Stride, Inc. — filing and period clarification
The supplied filing is K12 Inc.’s Form 10-K for the fiscal year ended June 30, 2013, not a Stride, Inc. filing for 2012 Q4. It includes unaudited quarterly results for the quarter ended June 30, 2013. The summary below reflects the filing as supplied.
Business context and reporting period
K12 was a technology-based K–12 education company providing curriculum, software, and education and school-management services. Its three business lines were Managed Public Schools, Institutional Sales, and International and Private Pay Schools. Managed Public Schools generated approximately 86% of fiscal 2013 revenue. The company reported one operating segment.
Financial performance and position
| Metric | FY ended June 30, 2013 | FY ended June 30, 2012 |
|---|---|---|
| Revenue | $848.2 million | $708.4 million |
| Operating income / margin | $45.7 million / 5.4% | $29.0 million / 4.1% |
| Net income | $26.5 million | $16.1 million |
| Net income attributable to common and Series A stockholders | $28.1 million | $17.5 million |
| Diluted EPS | $0.72 | $0.45 |
| Operating cash flow | $95.3 million | $33.0 million |
| EBITDA, non-GAAP | $111.4 million | $87.0 million |
Net margin was 3.1%, compared with 2.3% in fiscal 2012. Revenue increased 19.7%; operating income increased 57.6%, and net income increased 64.6%. Managed Public Schools revenue rose 22.6% to $730.8 million, Institutional Sales revenue was nearly flat at $73.3 million, and International and Private Pay revenue increased 12.9% to $44.2 million.
Cash and cash equivalents were $181.5 million at June 30, 2013, and working capital was $348.8 million. Current assets were $457.9 million and current liabilities $109.2 million. Capital lease obligations were $35.5 million, with a further $0.4 million note payable; the company had no borrowings outstanding on its $35 million revolving credit line. Cash used in investing activities was $50.3 million and cash used in financing activities was $8.2 million. Capital expenditures, including capitalized curriculum and software development, were $75.0 million.
For the June 2013 quarter, revenue was $203.1 million versus $170.4 million in the June 2012 quarter. Operating income was $1.4 million versus $2.0 million, and net income attributable to common and Series A stockholders was $2.3 million versus $1.8 million; diluted EPS was $0.06 versus $0.05.
Material changes versus the prior comparable period
- Revenue growth was driven mainly by Managed Public Schools, reflecting enrollment growth and higher per-pupil funding rates. Average managed-school enrollment increased 12.7% to 117,563.
- Instructional costs increased 22.0% to $498.4 million and rose to 58.7% of revenue from 57.7%, partly reflecting higher instructional and administrative costs, materials, computers, and amortization.
- Selling, administrative, and other operating expenses increased 15.4% to $283.0 million, but declined as a share of revenue to 33.4% from 34.6%. Product development expense fell 17.6% to $21.1 million, which management attributed mainly to higher capitalization and lower system-maintenance costs.
- Operating cash flow improved by $62.3 million, supported by higher earnings, depreciation, cash collections, and less working-capital investment than in fiscal 2012. Collections included recovery of receivables affected by prior California funding delays.
Outlook, commentary, risks, and unusual items
- Management expected Managed Public Schools to remain the majority of revenue over the next 12–24 months, while pursuing growth in Institutional Sales, private schools, and international markets. The filing gives no specific numerical revenue or earnings guidance.
- Management said education funding appeared to be stabilizing, but future state and district funding levels remained uncertain. Per-pupil funding cuts, payment delays, enrollment caps, charter nonrenewals, and regulatory interpretations could affect revenue, collections, and cash flow.
- Two schools accounted for approximately 25% of fiscal 2013 revenue: Agora Cyber Charter School (14%) and Ohio Virtual Academy (11%). Their contracts were reported to expire June 30, 2015 and June 30, 2017, respectively.
- The company recorded $64.5 million of reductions to revenue for estimated operating losses at managed schools, up from $54.8 million in fiscal 2012. Actual school funding and costs could differ from estimates.
- K12 exercised its put right on its Web International investment and recorded a $10 million receivable plus $2 million of interest income; payment was contractually due by May 6, 2014.
- Middlebury College could require K12 to buy its interest in the language-course joint venture at fair value beginning in 2015. The reported redeemable noncontrolling interest was $15.2 million at June 30, 2013.
- Pending matters included an IpLearn patent-infringement suit seeking an injunction and unspecified damages. A securities class-action settlement received final court approval in July 2013; a related derivative-action settlement had preliminary approval, subject to further process.
- The filing cited competitive pricing pressure in Institutional Sales, academic-performance and enrollment risks, reliance on third-party hosting and logistics providers, data-security risks, and seasonal working-capital swings. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm the intended issuer and period: the supplied document identifies K12 Inc. and fiscal 2013, despite the request’s Stride, Inc. and 2012 Q4 labels.
- Review the status and payment collectability of the $10 million Web receivable and related interest, due by May 2014.
- Assess exposure to the two largest managed-school customers, including contract renewals, charter status, funding, and enrollment trends.
- Check actual school operating losses and funding collections against management’s estimates, and monitor the trend in revenue deductions.
- Review the outcome and potential exposure of the IpLearn litigation, the Middlebury put right, and the revolving credit line’s renewal before its December 2013 expiration.