Business context and reporting period
This filing is K12 Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2015 (fiscal 2015 third quarter), not a Stride, Inc. filing or a 2014 reporting period as indicated in the request. K12 provided K–12 curriculum, software and educational services through Public School Programs, Institutional Sales, and International and Private Pay Schools.
Financial performance and condition
| Metric | Three months ended March 31, 2015 | Nine months ended March 31, 2015 |
|---|---|---|
| Revenue | $244.6 million; up 4.0% | $712.6 million; up 3.7% |
| Operating income (margin) | $27.4 million (11.2%) | $34.7 million (4.9%) |
| Net income | $16.5 million | $21.9 million |
| Net income attributable to common stockholders | $17.0 million | $22.6 million |
| Basic / diluted EPS | $0.46 / $0.45 | $0.60 / $0.60 |
| Operating cash flow | Not provided for the quarter | $46.5 million, versus $81.5 million |
At March 31, 2015, cash was $142.9 million, accounts receivable $275.8 million, working capital $346.1 million, and total assets $743.7 million. Current liabilities were $135.7 million. Capital lease obligations totaled $32.3 million; there were no borrowings on the $100 million revolving credit facility, and the company reported covenant compliance. Nine-month cash decreased $53.3 million to $142.9 million.
Material changes versus comparable periods
- Quarterly revenue growth was led by Public School Programs, up 4.6%; Institutional Sales rose 15.5%, while International and Private Pay Schools declined 14.5%, partly reflecting businesses sold in fiscal 2014.
- For nine months, Public School Programs revenue increased 4.6%, while Institutional Sales decreased 0.8% and International and Private Pay Schools decreased 8.6%; the latter declines were affected by divestitures.
- Nine-month operating income rose from $10.0 million to $34.7 million and common-stockholder income from $7.2 million to $22.6 million. The prior-year period included $31.2 million of severance, impairment, accelerated depreciation/amortization and inventory-related charges, making the comparison unusually favorable to 2015.
- Operating cash flow fell $35.0 million year over year, primarily due to working-capital movements, including higher receivables and collection timing. Investing outflow increased to $51.8 million, including the $6.5 million LearnBop investment and higher development and equipment spending.
- Average total Public School Program enrollment was nearly flat for nine months (+0.4%), while Managed Program enrollment declined 4.3% and Non-managed enrollment increased 40.2%. Management attributed revenue growth despite lower managed enrollment partly to state funding rates and school mix.
Outlook, commentary, risks and unusual items
- No quantified financial guidance was provided. Management said it expected operating cash generation, working capital and access to the credit facility to support operations for the foreseeable future, while noting possible future acquisitions and strategic investments.
- Management described online education demand as growing, but said managed programs are maturing amid greater academic accountability and school-board autonomy. Agora shifted to a reduced-scope, three-year curriculum contract beginning in the 2015–16 school year; the school will self-manage operations. New fully managed schools were expected to open in North Carolina and Maine in that school year.
- School revenue and operating-loss estimates depend on enrollment, attendance, funding formulas and other school-level assumptions; actual funding or losses could materially affect results. Revenue included estimated school operating-loss reductions of $45.2 million for the nine months.
- K12 had approximately $10 million of guarantees related to building leases for certain flex schools and contractual exposure to operating deficits at certain managed schools.
- A $13.2 million receivable from Web International (principal and accrued interest) remained outstanding. Due to difficulty repatriating funds from China, K12 stopped accruing interest beginning January 1, 2015 and continued efforts to collect.
- A managed school partner’s charter was ruled revoked effective June 30, 2015; K12 anticipated the school would close absent changed circumstances and said it would exercise its contractual rights under the secured mortgage arrangement.
- The Middlebury joint-venture partner could exercise a put right after April 12, 2015; redeemable noncontrolling interests totaled $19.8 million at quarter-end. LearnBop’s minority holders also have a future put option.
- The IpLearn patent case was dismissed with prejudice after the court found the asserted patent invalid. K12 reported no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Confirm the requested issuer and period: the supplied filing identifies K12 Inc. and the quarter ended March 31, 2015.
- Review whether receivable growth, collection timing and the Web International receivable affect cash conversion or require valuation adjustments.
- Assess the durability of revenue growth given managed-enrollment declines, school funding estimates, and the Agora contract’s reduced scope.
- Separate recurring operating performance from the prior-year $31.2 million of unusual charges when comparing earnings.
- Monitor capital-lease funding, school guarantees, the managed-school mortgage exposure and potential redemption obligations.