K12 Inc. (NYSE: LRN) — Form 10-Q Summary
Period: Fiscal second quarter and six months ended December 31, 2019. The filing identifies the registrant as K12 Inc. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
K12 provides K–12 curriculum, software, instruction and related services through managed public school programs, institutional offerings, and private-pay schools and other products. Managed public school programs generated approximately 89% of revenue for the six-month period. K12 served 76 managed schools in 30 states and the District of Columbia.
Key financial metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | $257.6 million | $254.9 million | $514.7 million | $506.2 million |
| Gross margin | $90.1 million (35.0%) | $94.5 million (37.1%) | $177.9 million (34.6%) | $186.9 million (36.9%) |
| Operating income | $30.3 million | $33.3 million | $10.9 million | $19.5 million |
| Net income attributable to common stockholders | $20.6 million | $23.7 million | $10.9 million | $15.4 million |
| Diluted EPS | $0.52 | $0.59 | $0.27 | $0.38 |
- Cash flow: Six-month operating cash flow was negative $21.3 million, versus positive $24.9 million a year earlier. Investing cash outflow was $30.4 million and financing cash outflow was $19.8 million. Cash, cash equivalents and restricted cash fell $71.5 million during the period.
- Liquidity: At December 31, cash and cash equivalents were $211.6 million, current assets were $513.7 million and current liabilities were $133.7 million. Management reported working capital of $380.0 million.
- Debt and leases: The filing reports $25.5 million of finance lease liabilities and $23.4 million of operating lease liabilities. No revolving credit facility balance was outstanding at December 31. The filing does not report other conventional borrowings at that date.
Material changes versus the prior comparable period
- Quarterly revenue rose 1.1%; six-month revenue rose 1.7%. Managed-program revenue increased 3.0% for the quarter and 3.1% for the half-year, supported by enrollment growth and higher achieved per-pupil funding.
- Institutional revenue declined 16.2% for the quarter and 11.7% for the half-year. Non-managed public-program enrollment was down 34.2% in both reported comparisons.
- Instructional costs grew faster than revenue: up 4.5% for the quarter and 5.5% for the half-year. The company attributed the increases primarily to personnel and related benefit costs supporting higher enrollments. Gross margin narrowed in both periods.
- Operating income fell 44.1% for the six-month period, and net income also declined. Quarterly SG&A decreased 2.4%, primarily due to lower advertising and marketing expense; six-month SG&A was nearly flat.
- Cash from operations swung from a $24.9 million inflow to a $21.3 million outflow, primarily reflecting changes in accounts receivable, accounts payable and deferred revenue.
Outlook, commentary, risks and unusual items
- Outlook and liquidity: No quantified revenue, earnings or cash-flow guidance is provided. Management said working capital and expected operating cash generation should be adequate to fund ongoing operations for the foreseeable future. Results for the interim periods are not necessarily indicative of full-year results.
- Acquisition after quarter-end: K12 acquired Galvanize Inc. on January 27, 2020, for approximately $165 million in cash, subject to customary adjustments. The company said the deal expands its career-readiness, skills-training and technical talent offerings; purchase-price allocation had not yet been determined.
- Financing after quarter-end: On January 27, 2020, K12 engaged PNC Capital Markets to structure, arrange and syndicate a proposed $100 million, five-year senior secured revolver, with a $200 million accordion feature. The filing describes the arrangement process, not a facility balance outstanding at December 31.
- School funding and operating-loss exposure: Managed-program revenue depends partly on estimates of enrollment, state funding and school costs. K12 may absorb certain managed schools’ operating deficits through reduced management fees or revenue. Changes in these estimates could materially affect results.
- Georgia Cyber Academy: K12 is pursuing arbitration over the school’s use of other providers and is defending counterclaims. K12 continued to provide limited services and said current-year service levels and revenue were unclear. Management could not predict the arbitration outcome but did not expect a material adverse effect on financial condition or results.
- Other contingencies: K12 guaranteed approximately $1.3 million of school building lease commitments and disclosed contractual operating-deficit guarantees. A securities class-action settlement was approved in July 2019; insurers agreed to fund $3.5 million.
- Accounting and reporting items: K12 adopted lease accounting Topic 842, recognizing operating lease liabilities of $22.7 million and right-of-use assets of $17.7 million at adoption. It also early adopted guidance that resulted in capitalization of $3.8 million of implementation costs during the six months. The company corrected previously reported cash-flow statements for fiscal 2019 interim periods due to accounts-receivable and deferred-revenue errors; it said the revisions did not affect fiscal 2019 operating statements or the June 30, 2019 balance sheet.
- Management concluded disclosure controls were effective as of December 31, 2019; no material changes in internal control over financial reporting were reported. The filing reported no material changes to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- Whether managed-program enrollment, per-pupil funding and school mix sustain revenue growth while instructional costs and margins improve.
- Collections and working-capital trends, particularly accounts receivable and operating cash flow, given the period’s cash outflow.
- The scope and financial impact of the Georgia Cyber Academy arbitration and any resulting change in managed-school revenue or deficit exposure.
- Galvanize’s final purchase accounting, integration costs, cash impact and contribution to results, and the final terms and availability of the proposed revolver.
- The corrected prior-period cash-flow disclosures and the effects of lease accounting and capitalized implementation costs on comparisons.