Business context and reporting period
Strategic Education, Inc. (Nasdaq: STRA) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Its business includes Strayer University, Capella University, and Non-Degree Programs. The August 1, 2018 Capella Education Company merger materially expanded the company; 2018 comparative results exclude Capella and are not directly comparable with 2019.
Financial results and liquidity
Amounts below are in millions, except per-share data and where stated.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $245.1 | $114.7 | $491.6 | $231.1 |
| Operating income | $27.6 | $4.2 | $53.3 | $15.5 |
| Net income | $24.4 | $5.2 | $35.9 | $14.7 |
| Diluted EPS | $1.10 | $0.46 | $1.63 | $1.29 |
Q2 operating and net margins were approximately 11.3% and 10.0%; six-month margins were approximately 10.8% and 7.3%. The sharp consolidated revenue increase primarily reflects Capella’s inclusion, not equivalent organic growth. Strayer revenue grew 13.2% in Q2 and 12.1% for the first half, while Strayer enrollment rose 11.5% in Q2 to 52,253. Capella Q2 enrollment increased 1.6% to 38,392. Continuing and new-student enrollment at Strayer and Capella showed differing growth rates; Capella new enrollment grew 7.8%.
Q2 instructional and support costs were 53.3% of revenue versus 60.4% in the prior-year quarter; general and administration costs were 27.9% versus 28.1%. For the first half, those expense ratios were 53.9% and 27.0%, respectively, compared with 59.6% and 27.5%. Reported results include merger-related amortization and integration costs. Non-GAAP adjusted diluted EPS was $1.59 for Q2 and $3.26 for the first half; these company-defined measures exclude specified merger, impairment, investment-income, and tax items and are not substitutes for GAAP results.
Six-month operating cash flow was $103.1, compared with $30.0 a year earlier; capital expenditures were $18.9 versus $8.6. Cash, cash equivalents, and marketable securities totaled $440.5 at June 30, 2019, versus $386.5 at year-end 2018. Current assets were $490.3 and current liabilities $153.8. The company had no revolver borrowings and $250.0 of revolving capacity available; it reported compliance with credit-facility covenants. Recognized lease liabilities totaled $113.8, separate from borrowings. Six-month dividends paid were $22.2; no shares were repurchased, and $70.0 of authorization remained through December 31, 2019.
Material changes, outlook, and risks
- The Capella merger also brought non-degree businesses into the consolidated results. The company recorded $10.2 of merger and integration costs and $30.8 of acquired-intangible amortization in the first half. No impairment charges were recorded in 2019; 2018 included $6.2 of NYCDA goodwill and intangible impairment.
- Six-month effective tax rate was 40.9%, versus 9.8% in 2018, including an $11.5 discrete charge from changes to deferred compensation arrangements that reduced deferred tax assets and increased future cash taxes. Management cited favorable share-based compensation tax adjustments as a partial offset.
- Adoption of lease accounting on January 1, 2019 added a $97.5 right-of-use asset and lease liabilities to the June balance sheet; management said adoption did not materially affect income or cash flows. The company expects existing cash, operating cash generation, and the revolver to meet requirements for at least 12 months.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It described continued investment in student success, affordability, marketing, technology, and merger synergies. A change in tuition benefits at one of Strayer’s largest corporate partners could weigh on future enrollment and revenue growth.
- Regulatory exposure remains important. A June 2019 Department of Education review of Capella’s FlexPath program was ongoing. A court order made distance-education state-authorization rules effective in May 2019 while the Department appealed; failure to obtain required authorization could affect Title IV eligibility. The universities early-adopted the Department’s final repeal of gainful-employment rules, effective July 2019. Capella held provisional Title IV certification through December 31, 2022 following the ownership change.
- The company disclosed ordinary-course litigation and said it did not expect a material adverse overall outcome, while noting an unfavorable resolution could affect results in a particular period. It also cited risks involving Title IV and state regulation, enrollment, competition, student financing, and merger integration. Management reported effective disclosure controls; integration of Capella’s financial controls was continuing.
Most important facts for investors to verify
- Separate acquisition-driven consolidated growth from underlying performance, especially Strayer trends, Capella enrollment, and the non-degree businesses.
- Track merger synergies against continuing amortization and integration expenses, and review the basis and consistency of non-GAAP adjustments.
- Monitor Strayer’s corporate-partner tuition-benefit change, student bad-debt trends, and collectibility assumptions; Q2 bad debt expense was 4.7% of revenue versus 5.8% a year earlier.
- Follow the Capella FlexPath program review, distance-education authorization litigation and rules, and Capella’s provisional Title IV status.
- Assess the effect of the deferred-compensation tax change on future cash taxes, and consider lease commitments alongside available liquidity and the undrawn revolver.