Franklin Covey Co. — FY2022 Form 10-K
Business context and reporting period. Franklin Covey provides organizational performance and education training, consulting, content, and subscription services. Its main offerings include the All Access Pass (AAP) for enterprise clients and Leader in Me membership for schools. This 10-K covers the fiscal year ended August 31, 2022; comparisons are with FY2021 unless noted. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $262.8 million | $224.2 million |
| Gross profit / margin | $201.9 million / 76.8% | $172.9 million / 77.1% |
| Operating income / margin | $23.7 million / 8.9% | $8.1 million / 3.6% |
| Income before taxes | $22.1 million | $6.1 million |
| Net income | $18.4 million | $13.6 million |
| Diluted earnings per share | $1.27 | $0.96 |
| Operating cash flow | $52.3 million | $46.2 million |
| Cash and cash equivalents at year-end | $60.5 million | $47.4 million |
- Revenue increased 17% (18% on a constant-currency basis). AAP subscription and related sales rose 28% to $144.5 million; Education Division revenue rose 26% to $61.9 million. Enterprise Division revenue increased 15% to $194.4 million.
- Adjusted EBITDA, a non-GAAP measure, increased 51% to $42.2 million from $28.0 million. Gross margin edged down 0.3 percentage points, while SG&A declined to 60.8% of revenue from 64.7%.
- Net income growth was smaller than operating-income growth partly because FY2021 included a $10.5 million reduction in the deferred-tax valuation allowance, contributing to an unusually large tax benefit. FY2022’s effective tax rate was 16.5%.
- Operating cash flow rose 13%. Investing activities used $5.3 million and financing activities used $32.7 million, including $23.9 million for treasury-share purchases and $8.7 million for principal payments on debt and financing obligations.
- Current assets were $155.9 million and current liabilities $153.8 million at year-end. The company had no borrowings on its $15 million revolver, with the facility due to expire in August 2024. Notes payable totaled $13.1 million, and the campus financing obligation totaled $11.2 million, including current portions.
- Deferred revenue was $102.4 million; remaining performance obligations, including unbilled contracted amounts, were $153.4 million. These balances support future revenue but are not equivalent to cash or guaranteed future growth.
Material changes and operating developments
- Both operating divisions grew, supported by subscription sales, contract renewals and expansions, new customers, and recovering in-person training. Management said price increases did not materially drive growth.
- Education added a record 739 Leader in Me schools in the United States and Canada; nearly 90% of existing schools in those markets were retained. The program was used in more than 3,300 schools in the United States and Canada at year-end.
- International operations remained uneven: China faced strict COVID-related lockdowns, while the United Kingdom and several other markets recovered. Currency movements reduced Direct Office sales by $2.0 million and adversely affected operating income.
- FY2022 share repurchases included $20.3 million of open-market purchases; $19.5 million remained authorized under the $40 million plan at year-end. The company paid no common-stock dividends.
Outlook, commentary, and risks
- Management said it expected FY2022 momentum to carry into FY2023 and identified investment in people, content, and technology as priorities. The Impact Platform, built on technology acquired with Strive Talent, launched in October 2022; management also planned a refreshed Leader in Me curriculum and additional sales hiring. The filing does not provide a clear quantified FY2023 revenue or earnings forecast.
- Management estimated FY2023 depreciation of approximately $5.7 million and amortization of $4.3 million, property-and-equipment purchases of $7.6 million, and curriculum development spending of $9.5 million.
- The company said existing cash, operating cash flow, and available external borrowing were expected to support operations for at least the next 12 months. FY2023 contractual obligations include $5.8 million of scheduled notes-payable principal and $3.2 million of financing-obligation principal; timing and amounts of contingent consideration may vary.
- Key risks include competition and client training-budget reductions, inflation and labor costs, continued COVID-related disruption—particularly in China and Japan—foreign-exchange movements, cyber and data-privacy risks, dependence on key personnel, and the ability to maintain subscription renewals and platform adoption. Debt covenants and the need to renew or amend the credit facility also merit attention.
- Management reported no material litigation expected to adversely affect the company. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether AAP and Leader in Me renewals, retention, and contracted but unbilled obligations convert into recognized revenue and cash as expected.
- FY2023 adoption and client response to the Impact Platform, and whether planned hiring and content investments improve growth without eroding margins.
- The extent and duration of COVID-related disruption in Asia, inflationary cost pressure, and currency effects.
- Debt balances, covenant compliance, scheduled payments, and the status of the credit facility ahead of its August 2024 maturity.
- Cash deployment, including share repurchases, and the assumptions behind contingent consideration and the deferred-tax valuation allowance.