Business context and reporting period
Strayer Education, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. It operated Strayer University, offering undergraduate and graduate degrees on campus and online, and—since its January 13, 2016 acquisition—New York Code and Design Academy (NYCDA), a non-degree coding-course provider. The company reported one segment. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $108.5 | $109.8 | $219.7 | $221.6 |
| Operating income | $12.9 | $20.9 | $33.0 | $40.8 |
| Operating margin | 11.9% | 19.1% | 15.0% | 18.4% |
| Net income | $7.8 | $11.9 | $20.2 | $23.3 |
| Diluted EPS | $0.72 | $1.11 | $1.87 | $2.17 |
| Operating cash flow | Not presented separately | Not presented separately | $22.4 | $43.8 |
- Q2 revenue fell 1%; management attributed the decline mainly to a 2% decrease in revenue per student, partly offset by slightly higher enrollment. First-half revenue also fell 1%.
- Q2 expenses rose: instruction and educational support increased 4% to $61.8 million, marketing increased 21% to $17.7 million, and general and administration increased 10% to $11.9 million. The filing cites NYCDA-related costs, branding investment, bad debt, and new academic content among the factors.
- Q2 bad debt expense was 3.8% of revenue, versus 3.2% a year earlier. Strayer University spring-term enrollment was 41,029, up from 40,875; new enrollments declined 7% while continuing enrollments rose 2%. First-half average enrollment increased less than 1%.
- At June 30, cash and cash equivalents were $117.4 million, up from $106.9 million at December 31, 2015. Current assets were $145.8 million and current liabilities $59.5 million. The company had no revolver borrowings and $150 million available under its facility, maturing July 2020; it reported compliance with its covenants.
- First-half operating cash flow was $22.4 million, down from $43.8 million. Investing cash use was $11.5 million, including $7.6 million net cash used in the NYCDA acquisition; capital expenditures were $3.9 million. Financing cash use was $0.4 million. Management cited working-capital movements, tax-payment timing, and NYCDA founder retention payments as cash-flow factors.
- The company had no term debt or revolver balance at quarter-end. Its $150 million secured revolving facility carries a variable rate if drawn. Operating-lease commitments totaled $160.4 million, excluding subleases; adoption of the forthcoming lease accounting standard was expected to materially increase reported assets and liabilities.
Material changes, outlook, and risks
- Operating income declined 38% in Q2 and 19% for the first half; net income declined 34% and 13%, respectively. Lower revenue and higher operating costs more than offset sharply lower interest expense following repayment of the prior term loan in July 2015.
- NYCDA acquisition consideration included $2.4 million paid up front, contingent payments, and $4.6 million of founder retention payments. A $6.0 million contingent payment was made after receipt of a state permit. Total potential acquisition cash payments could reach $25.0 million; the purchase-price allocation remained preliminary.
- Management expected undergraduate revenue per student to continue declining, though more gradually, as more students entered under the lower-tuition pricing structure and Graduation Fund. It expected marketing spending could increase in absolute terms and as a share of revenue in 2016. No numerical earnings or revenue guidance was provided.
- Management said existing cash, operating cash flow, and—if needed—the revolver should meet requirements for at least the next 12 months. The company did not repurchase shares in the first half and paid no regular quarterly dividend; $70 million of repurchase authorization remained through December 31, 2016.
- Key regulatory uncertainties included gainful-employment rules, proposed borrower-defense-to-repayment regulations, and proposed state-authorization requirements for distance education. The filing said these could increase compliance costs, affect enrollment or reputation, and potentially affect Title IV eligibility or require financial protection. Strayer University’s provisional Title IV participation agreement ran through June 30, 2017; NYCDA did not participate in federal student aid. The company reported no pending material legal proceedings and no material changes to previously disclosed risk factors.
- Management identified enrollment trends, student ability to pay, Title IV and other regulatory compliance, competitive conditions, and execution of new programs and acquisitions as risks to forward-looking expectations. Results for the six months were not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether enrollment and revenue-per-student trends improve, particularly the decline in new student enrollment and undergraduate revenue per student.
- Whether expense growth—especially marketing, instruction, and bad debt—can be controlled as revenue remains under pressure.
- NYCDA’s operating performance, regulatory permits, earnout obligations, and final purchase-price allocation.
- Cash conversion and working-capital movements, alongside the company’s substantial lease commitments and future lease-accounting effects.
- Developments in federal and state regulation, Title IV participation, and the company’s ability to meet applicable financial-responsibility and credit-facility requirements.