K12 Inc. Reports Third Quarter Fiscal 2013 Results and Updates Fiscal Year 2013 Guidance

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K12 Inc. Reports Third Quarter Fiscal 2013 Results and Updates Fiscal Year 2013 Guidance

Q3 Revenues Increase 22.3 percent to $218.0 million on Sustained Strong Enrollment in Core Business

Diluted Earnings Per Share Grew from $0.18 to $0.31


HERNDON, Va.--(BUSINESS WIRE)-- K12 Inc. (NYS: 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 third fiscal quarter ended March 31, 2013.

Summary Financial Results for the Third Quarter of Fiscal Year 2013

Revenues grew to $218.0 million, an increase of $39.8 million, or 22.3 percent, as compared to $178.2 million for the prior year period.

EBITDA (see reconciliation below) was $35.6 million, an increase of $9.4 million, or 35.9 percent, as compared to $26.2 million for the prior year period.

Operating income was $19.4 million, an increase of $7.8 million, or 67.2 percent, as compared to $11.6 million for the prior year period.

Net income to common and Series A stockholders was $12.0 million, an increase of $5.0 million, or 71.4 percent, as compared to $7.0 million in the prior year period.

Diluted earnings per share were $0.31, an increase of $0.13, or 72.2 percent, as compared to $0.18 in the prior year period.

Comments from Management

Nate Davis, Executive Chairman of the Board, commented: "K12 delivered solid results again this quarter. I am very proud of our team for maintaining its focus on students, their academic success and producing great financial results. Many of our internal plans are coming together and resulting in improvements in operating income, cash and margins. We are well positioned to offer more students individualized education solutions as the market opportunity continues to improve through enrollment cap expansion and new states embracing virtual education."

Financial Results for the Three Months Ended March 31, 2013 (Third Quarter Fiscal Year 2013)

Revenues for the third quarter of FY 2013 were $218.0 million, an increase of $39.8 million or 22.3 percent. This increase was primarily due to organic revenue growth of $39.4 million, or 26.0 percent, in our core Managed Public Schools business. The growth in Managed Public Schools revenue was driven by a 12.2 percent growth in average student enrollments and an increase in average revenue per student. Institutional Sales revenue declined by $0.5 million, or 3.2 percent, primarily as a result of weaker sales and a change in product mix. Our International and Private Pay Schools revenue increased $0.9 million, or 9.5 percent, due to an 8.3 percent increase in total semester course enrollments.

Instructional costs and services expenses for the third quarter of FY 2013 were $127.8 million, an increase of $21.8 million, or 20.6 percent, as a result of an increase in the number of enrollments. As a percentage of revenues, instructional costs and services expenses declined slightly to 58.6 percent from 59.5 percent for the three months ended March 31, 2013 and 2012, respectively.

Selling, administrative, and other operating expenses for the third quarter of FY 2013 were $65.8 million, an increase of $12.2 million, or 22.8 percent, over the same period in the prior year. As a percentage of revenues, selling, administrative, and other operating expenses were essentially flat at 30.2 percent compared to 30.1 percent for the three months ended March 31, 2013 and 2012, respectively.

Product development expenses for the third quarter of FY 2013 were $5.1 million, a decrease of $1.9 million, or 27.1 percent, over the same period in the prior year. The decrease was primarily due to an increase in the number of development projects that qualified for cost capitalization than in the prior year period. As a percentage of revenues, product development expenses decreased to 2.3 percent from 3.9 percent for the three months ended March 31, 2013 and 2012, respectively.

EBITDA, a non-GAAP measure (see reconciliation below), for the third quarter of FY 2013 was $35.6 million, an increase of 35.9 percent. EBITDA increased as a percentage of revenues to 16.3 percent from 14.7 percent.

Operating income was $19.4 million for the third quarter of FY 2013, an increase of $7.8 million or 67.2 percent. Depreciation and amortization was $16.3 million, an increase of $1.6 million or 11.2 percent.

Income tax expense was $7.6 million for the third quarter of FY 2013, representing an effective tax rate of 40.0 percent. Income tax expense for the third quarter of FY 2012 was $4.6 million, representing an effective tax rate of 41.0 percent. The decrease in the tax rate was primarily due to the positive impact of international operations, a change in non-deductible expenses and the benefit of research and development credits between the periods.

