Filing summary
Filing and period: The supplied filing is K12 Inc.’s Form 10-K for the fiscal year ended June 30, 2018, filed August 8, 2018. It is not identified in the filing as Stride, Inc., and it does not cover fiscal 2017. The filing reports quarterly results through June 30, 2018, including the fourth quarter.
Business context
K12 provided K-12 curriculum, learning software, instructional support and school-management services. Its three business lines were Managed Public School Programs, Institutional, and Private Pay Schools and Other. Managed Public School Programs represented approximately 85% of FY2018 revenue; the company served 75 managed schools across 31 states and the District of Columbia.
Financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $917.7 million | $888.5 million | +3.3% |
| Operating income | $25.5 million | $13.1 million | +94.7% |
| Operating margin | 2.8% | 1.5% | +1.3 percentage points |
| Net income (loss) | $27.4 million | $(0.5) million | Improved |
| Net income attributable to common stockholders | $27.6 million | $0.5 million | — |
| Diluted earnings per share | $0.68 | $0.01 | — |
| EBITDA, non-GAAP | $100.8 million | $87.4 million | +15.3% |
| Cash from operations | $103.6 million | $88.7 million | + $14.9 million |
FY2018 instructional costs and services rose 6.3% to $592.5 million, increasing from 62.7% to 64.6% of revenue. Selling, administrative and other operating expenses declined 5.0% to $290.4 million, or 31.6% of revenue, and product development expense fell to $9.2 million. The filing does not present a gross-margin figure.
Revenue by line: Managed Public School Programs increased 6.4% to $780.8 million; Institutional declined 15.5% to $100.6 million, including lower non-managed school enrollments and software sales; Private Pay Schools and Other increased 1.5% to $36.3 million. Managed-program average enrollment rose 4.9% to 108,740.
At June 30, 2018, cash and cash equivalents were $231.1 million, working capital was $343.0 million, and total assets were $742.0 million. Capital-lease obligations were $26.0 million; there were no borrowings on the $100 million revolving credit facility. Operating cash flow was $103.6 million, investing cash outflow $50.5 million and financing cash outflow $50.9 million. The company repurchased $27.5 million of shares during the year.
Fourth-quarter FY2018 revenue was $238.9 million, operating income $9.9 million and net income attributable to common stockholders $9.3 million. In fourth-quarter FY2017, revenue was $215.8 million and net loss attributable to common stockholders was $6.5 million, including a $10.0 million investment impairment.
Changes, outlook and notable items
- FY2018 revenue growth was led by managed programs; Institutional revenue weakened. Management cited enrollment growth, higher achieved per-pupil funding and school mix as contributors to managed-program growth.
- Net results improved substantially versus FY2017, which included a $10.0 million impairment of the Web International Education Group investment. FY2018 also benefited from a $0.9 million income-tax benefit, including effects of the federal tax-rate reduction and stock-based compensation tax treatment.
- Management expected managed programs to remain the majority of revenue and described growth efforts in Institutional offerings, private schools, and international markets. The filing provides no numeric earnings or revenue guidance.
- The company agreed to extend its Agora service agreement through June 30, 2022. Agora’s $28.7 million receivable at June 30, 2018 is payable over four years; $23.2 million was classified in deposits and other assets.
- Revenue recognition involved estimates of school funding and operating losses. Estimated school operating losses reduced revenue by $66.7 million in FY2018, versus $61.0 million in FY2017. The company planned to adopt the new revenue standard in FY2019 and anticipated possible quarterly timing shifts; the impact was still being quantified.
- Risks include dependence on government per-pupil funding and enrollment, charter renewal and contract retention, academic performance and regulatory compliance, competition and pricing pressure, teacher recruitment and labor costs, cybersecurity and student-data privacy, and reliance on a single logistics provider and third-party data centers.
- Contingencies include a pending securities class action alleging misstatements concerning Agora and academic performance; class certification was contested and discovery was proceeding. A California audit of CAVA attendance and related funding was also pending. The filing states that the company believed known proceedings would not materially affect it, but outcomes were uncertain.
- FY2018 included $6.3 million of severance, including amounts for the former CEO. A California teachers’ collective bargaining agreement was ratified in May 2018; the company said it had no material effect on FY2018 financial condition or results.
Most important facts to verify
- Confirm the issuer and requested period: the source is K12 Inc.’s FY2018 10-K, not a filing labeled Stride, Inc. or FY2017.
- Review the Agora receivable’s four-year payment schedule, collectability and associated service-contract economics.
- Check the outcome and potential financial effect of the CAVA audit and securities class action.
- Assess managed-program enrollment, per-pupil funding, school renewals and Institutional revenue trends, given the concentration in managed programs.
- Verify the eventual adoption impact of the new revenue-recognition standard and the quality of operating cash flow relative to working-capital movements and capital spending.