K12 Inc. Form 10-Q Summary
Business context and period: This filing is by K12 Inc. (the registrant; the filing does not identify it as Stride, Inc.) for the three months ended September 30, 2012, the first quarter of fiscal 2013. K12 provided technology-based K–12 curriculum, software and educational services, including management of virtual and blended public schools. Managed Public Schools generated about 84% of quarterly revenue.
Key financial results
| Metric | Quarter ended Sep. 30, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $221.1 million | $193.3 million | +14.4% |
| Operating income | $8.7 million | $8.3 million | +4.8% |
| Net income | $4.5 million | $4.3 million | Increased |
| Net income attributable to K12 common stockholders, including Series A | $4.4 million | $4.6 million | Decreased |
| Basic and diluted EPS attributable to common stockholders, excluding Series A | $0.11 | $0.12 | Decreased |
| Operating margin | 3.9% | 4.3% | Down 0.4 percentage points |
Revenue growth was led by Managed Public Schools, up 17.8% to $187.8 million. Institutional Business revenue fell 6.4% to $22.0 million, primarily reflecting perpetual-license revenue in the prior-year period; International and Private Pay revenue rose 9.3% to $11.4 million. Average Managed Public School enrollment increased 14.1% to 121,665.
Instructional costs rose 17.3% to $118.6 million and increased to 53.7% of revenue from 52.3%, which management attributed primarily to advance hiring. Selling, administrative and other operating expenses rose 15.2% to $89.6 million, reflecting personnel, benefits and recruiting costs, partly offset by lower ERP implementation costs. Product development expense fell 32.3% to $4.2 million, mainly because more development costs qualified for capitalization and ERP costs declined; cash expenditures including capitalized development nevertheless increased 4%. The effective tax rate was 46.1%, versus 46.0%.
Cash flow, liquidity and obligations
Operating cash outflow was $17.2 million, compared with $35.0 million in the prior-year quarter. Investing cash outflow was $15.2 million, and financing cash outflow was $4.5 million. Cash declined $36.7 million during the quarter to $107.9 million. Management attributed the lower operating cash outflow year over year to higher cash collections, among other factors; receivables typically peak in the first fiscal quarter due to billing timing.
Working capital was $292.2 million; current assets were $444.6 million and current liabilities $152.4 million. Accounts receivable was $258.8 million, up from $160.9 million at June 30, 2012. Total capital lease and note payable obligations were approximately $42.3 million, including $40.8 million outstanding under the equipment lease line. The separate $35 million revolving credit facility had no borrowings and about $0.3 million reserved for a letter of credit; it matured in December 2012. K12 said it expected to obtain a replacement facility but cautioned that there was no guarantee. The company reported compliance with its credit-facility covenants at quarter-end.
Outlook, risks and notable items
No specific revenue or earnings guidance was provided. Management said cash from operations, working capital and access to a credit line were expected to fund ongoing operations for the foreseeable future, while noting uncertainty around renewal of the revolving facility. The quarter’s results may not indicate full-year performance, and the business has seasonal working-capital needs.
- Two school contracts represented approximately 14% and 10% of quarterly revenue; one school accounted for about 10% of receivables at September 30.
- K12 guaranteed approximately $11.3 million of long-term leases for certain Flex school buildings and may have to reduce management fees to cover operating deficits at certain managed schools.
- Ongoing litigation included a patent-infringement case, in which direct-infringement claims proceeded to discovery, and a securities class action that the court allowed to proceed. A related derivative action was stayed; the board was evaluating a stockholder demand. The filing did not quantify potential losses.
- Middlebury College held a put right over its joint-venture interest, recorded at a $17.2 million redeemable noncontrolling interest. K12’s $10 million investment in Web International was valued using Level 3 inputs; management reported no change in estimated fair value.
- There was no impairment charge in the quarter. Management reported disclosure controls and procedures were effective as of September 30, 2012.
Important facts for investors to verify
- Whether K12 renewed or replaced the $35 million revolving credit facility before its December 2012 maturity, and on what terms.
- Collections and aging of the sharply higher receivables balance, including exposure to the concentrated school contracts and state-funding delays.
- Enrollment trends, per-student funding and unfunded enrollments, as well as the sustainability of managed-school revenue growth and margins.
- Developments and potential financial exposure in the patent and securities litigation, and any effect of school operating-loss or lease guarantees.
- Capitalized software and curriculum spending, lease obligations and cash usage as the school year progresses.