Business context and reporting period
Strayer Education, Inc.’s Form 10-K covers the fiscal year ended December 31, 2015; the filing is an annual report, not a standalone fourth-quarter report. The company primarily operated Strayer University, serving 42,975 students in fall 2015 through 76 campuses and online programs. About 71% of fall students took all courses online. NYCDA was acquired on January 13, 2016, after year-end, and did not affect 2015 results.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $434.4 million | $446.0 million |
| Operating income | $69.7 million; 16.0% margin | $81.7 million; 18.3% margin |
| Net income | $40.0 million; 9.2% margin | $46.4 million; 10.4% margin |
| Diluted EPS | $3.73 | $4.35 |
| Operating cash flow | $76.9 million | $77.6 million |
| Capital expenditures | $12.7 million | $6.9 million |
| Cash and cash equivalents, year-end | $106.9 million | $162.3 million |
| Working capital, year-end | $81.2 million | $140.3 million |
| Debt, year-end | None | $118.8 million |
Revenue fell 3%, principally because revenue per student declined 3%; average enrollment edged up to 40,450 from 40,254. Operating income declined 15%, net income 14%, and diluted EPS 14%. Marketing expense rose 5% to $70.1 million and was 16.1% of revenue, versus 14.9% in 2014. Bad-debt expense improved to 3.0% of revenue from 3.8%.
In July 2015, the company used approximately $116 million of cash to repay its term loan and terminated its interest-rate swap. It ended the year with a $150 million revolving facility undrawn, maturing July 2, 2020, and reported compliance with its covenants. Operating cash flow was nearly flat year over year despite lower operating income. Lease commitments totaled $167.1 million, including $37.2 million due within one year.
Material changes, outlook, risks and unusual items
- Pricing and enrollment: Undergraduate tuition for new students was reduced about 20% beginning in 2014, and qualifying students can earn Graduation Fund credits. These measures supported stable enrollment but pressured revenue per student. The Graduation Fund liability was $20.9 million at year-end.
- Management outlook: For 2016, management expected Strayer University revenue to be slightly lower if 2015 enrollment trends continued, revenue per student to decline approximately 2–3%, and operating expenses to be flat to up 2–3%. Marketing expense could increase. Capital expenditures were forecast at 3–4% of revenue; expected tax rate was 39.0–39.5%, and interest expense $0.7–0.8 million. The company said available cash, operating cash flow and its credit facility should cover requirements for at least 12 months.
- Restructuring and facilities: The 2013 restructuring involved 20 campus closures and $54.7 million of charges. 2015 operating income included a $0.4 million benefit from revising facility-loss estimates; 2014 included $4.1 million of such benefits. Approximately 200,000 square feet of closed facility space remained vacant, with lease obligations extending up to six years.
- Acquisition: NYCDA cost $7.0 million upfront, with up to a further $18.0 million contingent on performance over five years. It offers non-degree software-development courses and does not participate in federal student aid.
- Regulatory exposure: Strayer University’s Title IV participation agreement was provisional through June 30, 2017, requiring Department of Education approval for substantial changes, including new locations and programs. Four program reviews were closed; one identified a payment of less than $500, which was paid. The university reported that its 2015 90/10 calculation was not finalized or audited; it expected compliance. Its 2014 Title IV revenue share was approximately 73%.
- Key risks: Results remain sensitive to enrollment, competition, tuition affordability, and extensive federal, state and accreditor requirements. New gainful-employment rules could increase compliance costs or affect program eligibility and student demand. Title IV funding represented a significant revenue source. Other risks include online-system disruption, data security, and vacant-campus lease costs.
- Other disclosures: No pending material legal proceedings or off-balance-sheet arrangements were reported. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective. No regular dividend or share repurchases occurred in 2015.
Important facts for investors to verify
- Whether enrollment and revenue-per-student trends delivered results consistent with management’s 2016 outlook.
- The final audited 2015 90/10 calculation and continued Title IV eligibility, including any effects of gainful-employment requirements.
- NYCDA’s post-acquisition performance, integration, and likelihood of contingent payments up to $18.0 million.
- Cash generation and liquidity after the term-loan repayment, acquisition spending, and planned capital expenditures.
- Updates to unused-campus lease obligations, sublease assumptions, and the $20.9 million Graduation Fund liability.