FRANKLIN COVEY CO. Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995."
We suggest that the following discussion and analysis be read in conjunction
with the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the fiscal year ended
Non-GAAP Measures
This Management's Discussion and Analysis includes the concepts of adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA) and "constant currency," which are non-GAAP measures. We define Adjusted EBITDA as net income excluding the impact of interest, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other items such as adjustments to the fair value of expected contingent consideration liabilities arising from business acquisitions. Constant currency is a non-GAAP financial measure that removes the impact of fluctuations in foreign currency exchange rates and is calculated by translating the current period's financial results at the same average exchange rates in effect during the prior year and then comparing this amount to the prior year.
We reference these non-GAAP financial measures in our decision making because they provide supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe it provides investors with greater transparency to evaluate operational activities and financial results. For a reconciliation of our segment Adjusted EBITDA to net income, a related GAAP measure, please refer to Note 7, Segment Information, to our financial statements.
RESULTS OF OPERATIONS
Overview
Our financial results for the quarter ended
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?Strong growth of All Access Pass and Related Services. All Access Pass (AAP)
subscription and subscription services sales increased 20 percent in the first
quarter of fiscal 2023 to
?Education Division performance improvement. Education Division revenues grew 23 percent on the strength of increased consulting, coaching, and training days delivered during the quarter, increased Leader in Me subscription revenues, and increased material sales.
?International sales improvement. Three of our five international direct offices
reported improved sales compared with the first quarter of fiscal 2022 and
international licensee revenues increased nine percent over the prior year,
reflecting increased sales and improving economic conditions in many of the
countries in which we and our licensees operate. We expect sales activity in
We were pleased with our overall sales growth during the quarter despite some
continuing international headwinds, including unfavorable foreign exchange
rates, a 10 percent decrease in
The following is a summary of financial highlights for the first quarter of fiscal 2023:
?Sales - Our consolidated sales for the quarter ended
At
?Cost of Sales/Gross Profit - Our cost of sales totaled
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?Operating Expenses - Our operating expenses for the quarter ended
?Operating Income, Net Income, and Adjusted EBITDA - As a result of increased
sales and a strong gross margin, our income from operations for the quarter
ended
?Liquidity and Financial Position - Our liquidity and financial position
remained strong during the first quarter of fiscal 2023. At
Further details regarding our results for the quarter ended
Quarter Ended
Enterprise Division Direct Offices Segment
The Direct Office segment includes our sales personnel that serve clients in
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2022 Sales 2021 Sales Change
Sales $ 50,167 100.0 $ 45,119 100.0 $ 5,048
Cost of sales 10,246 20.4 8,917 19.8 1,329
Gross profit 39,921 79.6 36,202 80.2 3,719
SG&A expenses 28,671 57.2 26,248 58.2 2,423
Adjusted EBITDA $ 11,250 22.4 $ 9,954 22.1 $ 1,296 During the first quarter of fiscal 2023, Direct Office segment revenue increased
11 percent to
Consistent with the previous several quarters, the performance of our international direct offices was directly related to the level of recovery from the pandemic and corresponding business and social activity in each country. Increased sales in
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the
Gross Profit. Gross profit increased primarily due to increased sales as previously described. Direct Office gross margin remained strong, and was 79.6 percent compared with 80.2 percent in the prior year.
SG&A Expense. Direct Office SG&A expense increased primarily due to increased associate costs resulting from new personnel, increased salaries, and increased commissions on higher sales, and increased travel expenses.
International Licensees Segment
In foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations in the periods indicated (in thousands):
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2022 Sales 2021 Sales Change
Sales $ 3,278 100.0 $ 2,997 100.0 $ 281
Cost of sales 301 9.2 296 9.9 5
Gross profit 2,977 90.8 2,701 90.1 276
SG&A expenses 1,146 35.0 1,030 34.4 116
Adjusted EBITDA $ 1,831 55.9 $ 1,671 55.8 $ 160 Sales. International licensee revenues are primarily comprised of royalty
revenues. During the first quarter of fiscal 2023 our licensee revenues
increased primarily due to increased royalty revenues from certain licensees as
economies in many of the countries where our licensees operate continue to
recover from the pandemic. The ongoing recovery led to improved licensee royalty
revenues and continued increases in our share of AAP sales. Compared with the
first quarter of fiscal 2022, our royalty revenues increased seven percent and
our share of AAP revenues increased by 32 percent to
Gross Profit. Gross profit increased primarily due to increased royalty revenues and AAP revenues as previously described. Gross margin remained strong at 90.8 percent compared with 90.1 percent in the prior year, and improved slightly due to the mix of revenue recognized during the first quarter of fiscal 2023.
SG&A Expense. International licensee SG&A expenses increased primarily due to additional spending on technology, development, and various other shared service costs.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed Leader in Me program. The following comparative information is for our Education Division for the periods indicated (in thousands):
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Quarter Ended Quarter Ended
November 30, % of November 30, % of
2022 Sales 2021 Sales Change
Sales $ 14,350 100.0 $ 11,697 100.0 $ 2,653
Cost of sales 5,175 36.1 3,837 32.8 1,338
Gross profit 9,175 63.9 7,860 67.2 1,315
SG&A expenses 8,894 62.0 7,625 65.2 1,269
Adjusted EBITDA $ 281 2.0 $ 235 2.0 $ 46 Sales. Education Division sales for the quarter ended
Gross Profit. Education Division gross profit increased primarily due to sales growth as previously described. Education segment gross margin decreased compared with the prior year primarily due to increased costs related to the delivery of coaching and consulting services and related training materials. Education division gross margin was also adversely impacted by a change in the mix of services and products sold to customers compared with the prior year.
SG&A Expenses. Education SG&A expenses increased primarily due to increased associate expenses from new personnel and changes to compensation plans, and increased travel costs compared with the prior year.
Other Operating Expense Items
Depreciation - Depreciation expense for the first quarter was
Amortization - Amortization expense decreased
Income Taxes
Our income tax provision for the quarter ended
LIQUIDITY AND CAPITAL RESOURCES
Introduction
Due to economic uncertainties generated by a variety of current geopolitical
events, including macroeconomic factors, international conflicts, and the
ongoing impacts from the COVID-19 pandemic, we have prioritized maintaining and
preserving adequate liquidity during the past few years. We believe these
efforts have been successful and have provided the ability to maintain
operations, make strategic investments, and purchase shares of our common stock.
At
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--------------------------------------------------------------------------------the normal course of business and available proceeds from our revolving line of credit facility. Our primary uses of liquidity include payments for operating activities, debt payments, business acquisitions, capital expenditures (including curriculum development), working capital expansion, and purchases of our common stock.
At
In the event of noncompliance with these financial covenants and other defined
events of default, the lender is entitled to certain remedies, including
acceleration of the repayment of any amounts outstanding on the credit agreement
entered into on
In addition to our term-loan obligation and borrowings on our revolving line of credit, we have a long-term rental agreement on our corporate campus that is accounted for as a financing obligation.
The following discussion is a description of the primary factors affecting our
cash flows and their effects upon our liquidity and capital resources during the
quarter ended
Cash Flows Provided By Operating Activities
Our primary source of cash from operating activities was the sale of services to
our customers in the normal course of business. Our primary uses of cash for
operating activities were payments for SG&A expenses, to fund changes in working
capital, payments for direct costs necessary to conduct training programs, and
payments to suppliers for materials used in training manuals sold. Our cash
provided by operating activities during the first quarter of fiscal 2023 was
Cash Flows Used For Investing Activities and Capital Expenditures
During the quarter ended
Our purchases of property and equipment during the first quarter of fiscal 2023
consisted primarily of computer hardware, software, and leasehold improvements
on our corporate campus. We expect to continue investing in our content and
delivery modalities, including the AAP and Leader in Me subscription services
and expect to make required leasehold improvements on our corporate campus in
fiscal 2023 and in future periods. We currently anticipate that our purchases of
property and equipment will total
We spent
Cash Flows Used For Financing Activities
For the quarter ended
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awards. Partially offsetting these uses of cash were
On
Sources of Liquidity
We expect to meet our obligations on the 2019 Credit Agreement, service our
existing financing obligation, pay for projected capital expenditures, and meet
other obligations during fiscal 2023 from current cash balances and future cash
flows from operating activities. Going forward, we will continue to incur costs
necessary for the day-to-day operation of the business and may use additional
credit and other financing alternatives, if necessary, for these expenditures.
Our 2019 Credit Agreement expires in
We believe that our existing cash and cash equivalents, cash generated by operating activities, and the availability of external funds as described above, will be sufficient for us to maintain our operations for at least the upcoming 12 months. However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, the length and severity of business disruptions associated with the COVID-19 pandemic (and new variants), our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors. We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.
Material Uses of Cash and Contractual Obligations
We do not operate any manufacturing, mining, or other capital-intensive facilities, and we have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. However, we have normal ongoing cash expenditures and are subject to various contractual obligations that are required to run our business. Our material cash requirements include the following:
?Associate and Consultant Compensation
?Information Technology Expenditures
?Content Development Costs ?Income Taxes ?Contractual Obligations
These material cash requirements are discussed in more detail in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended
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to the information included in our Annual Report on Form 10-K for the fiscal
year ended
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements were prepared in accordance with GAAP. The
significant accounting policies used to prepare our consolidated financial
statements are outlined primarily in Note 1 to the consolidated financial
statements presented in Part II, Item 8 of our Annual Report on Form 10-K for
the fiscal year ended
Estimates
Some of the accounting guidance we use requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. We regularly evaluate our estimates and assumptions and base those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under GAAP. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made by the Company in this report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the
Exchange Act). Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results,
performance, or achievements, and may contain words such as "believe,"
"anticipate," "expect," "estimate," "project," or words or phrases of similar
meaning. In our reports and filings we may make forward-looking statements
regarding, among other things, our expectations about future sales levels and
financial results, our financial performance during fiscal 2023, expected and
lingering effects from the COVID-19 pandemic, including effects on how we
conduct our business and our results of operations, the timing and duration of
the recovery from the COVID-19 pandemic, future training and consulting sales
activity, expected benefits from the AAP and the electronic delivery of our
content, anticipated renewals of subscription offerings, our ability to hire
sales professionals, the amount and timing of capital expenditures, anticipated
expenses, including SG&A expenses, depreciation, and amortization, future gross
margins, the release of new services or products, the adequacy of existing
capital resources, our ability to renew or extend our line of credit facility,
the amount of cash expected to be paid for income taxes, our ability to maintain
adequate capital for our operations for at least the upcoming 12 months, the
seasonality of future sales, future compliance with the terms and conditions of
our line of credit, the ability to borrow on our line of credit, expected
collection of accounts receivable, estimated capital expenditures, and cash flow
estimates used to determine the fair value of long-lived assets. These, and
other forward-looking statements, are subject to certain risks and uncertainties
that may cause actual results to differ materially from the forward-looking
statements. These risks and uncertainties are disclosed from time to time in
reports filed by us with the
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements.
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--------------------------------------------------------------------------------Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management's expectations as of the date
made, and we do not undertake any responsibility to update any of these
statements in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or
suggested by forward-looking statements as a result of the factors set forth in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in our filings with the
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