Strategic Education, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company provides online and campus-based higher education and job-skills programs. Its reportable segments are U.S. Higher Education (USHE), Alternative Learning, and Australia/New Zealand (ANZ). ANZ was acquired on November 3, 2020, so the prior-year quarter excludes ANZ and the periods are not directly comparable.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $290.3 million | $265.3 million |
| Income from operations | $12.0 million | $44.0 million |
| Operating margin | 4.1% | 16.6% |
| Net income | $9.6 million | $35.2 million |
| Diluted EPS | $0.40 | $1.60 |
| Net cash from operating activities | $78.8 million | $68.7 million |
| Capital expenditures | $12.7 million | $14.3 million |
Reported revenue rose 9.4%, primarily reflecting ANZ’s inclusion. Reported profitability fell substantially amid weaker USHE results, ANZ’s operating loss, and $18.3 million of restructuring costs. The company’s non-GAAP adjusted operating income was $52.9 million, with an 18.2% adjusted operating margin, versus $63.1 million and 23.8% in Q1 2020; adjusted net income was $37.0 million versus $46.5 million, and adjusted diluted EPS was $1.53 versus $2.11. These company-defined measures exclude specified acquisition accounting, integration, restructuring, investment-income, tax, and foreign-exchange items and are not substitutes for GAAP results.
Segments and operating trends
- USHE: Revenue declined 11.3% to $226.5 million; operating income decreased 15.8% to $47.8 million. Enrollment fell 7% to 89,482, while scholarships and discounts also pressured revenue per student.
- Alternative Learning: Revenue increased 27.9% to $12.5 million, mainly from Sophia Learning growth and employer-affiliated enrollment. Operating income decreased 8.1% to $5.9 million amid increased corporate-partner outreach investment.
- ANZ: Revenue was $51.3 million, including a $2.2 million purchase-accounting reduction for acquired contract liabilities. The segment recorded a $2.9 million operating loss, primarily driven by that adjustment. Enrollment increased 12% to 21,469.
Consolidated instructional and support costs were 52.6% of revenue, up from 50.1%; general and administration was 29.9%, up from 26.1%. Both ratios reflect the changed business mix, including ANZ. The quarter included $14.4 million of right-of-use lease asset impairments and $2.0 million of fixed-asset impairments related to vacated locations. The effective tax rate was 32.4%, compared with 23.5%; the prior-year rate benefited from larger share-based compensation tax benefits.
Liquidity, debt, and capital
- Cash and cash equivalents were $238.3 million at March 31, 2021; marketable securities totaled $35.7 million. Together, cash, cash equivalents, and securities were $274.0 million, versus $225.3 million at December 31, 2020.
- Debt outstanding under the $350 million revolving credit facility was $141.8 million. The facility matures November 3, 2025; the company reported compliance with its covenants at quarter-end. Borrowing rates vary with LIBOR or a base rate and the company’s leverage ratio.
- Operating cash flow increased to $78.8 million; the company attributed the increase largely to ANZ. Cash flow also included a $46.9 million increase in contract liabilities.
- The company paid $14.8 million in dividends, including a quarterly dividend of $0.60 per share. It made no share repurchases during the quarter; $250 million of authorization remained through December 31, 2021.
- Management stated that available cash, operating cash generation, and facility availability should be sufficient for at least the next 12 months.
Outlook, risks, and notable matters
- Management said near-term USHE revenue growth is expected to remain pressured by the pandemic, weaker enrollment demand, and higher scholarships and discounts. It cited deteriorating overall demand and intensified cost management, but provided no numerical company-wide guidance.
- COVID-19-related uncertainty remains relevant to enrollment, tuition pricing, and collections. The company continued to adapt campus and office operations and reported restructuring actions to align costs with enrollment trends.
- The American Rescue Plan amended the 90/10 rule to include “all federal education assistance” on the federal-funding side, with changes applying to institutional fiscal years beginning on or after January 1, 2023. Further proposals could tighten the threshold. The company reported 2019 Title IV revenue shares of 82.4% for Strayer and 75.8% for Capella; 2020 calculations had not yet been audited.
- Foreign-currency exposure increased with ANZ: non-U.S.-dollar revenue was 17.7% of consolidated Q1 2021 revenue. The company does not hedge foreign-currency exposure. It estimated that a 100-basis-point LIBOR increase would add $3.5 million in annual interest expense if the full $350 million facility were drawn.
- ANZ’s acquisition consideration was approximately $658.4 million, funded with cash and revolver borrowings. Final purchase-price adjustments remained subject to true-up; the opening purchase accounting was preliminary and subject to measurement-period adjustments.
- After quarter-end, the Department of Education notified Capella that it would conduct a fact-finding process concerning more than 1,000 borrower-defense applications, some alleging misrepresentations about doctoral-program completion times. Capella said it would cooperate. The related Wright litigation complaint was amended in part on April 2, 2021, and the company said it would vigorously defend the case.
- After quarter-end, Strayer’s announced Department of Education program review began April 19, 2021. Capella’s separate review was closed in February 2021 without further action required. The company also reported ongoing ordinary-course litigation and stated that its ultimate outcome was not expected to materially affect consolidated financial position, results, or cash flows, while noting an unfavorable resolution could affect a particular period.
Important facts for investors to verify
- How much of reported revenue growth and operating cash flow reflects ANZ consolidation and acquisition-related timing, rather than comparable organic performance.
- Whether USHE enrollment, revenue per student, and margins stabilize as pandemic-related demand weakness and discounting continue.
- The ultimate cost and duration of restructuring, lease closures, and ANZ integration, as well as final purchase-accounting and purchase-price adjustments.
- Developments in the 90/10 rule, institutional financial-aid eligibility, the Capella borrower-defense process and litigation, and the Strayer program review.
- Whether cash generation and liquidity remain adequate while the company carries $141.8 million of revolver borrowings and pays dividends.