So yesterday I posted an entry entitled LRN: A Bit Of A Wild Ride For K12 Inc. Last Week, where I took a quick look at the corporate side of K12, Inc. and the explosive ride that it had on the stock market this past week. A few minutes after that was posted, a notice to this document showed up in my Twitter stream.
It is lengthy, but an interesting read…
K12 Inc. Reports Full Fiscal Year 2013 Financial Results
EPS Increases 60.0% to $0.72 on Revenue Growth of Nearly 20.0% to $848.2 Million
HERNDON, Va.–(BUSINESS WIRE)– K12 Inc. (NYSE: LRN ) , a leading provider of proprietary, technology-based curriculum, software and education services created for individualized learning for students primarily in kindergarten through 12th grade, today announced its results for the fourth fiscal quarter and full fiscal year ended June 30, 2013.
Financial Highlights for the Fiscal Year Ended June 30, 2013
- Revenues for the fiscal year ended June 30, 2013 grew 19.7% to $848.2 million, primarily due to a 12.7% increase in average student enrollments and an increase in average revenue per student in our managed public schools business.
- EBITDA, a non-GAAP measure (see reconciliation below), for the fiscal year ended June 30, 2013 increased 28.0% to $111.4 million and EBITDA margin grew to 13.1%.
- Operating income grew 57.6% to $45.7 million.
- Net income attributable to common and Series A stockholders grew by 60.6% to $28.1 million.
- Diluted net income attributable to common stockholders per share, which reflects a pro rata allocation of net income to Series A stockholders, grew 60.0% to $0.72.
Financial Highlights for the Three Months Ended June 30, 2013 (Fourth Quarter Fiscal Year 2013)
- Revenues for the fourth quarter of FY 2013 increased 19.2% to $203.1 million, primarily due to organic revenue growth of 20.8% in our core Managed Public Schools business.
- EBITDA, a non-GAAP measure (see reconciliation below), for the fourth quarter of FY 2013 grew 7.3% to $19.0 million.
- Operating income decreased 30.0% to $1.4 million.
- Net income attributable to common and Series A stockholders grew by 27.8% to $2.3 million.
- Diluted net income attributable to common stockholders per share, which reflects a pro rata allocation of net income to Series A stockholders, grew by 20.0% to $0.06.
Comments from Management
Nate Davis, Executive Chairman of the Board, commented: “I am very pleased with the financial results K12 delivered in fiscal 2013. We remain intensely focused on improving academics and, to that end, we have introduced innovative academic pilots to improve our learning model and have launched new diagnostic assessment tools. We are excited about the new school year and grateful to have the opportunity to offer an individualized and adaptive education to students around the world.”
Cash, Capital Expenditures and Capital Leases
As of June 30, 2013, the Company had cash and cash equivalents of $181.5 million, reflecting an increase of $36.8 million from June 30, 2012.
Capital expenditures for the fiscal year ended June 30, 2013 were $50.3 million, reflecting an increase of $1.7 million, and was comprised of:
- $8.3 million for property and equipment,
- $23.4 million for capitalized software development, and
- $18.6 million for capitalized curriculum.
Capital leases financed additional purchases of $24.7 million during the fiscal year ended June 30, 2013, primarily for computers and software for students.
Revenue and Enrollment Data
Revenue by Business Line
The following table sets forth revenue for the Company’s three lines of business — Managed Public Schools (turn-key management services provided to public schools), Institutional Sales (educational products and services provided to school districts, public schools and other educational institutions that it does not manage), and International and Private Pay Schools (private schools for which it charges student tuition and makes direct consumer sales) — for the periods indicated:
Year Ended June 30, 2013 / 2012 2012 / 2011 ($ in thousands) 2013 2012 2011 Change Change % Change Change % Managed Public Schools $ 730,800 $ 596,142 $ 454,001 $ 134,658 22.6 % $ 142,141 31.3 % Institutional Business 73,269 73,150 46,756 119 0.2 % 26,394 56.5 % International and Private Pay Business 44,151 39,115 21,677 5,036 12.9 % 17,438 80.4 % Total $ 848,220 $ 708,407 $ 522,434 $ 139,813 19.7 % $ 185,973 35.6 %
The following table sets forth average enrollment data for students in Managed Public Schools and total enrollment data for students in the International and Private Pay Schools for the periods indicated. These figures exclude enrollments from classroom pilot programs and consumer programs.
