Strategic Education, Inc. (filed as Strayer Education, Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The filing identifies the registrant as Strayer Education, Inc., not Strategic Education, Inc.
Business context
The company operated Strayer University, offering undergraduate and graduate programs on campus and online, and acquired New York Code and Design Academy (NYCDA) on January 13, 2016. The company reported one operating segment. NYCDA’s results since acquisition were not material to consolidated results for the quarter.
Financial performance
| Metric | Q1 2015 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $111.9 million | $111.2 million | Down 1% |
| Operating income | $19.9 million | $20.1 million | Up 1% |
| Net income | $11.4 million | $12.4 million | Up 9% |
| Diluted EPS | $1.06 | $1.15 | Up 8% |
| Operating margin | 17.7% | 18.1% | Up 0.4 percentage points |
| Net cash from operations | $30.7 million | $14.7 million | Down $16.0 million |
Tuition represented about 95% of Q1 2016 revenue. Revenue declined mainly because revenue per student fell 1%. University winter-term enrollment was 40,872, versus 40,728 a year earlier: new enrollment decreased 5%, while continuing enrollment increased 2%. Undergraduate revenue was generally flat; graduate revenue declined 5%, as enrollment fell 7% despite higher revenue per student.
Operating income included a $1.6 million benefit from reducing the liability for unused facilities, compared with a $0.2 million benefit in Q1 2015. Management attributed about $1.0 million of Q1 2016 net income, or $0.09 per diluted share, to this adjustment; the comparable prior-year benefit was about $0.1 million, or $0.01 per share. Marketing expense rose 10% to $18.3 million; instruction and educational support expense fell 3% to $58.1 million. The effective tax rate was 38.0%, versus 39.0%.
Cash, debt, and liquidity
- Cash and cash equivalents were $117.5 million at March 31, 2016, up from $106.9 million at December 31, 2015, but down from $188.3 million at March 31, 2015.
- Operating cash flow was $14.7 million; investing cash outflow was $3.7 million, including $1.6 million net cash used in the NYCDA acquisition; financing cash outflow was $0.4 million. Capital expenditures were $2.0 million.
- The company had no revolving-credit borrowings and $150 million available under its facility, which matures July 2, 2020. It reported compliance with its credit covenants. The filing describes no outstanding debt balance at March 31, 2016.
- Management said cash, operating cash generation, and available credit were expected to meet requirements for at least the next 12 months.
- Operating lease commitments totaled $159.2 million, excluding subleases. The filing notes that the future adoption of the new lease standard is expected to add significant assets and liabilities to the balance sheet.
Material changes, outlook, and risks
- NYCDA acquisition consideration included $2.4 million paid upfront, contingent payments of up to $18.0 million, and $4.6 million in founder retention payments. A state permit was received in April 2016, after quarter-end, and the company paid $6.0 million of contingent consideration. Purchase accounting remained preliminary; the filing says the allocation could change materially.
- Management expected undergraduate revenue per student to continue declining as more students enroll under the lower tuition structure and Graduation Fund. It also expected marketing expense to rise in absolute terms and as a percentage of revenue in 2016, while stating that its initiatives were intended to support long-term growth.
- The Graduation Fund deferred balance was $23.3 million at quarter-end, up from $12.7 million a year earlier; $14.4 million was estimated to be redeemable within 12 months. Redemption estimates depend on student persistence and completion.
- Key risks include Title IV and other regulatory compliance, gainful-employment rules that could affect program eligibility and enrollment, student financing and persistence, competition, and successful integration and growth of NYCDA, including obtaining additional state authorizations. The University’s provisional federal participation agreement runs through June 30, 2017. The company reported no pending material legal proceedings and no material changes to previously disclosed risk factors beyond adding the NYCDA acquisition risk.
- No specific financial guidance was provided. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant identity and relationship between the filing’s “Strayer Education, Inc.” and the requested “Strategic Education, Inc.”
- Assess underlying earnings excluding the $1.6 million unused-facilities liability reduction and the effect of acquisition-related accounting.
- Monitor enrollment mix, revenue per student, marketing spending, and the continuing effect of undergraduate pricing and Graduation Fund credits.
- Track NYCDA permit approvals, contingent-payment obligations, integration progress, and final purchase-price allocation.
- Review operating cash-flow trends, lease commitments, and the company’s ability to maintain regulatory and credit-covenant compliance.