Strategic Education, Inc. annual report, FY2016

Business context and reporting period

The filing is a Form 10-K for the fiscal year ended December 31, 2016, with unaudited fourth-quarter results also presented. The request identifies Strategic Education, Inc.; however, the registrant named in this filing is Strayer Education, Inc. The company operated Strayer University, offering undergraduate and graduate education online and at 74 campuses, and acquired New York Code and Design Academy (NYCDA) in January 2016. Fall-term enrollment was 45,509; about 78% of students took all courses online.

Financial results and liquidity

The company had a $150 million revolving credit facility, maturing July 2, 2020, and reported compliance with its covenants. FY 2016 cash from operations fell by $33.0 million, primarily reflecting lower operating income, higher income-tax payments and working-capital changes, including NYCDA-related compensation payments. Operating cash flow less capital expenditures was approximately $31.3 million.

Fourth-quarter 2016 revenue was $119.3 million, operating income $19.7 million, net income $11.7 million and diluted EPS $1.07; fourth-quarter 2015 figures were $113.7 million, $21.7 million, $13.0 million and $1.21, respectively.

Material changes versus the prior period

• Revenue rose 2% year over year, as average enrollment increased 3% to 41,556, offset in part by a 1% decrease in revenue per student.
• Operating income declined 18% and net income declined 13%. Total costs and expenses grew 5%, with marketing expense up 13% to $79.0 million; operating margin contracted by 3.0 percentage points.
• Interest expense fell to $0.6 million from $3.9 million after the company repaid its term loan in July 2015. Cash increased by $22.4 million during 2016.
• NYCDA was included from its January 2016 acquisition date; its results were described as insignificant relative to consolidated results. The company recorded approximately $3.2 million of favorable noncash adjustments associated with NYCDA and restructuring-related items in 2016. Management reported approximately $2.5 million of related after-tax benefits to net income.

Outlook, risks and unusual items

• Management expected 2017 revenue growth to be slightly below enrollment growth, assuming 2016 enrollment growth continued, and operating expenses to increase slightly. Revenue per student was expected to decline approximately 1% in 2017. Planned 2017 capital expenditures were 3%–3.5% of revenue.
• Management expected a 2017 tax rate of approximately 39.5%, excluding one-time adjustments associated with equity award vesting. The board approved a $0.25-per-share quarterly dividend beginning in 2017; future dividends remain subject to board review.
• Strayer University’s Title IV participation agreement was provisional through June 30, 2017; recertification was due by March 31, 2017. Middle States reaccreditation was in process, with an evaluation visit scheduled for February 2017. Loss or restriction of Title IV access, accreditation or state authorization could materially harm the business.
• None of the programs failed the final 2015 gainful-employment debt-to-earnings metrics, but two associate programs were “in the zone.” The 2016 90/10 calculation was not finalized; the company reported approximately 74% Title IV revenue under the rule in 2015 and believed it would remain compliant in 2016.
• Other principal risks include enrollment uncertainty, intense competition, reliance on federal student aid, regulatory changes, online-system disruption and cybersecurity or privacy breaches. Management said there were no pending material legal proceedings and no off-balance-sheet arrangements. Operating lease commitments totaled $135.5 million; the company anticipated that new lease accounting rules would materially increase balance-sheet assets and liabilities.

Important facts for investors to verify

• Confirm the intended issuer: this filing is for Strayer Education, Inc., not an entity named Strategic Education, Inc.
• Track enrollment, new-student trends and revenue per student against management’s 2017 assumptions, and assess whether expense growth stabilizes margins.
• Verify completion and outcomes of Title IV recertification and Middle States reaccreditation, plus the final 2016 90/10 calculation and subsequent gainful-employment metrics.
• Review operating cash generation, bad-debt expense (3.7% of revenue in 2016 versus 3.0% in 2015), lease commitments and any future NYCDA earnout payments.
• Assess the sustainability of the new dividend and the company’s capital-allocation plans, including the remaining $70 million share-repurchase authorization through 2017.