Strategic Education, Inc. (then Strayer Education, Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company operated Strayer University and New York Code and Design Academy (NYCDA), in one reportable segment. It planned to change its name to Strategic Education, Inc. in connection with the pending Capella merger.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $116.5 million | $114.9 million |
| Operating income | $11.3 million | $18.4 million |
| Net income | $9.5 million | $10.6 million |
| Diluted EPS | $0.84 | $0.95 |
| Cash from operations | $17.0 million | $24.5 million |
- Revenue rose 1%, as enrollment increased 6% but revenue per student declined 5%. Winter-term University enrollment was 46,184, up from 43,387.
- Operating margin was approximately 9.7%, versus 16.0% a year earlier; Q1 2018 included $5.3 million of Capella merger costs. Excluding those costs, the company reported non-GAAP operating income of $16.7 million, net income of $13.9 million, and diluted EPS of $1.23.
- Instruction and educational support costs increased 4% to $63.8 million; marketing costs rose 8% to $20.1 million, mainly reflecting branding investment. Bad-debt expense rose to 5.5% of revenue from 3.8%.
- Cash and cash equivalents were $165.9 million at March 31, up from $155.9 million at year-end. Current assets were $201.4 million and current liabilities $72.3 million. The company had no revolver borrowings and $150 million available under its credit facility, maturing July 2020; it reported compliance with covenants.
- Capital expenditures were $4.2 million; dividends paid were $2.9 million ($0.25 per share). Operating cash flow less capital expenditures was approximately $12.8 million.
- No material pending litigation was reported. Total liabilities were $113.5 million; the filing reports no outstanding debt borrowings. Operating lease commitments totaled $106.9 million.
Changes, outlook, and notable items
- Enrollment gains were offset by lower revenue per student, driven largely by scholarships and growth in lower-priced graduate programs. Undergraduate revenue increased 6%; graduate revenue declined 9%.
- Management expected 2018 revenue per student to decline 3%–4%, excluding any Capella-merger impact. If 2017 enrollment growth continued, it expected full-year revenue to rise by enrollment growth less the decline in revenue per student, with operating expenses increasing slightly, also excluding merger effects.
- Management expected a 27%–28% effective tax rate for 2018, excluding restricted-stock tax benefits, certain nondeductible merger costs, and other discrete adjustments. Q1’s 18.5% rate benefited from the lower federal tax rate and restricted-stock vesting tax benefits.
- The Capella merger had shareholder approval and was anticipated to close in Q3 2018, subject to customary conditions, including Department of Education, state regulatory, and accreditation approvals. Capella shareholders and Strayer shareholders were expected to own approximately 48% and 52% of the combined company, respectively.
- ASC 606 adoption reduced opening retained earnings by $0.2 million, net of tax. The company said the ongoing net-income impact was expected to be immaterial; reported Q1 revenue was $0.1 million higher and net income $0.04 million lower than under the prior standard.
- Key risks include Title IV and other education regulation, state authorization for online programs, gainful-employment rules, and the timing and approval of the Capella merger. Two University associate-degree programs were in the gainful-employment “zone”; none failed the reported metrics. Management said the University was in compliance with applicable disclosure requirements and had Title IV certification through June 30, 2021.
- The company cited slower-than-anticipated NYCDA growth and said further downward revisions to its operating plan could result in future impairment. It also noted increased student-aid verification delays as a contributor to higher bad debt, with Department process changes expected to improve timeliness.
Important facts for investors to verify
- Progress toward merger closing and required regulatory and accreditation approvals, along with final transaction terms and integration costs.
- Whether enrollment growth continues and offsets lower revenue per student, particularly given scholarship and pricing initiatives.
- Whether bad-debt expense improves as student-aid verification processes change, and the resulting effect on cash flow and earnings.
- Future performance and impairment assumptions for NYCDA, and the company’s regulatory exposure, including Title IV, gainful-employment, and online state-authorization requirements.
- Execution of the 2018 outlook and the effects of ASC 606, tax-law changes, and significant lease commitments.