K12 Inc. Reports Third Quarter Fiscal 2017 with Revenue of $222.5 Million

HERNDON, Va.--()--K12 Inc. (NYSE: LRN), a technology-based education company and leading provider of proprietary curriculum and online school programs for students in pre-K through high school, today announced its results for the three months ended March 31, 2017.

Financial Highlights for the Three Months Ended March 31, 2017 (Third Quarter Fiscal 2017)

  • Revenues of $222.5 million, compared to $221.3 million in the third quarter of FY 2016.
  • Operating income of $12.8 million, compared to $19.1 million in the third quarter of FY 2016.
  • Net income attributable to common stockholders of $9.1 million, compared to $14.3 million in the third quarter of FY 2016.
  • Diluted net income attributable to common stockholders per share of $0.23, compared to $0.37 in the third quarter of FY 2016.

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP), we are also presenting adjusted operating income (loss) and adjusted EBITDA. Management believes that these additional metrics provide useful information to our investors as an indicator of performance because they exclude non-cash stock-based compensation expense. Non-GAAP Financial Highlights for the three months ended March 31, 2017 (Third Quarter Fiscal Year 2017) are as follows. Historical information for these metrics can be found in Appendix A.

  • Adjusted operating income of $18.0 million, compared to $23.4 million in the third quarter of FY 2016.
  • Adjusted EBITDA of $38.0 million, compared to $40.9 million in the third quarter of FY 2016.

During the quarter ended March 31, 2017, the Company incurred the following charges, totaling $11.4 million.

  • Charges to consolidate the corporate headquarters and exit some underutilized school facilities of $5.5 million.
  • Severance costs associated with the consolidation of personnel from the LTS and Middlebury Interactive transactions, and a modest workforce reduction enacted primarily at K12 headquarters, collectively $2.3 million.
  • Additional reserves for receivables largely associated with schools that have closed, or are scheduled to close, of $3.6 million.

Excluding the impact of the aforementioned charges, for the three months ended March 31, 2017 (see Appendix B).

  • Operating income would have been $24.2 million.
  • Net income attributable to common stockholders would have been $16.5 million.
  • Diluted net income attributable to common stockholders per share would have been $0.42.
  • Adjusted operating income would have been $28.7 million.
  • Adjusted EBITDA would have been $47.3 million.

Financial Highlights for the Nine Months Ended March 31, 2017 (Year-to-Date Fiscal 2017)

  • Revenues of $672.8 million, compared to $651.4 million for the first nine months of FY 2016.
  • Operating income of $8.4 million compared to $13.4 million for the first nine months of FY 2016.
  • Net income attributable to common stockholders of $6.9 million, compared to $10.0 million for the first nine months of FY 2016.
  • Diluted net income attributable to common stockholders per share of $0.18, compared to $0.26 for the first nine months of FY 2016.

Non-GAAP Financial Highlights for the nine months ended March 31, 2017 (Year-to-Date Fiscal 2017) are as follows.

  • Adjusted operating income of $23.0 million, compared to $27.2 million for the first nine months of FY 2016.
  • Adjusted EBITDA of $79.3 million, compared to $77.8 million for the first nine months of FY 2016.

Liquidity

As of March 31, 2017, the Company had cash and cash equivalents of $194.7 million, a decrease of $19.3 million compared to the $214.0 million reported at June 30, 2016. This decrease is largely the result of normal seasonal trends. On a year over year basis, cash and cash equivalents decreased $4.8 million.

Comments from Management

“We continue to focus on improving the student and family learning experience through targeted investments in curriculum, platforms and programs,” said Stuart Udell, Chief Executive Officer. “The charges recorded this quarter stem from our ongoing effort to review our operations, and portfolio of assets, and look for ways to improve long term profitability for all the stakeholders we serve.” Udell added.

Capital Expenditures

Capital expenditures for the nine months ended March 31, 2017 were $33.2 million, a decrease of $7.8 million from the prior year’s first nine months, and was comprised of:

  • $1.4 million for property and equipment,
  • $19.4 million for capitalized software development, and
  • $12.4 million for capitalized curriculum.

