Business context and reporting period
Strayer Education, Inc. (the registrant in this filing) reported unaudited results for the quarter and nine months ended September 30, 2017. It operates Strayer University, offering undergraduate and graduate programs online and at campuses, and New York Code and Design Academy (NYCDA), offering software-development courses. The company reports one segment. The filing’s later-proposed name change to Strategic Education, Inc. is part of a merger agreement described below.
Financial performance
Amounts below are in millions, except per-share data and where stated.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $108.5 | $102.2 | $336.1 | $321.8 |
| Operating income | $8.2 | $4.8 | $40.5 | $37.8 |
| Net income | $6.2 | $2.9 | $27.1 | $23.1 |
| Diluted EPS | $0.56 | $0.27 | $2.43 | $2.14 |
| Operating margin | 7.6% | 4.7% | 12.1% | 11.7% |
- Q3 revenue increased 6%, chiefly on 7% enrollment growth, partly offset by a 1% decline in revenue per student. University summer-term enrollment was 41,679, up from 38,813; undergraduate enrollment rose 13%, while graduate enrollment fell 6%.
- Nine-month revenue rose 4% as average University enrollment increased 6%, partly offset by a 2% decline in revenue per student. Undergraduate revenue grew 10%; graduate revenue declined 7%.
- Q3 operating income included approximately $2.1 million of net benefits from reducing NYCDA contingent consideration, partly offset by one-time staff-reduction costs. Management reported Q3 diluted EPS of $0.34 after these nonrecurring adjustments, versus $0.25 on the same basis in 2016; reported diluted EPS was $0.56 and $0.27, respectively.
- Bad-debt expense was 4.9% of revenue in Q3 2017 versus 3.8% a year earlier. The allowance for doubtful accounts was $12.6 million at September 30, 2017, compared with $10.2 million at year-end 2016.
Cash, liquidity and capital
- Cash and cash equivalents were $150.5 million at September 30, 2017, versus $129.2 million at December 31, 2016. Current assets were $186.8 million and current liabilities $72.3 million.
- Nine-month operating cash flow was $44.4 million, up from $30.1 million. Capital expenditures were $14.6 million, versus $7.5 million in the prior-year period; cash dividends paid were $8.6 million.
- No borrowings were outstanding under the $150 million revolving credit facility, which matures July 2, 2020; the company reported covenant compliance. It stated that cash, operating cash flow and available credit should meet requirements for at least 12 months.
- The company declared an annual dividend of $1.00 per common share, payable quarterly. It made no share repurchases in the first nine months and had $70 million of authorization remaining through December 31, 2017.
- Operating lease commitments totaled $119.1 million, including $31.8 million due in less than one year. The company had no borrowings, but leases and other liabilities remain significant obligations.
Changes, outlook and key risks
- Management expected revenue per student to decline approximately 2% in 2017, reflecting pricing initiatives, discounts and the Graduation Fund. It expected an approximately 34% effective tax rate for 2017, including the effects of stock-award tax benefits and NYCDA contingent-consideration adjustments.
- NYCDA’s contingent-consideration fair value was reduced to zero by September 30, 2017, following revised revenue projections and delays in implementing its student-marketing strategy. The maximum possible remaining payment was stated as $11.5 million. The company reported no impairment of NYCDA goodwill or its indefinite-lived trade name.
- The Graduation Fund deferred-revenue balance was $34.4 million, including $19.3 million estimated to be redeemed within 12 months. Actual student persistence or redemption rates could require estimate changes.
- After quarter-end, on October 29, 2017, the company agreed to acquire Capella Education Company in an all-stock merger, with each eligible Capella share converting into 0.875 Strayer shares. Completion was expected in Q3 2018, subject to shareholder, antitrust and education-regulatory approvals. Either party may owe a $25 million termination fee in specified circumstances; expense reimbursement of up to $8 million may also apply in specified cases. The proposed name change to Strategic Education, Inc. and an increase in authorized common shares were also subject to shareholder approval.
- Regulatory oversight remains a central risk. Two University associate-degree programs were in the gainful-employment “zone,” though none failed the reported metrics. The Department of Education approved the University’s full Title IV certification through June 30, 2021. Changes to gainful-employment and borrower-defense rules were under federal review, and continued access to Title IV funding depends on compliance and regulatory outcomes.
- The company reported no pending material legal proceedings and no material changes to previously disclosed risk factors, other than updates noted in the filing. It anticipated a material balance-sheet effect from the forthcoming lease standard; it did not expect a material financial-statement impact from the forthcoming revenue standard.
Most important facts for investors to verify
- How much of earnings growth reflects underlying operations versus the NYCDA contingent-consideration benefit and other one-time staff-reduction costs.
- Whether enrollment gains persist and whether declining revenue per student and rising bad-debt expense weigh on future margins and cash collection.
- The assumptions behind the zero fair value of NYCDA contingent consideration and the potential for any remaining payment of up to $11.5 million.
- Capella merger approvals, expected closing timing, share issuance, integration costs and any termination or reimbursement exposure.
- Ongoing Title IV, gainful-employment and other regulatory compliance, as well as the potential balance-sheet impact of lease accounting changes.