Strategic Education, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The company completed its merger with Capella Education Company on August 1, 2018. Accordingly, 2018 results include Capella only from the merger date; prior-year comparisons are not like-for-like. Dollar amounts below are in millions unless otherwise stated.
Business context
Strategic Education operates Strayer University, Capella University, and non-degree education businesses focused primarily on working adults. Its offerings include campus-based and online degrees, competency-based programs, and software-development training. Tuition represented approximately 96% of 2018 revenue. The merger consideration included 10.3 million SEI shares, valued at approximately $1.24 billion.
Key financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $634.2 | $454.9 |
| Operating income (loss) | $(22.7) | $52.2 |
| Net income (loss) | $(15.7) | $20.6 |
| Diluted EPS | $(1.03) | $1.84 |
| Operating cash flow | $46.9 | $56.2 |
| Capital expenditures | $27.5 | $18.1 |
| Cash, cash equivalents and marketable securities at year-end | $386.5 | $155.9 |
| Working capital at year-end | $295.2 | $121.3 |
- Reported operating margin was approximately -3.6% in 2018 versus 11.5% in 2017; net margin was approximately -2.5% versus 4.5%.
- Non-GAAP adjusted operating income was $97.4, adjusted net income $75.1, and adjusted diluted EPS $4.75 in 2018. These measures exclude specified purchase-accounting, merger, amortization, impairment, and tax items; they are not GAAP results.
- Strayer revenue was $471.1, up 4.8%, and average enrollment rose 8.1% to 47,733. Capella revenue was $154.9, including a $28.7 purchase-accounting reduction to acquired contract liabilities; average enrollment was 38,050, up 0.7%, while new enrollment increased 10.0%. Non-degree revenue was $8.2.
- Year-end total assets were $1.66 billion and total liabilities $235.8 million. The company had no revolver borrowings and reported $250 million of available revolving capacity, maturing August 2023; it was in compliance with covenants.
- Operating cash flow declined year over year, which management attributed largely to merger costs and lower net income. Investing cash flow was $130.1, including $167.9 of cash acquired in the merger. Financing cash outflow was $21.2, including $27.8 of dividends paid.
- Annual dividends were $1.50 per share in 2018. No shares were repurchased; $70 million of authorization remained through year-end 2019.
Material changes and unusual items
- Revenue increased about 39% year over year, primarily because the results include Capella for the final five months of 2018; the increase should not be read as equivalent organic growth.
- GAAP operating results included $45.7 of merger costs, $25.7 of acquired-intangible amortization, and $19.6 of NYCDA goodwill and intangible-asset impairment. The impairment followed weaker-than-expected NYCDA performance and a decision to stop on-ground courses in early 2019.
- Q4 2018 revenue was $242.1, operating income $18.9, and net income $22.5. Q3 included a $57.1 operating loss and $52.8 net loss, reflecting substantial merger-related and impairment charges. Quarterly figures are unaudited.
- Bad-debt expense rose to 5.9% of revenue from 4.8% in 2017, reflecting a shift in student mix and delays in Title IV aid processing. Management said delays were largely resolved by year-end but could continue to affect 2019.
- Goodwill rose to $732.5 after the acquisition; acquired goodwill is not tax-deductible. The company also recorded a $59.4 net deferred tax liability at year-end, compared with a $24.5 deferred tax asset in 2017.
Outlook, commentary and risks
- Management expects merger scale to support cost synergies and investment in student outcomes and affordability, but cautions that integration, synergy realization, and enrollment growth may be slower or less successful than anticipated. No specific revenue or earnings guidance is provided.
- Management expected 2019 capital expenditures of 4%–5% of revenue and planned six to eight new Strayer campus locations and two Capella physical locations.
- Management stated that cash, operating cash generation and, if needed, the revolver should cover requirements for at least 12 months. The company had $142.3 of operating-lease commitments, including $33.6 due within one year.
- Title IV funding is a major business dependency: historically, about three-quarters of students participated in Title IV programs, and the filing says the universities received the majority of 2018 revenue from Title IV funds. The 2018 90/10 calculations were not finalized or audited at filing time; management expected compliance. Capella’s Title IV participation was provisionally certified through December 31, 2022 following the change of ownership; Strayer’s full certification runs through June 30, 2021.
- Regulatory, accreditation, state authorization, gainful-employment, student-loan, and consumer-protection requirements could affect enrollment, costs, or Title IV eligibility. For the latest disclosed 2015 cohort, default rates were 10.6% for Strayer and 6.5% for Capella, below the 15.6% national proprietary-institution average.
- Other stated risks include intensifying competition, uncertain enrollment trends, student affordability and loan financing, online-system disruption and cybersecurity/privacy incidents, and difficulty integrating the merger. The filing reported no material pending legal proceedings beyond routine matters.
- In February 2019, the company terminated deferred-compensation arrangements; it expected an approximately $11.5 reduction in deferred tax assets and higher future effective tax rates and cash taxes. Capella’s post-change-of-control accreditor site-visit report was expected in May 2019.
Most important facts for investors to verify
- Separate acquisition-driven revenue from organic performance, and monitor enrollment, new-student trends, revenue per student, and bad-debt expense at each university.
- Track realized merger synergies against the substantial merger and integration costs, and assess whether adjusted results reconcile appropriately to GAAP results.
- Confirm final 2018 90/10 compliance calculations, Capella’s provisional certification conditions, and outcomes of pending regulatory and accreditation matters.
- Assess the sustainability of operating cash flow, dividend payments, planned capital spending, lease commitments, and the expected balance-sheet impact of lease-accounting adoption in 2019.
- Review the completion of purchase-price accounting and subsequent impairment testing, particularly given the size of acquired goodwill and intangible assets.
- Note that management and the auditor excluded Capella from the 2018 internal-control-over-financial-reporting assessment and audit; Capella represented 18% of consolidated assets and 25% of revenue. The auditor otherwise opined that the financial statements were fairly presented and that assessed internal controls were effective.