Stride, Inc. (filing registrant: K12 Inc.) — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2018. The filing identifies the registrant as K12 Inc.; it describes a technology-based K–12 education business serving managed and non-managed public school programs, institutional customers, and private-pay schools.
Financial performance and position
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $254.9 million, up 17.3% year over year | $506.2 million, up 13.5% |
| Operating income (margin) | $33.3 million (13.1%), versus $13.7 million (6.3%) | $19.5 million (3.9%), versus an operating loss of $4.0 million |
| Net income attributable to common stockholders | $23.7 million; diluted EPS $0.59 | $15.4 million; diluted EPS $0.38 |
| Operating cash flow | Not separately presented for the quarter | $24.9 million, versus cash use of $0.9 million |
For the six-month period, investing cash use was $38.9 million, including $6.7 million invested in STEM Premier, $15.3 million of capitalized software development and $10.1 million of capitalized curriculum development. Financing cash use was $13.8 million. Cash and cash equivalents were $203.3 million at December 31; cash, cash equivalents and restricted cash totaled $205.3 million.
Total assets were $783.7 million and stockholders’ equity was $604.0 million. Working capital was $352.7 million. Capital lease obligations totaled $34.8 million; there were no borrowings under the $100 million credit line, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Managed Public School Programs drove growth: revenue increased 21.5% in the quarter and 19.2% for the six months. Managed-program enrollment rose 7.3% and 7.2%, respectively; management also cited improved per-pupil achieved funding and school mix.
- Institutional revenue declined 9.1% in the quarter and 18.6% for the six months, with management citing lower software sales and weakness in non-managed programs. Private Pay Schools and Other increased 6.9% for the quarter but decreased 4.5% for the six months.
- Instructional costs rose with higher enrollment, but declined as a share of revenue: 62.9% versus 64.1% in the quarter, and 63.1% versus 64.2% for the six months. Selling, administrative and other operating expenses fell in the quarter but rose 2.9% over six months.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced opening retained earnings by $1.3 million and changed revenue timing. The filing reports Q2 revenue of $254.9 million under ASC 606 versus $249.0 million on an ASC 605 basis; six-month revenue was $506.2 million versus $503.4 million on that prior-guidance basis. Prior-year figures were not restated.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said operating cash generation, working capital and access to the credit line should fund operations for the foreseeable future, while noting that results for the interim periods are not necessarily indicative of full-year results.
- Revenue depends on estimated student enrollment, attendance, state and district per-student funding, and school operating results. K12 generally absorbs operating deficits at managed schools; school losses reduced revenue by $16.7 million in the quarter and $34.0 million for the six months, compared with $13.7 million and $31.5 million in the prior-year periods.
- Managed Public School Programs accounted for approximately 88% of six-month revenue. Contracts commonly run two to five years and may be affected by renewals, charter decisions, regulation, funding formulas, or schools shifting to self-managed models. One contract represented 11% of revenue in the reported 2018 periods, according to the filing.
- Accounts receivable increased to $239.7 million from $176.3 million at June 30. Management says receivables vary seasonally; changes in receivables used $64.1 million of operating cash in the six-month period.
- The company invested $6.7 million for a 39.5% interest in STEM Premier and received a $5.0 million convertible note. Conversion could raise its ownership to 56%.
- A securities class action settlement was agreed in principle; insurers agreed to fund $3.5 million, subject to final documentation and court approval. The company also guarantees approximately $1.8 million of certain school lease commitments and guarantees against operating deficits at certain managed schools.
- Management reported disclosure controls were effective at December 31, 2018, no material changes to internal control over financial reporting, and no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether reported growth and margins remain strong when assessed consistently for the ASC 606 revenue-timing change.
- Enrollment, per-pupil funding, school mix and renewal trends in the concentrated Managed Public School Programs business.
- Receivable aging, collections and the assumptions used to estimate school funding and managed-school operating losses.
- The final court approval and insurance coverage for the $3.5 million securities-litigation settlement.
- Capital lease obligations, covenant compliance and the expected balance-sheet impact of adopting the new lease standard in fiscal 2020.