Net income attributable to common and Series A stockholders grew by 71.4 percent to $12.0 million as compared to net income of $7.0 million in the prior year period due to the factors mentioned above.

Diluted net income attributable to common stockholders per share was $0.31 for the third quarter of FY 2013 as compared to $0.18 in the prior year period due to the factors described above. Diluted net income per share reflects a pro rata allocation of net income to Series A stockholders.

Financial Results for the Nine Months Ended March 31, 2013

Revenues for the nine months ended March 31, 2013 were $645.1 million, an increase of $107.1 million, or 19.9 percent, over the prior year period. This increase was primarily due to organic revenue growth of $104.6 million, or 23.1 percent, in our core Managed Public Schools business. The growth in Managed Public Schools revenue was driven by a 13.1 percent increase in average student enrollments and an increase in average revenue per student. Institutional Sales revenue declined by $0.6 million, or 1.1 percent, due to a decrease in perpetual license sales and overall weaker sales and a change in product mix compared to the prior year period. Our International and Private Pay Schools revenue increased $3.1 million, or 10.5 percent, due to a 4.7 percent increase in total semester course enrollments.

Instructional costs and services expenses for the nine months ended March 31, 2013 were $369.2 million, an increase of $63.2 million, or 20.7 percent, over the prior year period. This increase was primarily attributable to the growth in enrollments during the period. As a percentage of revenue, these costs increased slightly to 57.2 percent from 56.9 percent, primarily as a result of the advance hiring of teachers in early fiscal 2013.

Selling, administrative, and other operating expenses for the nine months ended March 31, 2013 were $216.8 million, an increase of $32.5 million, or 17.6 percent, over the same period in the prior year. As a percentage of revenues, these expenses decreased to 33.6 percent from 34.2 percent for the nine months ended March 31, 2013 and 2012, respectively.

Product development expenses, for the nine months ended March 31, 2013 were $14.8 million, a decrease of $6.0 million or 28.8 percent over the same period in the prior year. The decrease was primarily due to an increase in the number of development projects that qualified for cost capitalization than in the prior year period. As a percentage of revenues, product development expenses decreased to 2.3 percent as compared to 3.9 percent for the same period in the prior year.

EBITDA, a non-GAAP measure (see reconciliation below), for the nine months ended March 31, 2013 was $92.5 million, an increase of 33.5 percent. EBITDA increased as a percentage of revenues to 14.3 percent from 12.9 percent in the prior year.

Operating income was $44.3 million for the nine months ended March 31, 2013, an increase of $17.4 million or 64.7 percent. Depreciation and amortization was $48.2 million, an increase of $5.9 million or 13.9 percent.

Income tax expense was $18.2 million for the nine months ended March 31, 2013, representing an effective tax rate of 41.9 percent. Income tax expense for the nine months ended March 31, 2012 was $11.3 million, representing an effective tax rate of 43.1 percent. The decrease in the tax rate between periods was primarily due to the impact of foreign operations in the prior year period and a change in non-deductible expenses and the benefit of research and development credits between the periods.

Net income attributable to common and Series A stockholders grew by 64.3 percent to $25.8 million as compared to net income of $15.7 million in the prior year period due to the factors mentioned above.

Diluted net income attributable to common stockholders per share was $0.66 for the nine months ended March 31, 2013 as compared to $0.41 in the prior year period due to the factors described above. Diluted net income per share reflects a pro rata allocation of net income to Series A stockholders.

Cash, Capital Expenditures and Capital Leases

As of March 31, 2013, the Company had cash and cash equivalents of $157.0 million, reflecting an increase of $12.3 million from June 30, 2012 and an increase of $33.3 million from March 31, 2012.

Capital expenditures for the nine months ended March 31, 2013 were $36.7 million and was comprised of:

  • $5.2 million for property and equipment,
  • $17.9 million for capitalized software development, and
  • $13.6 million for capitalized curriculum.

Capital leases financed additional purchases of $24.7 million during the nine months ended March 31, 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:

        
Three Months EndedChangeNine Months EndedChange
March 31, 2013 / 2012March 31, 2013 / 2012
($ in thousands)20132012$%20132012$%
Managed Public Schools$191,305$151,885$39,42026.0$556,607$451,980$104,62723.1
Institutional Sales15,88816,412(524)(3.2)55,94956,555(606)(1.1)
International and Private Pay Schools 10,816 9,878 938 9.5  32,577 29,470 3,107 10.5 
Total$218,009$178,175$39,834 22.4%$645,133$538,005$107,128 19.9%
 

Enrollment Data

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.

