K12 Inc. Reports Second Quarter Fiscal 2013 Results, Updates Fiscal Year 2013 Guidance and Provides

K12 Inc. Reports Second Quarter Fiscal 2013 Results, Updates Fiscal Year 2013 Guidance and Provides Third Quarter Fiscal 2013 Outlook

Q2 Revenues Increase 23.7 percent to $206.0 million on Continued Strong Enrollment in Core Business

Diluted Earnings Per Share Grew from $0.11 to $0.24


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 second fiscal quarter ended December 31, 2012.

Summary Financial Results for the Second Quarter of Fiscal Year 2013

Revenues grew to $206.0 million, an increase of $39.5 million, or 23.7 percent, as compared to $166.5 million for the prior year period.

EBITDA (see reconciliation below) was $32.5 million, an increase of $10.7 million, or 49.1 percent, as compared to $21.8 million for the prior year period.

Operating income was $16.3 million, an increase of $9.2 million, or 129.6 percent as compared to $7.1 million for the prior year period.

Net income to common and Series A stockholders was $9.5 million, an increase of $5.3 million, or 126.2 percent, as compared to $4.2 million in the prior year period.

Diluted earnings per share were $0.24, an increase of $0.13, or 118.2 percent, as compared to $0.11 in the prior year period.

Comments from Management

Nate Davis, Executive Chairman of the Board, commented: "From our new pre-K learning curriculum to the high school and school districts curriculum, K12 delivers a full range of individualized learning techniques to students and educators. Revenue for the quarter grew close to 24 percent year over year while operating margins grew to 7.9 percent from 4.3 percent, which in turn is driving increased returns on invested capital. We will continue to execute with excellence both our academic mission and operational strategy to reward our stockholders with a profitable growth business."

Financial Results for the Three Months ended December 31, 2012 (Second Quarter Fiscal Year 2013)

Revenues for the second quarter of FY 2013 were $206.0 million, an increase of $39.5 million or 23.7 percent. This increase was primarily due to organic revenue growth of $36.9 million, or 26.2 percent, in our core Managed Public Schools business and the comparative impact of state funding reductions in the prior year period. The growth in Managed Public Schools revenue was driven by a 13.6 percent growth in average student enrollments and an increase in average revenue per student. Our International and Private Pay Schools revenue increased $1.2 million, or 13.1 percent, due to a 10.9 percent increase in total student enrollments. Revenue in our Institutional Sales grew by $1.4 million, or 8.6 percent, from continued expansion into additional school districts.

Instructional costs and services expenses for the second quarter of FY 2013 were $122.8 million, an increase of $23.9 million, or 24.2 percent, as a result of an increase in the number of enrollments.

Selling, administrative, and other operating expenses for the second quarter of FY 2013 were $61.4 million, an increase of $8.5 million, or 16.1 percent, over the same period in the prior year. As a percentage of revenues, selling, administrative, and other operating expenses decreased to 29.8 percent from 31.8 percent for the three months ended December 31, 2012 and 2011, respectively.

Product development expenses for the second quarter of FY 2013 were $5.6 million, a decrease of $2.0 million, or 26.3 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, and a decrease in the amount of systems development expense in connection with the implementation phase of our Enterprise Resource Planning (ERP) system. As a percentage of revenues, product development expenses decreased to 2.7 percent from 4.5 percent for the three months ended December 31, 2012 and 2011, respectively.

EBITDA, a non-GAAP measure (see reconciliation below), for the second quarter of FY 2013 was $32.5 million, an increase of 49.1 percent and increased as a percentage of revenue to 15.8 percent from 13.1 percent.

Operating income was $16.3 million for the second quarter of FY 2013, an increase of $9.2 million or 129.6 percent. Depreciation and amortization were $16.2 million, an increase of $1.6 million or 10.6 percent.

Income tax expense was $6.7 million for the second quarter of FY 2013, representing an effective tax rate of 41.8 percent. Income tax expense for the second quarter of FY 2012 was $3.0 million, representing an effective tax rate of 43.4 percent. The decrease in the tax rate was primarily due to the positive impact of international operations and a change in non-deductible expenses between the periods.

