Strategic Education, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results cover Strayer University, Capella University, and Non-Degree Programs. The August 1, 2018 Capella Education Company merger makes comparisons with 2018 materially uneven: 2019 includes Capella for the full periods, while 2018 includes it only after the merger date.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $241.7 million | $160.9 million | $733.4 million | $392.1 million |
| Operating income (loss) | $20.0 million | $(57.1) million | $73.3 million | $(41.6) million |
| Net income (loss) | $16.7 million | $(52.8) million | $52.6 million | $(38.1) million |
| Diluted EPS | $0.75 | $(2.97) | $2.38 | $(2.90) |
Q3 GAAP operating margin was approximately 8.3% and net margin approximately 6.9%; nine-month margins were approximately 10.0% and 7.2%, respectively. The prior-year losses included substantial merger and integration costs and NYCDA goodwill and intangible-asset impairment charges. Strategic Education reported Q3 adjusted operating income of $36.9 million and adjusted net income of $28.4 million; these are non-GAAP measures and exclude specified acquisition, amortization, investment, impairment, and tax items.
- Revenue and enrollment: Q3 Strayer revenue rose 11.7% to $127.8 million; enrollment increased 11.3% to 50,582, with new-student enrollment up 4.1% and continuing enrollment up 13.3%. Capella revenue was $110.5 million, including a $26.2 million purchase-accounting reduction to acquired contract liabilities; Capella enrollment grew 1.7% to 38,451. Non-Degree Programs revenue was $3.4 million.
- Costs and margins: Q3 instructional and support costs were $132.5 million, or 54.8% of revenue, versus 64.0% a year earlier. General and administration was $72.3 million, or 29.9% of revenue, versus 38.5%. Merger and integration costs fell to $1.5 million from $29.6 million. Nine-month amortization of acquired intangible assets was $46.3 million.
- Cash flow: Nine-month operating cash flow was $141.4 million, versus cash used of $14.6 million in 2018. Capital expenditures were $27.8 million. Cash, cash equivalents, and restricted cash increased to $397.6 million from $312.2 million at the start of the year.
- Liquidity and obligations: Cash and cash equivalents were $397.1 million; marketable securities totaled $60.0 million, for combined cash and securities of $457.1 million. The company had no revolver borrowings and $250 million of revolving capacity available. Total liabilities were $336.5 million, including $109.2 million of lease liabilities recognized following adoption of the lease accounting standard.
- Capital returns: The company paid $33.3 million in dividends during the first nine months, at $0.50 per share in each of the first three quarters. No shares were repurchased; $70.0 million of authorization remained through December 31, 2019.
Material changes and management commentary
- Reported revenue and profitability improved substantially, primarily because 2019 included a full period of Capella operations and because enrollment growth and lower merger costs and impairment charges supported results. The filing cautions that the periods are not directly comparable.
- Management said a recent change in tuition-benefit policy by one of Strayer’s largest corporate partners could negatively affect future enrollment and revenue growth.
- Management believes existing liquidity, operating cash generation, and access to the revolver will be sufficient to meet requirements for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
- The nine-month 2019 effective tax rate was 37.4%, including an $11.5 million first-quarter discrete charge associated with termination of deferred compensation arrangements, which reduced deferred tax assets and is expected to increase future cash tax payments.
- The company adopted ASC 842 on January 1, 2019, recognizing an initial $123 million lease liability and $107 million right-of-use asset. Adoption did not materially affect reported income or cash flow.
Risks, contingencies, and unusual items
- Regulation and student aid: The universities rely significantly on Title IV federal student aid and face federal, state, and accreditor oversight. Rules affecting borrower defenses, institutional financial responsibility, state authorization, accreditation, and distance education may affect compliance costs, eligibility, or operations. Strayer and Capella elected early implementation of the 2019 gainful-employment rules, which repeal the prior framework.
- Pending review: The Department of Education’s June 2019 on-site review of Capella’s FlexPath program, covering federal aid years 2017–2018 and 2018–2019, had not concluded. Any findings or liabilities were not yet determined.
- Capella certification: Capella’s Title IV participation agreement is provisional through December 31, 2022; the provisional status carries requirements, including approval for certain new locations and programs.
- Receivables: The allowance for doubtful accounts rose to $31.5 million from $28.5 million at year-end; Q3 bad-debt expense was 5.0% of revenue, down from 6.1% a year earlier. Management notes that deterioration in student ability to pay could require additional reserves or write-offs.
- Other exposures: The company is involved in ordinary-course litigation and believes no current matter is expected to materially affect its consolidated financial position, results, or cash flows, while noting an unfavorable resolution could affect a particular period. Regulatory developments, enrollment, integration of Capella, and realization of merger synergies remain important uncertainties.
Important facts for investors to verify
- How much reported growth reflects underlying enrollment and pricing trends versus the acquired Capella business and purchase-accounting effects.
- Whether Strayer’s corporate-partner tuition-benefit change affects new and continuing student enrollment, revenue, or retention.
- The outcome of the Capella FlexPath Department of Education review and any resulting liabilities or remediation requirements.
- Trends in student receivables, bad-debt expense, and the Graduation Fund contract-liability estimate, which was $46.7 million at September 30, 2019.
- Progress on merger integration and recurring profitability after acquired-intangible amortization and other adjustments; assess non-GAAP reconciliations alongside GAAP results.
- Cash-tax effects of the deferred-compensation change, and lease obligations and covenant compliance alongside the reported cash and revolver availability.