Revenue and Enrollment Data

Revenue

The Company’s revenues are generally in three categories -- Managed Public School Programs (where K12 provides substantially all management, technology and academic support services in addition to curriculum, learning systems and instructional services), Institutional (Non-managed Public School Programs – curriculum, technology and other educational services where K12 does not provide primary administrative oversight, and Institutional Software and Services – educational software and services provided to school districts, public schools and other educational institutions), and Private Pay Schools and Other (private schools for which it charges student tuition and makes direct consumer sales) – The following table sets forth the Company’s revenues for the periods indicated:

       
Three Months Ended March 31, Change 2017 / 2016 Nine Months Ended March 31, Change 2017 / 2016
2017   2016 $   % 2017   2016 $   %
(In thousands, except percentages)
       
Managed Public School Programs $ 187,418 $ 185,832 $ 1,586 0.9 % $ 554,353 $ 533,633 $ 20,720 3.9 %
 
Institutional
Non-managed Public School Programs 16,031 13,145 2,886 22.0 % 51,960 44,441 7,519 16.9 %
Institutional Software & Services   10,234     10,645   (411 )   -3.9 %   38,968     36,134   2,834     7.8 %
Total Institutional 26,265 23,790 2,475 10.4 % 90,928 80,575 10,353 12.8 %
Private Pay Schools and Other   8,850     11,718   (2,868 )   -24.5 %   27,480     37,173   (9,693 )   -26.1 %
Total $ 222,533   $ 221,340 $ 1,193     0.5 % $ 672,761   $ 651,381 $ 21,380     3.3 %
 

Enrollment Data

The following table sets forth average enrollment data for the periods indicated. These figures exclude enrollments from classroom pilot programs and consumer programs.

       

Three Months Ended
March 31,

  2017 / 2016  

Nine Months Ended
March 31,

  2017 / 2016
(in thousands) 2017   2016 Change  

Change %

2017   2016 Change   Change %
 
 
Managed Public School Programs (1,2) 103.8 104.6 (0.8 ) -0.8 % 105.5 104.2 1.3 1.2 %
Non-managed Public School Programs (1) 29.3 26.8 2.5 9.3 % 28.8 27.3 1.5 5.5 %
 
(1)  

If a school changes from a Managed Public School Program to a Non-managed Public School Program, the corresponding enrollment classification would change in the period in which the contract arrangement changed.

(2) Managed Public School Programs may include enrollments for which K12 receives no public funding or revenue.
 

Revenue per Enrollment Data

The following table sets forth revenue per average enrollment data for students in Public School Programs for the periods indicated.

       
Three Months Ended Change Nine Months Ended Change
March 31, 2017/ 2016 March 31, 2017 / 2016
2017   2016 $   % 2017   2016 $   %
Managed Public School Programs $ 1,806 $ 1,777 $ 29 1.6 % $ 5,255 $ 5,121 $ 134 2.6 %
Non-managed Public School Programs 547 490 57 11.6 % 1,804 1,628 176 10.8 %
 

Outlook

The Company is forecasting the following for the fourth quarter, fiscal 2017:

  • Revenue in the range of $215 million to $220 million.
  • Operating income in the range of $3 million to $6 million.
  • Capital expenditures of $14 million to $18 million.
  • Adjusted operating income of $7 million to $10 million.
 

Please note the following:

 
(1) Capital expenditures include the purchase of property and equipment, and capitalized software and curriculum development costs as defined on our Statement of Cash Flows.
(2) In fiscal 2016, the Company introduced new performance-based stock compensation awards as part of a long-term incentive plan which has the potential to be partially earned in the fourth quarter of this year if certain performance metrics are achieved. In that event, higher levels of stock based compensation would result in the quarter.
(3) The reconciliation between the outlook for income from operations and adjusted income from operations is as follows.
 
 
Three Months Ended June 30, 2017
(In millions)
Operating income $ 3.0   $ 6.0
Stock-based compensation expense $ 4.0 $ 4.0
Adjusted operating income $ 7.0 $ 10.0
 

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: reduction of per pupil funding amounts at the schools we serve; inability to achieve sufficient levels of new enrollments to sustain or to grow our business model; failure of the schools we serve to comply with regulations resulting in a loss of funding, an obligation to repay funds previously received or contractual remedies; declines or variations in academic performance outcomes as curriculum and testing standards evolve; harm to our reputation resulting from poor performance or misconduct by operators or us in any school in our industry and in any school in which we operate; legal and regulatory challenges from opponents of virtual public education, public charter schools or for-profit education companies; 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 school contracts or renew existing contracts, in part or in their entirety; unsuccessful integration of mergers, acquisitions and joint ventures; failure to further develop, maintain and enhance our technology, products, services and brands; inadequate recruiting, training and retention of effective teachers and employees; infringement of our intellectual property; entry of new competitors with superior competitive technologies and lower prices; disruptions to our Internet-based learning and delivery systems resulting from cyber-attacks; 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 March 31, 2017, 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.

