Strategic Education(US:STRA)2023-07-27 20:05PART I — FINANCIAL INFORMATION Financial Statements This section presents Strategic Education, Inc.'s unaudited condensed consolidated financial statements, reflecting declines in total assets, stockholders' equity, net income, and cash from operations for the first half of 2023 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | June 30, 2023 | | :--- | :--- | :--- | | Total current assets | $329,061 | $350,914 | | Total assets | $2,161,747 | $2,142,112 | | Total current liabilities | $209,944 | $242,087 | | Total liabilities | $525,957 | $543,506 | | Total stockholders' equity | $1,635,790 | $1,598,606 | Condensed Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2022 | Q2 2023 | H1 2022 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $273,564 | $287,680 | $532,419 | $544,286 | | Income from operations | $21,865 | $16,817 | $35,306 | $15,468 | | Net income | $15,220 | $14,231 | $22,249 | $12,203 | | Diluted EPS | $0.63 | $0.59 | $0.92 | $0.51 | Condensed Consolidated Cash Flow Highlights (in thousands) | Cash Flow Activity | Six months ended June 30, 2022 | Six months ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $80,676 | $40,737 | | Net cash used in investing activities | ($20,811) | ($23,754) | | Net cash used in financing activities | ($57,739) | ($44,431) | | Net decrease in cash | ($2,855) | ($29,372) | Nature of Operations Strategic Education, