K12 Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. The filing is for K12 Inc.; the provided filing does not identify the registrant as Stride, Inc.
Business context
K12 provides K–12 curriculum, software, instruction, and related services through managed public school programs, institutional offerings, and private-pay schools and other services. Managed Public School Programs generated about 80% of quarterly revenue. The company reported one operating segment.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $221.2 million | $236.7 million |
| Operating loss | $20.5 million | $13.2 million |
| Net loss attributable to common stockholders | $12.8 million; $0.34 per share | $6.8 million; $0.18 per share |
| Operating cash flow | $(23.9) million | $(27.4) million |
| Investing cash flow | $(14.2) million | $(25.1) million |
| Financing cash flow | $(6.8) million | $(33.3) million |
Operating margin was approximately negative 9.3%, compared with negative 5.6% a year earlier. Instructional costs were $139.0 million, or 62.8% of revenue, versus $146.8 million, or 62.0%. Selling, administrative, and other operating expenses were $99.3 million, or 44.9% of revenue, versus $99.5 million, or 42.1%. The filing does not provide a separately stated gross margin.
Cash and cash equivalents were $150.9 million at September 30, down from $195.9 million at June 30. Current assets were $488.3 million and current liabilities $149.7 million, yielding reported working capital of $338.6 million. Capital lease obligations totaled $27.3 million; the company had no borrowings under its $100 million unsecured credit line and reported compliance with its covenants.
Material changes and drivers
- Revenue declined 6.5%. Managed Public School Programs revenue fell 12.3% to $177.5 million, while enrollment declined 12.0% to 104,429.
- The transition of the Agora Cyber Charter School contract from managed services to curriculum and certain technology services reduced quarterly revenue by approximately $23.5 million year over year. Management anticipated the transition would reduce full-year revenue by approximately $110 million versus the prior year.
- Non-managed public school enrollment increased 34.5% to 27,754, and Institutional revenue increased 25.4% to $29.0 million. Private Pay Schools and Other revenue increased 31.9% to $14.8 million.
- Management cited the Agora transition, enrollment declines, receivable write-offs, and higher operating expenses relative to revenue as factors in the larger loss. Selling, administrative, and other operating expenses were nearly flat in dollars but rose as a share of revenue.
- Cash used in investing declined year over year, partly because the prior-year period included the $6.5 million LearnBop investment and higher computer-related capital spending. Financing cash use fell mainly because the prior-year period included $26.5 million of share repurchases; the buyback plan was completed in 2014.
Outlook, risks, and unusual items
- Management expected operating needs to be funded by operating cash generation, working capital, and access to the credit line, and stated that these resources should be adequate for the foreseeable future. It also noted that results for the quarter may not indicate full-year results.
- Middlebury College had exercised a contractual put requiring K12 to purchase its joint-venture interest. Terms and valuation were still under discussion at quarter-end; K12 could pay in cash, stock, or a combination.
- A California Attorney General investigation into for-profit virtual schools issued the company a civil investigative subpoena on September 24, 2015. K12 said it was cooperating and was not then aware of a material adverse effect.
- A managed-school partner, Moyer, defaulted on a $2.1 million mortgage note; the school had closed, and K12 was pursuing foreclosure and receivership. The company reported that a prior appraisal valued the property above the note’s carrying value.
- K12 disclosed approximately $8.7 million in guarantees related to building leases for certain Flex schools, as well as contractual exposure to managed-school operating deficits. A contract with one school represented approximately 10% of quarterly revenue.
- The company’s former President and COO resigned effective September 15, 2015 and entered a consulting agreement for up to six months at $43,985 per month. The company reported no material changes to its previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether managed-program enrollment and revenue trends stabilize, and how the Agora transition affects actual full-year revenue.
- The final amount, timing, and form of payment for Middlebury’s put right.
- Developments and potential financial or regulatory consequences of the California investigation.
- Recovery prospects on the Moyer mortgage and the collectability of other receivables; quarterly accounts receivable were $260.8 million.
- Cash burn, seasonal working-capital movements, and compliance with credit-line covenants as the year progresses.