Business context and reporting period
Strayer Education, Inc. (the filing registrant; subsequently approved to change its name to Strategic Education, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2017. The report covers Strayer University and NYCDA; it is not a standalone quarterly filing, though it includes unaudited fourth-quarter results. Strayer University serves primarily working adults through online courses and 71 campuses. Fall 2017 enrollment was 48,144, with about 85% of students taking all courses online. The company reported one operating segment.
Key financial metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $454.9 million | $441.1 million | Up 3% |
| Operating income | $52.2 million | $57.5 million | Down 9% |
| Operating margin | 11.5% | 13.0% | Down 1.5 percentage points |
| Net income | $20.6 million | $34.8 million | Down 41% |
| Diluted EPS | $1.84 | $3.21 | Down 43% |
| Operating cash flow | $56.2 million | $44.5 million | Up $11.6 million |
| Capital expenditures | $18.1 million | $13.2 million | Up $4.9 million |
| Cash and cash equivalents | $155.9 million | $129.2 million | Up $26.7 million |
| Working capital | $121.3 million | $100.7 million | Up $20.6 million |
| Debt outstanding | None | None | $150 million revolving facility available |
Net margin was approximately 4.5%, versus 7.9% in 2016. The company paid $11.4 million in dividends during 2017 ($1.00 per share). It made no share repurchases. A $150 million revolving credit facility matures July 2, 2020; the company reported compliance with its covenants. Operating lease commitments totaled $114.6 million at year-end.
Material changes versus the prior comparable period
- Average enrollment rose 6% to 44,155, but average revenue per student declined 3%, reflecting affordability measures, scholarships, and tuition discounts. Undergraduate revenue increased 8%; graduate revenue fell 7%, primarily as graduate enrollment declined.
- Reported revenue growth did not translate into higher operating income: total costs and expenses rose 5% to $402.6 million. General and administrative costs increased 21% to $55.4 million, including about $8.4 million of Capella merger costs.
- Bad-debt expense increased to 4.8% of revenue from 3.7%. Management attributed the deterioration partly to Department of Education financial-aid verification delays.
- The effective tax rate increased to 60.8% from 39.3%, principally due to an $11.4 million one-time deferred-tax-asset write-down following the Tax Cuts and Jobs Act. Excluding that tax-law impact, the reported 2017 effective tax rate was 38.8%.
- Fourth-quarter revenue was $118.7 million, compared with $119.3 million in Q4 2016. Operating income fell to $11.7 million from $19.7 million; Q4 2017 recorded a $6.5 million net loss, versus $11.7 million net income in Q4 2016, largely reflecting the tax charge.
Management also presented non-GAAP adjusted net income of $34.9 million and adjusted diluted EPS of $3.11 for 2017, versus $32.3 million and $2.98 in 2016. These measures exclude specified fair-value items, merger and severance costs, and the deferred-tax adjustment; they are not substitutes for GAAP results.
Outlook, commentary, risks and unusual items
- Management expected 2018 revenue to grow at a rate slightly below enrollment growth, with operating expenses increasing slightly, excluding the Capella merger. Revenue per student was expected to decline approximately 3% in 2018. The company forecast a 2018 effective tax rate of approximately 27%–28% and capital expenditures of 4%–4.5% of revenue.
- The Capella merger, approved by both companies’ shareholders on January 19, 2018, was expected to close in Q3 2018, subject to closing conditions including education-regulator and accreditation approvals. The Department of Education completed its pre-acquisition review without material conditions; Higher Learning Commission approval remained a condition. Strayer shareholders were expected to own about 52% of the combined company and Capella shareholders about 48%. Management expected the transaction to be accretive to 2019 EPS excluding one-time charges, but cautioned that accretion and synergies were uncertain.
- Estimated 2018 merger expenses were $15 million–$20 million. If the merger failed, Strayer could, in certain circumstances, owe a termination fee of up to $25 million and reimburse expenses up to $8 million.
- Federal Title IV aid is a major source of student funding and revenue. Strayer’s 2016 90/10 ratio was approximately 75% (74.9% cited for compensation metrics); its 2017 calculation was not finalized, though management expected compliance. None of its programs failed the 2015 gainful-employment metrics, but two associate programs were in the warning “zone.”
- Other key risks include changes to federal education policy, accreditation or state authorization, enrollment and student financing, competition, online-platform reliability and cybersecurity, and integration challenges if the Capella merger closes. The filing reported no material pending legal proceedings; a merger-related shareholder suit was voluntarily dismissed without prejudice.
- NYCDA’s 2017 contingent-consideration liability was reduced to zero after revised forecasts; fair-value adjustments totaled $7.8 million, while up to $11.5 million could still be payable under the earnout. Management reported no 2017 impairment, but noted NYCDA growth was slower than originally anticipated and future impairment remained possible.
Most important facts for investors to verify
- Whether enrollment growth can continue while revenue per student and bad-debt trends stabilize.
- The bridge from GAAP net income of $20.6 million to non-GAAP adjusted net income of $34.9 million, including the tax charge and merger-related adjustments.
- Final 2017 90/10 compliance and subsequent gainful-employment results, plus any material changes to Title IV rules or institutional approvals.
- Completion of required Capella merger approvals, actual transaction and integration costs, realized synergies, and post-merger earnings accretion.
- Cash generation and capital needs alongside $114.6 million in operating lease commitments, planned capital spending, dividends, and the unused credit facility.
- NYCDA operating performance, earnout assumptions, and the sensitivity of goodwill and intangible-asset valuations to forecast changes.