K12 Inc. Reports First Quarter 2010 Results

November 6, 2009 7:30 AM EST

K12's First Quarter Revenues Reach $106 Million, Operating Income Increases 38 Percent

HERNDON, Va.--(BUSINESS WIRE)-- K12 Inc. (NYSE: LRN), a leading provider of proprietary, technology-based curriculum and education services created for online delivery to students in kindergarten through 12th grade, today announced its results for the first quarter of fiscal year 2010.

Revenues for the first quarter grew to $106.3 million, an increase of 20.0 percent over the first quarter in the prior year, primarily due to strong enrollment growth. EBITDA increased 38.8 percent to $18.9 million for the first quarter of fiscal year 2010 (FY 2010) over the same quarter in the prior year. Net income - K12 Inc. for the quarter was $7.1 million as compared to Net income - K12 Inc. of $5.9 million in the same period in the prior year. Operating income improved to $12.7 million, an increase of 38.1 percent compared with the first quarter of fiscal year 2009 (FY 2009).

Ron Packard, Chief Executive Officer of K12 Inc., stated, "we are pleased with the level of demand we are seeing for our offering and continued margin expansion, particularly in the current economic environment."

For the three months ended September 30, 2009 (First Quarter Fiscal Year 2010)

    --  Revenues for the first quarter were $106.3 million, an increase of $17.7
        million or 20.0 percent, as compared to revenues of $88.6 million for
        the first quarter of FY 2009. Average enrollments for the first quarter
        were 69,542, an increase of 23.7 percent over the first quarter of FY
        2009.
    --  Operating income for the first quarter was $12.7 million, an increase of
        $3.5 million or 38.1 percent, as compared to operating income of $9.2
        million for the first quarter of FY 2009. Operating margins increased to
        12.0 percent of revenue, representing a gross increase of 1.6 percentage
        points, as compared to 10.4 percent for the first quarter of FY 2009.
    --  Income tax expense for the first quarter was $5.4 million, representing
        an effective tax rate of 43.6 percent. Income tax expense for the first
        quarter of FY 2009 was $3.8 million.
    --  Net income - K12 Inc. for the first quarter was $7.1 million as compared
        to Net income - K12 Inc. of $5.9 million for the first quarter of FY
        2009.
    --  Diluted net income attributable to common stockholders per share for the
        first quarter was $0.24 as compared to diluted net income attributable
        to common stockholders per share of $0.20 for the first quarter of FY
        2009.
    --  EBITDA for the first quarter was $18.9 million, an increase of $5.3
        million or 38.8 percent, as compared to EBITDA of $13.6 million for the
        first quarter of FY 2009. EBITDA as a percentage of revenue improved to
        17.8 percent, representing a gross increase of 0.4 percentage points, as
        compared to 15.4 percent for the first quarter of FY 2009.

Cash and Capital Expenditures

    --  As of September 30, 2009, the Company had cash and cash equivalents of
        $38.3 million.
    --  Capital expenditures for the first quarter were $6.2 million, including
        $3.4 million for investments in capitalized curriculum and $2.9 million
        in property and equipment. In addition, the Company financed purchases
        of $7.8 million of computers and software, primarily for use by students
        and $1.2 million of corporate technology purchases, through capital
        leases.

FY 2010 Outlook

The Company is forecasting for full fiscal year 2010 revenues of approximately $380 million to $390 million, operating income of approximately $27 million to $31 million and EBITDA of approximately $56 million to $60 million.

In addition, the Company is forecasting for fiscal year 2010:

    --  Net income - K12 Inc. of approximately $14.6 million to $17.1 million
    --  Depreciation and amortization of approximately $28 million to $30
        million
    --  Non-cash stock compensation expense of approximately $6.0 million to
        $6.5 million
    --  Interest expense, net of interest income of approximately $1.0 million
        to $1.2 million
    --  Estimated tax rate of approximately 43 percent to 44 percent
    --  Capital expenditures of approximately $42 million, including purchases
        of student computers

Forward Statements

This press release contains forward-looking statements within the meaning of federal securities regulations. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will," "continue" and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: the reduction of per pupil funding amounts at the schools we serve; reputation harm resulting from poor performance or misconduct of other virtual school operators; challenges from virtual public school opponents; failure of the schools we serve to comply with regulations resulting in a loss of funding; 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 renew existing contracts with schools; increased competition; 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 November 6, 2009, 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 first quarter 2010 financial results and its outlook for fiscal year 2010 during a conference call scheduled for Friday, November 6, 2009 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 should dial 866-783-2138 (domestic) or 857-350-1597 (international) at 8:20 a.m. (ET). The participant passcode is 74239925.

