Business context and reporting period
K12 Inc. (the registrant named in the filing; the request metadata identifies Stride, Inc.) filed this unaudited Form 10-Q for the quarter ended December 31, 2015, covering its fiscal second quarter and first six months of fiscal 2016. K12 provides K–12 curriculum, software, and education services. Managed Public School Programs represented about 81% of six-month revenue.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2015 |
|---|---|---|
| Revenue | $208.8 million; down 9.7% year over year | $430.0 million; down 8.1% |
| Operating income (loss) | $14.7 million; 7.0% margin | ($5.7) million; (1.4)% margin |
| Net income (loss) attributable to common stockholders | $8.5 million; $0.23 per diluted share | ($4.3) million; ($0.11) per share |
| Operating cash flow | Not reported separately for the quarter | $12.9 million, versus $7.0 million |
For the six months, cash used in investing was $25.8 million and cash used in financing was $11.7 million. Cash and equivalents were $171.3 million at December 31, down from $195.9 million at June 30. Working capital was $353.3 million. Capital lease obligations totaled $24.4 million; there were no borrowings under the $100 million revolving credit facility, and the company reported compliance with its covenants. The filing provides no separate gross-margin figure.
Material changes versus the prior comparable period
- Quarterly revenue fell $22.5 million; six-month revenue fell $38.0 million. Managed Public School revenue decreased 13.4% for the quarter and 12.9% for the six months.
- Managed-program enrollment declined 10.8% for the quarter and 11.1% for the six months. Non-managed enrollment increased 35.9% and 35.4%, respectively.
- Institutional revenue increased 19.4% for the quarter and 22.4% for the six months, primarily reflecting the transition of the Agora contract from managed to non-managed service. Private Pay and Other revenue declined 5.5% in the quarter but rose 13.1% over six months.
- Six-month operating results shifted from $7.3 million of operating income and $5.6 million of common-stockholder income to operating and common-stockholder losses. Selling, administrative, and other operating costs were 37.4% of revenue, up from 34.6%; the company cited a receivables write-off.
- Operating cash flow improved by $5.9 million year over year, principally due to working-capital changes, including improved receivable collections. Cash used in investing and financing declined, with the prior-year financing period including $26.5 million of share repurchases.
Outlook, commentary, risks, and unusual items
Management expected the Agora transition to reduce full-year fiscal 2016 revenue by approximately $110 million versus the prior year. It described Institutional demand as an opportunity for growth, while noting that a shift from higher-revenue managed enrollments to non-managed enrollments can weigh on revenue relative to enrollment growth. The filing gives no broader numerical earnings or revenue guidance. Management said operating cash generation, working capital, and credit access should be adequate for foreseeable operating needs.
- Revenue depends on estimated school funding, enrollment, and school operating losses; actual results and year-end audits may differ from estimates. Estimated school operating losses reduced revenue by $26.6 million in the six-month period, versus $32.7 million.
- Middlebury College had exercised a put requiring K12 to purchase its joint-venture interest; terms remained under discussion at quarter-end. K12 could pay in cash, stock, or a combination, with the form not yet determined.
- A $10 million principal receivable from Web International remained outstanding; K12 had stopped accruing interest and wrote off $3.2 million of accrued interest in fiscal 2015. Collection was complicated by difficulties transferring funds from China.
- Moyer Academic Institute defaulted on its $2.1 million mortgage loan, including nonpayment and school closure. K12 was pursuing foreclosure and receivership; Moyer filed a counterclaim that K12 said was without merit.
- K12 received a California Attorney General subpoena in an industry-wide investigation of for-profit virtual schools and said it was cooperating. The company reported no known material adverse effect at that stage.
- The company guaranteed approximately $8.1 million of certain Flex-school building leases and may reduce management fees to cover certain school operating deficits. Market capitalization was below book value, but management did not consider the decline an impairment trigger at the reporting date.
- After quarter-end, K12 announced a CEO transition effective February 8, 2016: Stuart J. Udell was to become CEO and Nathaniel A. Davis Executive Chairman.
Important facts for investors to verify
- Whether enrollment trends and the Agora transition’s expected approximately $110 million annual revenue impact match subsequent results.
- Drivers, recoverability, and future impact of receivables and the six-month receivables write-off.
- Final settlement amount and payment form for Middlebury’s put, and progress on collecting the Web receivable and Moyer mortgage.
- Cash conversion, lease obligations, covenant headroom, and any change in access to the revolving credit facility.
- Developments in the California investigation and any subsequent changes to the company’s risk disclosures.