Conference Call

The Company will discuss its third quarter fiscal year 2017 financial results during a conference call scheduled for Thursday, April 27, 2017 at 5:00 p.m. eastern time (ET).

The conference call will be webcast and available at http://public.viavid.com/index.php?id=123655. Please access the web site at least 15 minutes prior to the start of the call.

To participate in the live call, investors and analysts should dial (877) 407-4019 (domestic) or (201) 689-8337 (international) at 4:45 p.m. (ET). No passcode is required.

A replay of the call will be available starting on April 27, 2017 at 8:00 p.m. ET through May 27, 2017 at 8:00 p.m. ET, at (877) 660-6853 (domestic) or (201) 612-7415 (international) using conference ID 13658478. A webcast replay of the call will be available at http://public.viavid.com/index.php?id=123655 for 30 days.

Financial Statements

The financial statements set forth below are not the complete set of K12 Inc.’s financial statements for the three and nine months ended March 31, 2017, and are presented below without footnotes. Readers are encouraged to obtain and carefully review K12 Inc.’s Form 10-Q for the quarter ended March 31, 2017, including all financial statements contained therein and the footnotes thereto, filed with the SEC. The Form 10-Q may be retrieved from the SEC's website at www.sec.gov or from K12 Inc.’s website at www.k12.com.

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 
 

March 31,
2017

 

June 30,
2016

(In thousands except share and
per share data)

ASSETS
Current assets
Cash and cash equivalents $ 194,708 $ 213,989
Accounts receivable, net of allowance of $14,475 and $10,813 at March 31, 2017 and June 30, 2016, respectively 225,784 169,554
Inventories, net 18,789 30,631
Prepaid expenses 15,448 9,634
Other current assets   24,828     22,047  
Total current assets 479,557 445,855
Property and equipment, net 25,976 28,447
Capitalized software, net 64,231 70,055
Capitalized curriculum development costs, net 60,960 63,367
Intangible assets, net 20,948 23,102
Goodwill 87,285 87,285
Deposits and other assets   6,459     15,944  
Total assets $ 745,416   $ 734,055  
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 13,267 $ 13,210
Accounts payable 16,105 25,919
Accrued liabilities 17,822 26,877
Accrued compensation and benefits 25,118 31,042
Deferred revenue   50,797     25,964  
Total current liabilities 123,109 123,012
Capital lease obligations, net of current portion 11,955 9,922
Deferred rent, net of current portion 4,365 6,661
Deferred tax liability 22,356 18,458
Other long-term liabilities   10,950     9,780  
Total liabilities   172,735     167,833  
Redeemable noncontrolling interest   700     7,502  
Stockholders’ equity
Common stock, par value $0.0001; 100,000,000 shares authorized; 44,061,275 and 43,184,068 shares issued and 40,558,677 and 39,681,470 shares outstanding at March 31, 2017 and June 30, 2016, respectively 4 4
Additional paid-in capital 681,434 675,436
Accumulated other comprehensive income (loss) 36 (293 )
Accumulated deficit (34,493 ) (41,427 )
Treasury stock of 3,502,598 shares at cost at March 31, 2017 and June 30, 2016   (75,000 )   (75,000 )
Total stockholders’ equity   571,981     558,720  
Total liabilities, redeemable noncontrolling interest and stockholders' equity $ 745,416   $ 734,055  
 

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Three Months Ended March 31,   Nine Months Ended March 31,
2017   2016 2017   2016
(In thousands except share and per share data)
Revenues $ 222,533 $ 221,340 $ 672,761 $ 651,381
Cost and expenses
Instructional costs and services 136,431 134,755 418,072 403,374
Selling, administrative, and other operating expenses 69,828 64,888 236,826 225,598
Product development expenses   3,511     2,563     9,446     9,004  
Total costs and expenses   209,770     202,206     664,344     637,976  
Income from operations 12,763 19,134 8,417 13,405
Interest income (expense), net   641     (101 )   1,247     (596 )
Income before income taxes and noncontrolling interest 13,404 19,033 9,664 12,809
Income tax expense   (4,522 )   (5,368 )   (3,520 )   (3,924 )
Net income 8,882 13,665 6,144 8,885
Add net loss attributable to noncontrolling interest   233     608     790     1,133  
Net income attributable to common stockholders $ 9,115   $ 14,273   $ 6,934   $ 10,018  
Net income attributable to common stockholders per share
Basic $ 0.24   $ 0.38   $ 0.18   $ 0.27  
Diluted $ 0.23   $ 0.37   $ 0.18   $ 0.26  
Weighted average shares used in computing per share amounts:
Basic   38,376,984     37,692,826     38,145,671     37,562,106  
Diluted   39,328,127     38,999,871     38,956,081     38,559,204  
 

