Business context and reporting period
Unaudited results for the three months ended March 31, 2017, compared with the same 2016 period. The filing is for Strayer Education, Inc. (the registrant named in the filing; the request metadata identifies Strategic Education, Inc.). The company operates Strayer University and New York Code and Design Academy (NYCDA); it reports one segment. Most revenue is from Strayer University tuition.
Key financial metrics
Amounts below are in millions of dollars except per-share data, enrollment, and percentages.
| Metric | Q1 2016 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $111.2 | $114.9 | +3% |
| Operating income | $20.1 | $18.4 | -8% |
| Operating margin | 18.1% | 16.0% | -2.1 percentage points |
| Net income | $12.4 | $10.6 | -15% |
| Net margin | 11.2% | 9.2% | -2.0 percentage points |
| Diluted EPS | $1.15 | $0.95 | -17% |
| Operating cash flow | $14.7 | $25.1 | +$10.4 |
| Capital expenditures | $2.0 | $3.8 | +$1.8 |
At March 31, 2017, cash and cash equivalents were $147.1 million, up from $129.2 million at December 31, 2016. Current assets were $177.4 million and current liabilities $66.2 million (current ratio approximately 2.7). There were no revolver borrowings; $150 million was available under the credit facility, which matures July 2, 2020. The company reported compliance with credit covenants. Total liabilities were $115.4 million. Operating lease commitments, excluding subleases, totaled $128.6 million.
Changes versus prior period
- Total winter-term enrollment at Strayer University increased 6% to 43,387: new enrollments rose 8% and continuing enrollments 6%.
- Revenue increased on enrollment growth, partly offset by a 3% decline in revenue per student. Undergraduate revenue rose 8% as enrollment grew 13%, while revenue per student fell 4%; graduate revenue declined 7% as enrollment fell 8%.
- Instruction and educational support costs increased 6% to $61.4 million; their share of revenue rose to 53.4% from 52.3%. Bad-debt expense rose to 3.8% of revenue from 2.8%.
- Q1 2016 included a $1.6 million noncash reduction in the liability for unused facilities, contributing approximately $1.0 million after tax, or $0.09 per diluted share, to that period’s results. This benefit did not recur in Q1 2017.
- Q1 2017 income tax expense included a $0.4 million stock-compensation tax deficiency following adoption of new accounting rules and an approximately $0.3 million adjustment to reduce certain state tax benefits. The effective tax rate was 42.7%, versus 38.0%.
- Operating cash flow increased to $25.1 million, reflecting working-capital changes, timing of tax payments, and comparison with NYCDA-related retention payments in 2016.
Outlook, risks and unusual items
- Management expected revenue per student to decline slightly, approximately 1% in 2017, as lower-priced undergraduate students enter and use the Graduation Fund. The filing gives no specific full-year revenue or earnings guidance and cautions that quarterly results may not indicate full-year results.
- Management said cash, operating cash generation, and available credit were expected to meet requirements for at least the next 12 months. A $0.25-per-share quarterly dividend was paid in March; another $0.25 dividend was declared May 2, payable June 19. No shares were repurchased in the quarter; $70 million of authorization remained through December 31, 2017.
- Regulatory exposure is significant because Strayer University depends on Title IV student aid. Its provisional participation agreement ran through June 30, 2017, and the University applied for recertification on March 29, 2017. The filing does not report the outcome. None of Strayer’s programs failed the 2015 gainful-employment measures, but two associate programs were in the warning zone.
- Other risks include continued compliance with federal, state, and accreditation requirements; enrollment and student persistence; tuition affordability and collectibility; and regulatory changes affecting for-profit education. NYCDA was licensed in 11 states plus the District of Columbia and was seeking authorizations in additional states.
- The company reported no pending material legal proceedings. It anticipated a material balance-sheet impact from adopting lease accounting rules, which require recognition of right-of-use assets and lease liabilities; adoption was scheduled for 2019.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is Strayer Education, Inc., not Strategic Education, Inc.
- Track Title IV recertification and any conditions or timing imposed by the Department of Education.
- Assess whether enrollment growth can offset lower revenue per student and rising bad debt.
- Review the assumptions behind the $31.6 million Graduation Fund deferred-revenue balance and the company’s doubtful-account allowance.
- Monitor lease commitments, restructuring liabilities, acquisition-related deferred payments, and the cash required for dividends and capital spending.