Franklin Covey Co. — FY2021 Form 10-K
Reporting period: Fiscal year ended August 31, 2021 (not calendar Q4). Franklin Covey provides organizational performance training and consulting, including subscription offerings All Access Pass (AAP) and Leader in Me, delivered through its Enterprise and Education divisions.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $224.2 million | $198.5 million |
| Gross profit / margin | $172.9 million / 77.1% | $145.4 million / 73.3% |
| Operating income | $8.1 million | $3.1 million |
| Income (loss) before taxes | $6.1 million | $0.8 million |
| Net income (loss) | $13.6 million; diluted EPS $0.96 | $(9.4) million; diluted EPS $(0.68) |
| Adjusted EBITDA (non-GAAP) | $28.0 million | $14.3 million |
| Cash from operating activities | $46.2 million | $27.6 million |
| Cash and cash equivalents at year-end | $47.4 million | $27.1 million |
- Revenue rose 13%. Enterprise Division revenue increased 14% to $168.6 million; Education Division revenue increased 13% to $48.9 million. Subscription revenue totaled $99.5 million, up 15%.
- Gross margin expanded 3.9 percentage points, which management attributed primarily to higher subscription mix and improved utilization of fixed delivery costs. SG&A increased $15.0 million and stock-based compensation expense increased $9.2 million.
- Operating cash flow increased 68%. Investing activities used $14.3 million, including $10.2 million for the Strive acquisition, $2.5 million for curriculum development, and $1.6 million for property and equipment. Financing activities used $11.5 million.
- At year-end, notes payable totaled $18.8 million, including $15.0 million of bank term loans and $3.8 million related to Strive. The corporate-campus financing obligation was $14.0 million. The company had no revolving-credit borrowings and $15.0 million of available revolving capacity; the facility matures in August 2024.
- Deferred revenue was $88.6 million, including $77.0 million of deferred subscription revenue. Remaining performance obligations were $127.4 million, including deferred subscription revenue; unbilled contracted amounts are not recorded on the balance sheet.
Material changes and unusual items
- FY2021 results improved from FY2020, when COVID-19 disruptions reduced sales and the company recorded a $10.2 million income-tax provision. FY2021 included a $7.5 million tax benefit, principally from a $10.5 million reduction in the valuation allowance on deferred tax assets after the company returned to three-year cumulative pretax income. This tax benefit materially contributed to reported net income; pretax income was $6.1 million.
- Subscription growth was a key driver: AAP subscription revenue increased 18%, AAP subscription services revenue increased 38%, and AAP annual revenue retention remained above 90%. More than 40% of AAP contracts were multi-year at year-end.
- Education revenue recovered as schools resumed activity; Leader in Me added 574 schools and retained over 92% of existing schools. The program was used in nearly 2,900 U.S. and Canadian schools at year-end.
- In April 2021, Franklin Covey acquired learning-platform company Strive. Initial purchase consideration was $14.3 million, including cash and a note; additional payments may depend on AAP growth and continued employment. The company recorded $7.0 million of goodwill and $8.0 million of acquired intangible assets.
- FY2020 included $1.6 million of restructuring costs and a stock-based compensation credit; FY2021 stock-based compensation expense was $8.6 million. Prior-year comparisons are affected by these items.
Outlook, commentary, and risks
- Management expects subscription offerings and digital delivery, continued renewals, new clients, international recovery, and Education growth to support FY2022 and later growth. It said strong FY2021 momentum could carry forward, while cautioning that recovery depends on economic reopening and other factors outside its control. No specific revenue or earnings guidance is provided in the filing.
- Management estimated FY2022 depreciation of approximately $5.8 million, amortization of $5.3 million, curriculum-development spending of $5.0 million, and property-and-equipment spending of approximately $4.9 million. It expects existing cash, operating cash flow, and available credit to fund operations and requirements over the next 12 months.
- COVID-19 continued to disrupt in-person training, schools, and international operations; renewed restrictions, uneven recovery, supply-chain issues, or clients’ reduced training budgets could weigh on results. Other stated risks include competition, subscription renewals and client retention, cybersecurity and privacy regulation, intellectual-property protection, key-personnel retention, foreign exchange, and credit-facility covenant compliance.
- Seasonality typically makes the fourth quarter stronger. The company paid no dividends in FY2021 or FY2020. It reported no material litigation, and its independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether AAP subscription growth, retention, and deferred/remaining performance obligations convert into recognized revenue and cash flow at expected rates.
- The sustainability of higher gross margins and operating cash flow as selling costs, headcount, stock compensation, and digital-platform investment evolve.
- The tax-asset assumptions underlying the FY2021 valuation-allowance release, and the potential for future tax-rate volatility.
- Strive’s integration, contribution to AAP growth, and potential contingent, employment-related, and note payments.
- Debt maturities, financing-obligation payments, covenant headroom, and the company’s ability to maintain liquidity if recovery slows.
- The filing’s performance figures are for the full fiscal year; quarterly results are unaudited and the fourth quarter is seasonally stronger.