Filing summary
Entity and period: The supplied filing is K12 Inc.’s Form 10-K for the fiscal year ended June 30, 2014, filed August 15, 2014. It is not identified as a Stride, Inc. filing. The metadata’s “2013 Q4” does not match the annual reporting period; the filing also provides unaudited fourth-quarter results for the quarter ended June 30, 2014.
Business context
K12 provided K–12 curriculum, software and education services through Managed Public Schools, Institutional Sales, and International and Private Pay Schools. Managed Public Schools generated about 88% of FY2014 revenue. Average enrollment there rose 4.8% to 123,259. Management expected to manage 77 schools in 33 states and the District of Columbia in the 2014–15 school year.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $919.6 million | $848.2 million |
| Operating income; margin | $22.9 million; 2.5% | $45.7 million; 5.4% |
| Net income | $18.1 million | $26.5 million |
| Net income attributable to common stockholders | $19.6 million | $28.1 million |
| Basic and diluted EPS | $0.50 | $0.72 |
| Operating cash flow | $123.5 million | $95.3 million |
| EBITDA (non-GAAP) | $115.5 million | $111.4 million |
Revenue grew 8.4%, while operating income fell 49.9% and common-stockholder net income fell 30.2%. Net margin was 2.0%, versus 3.1%. Managed Public Schools revenue increased 10.1% to $804.5 million; Institutional Sales revenue declined 8.9% to $66.8 million; International and Private Pay revenue rose 9.4% to $48.3 million.
At June 30, 2014, cash and equivalents were $196.1 million, working capital was $351.4 million, and total assets were $711.7 million. Capital lease obligations totaled $36.9 million. The company had no borrowings on its new $100 million unsecured revolving credit line and reported compliance with its covenants. FY2014 investing cash outflow was $45.8 million and financing cash outflow was $64.0 million; financing uses included $48.5 million of share repurchases.
For Q4 FY2014, revenue was $232.0 million, operating income $12.8 million, net income $12.0 million, and net income attributable to common stockholders $12.4 million. The comparable Q4 FY2013 figures were revenue of $203.1 million, operating income of $1.4 million, net income of $1.3 million, and common-stockholder net income of $2.3 million.
Material changes and unusual items
- Instructional costs rose 14.2% to $569.2 million, faster than revenue, reflecting personnel, program and materials costs, enrollment growth, and $18.6 million of accelerated depreciation and amortization and related provisions for assets and inventory no longer expected to be used.
- Selling, administrative and other operating expenses increased 10.7% to $313.3 million. This included $7.4 million of severance and accelerated stock compensation and a $5.2 million trade-name impairment. Management cited cost savings in underlying expense ratios.
- FY2014 operating income included approximately $31.2 million of severance-related costs, accelerated depreciation and amortization, and other write-downs/provisions. EBITDA increased 3.7%, but is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- The June 2014 sale of select businesses to Safanad generated a $6.4 million gain outside operating income and $5.7 million of net cash proceeds. The divested businesses contributed $16.9 million of FY2014 revenue.
Outlook, risks and contingencies
No numerical FY2015 revenue or earnings guidance is provided in the supplied filing text. Management described growth plans spanning managed-school enrollment, district sales, private schools, international markets, new products and partnerships. The company expected to transition its high-school learning management system to Desire2Learn by fall 2015.
- Results are substantially exposed to public-school funding, per-pupil formulas, enrollment levels, regulatory interpretations, charter renewals and school compliance. Management generally absorbs operating deficits at managed schools; revenue reductions for school operating losses were $49.8 million in FY2014, compared with $64.5 million in FY2013.
- Two schools represented about 23% of FY2014 revenue: Agora Cyber Charter School (13%) and Ohio Virtual Academy (10%). Agora’s contract expired June 30, 2015, and it initiated a competitive procurement process for 2015–16 services; Ohio Virtual Academy’s contract ran through June 30, 2017.
- Pending matters included IpLearn patent litigation and a securities class action alleging misleading statements concerning FY2014 enrollment and revenue prospects and regulatory compliance. The company intended to defend both. It recorded no IpLearn liability because loss was not considered probable or estimable.
- Middlebury College held a right, beginning in April 2015, to require the company to purchase its entire interest in the Middlebury Interactive Languages joint venture at fair market value. The recorded redeemable noncontrolling interest was $16.8 million; timing, payment form and ultimate cost were uncertain.
- The company disclosed approximately $8.5 million of guarantees related to certain Flex-school building leases, as well as school operating-deficit guarantees. Results also face seasonality, competition and risks related to academic outcomes, technology availability, data security and third-party fulfillment.
Most important facts to verify
- Confirm the issuer and period: the document is K12 Inc., FY2014, not a Stride, Inc. “2013 Q4” filing.
- Track Agora’s contract outcome and the renewal or terms of other significant managed-school agreements.
- Assess whether enrollment and funding growth can offset rising instructional costs and the dependence on public funding.
- Reconcile reported earnings with the $31.2 million of unusual costs and review the company’s non-GAAP EBITDA reconciliation.
- Monitor the securities and patent litigation, Middlebury’s put right, and the potential cash demands from lease and deficit guarantees.