Strategic Education, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. This is an annual filing, not a standalone Q4 filing. The company operates Strayer University, Capella University, and non-degree education programs.
Business context and performance
Strategic Education provides campus-based and online post-secondary education, primarily for working adults. Capella Education Company was acquired on August 1, 2018, so FY2019 includes a full year of Capella results while FY2018 includes only results from the merger date; annual comparisons are therefore not directly comparable.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $997.1 million | $634.2 million |
| Operating income (loss) | $110.5 million | $(22.7) million |
| Operating margin | 11.1% | (3.6)% |
| Net income (loss) | $81.1 million | $(15.7) million |
| Diluted EPS | $3.67 | $(1.03) |
| Operating cash flow | $202.1 million | $46.9 million |
| Capital expenditures | $38.7 million | $27.5 million |
Management attributed the annual improvement chiefly to the full-year inclusion of Capella, enrollment growth, lower merger and integration costs, and no repeat of FY2018 impairment charges. FY2019 adjusted operating income was $194.1 million and adjusted net income was $147.3 million; these are non-GAAP measures and exclude specified merger-related, amortization, investment-income, and tax items, among others.
Q4 2019: Revenue was $263.8 million, operating income $37.2 million, net income $28.5 million, and diluted EPS $1.29. Q4 2018 revenue was $242.1 million, operating loss $57.1 million, net loss $52.8 million, and diluted loss per share $2.97. The 2018 quarter included significant merger-related and impairment charges.
Revenue, segments, and material changes
- Strayer University revenue was $527.0 million, up from $471.1 million; average enrollment increased 11.0% to 52,963, and new-student enrollment rose 6.6%.
- Capella University revenue was $455.3 million, versus $154.9 million in the partial-year FY2018 comparison. Average enrollment increased 2.1% to 38,834, and new-student enrollment rose 8.9%.
- Non-degree program revenue was $14.8 million, versus $8.2 million, reflecting acquired operations including DevMountain, Hackbright, and Sophia Learning.
- Instructional and support costs declined to 53.2% of revenue from 58.6%; general and administration costs declined to 27.3% from 30.6%. Management cited merger synergies, while noting increased branding and partnership spending.
- Merger and integration costs fell to $21.9 million from $45.7 million. FY2019 included $6.0 million of impairment charges for vacated lease space. FY2018 included $13.9 million of goodwill impairment and $5.7 million of intangible-asset impairment related to NYCDA.
Financial position and liquidity
- Cash, cash equivalents, and marketable securities totaled $491.2 million at year-end, compared with $386.5 million a year earlier. Working capital was $367.3 million.
- No borrowings were outstanding under the $250 million revolving credit facility; the company reported covenant compliance. The facility matures August 1, 2023.
- Total liabilities were $326.7 million, including $105.8 million of lease liabilities. The company reported no long-term debt.
- Operating cash flow of $202.1 million substantially exceeded capital expenditures of $38.7 million. The company paid $46.6 million in cash dividends during FY2019.
- Lease commitments totaled $119.7 million, excluding $6.5 million of minimum payments on signed leases not yet commenced. The company adopted lease accounting guidance in 2019, recording a $123 million lease liability and $107 million right-of-use asset at adoption.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expected FY2020 capital expenditures of 4%–5% of revenue and planned to open eight to ten Strayer and Capella locations. It stated existing cash, operating cash flows, and available credit should cover requirements for at least 12 months.
- In February 2020, after year-end, the board increased the share-repurchase authorization to $250 million through December 31, 2020; $70 million remained under the prior authorization at year-end. No open-market shares were repurchased in 2019.
- Management warned that enrollment and demand are uncertain amid strong competition, sector-wide enrollment declines, and changing student preferences. A major Strayer corporate partner changed its tuition-benefit policy, which may negatively affect future enrollment and revenue growth.
- Title IV funding and regulatory compliance are material risks. The company said roughly three quarters of students historically used Title IV programs, and that most FY2019 revenue was collected from Title IV funds. FY2019 90/10 calculations were not yet finalized and audited; management expected both universities to remain compliant. Strayer had full Title IV certification through June 2021; Capella had provisional certification through December 2022 following the ownership change.
- A Department of Education program review of Capella’s FlexPath program, covering federal aid years 2017–2018 and 2018–2019, remained unresolved at filing. The filing does not state a resulting liability or finding.
- The company reported ordinary-course litigation and said it did not expect the ultimate outcome to materially affect its consolidated financial position, results, or cash flows, while noting an unfavorable resolution could affect a particular period.
- A $11.5 million discrete tax charge in 2019 arose from termination of deferred compensation arrangements. The 2019 effective tax rate was 34.4%, versus 18.1% in 2018; management reported a 27.8% rate excluding specified discrete tax adjustments.
Investor verification priorities
- Review the final outcome of the Capella FlexPath Department of Education review, including any liabilities, corrective actions, or effects on Title IV participation.
- Verify the FY2019 90/10 calculations and monitor proposed changes to the rule, including proposals concerning veterans’ and military benefits.
- Assess whether enrollment trends, the Strayer corporate partner policy change, and competitive pressures affect future revenue and margins.
- Track realized merger synergies against the non-GAAP adjustments and remaining integration costs; consider the limited comparability of FY2018 and FY2019.
- Evaluate the $49.6 million Graduation Fund liability, which depends on estimated student persistence and redemption rates and was identified as a critical audit matter.
- Review the company’s lease commitments, planned capital spending, dividends, and post-year-end repurchase authorization in light of cash generation and investment needs.
PwC issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2019.