Net income attributable to common and Series A stockholders grew by 126.2 percent to $9.5 million as compared to net income of $4.2 million in the prior year period due to the factors mentioned above.

Diluted net income attributable to common stockholders per share was $0.24 for the second quarter of FY 2013 as compared to $0.11 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 Special Stock.

Financial Results for the Six Months ended December 31, 2012 (First Half of Fiscal Year 2013)

Revenues for the six months ended December 31, 2012 were $427.1 million, an increase of $67.3 million or 18.7 percent over the prior year period. This increase was primarily due to organic revenue growth of $65.2 million, or 21.7 percent, in our core Managed Public Schools business, and the comparative impact of state funding reductions in the prior year period. The growth in Managed Public Schools revenue was driven by a 13.8 percent increase in average student enrollments and an increase in average revenue per student. Our International and Private Pay Schools revenue increased $2.2 million, or 11.1 percent, due to a 6.2 percent increase in total student enrollments. Revenue growth year over year in our Institutional Sales was partially offset by a decrease in perpetual license sales compared to the prior year period.

Instructional costs and services expenses for the six months ended December 31, 2012 were $241.4 million, an increase of $41.4 million or 20.7 percent over the prior year period. This increase was primarily attributable to the growth in revenue during the period and the advance hiring of teachers in early fiscal 2013. As a percentage of revenue, these costs increased to 56.5 percent from 55.6 percent.

Selling, administrative, and other operating expenses for the six months ended December 31, 2012 were $151.0 million, an increase of $20.3 million, or 15.5 percent, over the same period in the prior year. As a percentage of revenues, these expenses decreased to 35.4 percent from 36.3 percent for the six months ended December 31, 2012 and 2011, respectively.

Product development expenses, for the six months ended December 31, 2012 were $9.7 million, a decrease of $4.1 million or 29.7 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, and a decrease in the amount of systems development expense in connection with the implementation phase of our ERP system. As a percentage of revenues, product development expenses decreased to 2.3 percent as compared to 3.8 percent for the same period in the prior year.

EBITDA, a non-GAAP measure (see reconciliation below), for the six months ended December 31, 2012 was $56.8 million, an increase of 32.1 percent, and increased as a percentage of revenue to 13.3 percent from 12.0 percent in the prior year.

Operating income was $24.9 million for the six months ended December 31, 2012, an increase of $9.6 million or 62.3 percent. Depreciation and amortization were $31.9 million, an increase of $4.2 million or 15.3 percent.

Income tax expense was $10.6 million for the six months ended December 31, 2012, representing an effective tax rate of 43.3 percent. Income tax expense for the second quarter of FY 2012 was $6.7 million, representing an effective tax rate of 44.8 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 between the periods.

Net income attributable to common and Series A stockholders grew by 58.0 percent to $13.9 million as compared to net income of $8.8 million in the prior year period due to the factors mentioned above.

Diluted net income attributable to common stockholders per share was $0.36 for the six months ended December 31, 2012 as compared to $0.23 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 Special Stock.

Cash, Capital Expenditures and Capital Leases

As of December 31, 2012, the Company had cash and cash equivalents of $143.2 million, reflecting a decrease of $1.5 million from June 30, 2012 and an increase of $9.3 million from December 31, 2011.

Capital expenditures for the six months ended December 31, 2012 were $25.7 million and was comprised of:

  • $4.5 million for property and equipment,

  • $11.6 million for capitalized software development, and

  • $9.6 million for capitalized curriculum.

