K12 Inc. Form 10-Q Summary
Period and business: The filing covers the quarter ended March 31, 2019, and the first nine months of fiscal 2019. The registrant in the filing is K12 Inc.; this differs from the request metadata naming Stride, Inc. K12 provides curriculum, software and education services, primarily to virtual and blended K–12 schools. Managed Public School Programs generated about 88% of nine-month revenue.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $253.3 million, up 8.8% year over year | $759.4 million, up 11.9% |
| Operating income | $23.3 million vs. $19.7 million | $42.8 million vs. $15.7 million |
| Net income attributable to common stockholders | $18.5 million vs. $13.1 million | $33.9 million vs. $18.3 million |
| Diluted EPS | $0.44 vs. $0.32 | $0.84 vs. $0.45 |
| Operating margin | 9.2% vs. 8.5% | 5.6% vs. 2.3% |
| Net margin | 7.3% vs. 5.6% | 4.5% vs. 2.7% |
- Revenue mix: Managed Public School Programs revenue rose 11.0% in the quarter and 16.3% year to date. Institutional revenue fell 6.8% and 15.2%, respectively; Private Pay Schools and Other revenue declined 1.4% and 3.4%.
- Drivers and costs: Management attributed managed-program growth to higher enrollment, per-pupil funding and school mix. Managed enrollment increased 5.7% for the quarter and 6.6% year to date. Year-to-date instructional costs rose 12.0%; selling, administrative and other operating expenses rose 0.7% but declined as a share of revenue, from 32.5% to 29.3%.
- Cash flow: Nine-month operating cash flow was $73.3 million, compared with $55.2 million. Investing cash outflow was $48.0 million, including the Tallo investment and software and curriculum development; financing cash outflow was $22.4 million. Cash, cash equivalents and restricted cash ended at $236.0 million. The filing does not provide a free-cash-flow measure.
- Liquidity and obligations: Cash and cash equivalents were $234.0 million; working capital was $373.2 million. Capital lease obligations totaled $31.2 million, including $24.5 million current. No balance was outstanding under the revolving credit facility. The company stated available liquidity and expected operating cash generation should fund operations for the foreseeable future.
Changes, accounting and outlook
- Comparability: K12 adopted ASC 606 in fiscal 2019 using the modified retrospective method; prior periods were not restated. For the quarter, the company reported revenue of $253.3 million and operating income of $23.3 million, while the filing’s ASC 605 comparison for the same quarter would be $259.8 million and $29.9 million. For the nine months, reported revenue of $759.4 million and operating income of $42.8 million compare with ASC 605 amounts of $763.2 million and $46.8 million. Treat reported year-over-year growth with this accounting change in mind. Adoption reduced opening retained earnings by $1.3 million.
- School renewals: K12 served 75 managed public schools. Four schools’ authorizers elected not to renew for the 2019–2020 school year and thereafter; those schools were expected to close unless new authorizers were found. The company also reported new and renewed agreements and ongoing renewal negotiations.
- Guidance: The filing provides no specific numerical revenue or earnings guidance. Management said operating cash, working capital and access to its credit line were expected to support foreseeable operations; it also said it continued to explore acquisitions, strategic investments and joint ventures.
- Risks and contingencies: Managed-school revenue depends on enrollment and estimated public funding, and K12 generally absorbs school operating deficits under certain contracts. Estimated school operating-loss reductions to revenue were $9.2 million for the quarter and $43.2 million year to date, down from $18.7 million and $50.2 million, respectively. K12 guaranteed approximately $1.7 million of school-building lease commitments and had operating-deficit guarantees. A securities class-action settlement had preliminary court approval; insurers agreed to fund $3.5 million, with a final hearing scheduled for July 10, 2019. Management reported no material changes to previously disclosed risk factors.
- Investments and leases: K12 invested $6.7 million for a 39.5% minority interest in Tallo and held a $5.0 million convertible note, reported at fair value. It expected adoption of the new lease standard in fiscal 2020 to add a $22–$25 million lease liability and a $17–$20 million right-of-use asset, with an immaterial income-statement effect.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied filing is K12 Inc.’s quarter ended March 31, 2019, not a Stride, Inc. 2018 Q3 filing.
- Assess year-over-year results on a comparable accounting basis, given ASC 606 adoption and the absence of restated prior-period figures.
- Track the four nonrenewing schools, renewal negotiations, enrollment trends and public funding estimates, which affect the core managed-program business.
- Review cash conversion and receivable collection: accounts receivable increased to $238.6 million from $176.3 million at June 30, 2018, while nine-month operating cash flow benefited from higher net income.
- Monitor capital lease obligations, Tallo’s performance and valuation, and the status of the proposed securities settlement.