Year Ended June 30, 2013 / 2012 2012 / 2011 2013 2012 2011 Change Change % Change Change % Average Student Enrollments* 117,563 104,289 74,755 13,274 12.7 % 29,534 39.5 % Year Ended June 30, 2013 / 2012 2012 / 2011 2013 2012 2011 Change Change % Change Change % Student Enrollments 31,619 31,830 28,777 (211 ) -0.7 % 3,053 10.6 % Semester Course Enrollments 84,642 83,519 68,230 1,123 1.3 % 15,289 22.4 % * The Managed Public Schools average student enrollments include enrollments for which we received no public funding.
Fiscal Year 2014 Outlook
The Company intends to issue guidance for the current fiscal year in mid-October 2013.
Special Note on Forward-Looking Statements
This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have tried, whenever possible, to identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “continues,” “likely,” “may,” “opportunity,” “potential,” “projects,” “will,” “expects,” “plans,” “intends” and similar expressions to identify forward looking statements, whether in the negative or the affirmative. These statements reflect our current beliefs and are based upon information currently available to us. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, factors and contingencies include, but are not limited to: our potential inability to further develop, maintain and enhance our products and brands; the reduction of per pupil funding amounts at the schools we serve; reputation harm resulting from poor performance or misconduct by operators in any school in our industry and in any school in which we operate; challenges from virtual public school or hybrid school opponents; failure of the schools we serve to comply with regulations resulting in a loss of funding or an obligation to repay funds previously received; discrepancies in interpretation of legislation by regulatory agencies that may lead to payment or funding disputes; termination of our contracts with schools due to a loss of authorizing charter; failure to enter into new contracts or renew existing contracts with schools; risks associated with entering into and executing mergers, acquisitions and joint ventures; failure to successfully integrate mergers, acquisitions and joint ventures; inability to recruit, train and retain quality teachers and employees; uncertainty regarding our ability to protect our proprietary technologies; risks of new, changing and competitive technologies; increased competition in our industry; and other risks and uncertainties associated with our business described in the Company’s filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of August 29, 2013, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.
The Company will discuss its fourth quarter 2013 financial results during a conference call scheduled for Thursday, August 29, 2013 at 8:30 a.m. eastern time (ET).
The conference call will be webcast and available on the K12 web site at www.k12.com through the Investor Relations link. Please access the web site at least 15 minutes prior to the start of the call to register and download and install any necessary software.
To participate in the live call, investors and analysts should dial (866) 825-1709 (domestic) or (617) 213-8060 at 8:20 a.m. (ET). The participant pass code is 82179632. A replay of the call will be available starting on August 29, 2013, through September 5, 2013, at (888) 286-8010 (domestic) or (617) 801-6888 (international) pass code 35861153. It will also be archived at www.k12.com in the Investor Relations section for 60 days.
The financial statements set forth below are not the complete set of K12 Inc.’s financial statements for the quarter and year and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.’s Annual Report on Form 10-K for the year ended June 30, 2013, including all financial statements contained therein and the footnotes thereto, filed with the SEC. The Form 10-K may be retrieved from the SEC’s website at www.sec.gov or from K12 Inc.’s website at www.k12.com.
