Stride, Inc. quarterly report, Q3 FY2012

Full document

Business context and reporting period

The supplied filing is K12 Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012, covering fiscal 2012 Q3 and the first nine months of fiscal 2012. This does not match the request metadata identifying Stride, Inc. and 2011 Q3; investors should confirm the intended filing. K12 provided K–12 curriculum, technology and education services, with managed virtual and hybrid public schools accounting for about 84% of current-year revenue.

Financial performance and position

  • Quarter: Revenue was $178.2 million, up 36.8% year over year; operating income was $11.6 million, up 7.4%; net income attributable to K12 was $7.0 million versus $5.6 million. Diluted EPS was $0.18 versus $0.16. Operating margin declined to 6.5% from 8.3%; net margin attributable to K12 was 3.9% versus 4.3%.
  • Nine months: Revenue was $538.0 million, up 36.5%; operating income was $26.9 million versus $30.4 million; net income attributable to K12 was $15.7 million versus $15.6 million. Diluted EPS was $0.41 versus $0.46. Operating margin declined to 5.0% from 7.7%.
  • Enrollment: Average enrollment for the quarter rose 46.2% to 147,728. Managed public schools, institutional business and private schools grew 46.4%, 49.4% and 36.0%, respectively.
  • Cash flow: Nine-month operating cash flow was negative $13.5 million, compared with positive $27.0 million a year earlier. Investing cash outflow was $45.5 million and financing cash outflow was $10.6 million. Cash and equivalents fell to $123.7 million from $193.1 million at June 30, 2011.
  • Liquidity and obligations: Current assets were $390.4 million and current liabilities $113.9 million. Accounts receivable rose to $205.3 million from $96.2 million. Capital lease obligations totaled $34.1 million and notes payable $2.3 million; no borrowings were outstanding on the $35 million revolving credit line. A separate equipment lease facility was available through August 2012.

Changes versus comparable periods

Revenue growth reflected enrollment gains, acquisitions and expansion in institutional and private-school business. The quarter’s $47.9 million revenue increase included about $9.3 million from acquisitions; management reported growth in core managed schools as well. Costs rose faster than revenue in several areas: quarterly selling, administrative and other operating expense increased 45.7%, and nine-month product development expense increased 69.1%. Nine-month operating income and diluted EPS declined despite higher revenue. State-payment delays increased receivables and contributed to weaker operating cash flow.

Outlook, risks and unusual items

  • Management gave no specific revenue or earnings guidance in the supplied text. It expected to collect certain delayed state-related payments early in fiscal 2013 and said available funds plus expected operating cash generation should fund operations for the foreseeable future.
  • Management planned to renew its $35 million credit line before its December 2012 expiry and renew or replace the student-computer lease facility before its August 2012 expiry. It was still evaluating whether to exercise options relating to its 20% Web International investment by June 30, 2012.
  • Management cited state budget pressure, possible reductions or delays in public-school funding, school operating-loss estimates, enrollment and revenue mix, integration costs, infrastructure spending and lower capitalization of development costs as risks or factors affecting comparability.
  • The company reported a material weakness in ERP implementation project management that remained unremediated at March 31, 2012; disclosure controls were deemed ineffective. Management said remediation efforts were underway but required further operation and testing.
  • Contingencies included a patent-infringement case, a securities class action alleging misstatements concerning financial results, academic performance and enrollment practices, and a stayed shareholder derivative action. The filing does not provide a clear estimate of potential loss.
  • Other notable items included a $12.6 million acquisition of Kaplan/Insight assets, $25.6 million of new capital lease obligations, and a $6.7 million guarantee related to a 10-year lease for a newly managed hybrid school. No interim goodwill impairment trigger was identified; the annual impairment test was planned for May 31, 2012.

Key facts investors should verify

  1. Confirm that K12 Inc.’s March 31, 2012 filing—not a Stride, Inc. or 2011 Q3 filing—is the intended document.
  2. Track collection of the sharply higher receivables and the timing of state payments, given negative operating cash flow.
  3. Assess whether enrollment and revenue growth can translate into restored operating margins as selling, development and infrastructure costs rise.
  4. Monitor renewal or replacement of the credit and equipment lease facilities, lease commitments and any additional investment in Web.
  5. Follow remediation and testing of ERP controls, the planned goodwill impairment review, and developments in the disclosed litigation.