Strategic Education, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2018. At period-end, the company operated Strayer University and NYCDA as a single reportable segment. The Capella merger closed on August 1, 2018, after the reporting period; Capella’s results are not included in the figures below. The company subsequently changed its name from Strayer Education, Inc. to Strategic Education, Inc.
Financial results and liquidity
Amounts below are in millions, except per-share figures and percentages. Q2 comparisons are with Q2 2017; six-month comparisons are with the first half of 2017.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $114.7 | $112.7 | $231.1 | $227.6 |
| Operating income | $4.2 | $13.9 | $15.5 | $32.3 |
| Operating margin | 3.6% | 12.3% | 6.7% | 14.2% |
| Net income | $5.2 | $10.3 | $14.7 | $20.9 |
| Diluted EPS | $0.46 | $0.92 | $1.29 | $1.87 |
| Operating cash flow | Not stated by quarter | $30.0 | $32.8 |
- Revenue grew 2% in both the quarter and first half. University enrollment rose 8% in Q2 and 7% on average for the half, but revenue per student fell 6% and 5%, respectively.
- GAAP operating income and net income fell substantially, largely reflecting Capella merger costs and NYCDA-related impairments. Adjusted non-GAAP operating income was $13.2 million in Q2 (versus $11.9 million) and $29.9 million for the half (versus $30.3 million). Adjusted diluted EPS was $0.87 in Q2 (versus $0.65) and $1.96 for the half (versus $1.65).
- Six-month capital expenditures were $8.6 million, compared with $8.4 million. Operating cash flow less capital expenditures was approximately $21.4 million, versus $24.3 million.
- Cash and cash equivalents were $171.6 million at June 30, up from $155.9 million at December 31, 2017. Current assets were $214.2 million and current liabilities $69.2 million. The company reported no borrowings and $150 million available under its revolving facility; it was in covenant compliance.
- Total liabilities were $112.9 million, including $43.7 million of other long-term liabilities. Six-month dividends paid were $5.8 million; the quarterly dividend was $0.25 per share.
Material changes and unusual items
- Q2 included $2.8 million of merger costs; first-half merger costs totaled $8.2 million, principally legal, accounting, and integration expenses.
- The company recorded $2.8 million of goodwill impairment and $3.4 million of indefinite-lived intangible asset impairment related to NYCDA. The impairment assessment was prompted by actual growth falling short of prior expectations; future impairment is possible if forecast growth is not achieved.
- Bad debt expense was 5.8% of Q2 revenue, up from 4.5%. Management attributed pressure to a shift toward less experienced undergraduate students and delays in Title IV aid processing, which it expected to resolve by year-end 2018.
- ASC 606 revenue recognition was adopted January 1, 2018. Adoption reduced opening retained earnings by $0.2 million, net of tax, and management expected an immaterial ongoing net-income effect. The reported first-half net-income impact was a reduction of $0.1 million versus results without adoption.
- The company’s NYCDA contingent earnout liability was estimated at zero at June 30, 2018; estimates remain subject to periodic reassessment.
Outlook, commentary, and risks
- Management expected 2018 revenue per student to decline 4%–5%, excluding the Capella merger, and expected operating expenses to increase slightly, also excluding merger effects. It said full-year revenue growth would depend on enrollment growth offset by lower revenue per student.
- Management expected a 27%–28% 2018 effective tax rate excluding specified stock-award benefits, nondeductible merger costs, and other discrete adjustments. The reported first-half effective rate was 9.8%, reflecting tax-law changes and discrete tax benefits.
- Management believed cash, operating cash generation, and available revolving credit would meet requirements for at least the next 12 months. Operating lease commitments totaled $101.3 million, including $29.6 million due within one year.
- Key exposures include Title IV and other education regulation, gainful-employment rules, state authorization for online programs, accreditation, enrollment and student persistence, student financing and collections, competition, and execution and integration of the Capella merger. The filing reported no pending material legal proceedings and no material changes to previously disclosed risk factors.
- Subsequent to quarter-end, the August 1 Capella merger closing was accompanied by an amended credit facility: capacity increased to $250 million, maturity extended to August 1, 2023, and no borrowings were outstanding at closing.
Most important facts for investors to verify
- Whether enrollment growth can offset lower revenue per student, particularly as scholarship programs and lower-priced graduate offerings affect revenue mix.
- Whether bad debt expense and Title IV processing delays improve as management anticipated.
- Whether NYCDA meets the revenue-growth and operating assumptions underlying its impairment valuation, and whether further impairment is required.
- The realized costs, integration progress, and financial contribution of Capella after its August 1, 2018 closing; the merger is not reflected in Q2 results.
- Whether the $150 million pre-merger facility was replaced as described by the amended $250 million facility, and how lease obligations and future liquidity needs evolve.