K12 INC. CONSOLIDATED BALANCE SHEETS June 30, 2013 2012 (In thousands, except share and per share data) ASSETS Current assets Cash and cash equivalents $ 181,480 $ 144,652 Restricted cash and cash equivalents – 1,501 Accounts receivable, net of allowance of $2,560 and $1,624 at June 30, 2013 and June 30, 2012, respectively 186,459 160,922 Inventories, net 44,395 37,853 Current portion of deferred tax asset 11,368 16,140 Prepaid expenses 10,331 11,173 Other current assets 23,916 14,598 Total current assets 457,949 386,839 Property and equipment, net 56,142 55,903 Capitalized software, net 43,504 34,709 Capitalized curriculum development costs, net 64,599 60,345 Intangible assets, net 32,139 36,736 Goodwill 61,413 61,619 Investment in Web International – 10,000 Deposits and other assets 3,150 2,684 Total assets $ 718,896 $ 648,835 LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY Current liabilities Accounts payable $ 21,838 $ 23,951 Accrued liabilities 17,027 13,802 Accrued compensation and benefits 21,970 17,355 Deferred revenue 28,567 25,410 Current portion of capital lease obligations 19,395 15,950 Current portion of note payable 390 1,145 Total current liabilities 109,187 97,613 Deferred rent, net of current portion 8,833 6,974 Capital lease obligations, net of current portion 16,107 15,124 Note payable, net of current portion – 777 Deferred tax liability 33,299 31,591 Other long term liabilities 2,512 1,908 Total liabilities 169,938 153,987 Commitments and contingencies – – Redeemable noncontrolling interest 15,200 17,200 Equity: K12 Inc. stockholders’ equity Common stock, par value $0.0001; 100,000,000 shares authorized; 37,440,662 and 36,436,933 shares issued and outstanding at June 30, 2013 and June 30, 2012, respectively 4 4 Additional paid-in capital 548,390 519,439 Series A Special Stock, par value $0.0001; 2,750,000 shares issued and outstanding at June 30, 2013 and 2012 63,112 63,112 Accumulated Other Comprehensive Income (Loss) (294 ) 100 Accumulated deficit (81,050 ) (109,161 ) Total K12 Inc. stockholders’ equity 530,162 473,494 Noncontrolling interest 3,596 4,154 Total equity 533,758 477,648 Total liabilities, redeemable noncontrolling interest and equity $ 718,896 $ 648,835
K12 INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, Year Ended June 30, 2013 2012 2013 2012 (In thousands, except share and per share data) Revenues $ 203,087 $ 170,402 $ 848,220 $ 708,407 Cost and expenses Instructional costs and services 129,192 102,617 498,398 408,560 Selling, administrative and other operating expenses 66,206 60,970 283,032 245,274 Product development expenses 6,268 4,783 21,084 25,593 Total costs and expenses 201,666 168,370 802,514 679,427 Income from operations 1,421 2,032 45,706 28,980 Interest income (expense), net 1,657 (267 ) 851 (989 ) Income before income tax expense and noncontrolling interest 3,078 1,765 46,557 27,991 Income tax expense (1,828 ) (571 ) (20,023 ) (11,882 ) Net income 1,250 1,194 26,534 16,109 Add net loss attributable to noncontrolling interest 1,018 607 1,577 1,434 Net income attributable to common stockholders, including Series A stockholders $ 2,268 $ 1,801 $ 28,111 $ 17,543 Net income attributable to common stockholders per share, excluding Series A stockholders: Basic $ 0.06 $ 0.05 $ 0.72 $ 0.46 Diluted $ 0.06 $ 0.05 $ 0.72 $ 0.45 Weighted average shares used in computing per share amounts: Basic 36,642,685 35,952,162 36,267,345 35,802,678 Diluted 39,475,382 38,723,316 39,017,345 38,740,863
K12 INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30, 2013 2012 2011 (In thousands) Cash flows from operating activities Net income $ 26,534 $ 16,109 $ 11,665 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 65,737 58,033 42,934 Stock based compensation expense 14,374 10,067 9,466 Excess tax (benefit) expense from stock based compensation (8,889 ) 3,122 (4,954 ) Deferred income taxes 15,770 10,297 10,978 Provision for doubtful accounts 2,070 204 1,472 Provision for inventory obsolescence 387 1,618 1,060 Provision for student computer shrinkage and obsolescence 482 1,038 219 Changes in assets and liabilities: Accounts receivable (27,708 ) (64,270 ) (15,810 ) Inventories (6,929 ) (8,918 ) (4,621 ) Prepaid expenses 843 (784 ) 363 Other current assets 682 (5,260 ) (1,825 ) Deposits and other assets (466 ) 764 (1,037 ) Accounts payable (2,115 ) 2,794 2,726 Accrued liabilities 3,226 (292 ) 615 Accrued compensation and benefits 4,616 4,275 1,976 Deferred revenue 3,119 3,351 6,760 Restricted cash 1,501 – 1,842 Deferred rent and other liabilities 2,059 843 3,384 Net cash provided by operating activities 95,293 32,991 