Strategic Education, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 2, 2019. The company operates Strayer University, Capella University, and Non-Degree Programs.
Business context and comparability
Strategic Education completed its merger with Capella Education Company on August 1, 2018. Q1 2019 includes Capella’s results, while Q1 2018 does not; therefore, consolidated year-over-year changes are not directly comparable. Management reported that Capella generated $112.0 million of revenue and $18.4 million of income from continuing operations in Q1 2018, outside Strategic Education’s reported consolidated results.
- Strayer enrollment increased 11.5% to 51,479; new enrollment rose 13.2% and continuing enrollment 11.1%.
- Capella enrollment increased 2.9% to 39,271; new enrollment rose 14.7%.
Financial results
| Metric | Q1 2018 | Q1 2019 |
|---|---|---|
| Revenue | $116.5 million | $246.5 million |
| Income from operations | $11.3 million | $25.7 million |
| Net income | $9.5 million | $11.5 million |
| Diluted EPS | $0.84 | $0.52 |
| Operating cash flow | $17.0 million | $58.7 million |
| Capital expenditures | $4.2 million | $8.8 million |
- Reported operating margin was approximately 10.4%, versus 9.7%; net margin was approximately 4.7%, versus 8.1%. These comparisons are affected by the merger and the 2019 tax charge.
- Instructional and support costs were 54.4% of revenue, compared with 58.8%; general and administration costs were 26.0%, compared with 26.9%.
- Strayer revenue increased 11.1% to $128.1 million. Capella contributed $114.7 million, and Non-Degree Programs revenue was $3.8 million.
- Management’s non-GAAP adjusted results were operating income of $48.3 million, net income of $36.7 million, and diluted EPS of $1.66. These exclude specified merger amortization and costs, partnership income, and tax adjustments; they are not GAAP measures.
Liquidity, debt, and capital
- Cash, cash equivalents, and marketable securities totaled $420.7 million at March 31, 2019, compared with $386.5 million at December 31, 2018. Cash and cash equivalents were $352.4 million.
- The company had no revolving-credit borrowings and $250 million available under its revolving facility, which matures August 1, 2023. It reported compliance with facility covenants.
- Operating lease liabilities totaled $117.0 million ($26.5 million current and $90.5 million non-current). The company adopted ASC 842 on January 1, 2019, recognizing lease assets and liabilities; adoption did not materially affect income or cash flows.
- The company paid $11.1 million in dividends during the quarter; the declared quarterly dividend was $0.50 per share. No shares were repurchased; $70 million remained authorized for repurchases through December 31, 2019.
Material changes, outlook, and risks
- Income tax expense was $17.6 million, at a 60.4% effective rate versus 18.5% a year earlier. A discrete $11.5 million charge reduced deferred tax assets after changes to deferred compensation arrangements and is expected to increase future cash taxes.
- Merger and integration costs were $7.2 million, including legal, accounting, integration, and severance costs. The company recorded $15.4 million of acquired-intangible amortization.
- Management said existing cash, operating cash generation, and, if needed, the revolver should meet requirements for at least 12 months. No specific revenue or earnings guidance was provided.
- Management cited expected merger synergies and continued investment in student outcomes, affordability, technology, and growth, while warning that integration and synergy benefits may take longer than expected or may not be fully realized.
- Key regulatory uncertainties include Title IV and accreditation requirements, borrower-defense rules, gainful-employment regulation, and state authorization of online education. An April 26, 2019 court ruling ordered the 2016 distance-education state-authorization rules to take effect May 26, 2019. The company said no Strayer or Capella programs failed the reported 2015 gainful-employment measures; three programs were in the warning zone.
- The filing reported no pending material legal proceedings and no material changes to the risk factors in the 2018 Form 10-K. HLC notified Capella on April 19, 2019 that it affirmed the change of control and the university’s continued adherence to accreditation criteria.
Important facts for investors to verify
- Assess performance on a comparable basis, given Capella’s inclusion only in 2019 reported results; the filing does not provide a full pro forma year-over-year comparison.
- Track enrollment, persistence, student receivables, and the $29.4 million allowance for doubtful accounts; bad-debt expense was 5.0% of revenue versus 5.5%.
- Monitor the $44.5 million Graduation Fund contract liability and whether student redemption and persistence assumptions remain appropriate.
- Separate recurring earnings from the $11.5 million tax charge, merger costs, acquired-intangible amortization, and partnership investment income when evaluating reported and adjusted results.
- Follow regulatory developments affecting Title IV eligibility, online state authorization, and accreditation, alongside merger integration and expected synergies.
- Review lease-payment commitments, revolver covenant headroom, and the terms and timing of capital returns.