A replay of the call will be available starting on November 6, 2009, through November 13, 2009, at 888-286-8010 (domestic) or 617-801-6888 (international) passcode 56235630. It will also be archived at www.k12.com in the investor relations section for 60 days.

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

                                                   September 30,    June 30,

                                                   2009             2009

ASSETS

Current assets

Cash and cash equivalents                          $ 38,298         $ 49,461

Restricted cash and cash equivalents                 2,500            2,500

Accounts receivable, net of allowance of $1,618
and $1,555 at September 30, 2009 and June 30,        106,766          52,532
2009, respectively

Inventories, net                                     20,052           32,052

Current portion of deferred tax asset                4,318            3,888

Prepaid expenses                                     4,369            7,810

Other current assets                                 7,834            3,454

Total current assets                                 184,137          151,697

Property and equipment, net                          44,827           37,860

Capitalized curriculum development costs, net        33,979           31,649

Deferred tax asset, net of current portion           9,572            14,619

Goodwill                                             1,825            1,825

Deposits and other assets                            2,169            2,526

Total assets                                       $ 276,509        $ 240,176

LIABILITIES AND EQUITY

Current liabilities

Accounts payable                                   $ 10,463         $ 10,366

Accrued liabilities                                  10,011           7,329

Accrued compensation and benefits                    4,883            8,291

Deferred revenue                                     24,060           3,389

Current portion of capital lease obligations         12,650           10,240

Current portion of notes payable                     959              1,034

Total current liabilities                            63,026           40,649

Deferred rent, net of current portion                1,661            1,699

Capital lease obligations, net of current portion    12,983           9,222

Notes payable, net of current portion                1,600            1,906

Total liabilities                                    79,270           53,476

Commitments and contingencies

Equity:

K12 Inc. stockholders' equity

Common stock, par value $0.0001; 100,000,000
shares authorized; 29,466,399 and 29,290,486         3                3
shares issued and outstanding at September 30,
2009 and June 30, 2009, respectively

Additional paid-in capital                           346, 901         343,304

Retained Earnings (Deficit)                          (153,938    )    (161,021 )

Total K12 Inc. stockholders' equity                  192,966          182,286

Noncontrolling Interest                              4,273            4,414

Total equity                                         197,239          186,700

Total liabilities and equity                       $ 276,509        $ 240,176

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

                                              Three Months Ended September 30,

                                              2009            2008

Revenues                                      $ 106,325       $ 88,625

Cost and expenses

Instructional costs and services                58,093          54,421

Selling, administrative, and other operating    33,327          22,835
expenses

Product development expenses                    2,238           2,195

Total costs and expenses                        93,658          79,451

Income from operations                          12,667          9,174

Interest (expense) income, net                  (357       )    107

Income before income tax expense and            12,310          9,281
noncontrolling interest

Income tax expense                              (5,368     )    (3,786         )

Net income                                      6,942           5,495

Add net loss - noncontrolling interest          141             419

Net income - K12 Inc.                         $ 7,083         $ 5,914

Net income attributable to common
stockholders per share:

Basic                                         $ 0.24          $ 0.21

Diluted                                       $ 0.24          $ 0.20

Weighted average shares used in computing
per share amounts:

Basic                                           29,378,074      28,487,440

Diluted                                         29,948,550      29,499,102

K12 INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

                                                      Three Months Ended

                                                      September 30,

                                                      2009         2008

Cash flows from operating activities

Net income                                            $ 6,942      $ 5,495

Adjustments to reconcile net income to net cash used
in operating activities:

Depreciation and amortization expense                   6,233        4,446

Stock based compensation expense                        1,882        529

Excess tax benefit from stock-based compensation        (332    )    (2,194  )

