Stride, Inc. quarterly report, Q3 FY2020

Stride, Inc. — filing identity and reporting period

Important discrepancy: The supplied filing is K12 Inc.’s Form 10-Q for the quarter ended March 31, 2020 (fiscal third quarter of 2020), filed April 28, 2020. It is not identified in the filing as Stride, Inc. or as a 2019 Q3 report. The financial statements are unaudited. K12 provides online and blended K–12 education programs and services; it acquired career-training company Galvanize in January 2020.

Financial performance

For the quarter, instructional costs rose 6.4% to $179.0 million, faster than revenue growth; management cited higher enrollment-related personnel costs and Galvanize costs. For the nine months, instructional costs increased 5.8% to $515.8 million. SG&A was $63.7 million for the quarter, up 3.2%, and $230.6 million for nine months, up 0.7%.

Liquidity, debt and cash flow

At March 31, 2020, cash and cash equivalents were $150.0 million, current assets $486.7 million, current liabilities $257.6 million, and working capital $229.1 million. Cash had been $283.1 million at June 30, 2019. Accounts receivable was $284.3 million, compared with $191.6 million at June 30, 2019; management noted receivables fluctuate with school-year billing and collection timing.

The company had $100.0 million outstanding on a new five-year, $100 million senior secured revolving credit facility; it reported compliance with covenants and a further $200 million accordion feature. Finance lease liabilities were $23.3 million. Operating lease liabilities were $121.2 million, including the effect of lease accounting adoption and Galvanize. Management said operating cash generation, revolver availability and working capital should fund foreseeable operations.

Nine-month investing cash use was $208.1 million, primarily reflecting the $177.2 million cash acquisition of Galvanize (net cash paid in investing activities was $168.0 million). Financing provided $71.9 million, including $105.0 million of revolver borrowings and $5.0 million of repayments. Operating cash flow fell mainly because of changes in accounts receivable, accounts payable and accrued compensation.

Business changes and material developments

• Managed Public School Programs remained the largest business: nine-month revenue was $685.4 million, up 2.9%, and represented about 89% of revenue. Managed-program enrollment increased 1.8% year over year to 119,100 on a nine-month average basis.
• Institutional revenue declined 14.8% to $57.0 million for nine months, mainly reflecting a 33.8% fall in non-managed program enrollment. Private Pay Schools and Other revenue rose 10.6% to $29.4 million, partly due to Galvanize.
• Galvanize contributed $3.2 million of revenue and an $8.1 million operating loss after acquisition. The purchase-price allocation, including $107.6 million of goodwill, was preliminary.
• Adoption of lease accounting added operating lease right-of-use assets and liabilities to the balance sheet. The company also early adopted guidance that led it to capitalize $7.0 million of hosting-arrangement implementation costs during the nine months; those costs would previously have been expensed.
• The company corrected previously reported 2019 interim cash-flow statements for accounts receivable and deferred revenue classification/measurement errors. It said the revisions did not affect 2019 statements of operations or the June 30, 2019 balance sheet.

Outlook, commentary and risks

Management said COVID-19’s effects on the business and fiscal fourth-quarter results could not yet be estimated. It reported operating with modifications to travel, work locations and events, and adopted the CARES Act deferral of the employer Social Security payroll tax. The filing did not provide numerical earnings or revenue guidance.

• Public-school revenue depends heavily on government per-pupil funding, enrollment, funding formulas and timely payments; economic pressure or policy changes could reduce or delay funding. The company also estimates school funding and operating losses, and actual results may differ.
• One managed school was not renewed for the 2020–2021 school year unless a new authorizer is found. The Georgia Cyber Academy contract dispute and arbitration remained ongoing; the company could not predict the outcome.
• Galvanize integration, retention of key employees, realization of expected benefits and the acquired business’s performance present risks. Galvanize’s purchase-price allocation and tax-loss analysis remained under review.
• The company reported no COVID-19 impairment indicators for goodwill or long-lived assets through March 31, 2020. Its assessment was based on information available at that date.
• The company guarantees approximately $1.1 million of certain school lease commitments and contractually covers operating deficits for certain managed schools, potentially through reduced management fees.

Important facts for investors to verify

1. Confirm the intended issuer and period: this source is K12 Inc., quarter ended March 31, 2020, not Stride, Inc. 2019 Q3.
2. Assess the sustainability of earnings and cash generation given falling margins, sharply lower nine-month operating cash flow and rising receivables.
3. Review the final Galvanize purchase-price allocation, integration performance and subsequent revenue, operating losses and cash needs.
4. Monitor public-school enrollment, per-pupil funding, contract renewals, the non-managed enrollment decline and the Georgia Cyber Academy arbitration.
5. Evaluate liquidity and leverage alongside the $100 million revolver balance, finance leases and substantial operating lease commitments.
6. Consider comparability effects from lease accounting, capitalized implementation costs and the corrections to prior interim cash-flow statements.