Filing identity and period
Important discrepancy: The supplied filing is K12 Inc.’s Form 10-Q for the quarter ended March 31, 2014 (fiscal Q3 2014), filed April 29, 2014. It is not identified in the filing as Stride, Inc. or as a 2013 Q3 filing. Verify the issuer and period before relying on this summary.
K12 was a technology-based education company providing curriculum, software, and services. Managed public schools generated about 87% of revenue in the first nine months.
Financial performance
| Metric | Three months ended March 31, 2014 | Nine months ended March 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $235.2 million, up 7.9% | $687.5 million, up 6.6% | $218.0 million; $645.1 million |
| Operating income | $27.4 million; 11.6% margin | $10.0 million; 1.5% margin | $19.4 million; $44.3 million |
| Net income | $15.5 million | $6.2 million | $11.4 million; $25.3 million |
| Net income attributable to common stockholders | $15.9 million; $0.40 per share | $7.2 million; $0.19 per share | $12.0 million; $0.31 per share, and $25.8 million; $0.66 per share |
| Operating cash flow | Not separately presented | $81.5 million | $59.2 million for nine months |
For the nine-month period, net margin was approximately 0.9%, versus 3.9% in 2013. Net interest expense was $0.1 million for nine months. Gross profit and gross margin are not separately presented; instructional costs were 62.1% of revenue for nine months, compared with 57.2% a year earlier.
At March 31, 2014, cash and cash equivalents were $185.3 million, current assets $487.5 million, current liabilities $132.4 million, and working capital $355.1 million. Accounts receivable was $236.4 million. Capital lease obligations totaled $37.6 million; the note payable was fully repaid. K12 had a new $100 million, five-year unsecured revolving credit facility and no borrowings outstanding; it reported compliance with the facility’s covenants.
Nine-month investing cash outflow was $38.2 million, including $18.5 million of capitalized software development, $11.3 million of curriculum development, and a $2.1 million mortgage to a managed-school partner. Financing cash outflow was $40.3 million, including $26.6 million of share repurchases and $17.0 million of capital-lease repayments. Cash increased $3.9 million from June 30, 2013.
Changes versus the prior comparable period
- Quarterly revenue rose 7.9%; managed-public-school revenue increased 9.0%, while institutional-sales revenue declined 13.9%. International and private-pay revenue grew 20.2%.
- Nine-month revenue rose 6.6%, but operating income fell from $44.3 million to $10.0 million and common-stockholder income fell from $25.8 million to $7.2 million.
- Managed public-school average enrollment increased 5.2% for nine months. Institutional-sales revenue declined 10.7%; international and private-pay revenue increased 12.9%.
- Nine-month operating cash flow increased by $22.3 million. Management attributed the change to noncash charges and working-capital movements, among other factors.
Outlook, risks, and unusual items
- Management said cash, working capital, and expected operating cash generation would be adequate for ongoing operations for the foreseeable future. The filing provides no numerical earnings or revenue guidance.
- Management cited $31.2 million of nine-month severance and related stock compensation, accelerated depreciation and amortization, and inventory-related charges as weighing on results. Disclosed items included $6.3 million of accelerated depreciation for computers estimated not to be returned, a $3.8 million software write-down, a $2.2 million curriculum write-down, a $5.2 million trade-name impairment, and increased inventory obsolescence provisions.
- Management decided not to pursue its previously announced plan to create a new company with Safanad because of transaction complexity, while continuing to evaluate strategic options, including possible asset sales.
- Risks include school operating-loss guarantees that can reduce management fees, approximately $9.1 million of guarantees related to certain school building leases, and dependence on school contracts and state funding. The company also disclosed a pending patent-infringement action and a securities class action alleging misleading statements about enrollment, revenue prospects, and regulatory compliance; the company intended to defend the securities claims. No liability was recorded for the patent matter because loss was considered neither probable nor estimable.
- The board authorized up to $75 million of repurchases over two years. K12 repurchased $26.6 million through March 31, leaving approximately $48.4 million authorized. It reported no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Confirm that K12 Inc. and fiscal Q3 2014—not Stride, Inc. and 2013 Q3—are the intended issuer and reporting period.
- Review the nature, timing, and cash versus noncash impact of the $31.2 million of unusual charges, and whether further impairments or restructuring costs may arise.
- Assess the sustainability of enrollment and revenue growth, particularly managed-public-school concentration and declining institutional-sales revenue.
- Monitor receivable collection, school operating-loss guarantees, the Web International receivable due in May 2014, and liquidity available under the credit and computer-lease facilities.
- Track developments in the disclosed litigation and any changes in the share-repurchase program or strategic-asset-sale discussions.