Filing and reporting period
The supplied filing is K12 Inc.’s Form 10-K for the fiscal year ended June 30, 2020, filed August 12, 2020. It is not a 2019 Q4 filing, and the registrant identified in the filing is K12 Inc., not Stride, Inc. The filing reports annual results, not a standalone fourth quarter.
K12 provides curriculum, software, and services for virtual and blended public schools, institutional customers, and tuition-based schools. Managed Public School Programs generated approximately 88% of FY2020 revenue.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,040.8 million | $1,015.8 million | +2.5% |
| Gross profit / margin | $347.5 million / 33.4% | $352.3 million / 34.7% | Profit down $4.8 million; margin down 1.3 percentage points |
| Operating income / margin | $32.5 million / 3.1% | $45.5 million / 4.5% | Down 28.6% |
| Net income | $24.5 million | $37.2 million | Down 34.1% |
| Diluted EPS | $0.60 | $0.91 | Down $0.31 |
| Adjusted EBITDA | $128.2 million | $133.6 million | Down 4.0% |
| Operating cash flow | $80.4 million | $141.6 million | Down $61.2 million |
Instructional costs rose 4.5% to $693.2 million and increased to 66.6% of revenue from 65.3%. Selling, general and administrative expenses rose 2.7% to $315.1 million, or 30.3% of revenue versus 30.2%. The filing attributes the higher instructional costs primarily to personnel and benefit costs for increased enrollments and costs of serving Galvanize. Galvanize recorded an $18.1 million operating loss after its acquisition.
Revenue by business line
| Business line | FY2020 | FY2019 | Change |
|---|---|---|---|
| Managed Public School Programs | $920.1 million | $890.3 million | +3.3% |
| Institutional | $75.0 million | $90.0 million | -16.7% |
| Private Pay Schools and Other | $45.7 million | $35.5 million | +28.7% |
Managed-program average enrollment increased 2.6% to 118,591. Institutional revenue declined mainly with a 33.9% drop in Non-managed Public School Program enrollments and continued competitive pricing pressure. Private Pay Schools and Other growth primarily reflected the Galvanize acquisition.
Cash, debt, and liquidity
- At June 30, 2020, cash and cash equivalents were $212.3 million, down from $283.1 million a year earlier; working capital was $227.9 million, down from $374.1 million.
- Operating cash flow was $80.4 million. Investing activities used $217.4 million, including $168.0 million net cash paid for Galvanize. Financing activities provided $65.6 million, principally from credit-facility borrowings.
- The company had $100.0 million outstanding on its $100.0 million senior secured revolving credit facility, due in five years, and reported compliance with its covenants. The facility includes a $200.0 million accordion feature.
- Finance lease liabilities were $17.9 million; operating lease liabilities were $117.2 million. Contractual lease payments totaled $147.3 million, including interest.
- Management stated that operating cash generation, credit availability, and working capital should be adequate for foreseeable operating needs. No cash dividend was anticipated for the foreseeable future.
Material changes, outlook, and risks
- Galvanize acquisition: Acquired January 27, 2020 for $165.0 million plus working capital; the disclosed working-capital amount was $12.2 million. The deal expanded the business into data science and software-engineering training, enterprise training, and technology staffing. The preliminary purchase-price allocation included $84.7 million of goodwill and $68.5 million of intangible assets.
- COVID-19: Management said the effects on the business and FY2021 financial results could not be estimated. The filing notes possible increased demand for virtual-learning solutions, but warns that pandemic-related institutional sales could be temporary and could decline as physical schools reopen.
- Business outlook: Management expected Managed Public School Programs to remain the majority of revenue over the next several years and aimed to grow Institutional and other channels. No specific financial guidance or numerical FY2021 forecast is provided in the filing text.
- Funding and contract exposure: Revenue depends heavily on government-funded per-pupil amounts, student enrollment, attendance and state rules. Enrollment caps, funding reductions or delays, charter nonrenewals, regulatory findings, or adverse contract renewals could reduce revenue or require repayment of funds.
- Other key risks: Academic outcomes and student retention; competition and pricing pressure; compliance with complex education and privacy rules; cybersecurity and service availability; teacher recruitment; and execution and integration risks from acquisitions.
- Georgia Cyber Academy settlement: The parties settled all claims for $19 million payable over two years; $10 million was paid in July 2020. K12 recorded $4.6 million of FY2020 revenue for services, with the remaining $14.4 million relating to a prior-year receivable.
- Accounting and controls: The auditor issued an unqualified opinion on the financial statements and internal controls. Management’s and the auditor’s control assessments excluded Galvanize, acquired during the year; integration of its controls was still in progress.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is K12 Inc.’s FY2020 10-K, not a Stride, Inc. 2019 Q4 filing.
- Review the full audited statements and notes for the Galvanize purchase allocation, acquired-business performance, and integration progress.
- Track enrollment, per-pupil funding, school operating-loss reductions to revenue, and contract renewals; these are significant revenue-estimation drivers.
- Assess liquidity and refinancing exposure alongside the $100 million facility balance, lease obligations, and lower operating cash flow.
- Monitor COVID-19-related demand, subsequent sales or cancellations, and any changes to school funding or customer payment timing.
- Review the settlement’s remaining payment schedule and collection of the prior-year receivable.