84 |
| Adjusted EBITDA (non-GAAP) | $10.9 | $8.6 | $28.9 | $17.4 |
Q3 sales grew 13%; operating income rose 91% and Adjusted EBITDA rose 27%. SG&A increased to $42.6 million from $40.1 million, but declined as a share of sales to 64.4% from 68.3%. Q3 net income was lower year over year despite stronger operating results, principally because the prior-year quarter included a much larger income-tax benefit ($10.1 million versus $1.6 million). The nine-month effective tax rate was approximately 7%, including use of previously reserved foreign tax credits and an FDII benefit.
For the first three quarters, operating cash flow was $39.5 million, versus $30.9 million. Investing activities used $3.5 million; financing activities used $30.7 million, including $23.9 million of treasury-stock purchases and $6.7 million of principal payments on notes and the financing obligation. Cash increased $4.7 million to $52.1 million.
At May 31, cash was $52.1 million, including $15.7 million held by foreign subsidiaries. The company reported no borrowings on its $15.0 million revolving credit facility. Notes payable totaled $14.3 million, and the campus financing obligation totaled $11.9 million. Current assets were $122.1 million and current liabilities were $128.9 million. The company said it was in compliance with credit-agreement covenants and believed cash, operating cash flows and available external funding would cover operations for at least 12 months.
Material changes and operating trends
- Q3 Enterprise Division sales rose 11% to $50.0 million; Education sales rose 21% to $14.4 million. For the first three quarters, Education sales increased 33% to $37.2 million, and its Adjusted EBITDA improved to $1.8 million from a $2.0 million loss.
- AAP and related sales increased 32% in Q3 and 29% for the first three quarters; annual AAP revenue retention remained well above 90%. Deferred subscription revenue was $68.5 million, up 24% from May 31, 2021. Deferred revenue plus unbilled multi-year contracts was $116.5 million, up 21% year over year.
- Q3 sales in China fell 66% and Japan fell 15%, amid pandemic restrictions and economic conditions. U.S. and Canada Direct Office sales increased 19%. Foreign exchange reduced Q3 consolidated sales by approximately $0.8 million.
- Gross margin eased in Q3, mainly due to sales mix; nine-month margin improved year over year. SG&A rose with staffing, compensation, commissions, travel and marketing costs.
- The company repurchased 499,411 shares on the open market in Q3 for $20.3 million, at an average $40.68 per share. Total treasury-stock purchases for the first three quarters were $23.9 million.
Outlook, commentary and risks
Management described sales and profitability momentum as strong and said it expected improving earnings and cash flows to continue through fiscal 2022, dependent on ongoing pandemic recovery and improving international economic and geopolitical conditions. It anticipated fiscal 2022 property-and-equipment purchases of $4.8 million, curriculum-development spending of $4.0 million, depreciation of approximately $5.2 million and intangible amortization of $5.3 million. These are management estimates, not formal earnings guidance.
Management identified continuing COVID-19 disruption, especially in China and Japan; inflation and the possibility that higher costs cannot be passed through to clients; supply-chain and labor-cost pressures; geopolitical and economic instability, including the Russia-Ukraine conflict; foreign-exchange movements; and execution, competition and cybersecurity risks. The Russia licensee relationship was suspended, and Ukraine operations were limited; related royalty revenue was not generally material. The company noted that higher interest rates could increase expense on variable-rate debt; a 1% rate increase on term loans outstanding at May 31 was estimated to add $0.1 million of interest expense over 12 months.
Important facts for investors to verify
- Whether subscription growth, retention above 90% and contracted/unbilled obligations translate into recognized revenue and cash collection.
- Whether China and Japan operations recover, and how pandemic measures, geopolitical developments and foreign exchange affect international sales.
- How inflation, compensation, travel and other operating costs affect margins and whether pricing offsets those pressures.
- The sustainability of operating cash flow and liquidity after substantial share repurchases, scheduled debt payments and planned investment spending.
- The effect of tax-credit utilization and other tax items on future effective tax rates; Q3 and prior-year comparisons were materially affected by discrete tax benefits.
- Management’s Adjusted EBITDA measure is non-GAAP; review its reconciliation to GAAP net income when assessing performance.