Deferred income taxes                                   4,949        3,674

Provision for doubtful accounts                         63           70

Provision for inventory obsolescence                    255          40

Reduction of student computer shrinkage and             (260    )    (6      )
obsolescence

Changes in assets and liabilities:

Accounts receivable                                     (54,297 )    (58,409 )

Inventories                                             11,745       6,632

Prepaid expenses                                        3,441        828

Other current assets                                    (4,379  )    (4,021  )

Deposits and other assets                               340          28

Accounts payable                                        96           (367    )

Accrued liabilities                                     2,682        3,271

Accrued compensation and benefits                       (3,409  )    (4,396  )

Deferred revenue                                        20,671       21,825

Deferred rent                                           (37     )    5

Net cash used in operating activities                   (3,415  )    (22,550 )

Cash flows from investing activities

Purchase of property and equipment                      (2,853  )    (2,397  )

Capitalized curriculum development costs                (3,391  )    (3,618  )

Net cash used in investing activities                   (6,244  )    (6,015  )

Cash flows from financing activities

Repayments on capital lease obligations                 (2,841  )    (1,466  )

Repayments on notes payable                             (378    )    (170    )

Proceeds from exercise of stock options                 1,383        5,348

Excess tax benefit from stock-based compensation        332          2,194

Net cash (used in) provided by financing activities     (1,504  )    5,906

Net change in cash and cash equivalents                 (11,163 )    (22,659 )

Cash and cash equivalents, beginning of period          49,461       71,682

Cash and cash equivalents, end of period              $ 38,298     $ 49,023

Non-GAAP Financial Measures

EBITDA

EBITDA consists of net income minus interest income, minus income tax benefit, minus noncontrolling interest benefit, plus interest expense, plus income tax expense, plus noncontrolling interest loss and plus depreciation and amortization. Interest income consists primarily of interest earned on short-term investments or cash deposits. Interest expense consists primarily of interest expense for capital leases, long-term and short-term borrowings. We use EBITDA 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 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 tax payments.

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 a measurement of operating performance, because it assists us in comparing our performance on a consistent basis, as it removes depreciation, amortization, interest and taxes. We also use EBITDA 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.

The following table provides a reconciliation of net income to EBITDA:

(in thousands)

                                     Three Months Ended

                                     September 30,

                                       2009        2008

Net Income - K12 Inc.                $ 7,083     $ 5,914

Interest expense (income), net         357         (107   )

Income tax expense, net                5,368       3,786

Noncontrolling interest, net of tax    (141   )    (419   )

Depreciation and amortization          6,233       4,446

EBITDA                               $ 18,900    $ 13,620

The following table provides a reconciliation of net income to

EBITDA for the full year outlook:

(in millions)

                                     Full Year FY 2010

                                     Outlook

                                     Low     High

Net Income - K12 Inc.                $ 14.6  $ 17.1

Interest expense (income), net         1.2     1.0

Income tax expense, net                12.2    13.1

Noncontrolling interest, net of tax    0.0     (0.1 )

Depreciation and amortization          29.0    29.0

EBITDA                               $ 56.0  $ 60.0

About K12

K12 Inc. (NYSE: LRN), a technology-based education company, is the nation's largest provider of proprietary curriculum and online education programs to students in kindergarten through high school. K12 provides high quality, customized education solutions to school districts, charter schools, and directly to families ranging from individual courses to classroom and hybrid programs to full-time virtual school programs. K12 Inc. also operates the K12 International Academy, an accredited, diploma-granting online private school serving students in over 35 countries.

Since K12 was founded in 1999 it has delivered over 1.5 million courses to students worldwide. Students recently graduating from K12 virtual schools have been accepted to over 150 post-secondary schools, including many top-ranked universities and colleges.

K12 Inc. is accredited through the Commission on International Trans-Regional Accreditation (CITA), which recently joined AdvancED, the world's largest education community. K12 is the largest national K-12 online school provider to be recognized by CITA.

K12's mission is to provide any child the curriculum and tools to maximize success in life, regardless of geographic, financial, or demographic circumstances. More information can be found at www.K12.com.

K12(R) is a registered trademark and the K12 logo, xPotential and Unleash the xPotential are trademarks of K12 Inc.

    Source: K12 Inc.

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