K12 Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017. The registrant named in the filing is K12 Inc.; the filing does not identify the registrant as Stride, Inc. K12 provides K–12 curriculum, software, and educational services, with Managed Public School Programs generating approximately 83% of six-month revenue. All dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Six months ended Dec. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $217.2 | $221.1 | $446.0 | $450.2 |
| Operating income (loss) | $13.7 | $18.3 | $(4.0) | $(4.3) |
| Net income (loss) attributable to common stockholders | $13.3 | $11.7 | $5.2 | $(2.2) |
| Diluted earnings (loss) per share | $0.33 | $0.30 | $0.13 | $(0.06) |
| Operating cash flow | Not presented separately | Not presented separately | $(2.7) | $10.3 |
- Quarterly operating margin was 6.3%, versus 8.3% a year earlier. For the six-month period, operating margin was negative 0.9%, versus negative 1.0%.
- Instructional costs rose 1.7% to $286.5 for six months and increased to 64.2% of revenue from 62.6%. Selling, administrative, and other operating expenses fell 5.3% to $158.2, or 35.5% of revenue versus 37.1%.
- Six-month net income improvement included an $8.8 income tax benefit, compared with a $1.0 benefit in the prior period; the company reported a six-month pretax loss of $3.8.
Revenue trends and material changes
- Six-month revenue declined 0.9%. Managed Public School Programs revenue grew 1.4% to $371.9; Institutional revenue fell 13.3% to $56.0; Private Pay Schools and Other declined 3.1% to $18.1.
- Managed program enrollment increased 2.2% to 109,100. Non-managed public school enrollment fell 16.1% to 23,900. Management attributed the institutional decline to lower enrollments and software sales.
- Quarterly revenue fell 1.8%; Managed Public School Programs grew 0.5%, while Institutional revenue declined 16.4%.
Liquidity, debt, and cash flow
- At December 31, cash and cash equivalents were $189.5, down from $230.9 at June 30. Current assets were $488.8 and current liabilities $117.7, giving working capital of $371.1.
- Operating activities used $2.7 cash in the six months, versus providing $10.3 a year earlier. Management cited working-capital pressures, including higher accounts receivable and prepaid expenses, partly offset by increased deferred revenue.
- Investing activities used $25.9, including $13.4 of capitalized software development, $4.5 of capitalized curriculum development, $5.9 of property and equipment purchases, and $2.2 for the Big Universe acquisition. Financing activities used $12.7, including capital lease repayments and restricted-stock tax withholding.
- Capital lease obligations totaled $27.3, up from $21.9 at June 30. There were no borrowings on the $100.0 unsecured line of credit, and the company reported compliance with its covenants. Remaining availability under the student-computer lease line was $24.2.
- Management said cash, working capital, operating cash generation, and access to the credit line should fund operations for the foreseeable future.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- The Tax Cuts and Jobs Act reduced the federal statutory rate from 35% to 21%. K12 recorded provisional estimates for deferred-tax remeasurement and the transition tax on foreign earnings; those estimates remained subject to refinement. Tax effects, including adoption of new stock-compensation accounting, materially affected the period’s tax benefit.
- K12 recorded a $1.4 net-income benefit in the first quarter from an out-of-period adjustment that increased capitalized software and curriculum costs by $2.3 and $0.6, respectively. The company concluded the errors were not material to previously issued financial statements.
- Collective bargaining negotiations involving California Virtual Academies teachers and the California Teachers Association remained ongoing. Management said the timing and outcome, possible strike authorization, enrollment effects, and impact on future revenue or margins were uncertain.
- A securities class action remained pending. The court dismissed Scantron-related allegations with prejudice; other claims concerning Agora’s non-renewal notice and replacement contract remained. The company said it intended to defend the claims and did not expect known proceedings to materially affect its business or financial condition.
- The company guaranteed approximately $2.3 of school building lease commitments and certain managed-school operating deficits. It also continued marketing a school-partner property held for sale at an estimated value of $1.2.
- The filing reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether institutional enrollment and software sales stabilize, and whether managed-program growth offsets continued weakness elsewhere.
- Cash conversion and receivables collection, given negative operating cash flow despite reported six-month net income.
- The final Tax Act calculations and how much of the reported earnings improvement reflects tax items rather than operating performance.
- Developments in California teacher negotiations and any effects on school enrollment, funding, revenue, or margins.
- Progress and potential exposure in the securities litigation, and realization of the held-for-sale property value.