Business context and reporting period
This is K12 Inc.’s unaudited Form 10-Q for the quarter and six months ended December 31, 2013 (fiscal 2014 Q2). The filing identifies the registrant as K12 Inc.; this differs from the request metadata naming Stride, Inc. K12 provided technology-based curriculum, software and education services, with managed public schools accounting for about 87% of revenue in the six-month period.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2013 | Prior-year comparable |
|---|---|---|---|
| Revenue | $223.9 million; up 8.7% | $452.3 million; up 5.9% | $206.0 million and $427.1 million |
| Operating income (loss) | $(8.9) million; margin (4.0%) | $(17.4) million; margin (3.8%) | $16.3 million and $24.9 million; margins 7.9% and 5.8% |
| Net income (loss) attributable to common stockholders | $(3.7) million; margin (1.6%) | $(8.7) million; margin (1.9%) | $9.5 million and $13.9 million |
| Diluted EPS | $(0.09) | $(0.22) | $0.24 and $0.36 |
| Operating cash flow | Not separately presented | $20.6 million | $32.1 million for six months |
For the six months, cash used in investing was $25.7 million and cash used in financing was $14.2 million. Cash declined $18.6 million to $162.9 million. At December 31, current assets were $495.6 million and current liabilities $135.0 million, yielding reported working capital of $360.6 million. Accounts receivable was $254.4 million.
Outstanding capital lease obligations totaled $41.6 million ($22.2 million current and $19.4 million long-term); the filing reports no outstanding conventional revolving-credit borrowings at period end. The prior $35 million unsecured credit line expired December 31, 2013. On January 31, 2014, K12 entered a new $100 million unsecured, five-year credit line with customary financial covenants. The filing does not provide a gross margin figure.
Material changes versus the prior comparable period
- Revenue grew, led by Managed Public Schools: six-month revenue rose 7.4%, while average managed-school enrollment increased 5.1%. International and Private Pay Schools revenue rose 9.3%; Institutional Sales revenue fell 9.4%.
- Results swung from profit to loss. Six-month total costs and expenses increased 16.8%, faster than revenue growth, and operating margin fell from 5.8% to (3.8%).
- Six-month instructional costs rose 18.7%. Excluding specified accelerated charges, the filing attributes the increase mainly to teacher and material costs, enrollment growth, and costs ramping up ahead of enrollments.
- Operating cash flow declined by $11.5 million year over year, to $20.6 million.
- Cash and cash equivalents decreased from $181.5 million at June 30, 2013 to $162.9 million at December 31, 2013; capital lease obligations rose from $35.5 million to $41.6 million.
Outlook, commentary, risks and unusual items
- Management said working capital and expected operating cash generation should fund operations for the foreseeable future. No specific earnings or revenue guidance was provided.
- The six-month loss included $31.2 million of severance and related stock compensation, accelerated depreciation and amortization, and additional inventory provisions. Disclosures include $6.3 million of accelerated depreciation for student computers estimated not to be returned; a $5.2 million trade-name impairment; software and curriculum project write-downs; and increased excess-inventory reserves. Verify the precise composition and income-statement classification of the $31.2 million total against the notes.
- On January 2014, K12 signed a non-binding letter of intent to form a new company with an investor group, contributing selected assets and retaining an initial minority stake greater than 25%. K12 expected deconsolidation if definitive agreements were completed; completion was not assured.
- A patent-infringement case brought by IpLearn remained in discovery; the company had recorded no liability because loss was not considered probable or estimable. A securities class action was filed January 30, 2014, alleging misleading statements concerning fiscal 2014 enrollment and revenue prospects and state enrollment compliance. K12 said it would defend the case; damages sought were unspecified.
- K12 guaranteed approximately $9.6 million of certain Flex-school building lease commitments and may have to absorb operating deficits at managed schools, reducing management fees. The company also noted that actual school operating losses may differ materially from estimates.
- The board authorized up to $75 million of share repurchases over two years. K12 repurchased 284,200 shares for $5.9 million at an average $20.72 per share during the six months, leaving about $69.1 million authorized.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for K12 Inc., not Stride, Inc., and covers the quarter ended December 31, 2013.
- Review the nature, timing, cash impact, and repeatability of the $31.2 million of disclosed unusual charges and related asset write-downs.
- Assess whether enrollment growth and revenue per student can translate into improved margins, particularly given rising instructional costs and lower Institutional Sales revenue.
- Check subsequent filings for the new credit line’s covenant compliance and use, and for any final agreements or outcomes concerning the proposed asset contribution and lawsuits.
- Evaluate working-capital quality, especially the large accounts-receivable balance, seasonal collections, and managed-school funding and deficit exposure.