        
Three Months EndedChangeNine Months EndedChange
March 31, 2013/2012March 31, 2013/2012
20132012$%20132012$%
Managed Public Schools
Average Student Enrollments*118,717105,82812,88912.2%119,354105,52213,83213.1%
 
International and Private Pay Schools
Total Student Enrollments5,0605,652(592)(10.5%)22,45922,0384211.9%
Total Semester Course Enrollments20,44518,8791,5668.3%68,61465,5303,0844.7%
 

* The Managed Public Schools average student enrollments include enrollments for which we receive no public funding.

Fiscal Year 2013 Outlook

The Company is updating its previously issued forecast for the current fiscal year:

  • Revenue of $840 million to $850 million
  • EBITDA of $108 million to $112 million (see GAAP reconciliation below)
  • Operating income of $43 million to $47 million
  • Depreciation and amortization expense of $65 million
  • Capital expenditures including capitalized curriculum, capitalized software development, and property and equipment of $50 million to $53 million
  • Capitalized leases for student computers of $25 million
  • Income tax rate of 41% to 42%

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 May 3, 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.

Conference Call

The Company will discuss its third quarter 2013 financial results during a conference call scheduled for Friday, May 3, 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) 277-1184 (domestic) or (617) 597-5360 at 8:20 a.m. (ET). The participant pass code is 35864605. A replay of the call will be available starting on May 3, 2013, through May 10, 2013, at (888) 286-8010 (domestic) or (617) 801-6888 (international) pass code 89048298. It will also be archived at www.k12.com in the Investor Relations section for 60 days.

Financial Statements

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, 2012, 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.
Unaudited Condensed Consolidated Balance Sheets
 
March 31,June 30,
20132012
(In thousands, except share and per share data)
ASSETS
Current assets
Cash and cash equivalents$156,968$144,652
Restricted cash and cash equivalents-1,501
Accounts receivable, net of allowance of $3,000 and $1,624 at March 31, 2013 and June 30, 2012, respectively234,550160,922
Inventories, net29,34437,853
Current portion of deferred tax asset9,79916,140
Prepaid expenses21,08611,173
Other current assets 13,606  14,598 
Total current assets465,353386,839
Property and equipment, net61,39055,903
Capitalized software, net42,28834,709
Capitalized curriculum development costs, net63,37460,345
Intangible assets, net33,28836,736
Goodwill61,40061,619
Investment in Web International10,00010,000
Deposits and other assets 2,825  2,684 
Total assets$739,918 $648,835 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current liabilities
Accounts payable$19,976$23,951
Accrued liabilities26,03013,802
Accrued compensation and benefits19,68317,355
Deferred revenue49,51825,410
Current portion of capital lease obligations20,59515,950
Current portion of note payable 745  1,145 
Total current liabilities136,54797,613
Deferred rent, net of current portion8,5786,974
Capital lease obligations, net of current portion20,47715,124
Note payable, net of current portion-777
Deferred tax liability37,18531,591
Other long term liabilities 1,970  1,908 
Total liabilities 204,757  153,987 
Commitments and contingencies--
Redeemable noncontrolling interest 17,200  17,200 
Equity:
K12 Inc. stockholders' equity
Common stock, par value $0.0001; 100,000,000 shares authorized; 37,164,431 and 36,436,933 shares issued and outstanding at March 31, 2013 and June 30, 2012, respectively44
Additional paid-in capital534,292519,439

Series A Special Stock, par value $0.0001; 2,750,000 shares authorized, issued and outstanding at March 31, 2013 and June 30, 2012

63,11263,112
Accumulated other comprehensive (loss) income(326)100
Accumulated deficit (83,319) (109,161)
Total K12 Inc. stockholders' equity513,763473,494
Noncontrolling interest 4,198  4,154 
Total equity 517,961  477,648 
Total liabilities, redeemable noncontrolling interest and equity$739,918 $648,835 
 

    
K12 Inc.
Unaudited Condensed Consolidated Statements of Operations
 
Three Months EndedNine Months Ended
March 31,March 31,
2013201220132012
(In thousands, except share and per share data)
 
Revenues$218,009 $178,175 $645,13
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