Stride, Inc. quarterly report, Q2 FY2015

Business context and reporting period

This is K12 Inc.’s unaudited Form 10-Q for the quarter and six months ended December 31, 2014 (the second quarter of fiscal 2015). K12 provides K-12 curriculum, software and educational services, primarily through public school programs. The filing identifies K12 Inc. as the registrant; the request metadata names Stride, Inc.

Financial performance and liquidity

Amounts below are in millions of dollars unless otherwise stated.

For the six-month period, instructional costs were $291.9 (62.4% of revenue), selling, administrative and other operating expenses were $162.1 (34.6%), and product development was $6.7 (1.4%). The corresponding operating margin was 1.5%; net income margin was 1.1%. Quarterly net income margin was 5.2%.

At December 31, cash and equivalents were $124.2, accounts receivable $266.8, and working capital $327.4. Current assets were $455.1 and current liabilities $127.8. Total capital lease obligations were $32.4, including $18.3 current; there were no borrowings under the $100 million revolving credit line, and $0.2 of letters of credit was outstanding. The company reported compliance with credit covenants. Total assets were $715.3 and total liabilities $181.7.

Cash fell $71.9 during the six months, from $196.1 to $124.2. Investing used $37.6, including $6.5 invested in LearnBop and spending on property, software and curriculum. Financing used $39.9, including $26.5 of share repurchases and $11.5 of capital lease repayments.

Material changes versus the prior comparable period

• Revenue increased, led by Public School Programs: up 4.2% for the quarter and 4.7% for six months. Public School Programs represented about 90% of six-month revenue. Total program enrollment grew modestly, while managed enrollment declined and non-managed enrollment expanded.
• Institutional Sales revenue was down 6.6% for six months, but excluding businesses sold in 2014, it increased 0.8%. International and Private Pay Schools revenue fell 5.4%, partly reflecting those divestitures.
• Profitability improved substantially against prior-year results that included $31.2 of severance and related stock compensation, accelerated depreciation and amortization, and inventory-related charges. Excluding specified prior-year charges, instructional costs increased, reflecting additional teachers, compensation and special-education services. Management also cited cost-saving initiatives in selling and administrative expenses.
• Operating cash flow declined $13.0 year over year, primarily due to working-capital changes. The company completed its $75 million repurchase authorization in September 2014.

Outlook, commentary, risks and unusual items

• Management expected demand to strengthen for non-managed public school programs and Institutional Sales, while describing the managed-program business as maturing. It said available working capital, operating cash generation and the credit line should fund operations for the foreseeable future. No numeric earnings or revenue guidance was provided.
• Agora Cyber Charter School contributed approximately 13% of six-month revenue. Under a new three-year agreement, K12 is to provide curriculum beginning in the 2015-16 school year, with Agora self-managing operations and using a reduced scope of K12 services.
• Revenue and receivables depend on estimates of school enrollment, state funding and school operating losses. K12 generally absorbs operating losses under managed-school contracts; recognized revenue is reduced for expected losses. Six-month revenue reductions for these losses were $32.7, versus $25.7 a year earlier.
• The company guaranteed approximately $8.9 of certain flex-school lease commitments and disclosed contractual exposure to school operating deficits. It also reported a $13.2 receivable from Web International, including accrued interest, that was past its stated payment date and remained subject to administrative processing.
• A Delaware court ruling affirmed that a managed school partner’s charter would be revoked effective June 30, 2015; K12 anticipated the school would close absent changed circumstances and said it would exercise its contractual rights. The filing does not quantify any resulting loss.
• The company acquired 51% of LearnBop for $6.5 cash; the purchase-price allocation was preliminary and included $9.0 of goodwill. Minority holders have a future put right, and the redeemable noncontrolling interests totaled $19.8 at quarter-end.
• Two disclosed legal matters had been dismissed: the IpLearn patent case with prejudice and a securities class action after dismissal and expiration of the appeal deadline. The company said there were no material changes to previously disclosed risk factors.

Important facts investors should verify

1. Confirm the registrant and security identity: this filing is for K12 Inc., although the request metadata says Stride, Inc.
2. Track managed versus non-managed enrollment, the effects of Agora’s reduced-scope contract, and revenue concentration in public school programs.
3. Assess receivable collection and working-capital exposure, especially the Web International balance and the large school-funding-related accounts receivable balance.
4. Monitor operating cash generation against capitalized development spending, lease obligations, and the completed share-repurchase program.
5. Review school deficit and lease guarantees, the partner-school charter closure, and LearnBop’s preliminary acquisition valuation and future put exposure.