Strategic Education, Inc. — Q2 2021 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2021. Strategic Education provides campus-based and online post-secondary education and workforce learning programs. Its reportable segments are U.S. Higher Education (USHE), Alternative Learning, and Australia/New Zealand (ANZ). Results are not directly comparable with 2020 because ANZ was acquired on November 3, 2020; the company also reorganized its segment reporting in Q1 2021 and recast prior-period segment data.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $299.2 million | $255.8 million | $589.5 million | $521.1 million |
| Operating income | $26.7 million | $46.4 million | $38.7 million | $90.4 million |
| Operating margin | 8.9% | 18.1% | 6.6% | 17.3% |
| Net income | $20.0 million | $34.2 million | $29.6 million | $69.4 million |
| Diluted EPS | $0.83 | $1.55 | $1.22 | $3.15 |
| Operating cash flow | Not separately presented by quarter | $125.8 million | $111.9 million |
- Segment performance: Q2 USHE revenue fell 14.2% to $212.2 million and operating income fell 45.4% to $32.1 million. USHE enrollment declined 10% to 83,923. Alternative Learning revenue rose 52.2% to $12.9 million, with operating income of $5.2 million. ANZ contributed $74.1 million of revenue and $15.6 million of operating income; the 2020 comparison excludes ANZ.
- Margins and adjustments: Q2 GAAP operating margin declined to 8.9% from 18.1%; first-half margin fell to 6.6% from 17.3%. Management reported non-GAAP adjusted operating income of $53.7 million for Q2 and $106.7 million for the first half, versus $63.0 million and $126.1 million, respectively, in 2020. These non-GAAP measures exclude specified purchase-accounting, integration, restructuring, investment, tax, and foreign-exchange items.
- Cash, liquidity, and debt: At June 30, cash and cash equivalents were $261.6 million and marketable securities were $32.1 million, totaling $293.7 million. Long-term debt was $141.7 million, drawn under a $350 million revolving facility maturing in 2025. The company reported compliance with facility covenants and expects cash, operating cash flow, and available borrowing capacity to meet needs for at least 12 months.
- Cash uses: First-half capital expenditures were $23.1 million; dividends paid were $29.5 million. The company repurchased $2.9 million of shares and had $247.1 million of authorization remaining at quarter-end.
Changes, outlook, risks, and unusual items
- Revenue growth primarily reflects the inclusion of ANZ, while USHE revenue and enrollment weakened. Management attributed USHE pressure to lower demand and higher scholarships and discounts during the pandemic.
- Management stated that 2021 results could be at or below the low end of its previously provided full-year outlook, citing USHE third-quarter enrollment indicators and continued ANZ border closures. The filing text does not provide a clear numeric value for that prior outlook.
- First-half restructuring costs were $23.1 million, including lease-asset impairments and severance; the company also recorded fixed-asset impairment charges. Q2 restructuring costs were $4.8 million. The company is downsizing or exiting underused locations and marketing two owned U.S. campuses for sale; no impairment was recorded on those held-for-sale assets.
- ANZ acquisition consideration was approximately $658.4 million, funded with cash and revolving-credit borrowings. Acquisition-related purchase accounting and intangible amortization affect reported results.
- Regulatory exposure includes the amended 90/10 rule, applicable to institutional fiscal years beginning on or after January 1, 2023, and possible further changes. For 2020, Strayer derived approximately 82.95% and Capella 71.98% of cash-basis revenue from Title IV programs.
- The Department of Education is conducting a fact-finding process concerning more than 1,000 borrower-defense applications involving Capella; the company said it had since received approximately 500 applications and is cooperating. A related lawsuit, Wright v. Capella, is ongoing. The company said litigation outcomes could affect results in a particular period, though it did not expect the matters to materially affect its overall financial position, results, or cash flows.
- Other risks include continued COVID-19 effects, student enrollment and collections, foreign-currency exposure, and changes to higher-education regulation. ANZ-generated currencies represented 21.3% of first-half revenue; the company does not hedge foreign-currency exposures.
Important facts for investors to verify
- Whether USHE enrollment, revenue per student, and scholarship levels stabilize, and whether management’s full-year outlook is achieved.
- ANZ enrollment, operating performance, integration progress, foreign-exchange effects, and final acquisition purchase-price adjustments.
- Developments in the 90/10 rule, Title IV participation, the Strayer recertification application, and the Department’s Strayer program review.
- Progress and potential financial exposure from Capella borrower-defense applications and the Wright litigation.
- Whether restructuring delivers sustainable savings and whether campus exits or asset sales result in additional charges or proceeds.
- The quality of operating cash flow, including the effects of working-capital timing and rising tuition receivables and contract liabilities.