Capital leases financed additional purchases of $19.2 million during the six months ended December 31, 2012, 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 sources of revenue -- 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 Ended

Change

Six Months Ended

Change

December 31,

2012 / 2011

December 31,

2012 / 2011

($ in thousands)

2012

2011

$

%

2012

2011

$

%

Managed Public Schools

$

177,541

$

140,645

$

36,896

26.2

$

365,302

$

300,095

$

65,207

21.7

Institutional Business

18,089

16,662

1,427

8.6

40,061

40,143

(82

)

(0.2

)

International and Private Pay Business

10,398

9,193

1,205

13.1

21,761

19,592

2,169

11.1

Total

$

206,028

$

166,500

$

39,528

23.7

%

$

427,124

$

359,830

$

67,294

18.7

%

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 Ended

Six Months Ended

December 31,

December 31,

2012

2011

Change

%

2012

2011

Change

%

Managed Public Schools

Average Student Enrollments

119,132

104,836

14,296

13.6

%

119,831

105,293

14,538

13.8

%

International and Private Pay Schools

Total Student Enrollments

4,403

3,971

432

10.9

%

17,399

16,386

1,013

6.2

%

Total Semester Course Enrollments

12,138

11,959

179

1.5

%

48,170

46,651

1,519

3.3

%

Fiscal Year 2013 and Q3 Fiscal Year 2013 Outlook

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

  • Revenue of $840 million to $860 million

  • EBITDA of $107 million to $115 million (see GAAP reconciliation below)

  • Operating income of $45 million to $50 million

  • Depreciation and amortization expense of $64 million to $67 million

  • Capital expenditures including capitalized curriculum, capitalized software development, and property and equipment of $50 million to $55 million

  • Capitalized leases for student computers of $20 million to $25 million

  • Income tax rate of 41% to 42%

The Company is forecasting the following for Q3 FY 2013:

  • Revenue of $210 million to $220 million

  • EBITDA of $28 million to $32 million

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 February 5, 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 second quarter 2013 financial results during a conference call scheduled for Tuesday, February 5, 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) 713-8395 (domestic) or (617) 597-5309 at 8:20 a.m. (ET). The participant pass code is 48785487.

A replay of the call will be available starting on February 5, 2013, through February 12, 2013, at (888) 286-8010 (domestic) or (617) 801-6888 (international) pass code 63276797. 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.

December 31,

June 30,

2012

2012

(In thousands, except share and per share data)

ASSETS

Current assets

Cash and cash equivalents

$

143,192

$

144,652

Restricted cash and cash equivalents

-

1,501

Accounts receivable, net of allowance of $2,970 and $1,624 at December 31, 2012 and June 30, 2012, respectively

223,312

160,922

Inventories, net

29,470

37,853

Current portion of deferred tax asset

12,363

16,140

Prepaid expenses

19,833

11,173

Other current assets

16,000

14,598

Total current assets

444,170

386,839

Property and equipment, net

63,134

55,903

Capitalized software, net

39,639

34,709

Capitalized curriculum development costs, net

62,926

60,345

Intangible assets, net

34,437

36,736

Goodwill

61,501

61,619

Investment in Web International

10,000

10,000

Deposits and other assets

2,902

2,684

Total assets

$

718,709

$

648,835

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

Current liabilities

Accounts payable

$

20,121

$

23,951

Accrued liabilities

22,218

13,802

Accrued compensation and benefits

13,296

17,355

Deferred revenue

59,249

25,410

Current portion of capital lease obligations

19,799

15,950

Current portion of note payable

1,138

1,145

Total current liabilities

135,821

97,613

Deferred rent, net of current portion

8,679

6,974

Capital lease obligations, net of current portion

20,619

15,124

Note payable, net of current portion

-

777

Deferred tax liability

34,764

31,591

Other long term liabilities

2,146

1,908

Total liabilities

202,029

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; 36,872,800 and 36,436,933 shares issued and outstanding at December 31, 2012 and June 30, 2012, respectively

4

4

Additional paid-in capital

527,574

519,439

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

63,112

63,112

Accumulated other comprehensive (loss) income

(50

)

100

Accumulated deficit

(95,293

)

(109,161

)

Total K12 Inc. stockholders' equity

495,347

473,494

Noncontrolling interest

4,133

4,154

Total equity

499,480

477,648

Total liabilities, redeemable noncontrolling interest and equity

$

718,709

$

648,835

Three Months Ended

Six Months Ended

December 31,

December 31,

2012

2011

2012

2011

(In thousands, except share and per share data)

Revenues

$

206,028

$

166,500

$

427,124

$

359,830

Cost and expenses

Instructional costs and services

122,799

98,909

241,446