 

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Nine Months Ended March 31,
2017   2016
(In thousands)
Cash flows from operating activities
Net income $ 6,144 $ 8,885
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 56,325 50,622
Stock-based compensation expense 14,557 13,759
Excess tax benefit from stock-based compensation (250 ) (6 )
Deferred income taxes (259 ) (552 )
Provision for doubtful accounts 4,196 2,895
Provision for excess and obsolete inventory 395 543
Provision for student computer shrinkage and obsolescence 256 (422 )
Impairment loss on other assets 586
Expensed computer peripherals   3,412     2,532  
Changes in assets and liabilities:
Accounts receivable (61,000 ) (37,521 )
Inventories 11,447 12,882
Prepaid expenses (5,814 ) (5,409 )
Other current assets (2,781 ) 79
Deposits and other assets 9,811 (159 )
Accounts payable (9,813 ) (14,074 )
Accrued liabilities (7,608 ) 3,483
Accrued compensation and benefits (5,922 ) 110
Deferred revenue 24,833 25,971
Deferred rent and other liabilities   (1,140 )   (2,496 )
Net cash provided by operating activities   37,375     61,122  
Cash flows from investing activities
Purchase of property and equipment (1,391 ) (2,458 )
Capitalized software development costs (19,345 ) (26,321 )
Capitalized curriculum development costs (12,427 ) (12,206 )
Purchase of noncontrolling interest   (9,134 )    
Net cash used in investing activities   (42,297 )   (40,985 )
Cash flows from financing activities
Repayments on capital lease obligations (11,879 ) (13,428 )
Proceeds from exercise of stock options 1,518 14
Excess tax benefit from stock-based compensation 250 6
Repurchase of restricted stock for income tax withholding   (4,236 )   (3,056 )
Net cash used in financing activities   (14,347 )   (16,464 )
Effect of foreign exchange rate changes on cash and cash equivalents   (12 )   (17 )
Net change in cash and cash equivalents (19,281 ) 3,656
Cash and cash equivalents, beginning of period   213,989     195,852  
Cash and cash equivalents, end of period $ 194,708   $ 199,508  
 

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP), we have presented adjusted operating income (loss) and adjusted EBITDA. These measures are not measurements recognized under GAAP.

  • Adjusted operating income (loss) is defined as income (loss) from operations as adjusted for stock-based compensation.
  • Adjusted EBITDA is defined as net income (loss) as adjusted for interest income (expense), net; income tax benefit (expense); non-controlling interest; stock-based compensation; and depreciation and amortization. Interest expense primarily consists of interest expense for capital leases and on customer receivables.
  • Adjusted EBITDA and adjusted operating income (loss) exclude stock-based compensation, which consists of expenses for stock options, restricted stock, and restricted stock units.

This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Management believes that the presentation of these non-GAAP measures provides useful information to investors regarding our results of operations because it is an indicator of performance with the removal of stock-based compensation which assists both investors and management in analyzing and benchmarking the performance and value of our business.

We believe adjusted EBITDA is useful to an investor in evaluating our operating performance because it is both 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 adjusted EBITDA and adjusted operating income (loss):

  • 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
  • as consistent with lending covenants on our line of credit.

Other companies may define these non-GAAP measures differently and, as a result, our use of these non-GAAP measures may not be directly comparable to adjusted EBITDA, and adjusted operating income (loss) used by other companies. Although we use these non-GAAP measures as financial measures to assess the performance of our business, the use of non-GAAP measures is limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP measure.

Adjusted EBITDA and adjusted operating income (loss) should be considered in addition to, and not as a substitute for, income or loss from operations, net income or loss, and earnings or loss per share prepared in accordance with GAAP as a measure of performance. Adjusted EBITDA is not intended to be a measure of liquidity. You are cautioned not to place undue reliance on these non-GAAP measures.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is provided below.

