Strategic Education, Inc. (reported as Strayer Education, Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is unaudited and covers Strayer University and New York Code and Design Academy (NYCDA); the company reports one segment. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $112.7 | $108.5 | $227.6 | $219.7 |
| Operating income | $13.9 | $12.9 | $32.3 | $33.0 |
| Net income | $10.3 | $7.8 | $20.9 | $20.2 |
| Diluted EPS | $0.92 | $0.72 | $1.87 | $1.87 |
| Operating margin | 12.3% | 11.9% | 14.2% | 15.0% |
Q2 revenue grew 4%, principally on 6% enrollment growth, partly offset by a 2% decline in revenue per student. University spring enrollment was 43,411, up 6%; undergraduate revenue rose 9%, while graduate revenue fell 8%. For the first half, average University enrollment also increased 6%. Management attributed lower revenue per student mainly to reduced undergraduate tuition and the Graduation Fund; it expects this per-student decline to continue, more gradually.
For the six months, operating cash flow was $32.8 million, compared with $22.4 million a year earlier. Capital expenditures were $8.4 million versus $3.9 million. Cash and cash equivalents totaled $147.9 million at June 30, up from $129.2 million at year-end 2016. Current assets were $180.1 million and current liabilities $61.3 million. The company had no revolving-credit borrowings and had $150 million available under its facility, which matures July 2, 2020; it reported compliance with covenants. Total liabilities were $109.3 million. Operating-lease commitments totaled $123.5 million, including $32.4 million due within one year.
Changes, unusual items, and management commentary
- Q2 operating income increased 7% year over year, while first-half operating income declined 2%. First-half net income rose 3%, but diluted EPS was unchanged at $1.87.
- Q2 marketing expense rose 8%, admissions advisory expense 16%, and general and administration expense $1.3 million, reflecting branding investment, personnel, and compliance costs. First-half bad-debt expense increased; the Q2 ratio rose to 4.5% of revenue from 3.8%.
- Management identified approximately $2.0 million of Q2 noncash adjustments associated with NYCDA contingent consideration and leases on facilities no longer in use. It also said Q2 net income included approximately $2.1 million of after-tax charges from noncash adjustments, while describing $0.19 per diluted share as after-tax earnings related to those adjustments. The filing’s description of the adjustments’ net earnings effect is not fully clear; reported results should be evaluated with this reconciliation in mind.
- The company paid $5.7 million in dividends during the first half; the board’s stated annual dividend was $1.00 per common share. No shares were repurchased in the first half; $70 million of authorization remained through December 31, 2017.
- Management said cash, operating cash generation, and the revolver should meet requirements for at least the next 12 months. No formal earnings or revenue outlook was provided; management expected undergraduate revenue per student to continue declining slightly in 2017.
Risks, contingencies, and other notable matters
- Strayer University’s Title IV recertification application was pending. Its provisional Program Participation Agreement was extended month to month while the Department of Education considers the application. Loss of Title IV eligibility would materially affect the business.
- No Strayer programs failed the disclosed gainful-employment metrics; two active associate programs were in the “zone.” The Department announced plans to revise gainful-employment rules and delayed certain requirements. Compliance, enrollment, and program-eligibility consequences remain risks.
- NYCDA’s remaining contingent payments were valued at approximately $5.5 million; the maximum remaining possible payment was $11.5 million. The company reduced the fair value of contingent consideration by $2.3 million during Q2.
- The Graduation Fund liability was $33.8 million at June 30, including $17.6 million estimated to be redeemed within 12 months. Redemption and student-persistence estimates may change.
- Management anticipated a material balance-sheet effect from adopting the new lease standard, which requires recognition of right-of-use assets and lease liabilities. The company reported no pending material legal proceedings and no material changes to previously disclosed risk factors, apart from specified updates.
Important facts for investors to verify
- Reconcile the Q2 noncash adjustments and their stated effects on net income and diluted EPS.
- Track enrollment, revenue per student, graduate-program trends, and the rising bad-debt ratio.
- Monitor the Department of Education’s decision on Title IV recertification and the status of the two gainful-employment programs in the zone.
- Assess cash generation against capital spending, dividends, lease commitments, and potential NYCDA payments.
- Review the eventual effects of the new revenue-recognition and lease-accounting standards; the filing says revenue-standard implementation was still under evaluation.