Business context and reporting period
The supplied filing is K12 Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013 (its fiscal third quarter), not a Stride, Inc. filing or a 2012 Q3 filing. K12 provides K–12 curriculum, software and educational services; managed public schools generated about 86% of revenue for the first nine months of fiscal 2013. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and liquidity
- Quarter revenue: $218.0 million, up 22.4% from $178.2 million a year earlier. Operating income was $19.4 million versus $11.6 million; net income was $11.4 million versus $6.7 million. Net income attributable to common stockholders, including Series A stockholders, was $12.0 million; reported basic and diluted EPS were $0.31.
- First nine months: Revenue was $645.1 million, up 19.9%; operating income was $44.3 million versus $26.9 million; net income was $25.3 million versus $14.9 million. Net income attributable to common stockholders, including Series A stockholders, was $25.8 million; basic and diluted EPS were $0.66.
- Margins: Operating margin was 8.9% for the quarter and 6.9% for the nine months, compared with 6.5% and 5.0%, respectively, in the prior-year periods. Net margin was 5.2% and 4.0%, versus 3.7% and 2.8%. The filing does not report gross profit or gross margin.
- Cash flow: Nine-month operating cash flow was $59.2 million, compared with cash used of $13.5 million a year earlier. Investing activities used $36.7 million, including $17.9 million of capitalized software development and $13.6 million of capitalized curriculum development. Financing activities used $10.2 million. Cash and cash equivalents were $157.0 million at March 31, 2013.
- Liquidity and obligations: Current assets were $465.4 million and current liabilities $136.5 million; management reported working capital of $328.8 million. The $35 million unsecured revolving credit facility had no borrowings outstanding, with about $0.3 million reserved for a letter of credit. Capital lease obligations totaled $41.1 million and the note payable was $0.7 million. Total liabilities were $204.8 million.
Material changes versus the prior comparable period
- Managed Public Schools revenue rose 26.0% in the quarter and 23.1% in the nine-month period, supported by enrollment growth, improved funding rates and capture in certain states, and fewer unfunded enrollments. Average managed-school enrollment increased 12.2% and 13.1%, respectively.
- Institutional Sales revenue declined 3.2% for the quarter and 1.1% for the nine months, reflecting weaker sales, lower perpetual-license sales and product mix. International and Private Pay Schools revenue grew 9.5% and 10.5%, respectively.
- For the nine months, instructional costs rose 20.7%; as a share of revenue, they edged up to 57.2% from 56.9%, partly due to advance teacher hiring, utilization and higher depreciation and amortization. Selling, administrative and other operating expenses rose 17.6% but declined to 33.6% of revenue from 34.2%. Product development expense fell 28.8%, primarily as more development costs qualified for capitalization.
- Accounts receivable increased to $234.6 million from $160.9 million at June 30, 2012. Management attributed the improved operating cash flow in part to collections of receivables associated with prior state funding delays.
Outlook, risks and unusual items
- No specific revenue, earnings or enrollment guidance is provided. Management said cash from operations, working capital and access to the credit facility should fund ongoing operations for the foreseeable future. The revolving facility expires December 31, 2013; renewal or replacement was under evaluation, with no assurance of reasonable terms or availability. The student-computer lease facility’s current annual availability was due to expire in August 2013; extension or alternative financing was being considered.
- Management cited public-school funding and regulatory compliance, student performance and satisfaction, enrollment retention, and recruiting and retaining qualified certified teachers as material risks. Funding audits or noncompliance could delay or reduce school funding and, under certain agreements, require K12 to indemnify schools.
- Two school contracts each represented approximately 14% and 10% of revenue for the quarter and nine-month period. One school accounted for approximately 8% of receivables at March 31, 2013.
- The securities class action and related shareholder matters had proposed settlements subject to final court approval, then scheduled for July 19, 2013. The proposed $6.75 million class settlement was to be funded by the company’s insurers; K12 denied wrongdoing. A related derivative settlement included proposed governance changes. A separate patent-infringement case remained in discovery, with one patent claim stayed.
- K12 reported approximately $10.9 million of guarantees related to long-term building leases for certain Flex schools, in addition to contractual exposure for operating deficits at certain managed schools. Management reported no impairment charge for the period and stated disclosure controls were effective.
Most important facts for investors to verify
- Confirm the filing and issuer: this source is K12 Inc., quarter ended March 31, 2013, despite the request identifying Stride, Inc. and 2012 Q3.
- Review the sustainability of managed-school enrollment growth, funding rates and cash collections, including receivable concentration and state funding timing.
- Check the status and terms of the revolving credit and computer-lease facilities as their stated expirations approached.
- Track final court approval and insurance coverage for the proposed securities and derivative settlements, and developments in the patent case.
- Assess regulatory, academic-performance and teacher-certification risks, as well as the effect of capitalizing software and curriculum development costs on reported expenses and cash investment.