   
Three Months Ended March 31, Nine Months Ended March 31,
2017   2016 2017   2016
(In thousands)
Net income attributable to common stockholders - K12 Inc. $ 9,115 $ 14,273 $ 6,934 $ 10,018
Interest (income) expense, net (641 ) 101 (1,247 ) 596
Income tax expense 4,522 5,368 3,520 3,924
Noncontrolling interest (233 ) (608 ) (790 ) (1,133 )
Stock-based compensation expense   5,265     4,218     14,557     13,759  
Adjusted operating income   18,028     23,352     22,974     27,164  
Depreciation and amortization   19,950     17,586     56,325     50,622  
Adjusted EBITDA $ 37,978   $ 40,938   $ 79,299   $ 77,786  
 

Appendix A

The following table is provided for reference only and is related to the new non-GAAP metrics provided in this release. The table sets forth adjusted EBITDA and adjusted operating income (loss) for the three months ended September 30, 2015; December 31, 2015; March 31, 2016; and June 30, 2016.

 
Three Months Ended
September 30, 2015   December 31, 2015   March 31, 2016   June 30, 2016
 
Net income (loss) attributable to common stockholders - K12 Inc. $ (12,793 ) $ 8,538 $ 14,273 $ (982 )
Interest (income) expense, net 305 190 101 21
Income tax (benefit) expense (8,097 ) 6,653 5,368 822
Noncontrolling interest 129 (654 ) (608 ) 649
Stock-based compensation expense   4,587     4,954     4,218     4,858  
Adjusted operating income (loss)   (15,869 )   19,681     23,352     5,368  
Depreciation and amortization   16,565     16,470     17,586     17,603  
Adjusted EBITDA $ 696   $ 36,151   $ 40,938   $ 22,971  
 

Appendix B

The following tables, for the three months ended March 31, 2017, are provided as reference only and are related to the $11.4 million charges incurred in the third quarter of FY 2017.

 
Three Months Ended March 31, 2017

Reported
Results

 

Specific Q3
Charges

 

Results
Excluding
Charges

   

Reported
Results

 

Results
Excluding
Charges

(In thousands, except percentages)     (% of Revenues)
     
Revenues $ 222,533   $   $ 222,533   100.0 % 100.0 %
Cost and expenses
Instructional costs and services 136,431 (50 ) 136,381 61.3 61.3
Selling, administrative, and other operating expenses 69,828 (11,398 ) 58,430 31.4 26.3
Product development expenses   3,511         3,511   1.6 1.6
Total costs and expenses   209,770     (11,448 )   198,322   94.3 89.1
Income from operations 12,763 11,448 24,211 5.7 10.9
Interest income (expense), net   641         641   0.3 0.3
Income before income taxes and noncontrolling interest 13,404 11,448 24,852 6.0 11.2
Income tax expense   (4,522 )   (4,039 )   (8,561 ) (2.0 ) (3.8 )
Net income 8,882 7,409 16,291 4.0 7.3
Add net loss attributable to noncontrolling interest   233         233   0.1 0.1
Net income attributable to common stockholders $ 9,115   $ 7,409   $ 16,524   4.1 % 7.4 %
 
Net income attributable to common stockholders per share
Basic $ 0.24   $ 0.19   $ 0.43  
Diluted $ 0.23   $ 0.19   $ 0.42  
Weighted average shares used in computing per share amounts:
Basic   38,376,984         38,376,984  
Diluted   39,328,127         39,328,127  
 
 

Three Months Ended
March 31,

2017
(In thousands)
Net income attributable to common stockholders - K12 Inc. $ 9,115
Interest (income), net (641 )
Income tax expense 4,522
Noncontrolling interest (233 )
Stock-based compensation expense 4,501
Specific Q3 charges:
Facility exit charges 5,521
Severance 2,266
Bad debt reserves   3,661  
Adjusted operating income   28,712  
Depreciation and amortization   18,552  
Adjusted EBITDA $ 47,264  
 

About K12 Inc.

K12 Inc. (NYSE: LRN) is driving innovation and advancing the quality of education by delivering state-of-the-art, digital learning platforms and technology to students and school districts across the globe. K12’s award-winning curriculum serves over 2,000 schools and school districts and has delivered more than four million courses over the past decade. K12 is a company consisting of thousands of online school educators providing instruction, academic services, and learning solutions to public schools and districts, traditional classrooms, blended school programs, and directly to families. The K12 program is offered through K12 partner public schools in 33 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.

Contacts

K12 Inc.
Investor and Press Contact:
Mike Kraft, 571-353-7778
VP Finance
mkraft@k12.com

Contacts

K12 Inc.
Investor and Press Contact:
Mike Kraft, 571-353-7778
VP Finance
mkraft@k12.com