Filing summary
Entity and period: The supplied filing is K12 Inc.’s Form 10-K for the fiscal year ended June 30, 2015, not a Stride, Inc. filing or a 2014 Q4 filing. It also provides unaudited results for the quarter ended June 30, 2015 (fiscal Q4). Dollar amounts below are in U.S. dollars.
Business context
K12 provided online curriculum, software, instructional services and school-management support to public schools, districts, private schools and families. Public School Programs generated about 90% of FY2015 revenue. The company served managed public-school programs in 32 states and the District of Columbia; its Institutional Sales business served schools and districts nationwide.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $948.3 million | $919.6 million | +3.1% |
| Operating income | $18.4 million | $22.9 million | −19.7% |
| Operating margin | 1.9% | 2.5% | −0.6 percentage points |
| Net income attributable to common stockholders | $11.0 million | $19.6 million | −43.9% |
| Diluted earnings per share | $0.29 | $0.50 | −42.0% |
| EBITDA (non-GAAP) | $102.2 million | $115.5 million | −11.5% |
| Cash from operating activities | $120.1 million | $122.9 million | −$2.8 million |
- FY2015 cash used in investing activities was $68.3 million, including $6.5 million for the LearnBop acquisition and higher spending on property, software and curriculum. Cash used in financing was $50.4 million, including $26.5 million of share repurchases and capital-lease repayments.
- At June 30, 2015, cash and cash equivalents were $195.9 million, working capital was $348.3 million, and total current assets and current liabilities were $459.0 million and $110.7 million, respectively. The balance sheet reported $16.6 million of current and $13.0 million of long-term capital-lease obligations. The company had no borrowings on its $100 million unsecured credit line and reported covenant compliance.
- FY2015 capital-lease and operating-lease commitments totaled $81.2 million. The company also guaranteed approximately $9.2 million of certain Flex-school building leases.
Changes versus the prior comparable year
- Public School Programs revenue rose 3.7% to $853.0 million. Managed-program average enrollments fell 3.9% to 114,579, while managed-program revenue increased 2.5%; higher achieved per-pupil funding and school mix contributed to revenue growth. Non-managed-program enrollments rose 38.5% to 20,053.
- Institutional Sales revenue was nearly flat at $48.8 million as presented in the revised business-line classification. International and Private Pay Schools revenue fell 3.7% to $46.5 million, partly reflecting prior-year business divestitures; management reported growth in both areas excluding divested businesses.
- Instructional costs rose 6.8% to $607.8 million, or 64.1% of revenue versus 61.9% a year earlier. Management cited staffing, compensation and special-education service costs. Selling, administrative and other operating expenses declined 1.8% to $307.7 million, reflecting cost savings, while product-development expense was broadly flat.
- Cash was nearly unchanged year over year. The allowance for doubtful accounts increased to $9.7 million from $3.5 million; the company recorded $9.3 million of doubtful-account provision in FY2015.
Outlook, commentary, risks and unusual items
- Management expected continued opportunity in Non-managed Programs and Institutional Sales, but described Managed Programs as maturing. It expected to manage 75 contracts in 32 states and the District of Columbia for the 2015–16 school year, while noting that some customers were shifting to self-management. The filing gives no quantified FY2016 revenue or earnings guidance.
- Agora Cyber Charter School represented about 14% of FY2015 revenue and 9% of accounts receivable at year-end. Agora entered a three-year agreement to buy curriculum and certain technology services while taking over daily operations; the future revenue impact depends on enrollment and Pennsylvania funding.
- Management cited approximately $25.2 million of FY2015 expenses associated with bad debt, asset and software write-offs, severance and inventory provisions. Fourth-quarter pretax results included approximately $28.4 million of specified charges, including bad debt, asset and curriculum write-offs, severance, inventory provisions and a $3.2 million write-off of previously accrued interest income. Fiscal Q4 reported a $16.3 million operating loss and an $11.6 million net loss attributable to common stockholders.
- Middlebury College exercised its contractual right to require K12 to buy its interest in the Middlebury Interactive Languages joint venture. The purchase price and whether payment would be in cash, stock or both were undetermined at filing. Separately, the company continued to seek collection of the $10 million principal receivable from Web International Education Group after writing off $3.2 million of accrued interest.
- Key risks include dependence on public per-pupil funding and charter renewals; enrollment limits and changing regulation; student performance, retention and service costs; contract transitions and customer concentration; competition and pricing pressure; and cyber, privacy, technology and fulfillment disruptions. The company stated that its audited financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Confirm the issuer and reporting period: the document identifies K12 Inc. and FY ended June 30, 2015; the request’s Stride, Inc./2014 Q4 label does not match.
- Track the impact of Agora’s reduced-service contract, its enrollment levels and Pennsylvania cyber-charter funding on revenue and margins.
- Review receivables quality, the sharp increase in doubtful-account provisions, and collection progress on the Web principal.
- Determine the final Middlebury buyout value and form of consideration, and assess any resulting cash need or dilution.
- Assess whether enrollment growth in non-managed and institutional channels can offset managed-program pressures and rising instructional costs.