67,213 Cash flows from investing activities Purchase of property and equipment (8,339 ) (10,483 ) (19,616 ) Capitalized software development costs (23,446 ) (21,994 ) (9,947 ) Capitalized curriculum development costs (18,560 ) (16,123 ) (18,086 ) Purchase of Kaplan – (12,641 ) – Purchase of AEC, net of cash acquired of $3,841 – – (24,543 ) Purchase of IS Berne, net of cash acquired of $1,563 – – (839 ) Cash advanced for AEC performance escrow – – (6,825 ) Cash returned for AEC performance escrow – – 6,825 Cash paid for investment in Web – – (10,000 ) Net cash used in investing activities (50,345 ) (61,241 ) (83,031 ) Cash flows from financing activities Proceeds from issuance of common stock – – 125,619 Repayments on capital lease obligations (20,275 ) (16,600 ) (15,135 ) Repayments on notes payable (1,533 ) (1,820 ) (1,969 ) Proceeds from notes payable – – 1,932 Borrowings from line of credit – – 15,000 Repayments under the line of credit – – (15,000 ) Proceeds from exercise of stock options 7,253 3,380 13,364 Payment of stock registration expense – (313 ) – Excess tax (benefit) expense from stock based compensation 8,889 (3,122 ) 4,954 Repurchase of restricted stock for income tax withholding (2,546 ) (1,292 ) (1,627 ) Net cash provided by (used in) financing activities (8,212 ) (19,767 ) 127,138 Effect of foreign exchange rate changes on cash and cash equivalents 92 (430 ) 28 Net change in cash and cash equivalents 36,828 (48,447 ) 111,348 Cash and cash equivalents, beginning of year 144,652 193,099 81,751 Cash and cash equivalents, end of year $ 181,480 $ 144,652 $ 193,099
Non-GAAP Financial Measures
EBITDA consists of net income (loss), plus net interest expense, plus income tax expense, minus income tax benefit, plus depreciation and amortization and noncontrolling interest charges. Interest expense primarily consists of interest expense for capital leases and long-term and short-term borrowings. We use EBITDA in addition to income from operations and net income as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income (loss) as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as capital expenditures, tax payments, interest payments, or other working capital.
We believe EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company’s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired. Our management uses EBITDA:
- as an additional measurement of operating performance because it assists us in comparing our performance on a consistent basis;
- in presentations to the members of our Board of Directors to enable our Board to have the same measurement basis of operating performance as is used by management to compare our current operating results with corresponding prior periods and with the results of other companies in our industry; and
- on an adjusted basis in determining compliance with the terms of our credit agreement.
The following tables provide a reconciliation of net income to EBITDA.
Three Months Ended June 30, Year Ended June 30, 2013 2012 2013 2012 (In thousands) Net income $ 2,268 $ 1,801 $ 28,111 $ 17,543 Interest expense, net (1,657 ) 267 (851 ) 989 Income tax expense 1,828 571 20,023 11,882 Depreciation and amortization 17,562 15,708 65,737 58,033 Noncontrolling interest (1,018 ) (607 ) (1,577 ) (1,434 ) EBITDA $ 18,983 $ 17,740 $ 111,443 $ 87,013
About K12 Inc.
K12 Inc. (NYSE: LRN) is leading the transformation to individualized learning as the nation’s foremost provider of technology-powered online solutions for students in pre-kindergarten through high school. K12 has worked with over 2,000 school districts and has delivered more than four million courses over the past decade. K12 provides curricula, academic services, and learning solutions to public schools and districts, traditional classrooms, blended school programs, and families. K12’s curriculum is rooted in decades of research combined with 21st-century technology by cognitive scientists, interactive designers and teachers. K12’s portfolio of more than 550 unique courses and titles—the most extensive in the technology-based education industry—covers every core subject and four academic levels for high school including Honors and AP. K12 offers credit recovery courses, career-building electives, remediation support, six world languages and a deep STEM offering. The K12 program is offered through K12 partner public schools in more than two-thirds of the states and the District of Columbia, and through private schools serving students in all 50 states and more than 100 countries. More information can be found at K12.com.
KEYWORDS: United States North America Virginia