Stride, Inc. (filed as K12 Inc.) — Form 10-K summary
Reporting period: Fiscal year ended June 30, 2019, with comparative results for fiscal 2018. The request specifies “2018 Q4,” but this filing is the FY2019 annual report; it also reports the quarter ended June 30, 2019. The registrant named in the filing is K12 Inc. (NYSE: LRN).
Business context
K12 provided K–12 curriculum, software and education services through Managed Public School Programs, Institutional, and Private Pay Schools and Other. Managed programs served 75 schools in 30 states and the District of Columbia and accounted for approximately 88% of FY2019 revenue. Average managed-program enrollment rose 6.3% to 115,561.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,015.8 million | $917.7 million | +10.7% |
| Operating income | $45.5 million | $25.5 million | +78.4% |
| Operating margin | 4.5% | 2.8% | +1.7 percentage points |
| Net income attributable to common stockholders | $37.2 million | $27.6 million | +34.8% |
| Diluted EPS | $0.91 | $0.68 | +$0.23 |
| Operating cash flow | $141.6 million | $105.4 million | +$36.2 million |
| Adjusted EBITDA (non-GAAP) | $133.6 million | $121.6 million | +9.9% |
Net margin was 3.7% in FY2019, versus 3.0% in FY2018. Instructional costs and services rose 12.0% to $663.4 million, faster than revenue; they represented 65.3% of revenue, up from 64.6%. Selling, administrative and other operating expenses increased 2.4% to $297.4 million, but declined as a share of revenue to 29.3% from 31.6%.
Managed Public School Programs revenue increased 14.0% to $890.3 million, primarily from enrollment growth and higher achieved per-pupil funding and school mix. Institutional revenue declined 10.6% to $90.0 million, amid lower software sales and a less favorable program mix. Private Pay Schools and Other revenue decreased 2.1% to $35.5 million.
At June 30, 2019, cash and cash equivalents were $283.1 million, working capital was $374.1 million, and total assets were $819.6 million. Current assets of $529.7 million and current liabilities of $155.6 million imply a current ratio of approximately 3.4x. Capital lease obligations totaled $24.6 million; the filing reports no material conventional borrowings. FY2019 investing cash outflow was $61.1 million, including capitalized software and curriculum costs and investments. Capital expenditures, including new capital lease obligations, totaled $68.1 million.
Material changes and notable quarterly results
- Revenue growth accelerated from 3.3% in FY2018 to 10.7% in FY2019, led by managed programs. Managed-program average enrollment increased 6.3%, while Institutional revenue continued to contract.
- Operating income improved substantially, though instructional costs grew faster than revenue. FY2019 net income also reflected $10.5 million of income tax expense, compared with a $0.9 million tax benefit in FY2018; the prior-year tax result was affected by the Tax Act.
- For the quarter ended June 30, 2019, revenue was $256.3 million, operating income was $2.7 million, and net income attributable to common stockholders was $3.3 million. Quarterly results were seasonal and varied across the year.
- FY2019 operating cash flow increased to $141.6 million. Cash rose by $52.0 million from the prior year-end, while net cash used in financing activities was $29.0 million.
Outlook, risks and unusual items
The company gave no specific numerical FY2020 guidance in the provided filing text. Management expected managed-program revenue to remain the majority of revenue in coming years, while pursuing growth in Institutional, private-pay, international and career-readiness offerings. Management stated that operating cash generation and working capital should be adequate for ongoing operations for the foreseeable future.
- Concentration and funding: Results depend heavily on public-school per-pupil funding, enrollment, state rules and contract renewals. The company reduced reported revenue by $54.7 million for estimated managed-school operating losses in FY2019, versus $66.7 million in FY2018, and generally bears certain school operating deficits.
- Contracts and arbitration: Four managed schools were not renewed for 2019–20 and were expected to close unless they found new authorizers. Georgia Cyber Academy engaged other providers despite K12’s asserted exclusive contract; K12 initiated arbitration, and GCA filed counterclaims. The outcome was uncertain, and the company did not expect a material FY2019 financial effect.
- Receivables: A $25.1 million current and long-term receivable balance from Agora remained at June 30, 2019, under a payment arrangement. Collection timing and recoverability merit attention.
- Litigation: A securities class action settlement received final court approval in July 2019; insurers agreed to fund $3.5 million. The filing said other proceedings were not expected to have a material adverse effect based on information available.
- Investments and accounting: K12 invested $6.7 million for a 39.5% interest in Tallo and provided a $5.0 million convertible note. Adoption of ASC 606 reduced opening retained earnings by $1.3 million; the FY2019 income-statement effect was not material. The company expected ASC 842 adoption to add about $23 million of lease liabilities and an $18 million right-of-use asset.
- Key risks: Regulatory changes, funding reductions, academic performance and student retention, competition and pricing pressure, teacher recruitment, cybersecurity and student-data privacy, and dependence on third-party hosting and logistics providers.
Important facts for investors to verify
- Enrollment, per-pupil funding and renewal status for managed schools, including the effect of the four non-renewals and Georgia Cyber Academy dispute.
- Collection progress on the Agora receivable and other customer balances, including the allowance for doubtful accounts.
- Whether managed-program cost growth moderates and Institutional revenue stabilizes, supporting margin improvement.
- Cash conversion and investment returns, including the Tallo note and other strategic investments; compare non-GAAP Adjusted EBITDA with GAAP earnings and cash flow.
- Any updates to regulatory audits, school operating-deficit exposure, legal proceedings, or cybersecurity and student-privacy matters.