Strategic Education, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The filing is unaudited. Strategic Education provides campus-based and online higher education and workforce-learning programs through U.S. Higher Education (USHE), Alternative Learning, and Australia/New Zealand (ANZ). ANZ was acquired on November 3, 2020, so 2021 results include ANZ while 2020 comparative results do not; consolidated year-over-year growth is therefore not directly comparable.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $270.1 million | $239.0 million | $859.6 million | $760.2 million |
| Operating income | $7.3 million | $15.4 million | $46.0 million | $105.8 million |
| Operating margin | 2.7% | 6.5% | 5.4% | 13.9% |
| Net income | $3.9 million | $11.0 million | $33.4 million | $80.4 million |
| Diluted EPS | $0.16 | $0.47 | $1.38 | $3.58 |
| Operating cash flow | Not separately presented | Not separately presented | $161.2 million | $158.8 million |
Q3 revenue rose 13% year over year, principally due to ANZ, but operating income fell about 52% and net income about 65%. USHE operating income declined 85% to $5.2 million. Nine-month revenue rose about 13%, while operating income declined about 56%; lower USHE earnings and higher restructuring costs were partly offset by ANZ.
For Q3, instructional and support costs were 56.9% of revenue versus 53.2% a year earlier, and general and administration costs were 35.4% versus 31.0%. Nine-month ratios were 53.4% and 32.1%, respectively, compared with 50.7% and 27.7%. The company reported non-GAAP adjusted Q3 operating income of $20.8 million and adjusted diluted EPS of $0.59, versus $37.8 million and $1.18 in 2020. Nine-month adjusted operating income was $127.4 million and adjusted diluted EPS $3.67, versus $163.9 million and $5.32. These non-GAAP measures exclude specified acquisition-related amortization, merger and integration costs, restructuring items, investment results, tax adjustments, and, where applicable, foreign-exchange effects.
Liquidity, debt and capital
- At September 30, 2021, cash and cash equivalents were $274.8 million and marketable securities totaled $30.2 million, or $305.0 million combined. Combined cash and marketable securities were $225.3 million at December 31, 2020.
- Working capital was approximately $150.8 million, based on current assets of $406.5 million and current liabilities of $255.6 million. Contract liabilities rose to $123.9 million from $60.5 million at year-end.
- Long-term debt was $141.6 million, down slightly from $141.8 million at December 31, 2020. The $350 million revolving facility matures in November 2025; the company was in compliance with its covenants. Management said available cash, operating cash flow and facility capacity should meet requirements for at least 12 months.
- Nine-month capital expenditures were $33.6 million. The company paid $44.3 million in dividends and repurchased $5.9 million of shares; $244.1 million of repurchase authorization remained at quarter-end, available through December 31, 2021.
Segments and material changes
- USHE: Q3 revenue fell 16.7% to $191.9 million as enrollment and revenue per student declined, including from higher scholarships and discounts. Enrollment fell 13% to 77,574. Nine-month revenue decreased 14.0% to $630.6 million.
- Alternative Learning: Q3 revenue increased 48.7% to $13.0 million; nine-month revenue increased 42.3% to $38.4 million. Growth reflected Sophia Learning and higher employer-affiliated enrollment. Employer-affiliated enrollment was 21.1% of USHE enrollment versus 18.3% a year earlier.
- ANZ: Revenue was $65.2 million in Q3 and $190.5 million for the nine months. Q3 enrollment declined 4% to 18,188; pandemic-related international-border closures affected enrollment.
- Restructuring: Nine-month restructuring costs were $26.4 million versus $4.0 million in 2020, including lease-asset and fixed-asset impairments related to campus and office closures. A campus sale generated a $0.7 million gain in Q3; another campus sale closed October 15, 2021.
Outlook, risks and contingencies
No specific financial guidance was provided. Management expected near-term USHE revenue to remain pressured by weaker enrollment demand and higher scholarships and discounts. It cited ongoing COVID-19 effects, enrollment trends, regulatory developments, competition, and the execution and integration of the ANZ acquisition as factors that could affect results. Management stated that its financial position and cost-control capacity supported ongoing operations.
- Regulation: Changes to the 90/10 rule, including the American Rescue Plan’s expansion of what counts as federal education assistance, are expected to apply to institutional fiscal years beginning on or after January 1, 2023. Strayer reported 82.95% and Capella 71.98% of 2020 cash-basis revenue from Title IV programs. Further rulemaking or legislative changes could affect eligibility and operations.
- Borrower-defense litigation and applications: Capella faces the Wright litigation concerning alleged representations about doctoral-program completion times. The Department of Education also initiated fact-finding concerning more than 1,000 borrower-defense applications; Capella had received approximately 500 applications and said it was cooperating. The company could not predict outcomes or reasonably estimate potential losses.
- Other oversight: Strayer and Capella received an FTC notice concerning practices the agency has identified as potentially unfair or deceptive; the FTC said the notice itself was not an assessment of either institution’s conduct. The filing also describes evolving federal rulemaking and oversight risks. Certain Department of Education program reviews of Capella and Strayer were closed without further action.
- Currency and interest rates: Foreign-currency revenue represented 22.2% of nine-month consolidated revenue, and the company did not hedge currency exposure. A 100-basis-point LIBOR increase would add about $3.5 million of annual interest expense if the full $350 million facility were drawn.
- Unusual noncash/other comprehensive item: Foreign-currency translation reduced other comprehensive income by $46.9 million for the nine months, substantially reducing accumulated other comprehensive income.
Investor verification points
- Separate ANZ’s contribution from underlying performance when assessing reported consolidated revenue growth and margins.
- Track USHE enrollment, revenue per student, scholarship levels and operating profitability, alongside growth and margins in Alternative Learning and ANZ.
- Review restructuring charges, campus-closure savings, and the financial impact of the campus sale completed after quarter-end.
- Monitor borrower-defense applications and the Wright litigation, as well as 90/10 rulemaking and other federal oversight developments.
- Check cash generation against rising receivables and contract liabilities, and monitor debt, covenant compliance, dividends and share repurchases.