Franklin Covey(FC) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents Franklin Covey Co.'s unaudited condensed consolidated financial statements for periods ended May 31, 2023 Condensed Consolidated Balance Sheets Balance sheet as of May 31, 2023, shows decreased total assets to $217.7 million and liabilities to $143.2 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | May 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $39,329 | $60,517 | | Accounts receivable, net | $55,476 | $72,561 | | Total current assets | $116,730 | $155,883 | | Total assets | $217,724 | $259,155 | | Liabilities & Equity | | | | Deferred subscription revenue (current) | $70,419 | $85,543 | | Total current liabilities | $128,406 | $153,796 | | Total liabilities | $143,217 | $176,341 | | Total shareholders' equity | $74,507 | $82,814 | Condensed Consolidated Income Statements Q3 2023 net sales increased to $71.4 million, but net income decreased to $4.6 million due to tax provision changes Income Statement Summary (in thousands, except per-share amounts) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $71,441 | $66,176 | $202,565 | $184,035 | | Gross profit | $54,233 | $51,132 | $154,185 | $142,845 | | Income from operations | $6,572 | $5,949 | $15,793 | $15,011 | | Net income | $4,563 | $7,162 | $10,969 | $12,852 | | Diluted EPS | $0.32 | $0.51 | $0.76 | $0.90 | Condensed Consolidated Statements of Cash Flows Nine-month operating cash flow decreased to $25.9 million, with increased investing and financing outflows Cash Flow Summary for Nine Months Ended May 31 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $25,947 | $39,536 | | Net cash used for investing activities | ($10,386) | ($3,459) | | Net cash used for financing activities | ($36,590) | ($30,663) | | Net (decrease) increase in cash | ($21,188) | $4,651 | - Purchases of common stock for treasury significantly increased to $29.7 million in the first three quarters of fiscal 2023, compared to $23.9 million in the same period of 2022[11] - Curriculum development costs, a key investing activity, rose sharply to $6.8 million from $1.4 million in the prior-year period[11] Notes to Condensed Consolidated Financial Statements Detailed disclosures on accounting policies, revenue recognition, new credit agreement, and segment information - On March 27, 2023, the company entered into a new five-year, $70.0 million credit agreement with KeyBank, replacing its previous agreement, including a $7.5 million term loan and a $62.5 million revolving line of credit[26] - Total deferred revenue was $90.5 million at May 31, 2023, with $72.7 million from subscription offerings, and $140.9 million of remaining performance obligations[33][35] - On February 14, 2023, the Board approved a new $50.0 million stock repurchase plan, under which the company purchased 743,000 shares for $28.8 million in the first three quarters of fiscal 2023[31] Revenue by Service Type - Three Quarters Ended May 31 (in thousands) | Service Type | 2023 | 2022 | | :--- | :--- | :--- | | Services and Products | $85,453 | $80,859 | | Subscriptions | $101,264 | $87,260 | | Royalties | $13,092 | $12,195 | | Leases and Other | $2,756 | $3,721 | | Consolidated | $202,565 | $184,035 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial condition and results, highlighting record Q3 2023 sales of $71.4 million - Q3 2023 consolidated sales grew 8% to a record $71.4 million, driven by the strength of the subscription business model[60] - Key performance trends include: 1) Growth of All Access Pass (AAP) and related services, with rolling four-quarter sales up 15% to $156.6 million; 2) Education Division revenue growth of 18% in Q3; and 3) International sales improvement, with direct office sales up 23% in Q3[63] - The company's liquidity remains strong with over $100 million available, consisting of $39.3 million in cash and a $62.5 million undrawn credit line at quarter-end[64] - During Q3 2023, the company repurchased $25.0 million of its common stock on the open market[64] Results of Operations Details operating results for Q3 and first three quarters of fiscal 2023 by segment, showing growth Q3 2023 vs Q3 2022 Segment Sales (in thousands) | Segment | Q3 2023 Sales | Q3 2022 Sales | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Direct Offices | $50,382 | $47,416 | $2,966 | +6.3% | | International Licensees | $2,835 | $2,610 | $225 | +8.6% | | Education Division | $17,082 | $14,439 | $2,643 | +18.3% | YTD 2023 vs YTD 2022 Segment Sales (in thousands) | Segment | YTD 2023 Sales | YTD 2022 Sales | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Direct Offices | $144,194 | $134,037 | $10,157 | +7.6% | | International Licensees | $9,048 | $8,196 | $852 | +10.4% | | Education Division | $45,631 | $37,202 | $8,429 | +22.7% | - International Direct Office sales increased 23% in Q3, primarily due to a sharp recovery in China, which had been impacted by pandemic-related issues in the first half of the fiscal year[62][66] - The sum of deferred subscription revenue and unbilled multi-year contracts increased 21% year-over-year to $140.9 million as of May 31, 2023, indicating a solid base for future revenue[65] Liquidity and Capital Resources As of May 31, 2023, the company had $39.3 million cash and a $62.5 million undrawn credit facility - The company entered a new $70.0 million credit agreement on March 27, 2023, which matures in 2028 and provides a $62.5 million revolving line of credit[92] - Cash from operating activities decreased to $25.9 million for the nine months ended May 31, 2023, from $39.5 million in the prior year, mainly due to working capital changes[97] - Primary uses of financing cash in the first nine months of fiscal 2023 were $29.7 million for common stock purchases and $7.0 million for principal payments on debt and financing obligations[101] - The company expects to spend approximately $9.7 million on curriculum development and $3.9 million on property and equipment for the full fiscal year 2023[99][100] Critical Accounting Estimates No significant changes to critical accounting policies and estimates as disclosed in the fiscal 2022 10-K - There have been no significant changes to the company's previously disclosed critical accounting policies or estimates[108] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on variable-rate debt, with no derivative instruments used - A hypothetical one percent increase in the effective interest rate on the unpaid term loan balance as of May 31, 2023, would result in approximately $35,000 of additional interest expense over the next 12 months[116] - The company did not utilize any foreign currency or interest rate derivative instruments during the reported periods[117] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of May 31, 2023, with no material changes - Based on an evaluation as of the end of the reporting period, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[119] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[120] PART II. OTHER INFORMATION Item 1A. Risk Factors Highlights financial services industry risks, where cash balances exceeding FDIC limits could impact liquidity - The company is exposed to risks from the financial services industry, as its cash held in bank accounts exceeds FDIC insurance limits[122] - Instability in the banking system, such as the failure of Silicon Valley Bank, could adversely affect the company's liquidity and access to financing, even without direct exposure to the failed institutions[122][123] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Q3 2023 repurchases totaled 664,133 shares for $37.65 average, under a new $50.0 million plan Common Stock Purchases for Quarter Ended May 31, 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | March 2023 | - | $ - | | April 2023 | 324,833 | $38.68 | | May 2023 | 339,300 | $36.67 | | Total | 664,133 | $37.65 | - A new $50.0 million stock purchase plan was approved on February 14, 2023, replacing the prior plan, with $21.6 million remaining available for future repurchases as of May 31, 2023[124] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including the new Credit Agreement and CEO/CFO certifications - Exhibit 10.1: Credit Agreement with KeyBank National Association, dated March 27, 2023[129] - Exhibits 31.1 and 31.2: Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)[129]