K12 Inc. Form 10-Q Summary
Issuer and period: The filing identifies the registrant as K12 Inc. (not Stride, Inc.). This unaudited quarterly report covers the three months ended September 30, 2014, the first quarter of fiscal 2015; comparisons are with the three months ended September 30, 2013 unless otherwise noted. K12 provides K–12 curriculum, software and education services, including public school programs in 34 states and the District of Columbia.
Financial results and position
| Metric | Quarter ended Sep. 30, 2014 | Prior-year quarter |
|---|---|---|
| Revenue | $236.7 million | $228.4 million |
| Operating loss | $13.2 million | $8.5 million |
| Net loss attributable to common stockholders | $6.8 million; $0.18 per share | $5.0 million; $0.13 per share |
| Operating margin | (5.6)% | (3.7)% |
| Cash used in operations | $27.0 million | $3.9 million |
| Cash and cash equivalents, Sep. 30, 2014 | $109.2 million | $196.1 million at June 30, 2014 |
Revenue grew 3.7%, while total costs and expenses increased 5.5% to $249.9 million. Instructional costs rose 10.5% to $146.8 million, or 62.0% of revenue versus 58.2%; management cited more teachers, compensation and special-education services. Selling, administrative and other operating expenses increased 1.3% to $99.5 million but declined as a share of revenue to 42.1% from 43.0%. Product development expense fell 38.6% to $3.5 million, partly because more development costs were capitalized. The $6.5 million income-tax benefit partly offset the operating loss.
Public School Programs generated $212.9 million of revenue, up 5.0%; Institutional Sales revenue fell 9.8% to $12.6 million, and International and Private Pay Schools revenue declined 4.3% to $11.2 million. Public School Program enrollment was essentially flat at 139,239: managed enrollment declined 4.7%, while non-managed enrollment increased 39.2%.
At September 30, current assets were $468.9 million and current liabilities $157.3 million, for working capital of $311.7 million. Accounts receivable was $285.0 million. Capital lease obligations totaled $35.3 million, including $19.6 million current. The company had no borrowings on its $100 million unsecured revolving credit facility and $0.2 million of letters of credit outstanding; it reported compliance with credit covenants. Cash-flow investment included $6.5 million for LearnBop and $18.6 million for property, software and curriculum development. Financing used $33.7 million, including $26.5 million for share repurchases.
Changes, outlook and material matters
- Operating and net losses widened year over year despite revenue growth. Management attributed quarterly operating results partly to revenue timing and seasonal selling and administrative costs. Cash used in operations increased, primarily due to the larger loss, working-capital movements and lower receivable collections.
- Revenue included estimated reductions for school operating losses of $17.6 million, up from $13.8 million. K12’s estimates of school funding, enrollment and operating losses can change, and actual results may differ.
- K12 acquired a 51% interest in LearnBop on July 31, 2014 for $6.5 million. The purchase-price allocation was preliminary and included $9.0 million of goodwill; the company said LearnBop’s results were immaterial for separate disclosure.
- Agora Cyber Charter School represented approximately 12% of quarterly revenue. On October 9, 2014, K12 signed a three-year contract to provide Agora academic curriculum beginning in school year 2015–16, with a reduced scope as the school takes over operations.
- The company completed its $75 million share-repurchase authorization during the quarter, buying 1,307,402 shares for approximately $26.5 million. It reported no shares remaining under the plan.
- Management stated that cash, working capital, expected operating cash generation and the credit facility should fund operations for the foreseeable future. The filing provides no quantified earnings or revenue guidance. Management also expects demand for non-managed and institutional offerings to strengthen, while noting that school boards’ changing preferences may alter managed-service arrangements.
- Contingencies include a patent-infringement suit and a securities class action; K12 recorded no liability for either because losses were not considered probable or estimable. It also guaranteed approximately $8.1 million of certain school-building lease commitments and may bear operating losses under some school contracts.
Investor verification priorities
- Confirm the issuer identity: this filing is for K12 Inc., although the request names Stride, Inc.
- Track Agora’s transition to a reduced-scope curriculum contract and any effect on revenue and margins after June 30, 2015.
- Assess whether higher instructional costs and school operating-loss estimates persist, and whether enrollment and revenue growth translate into improved profitability.
- Review receivable collections and seasonal cash needs; quarterly operating cash flow was materially negative.
- Monitor the LearnBop purchase-price allocation, capital lease obligations, credit-covenant compliance and the outcome of the disclosed litigation.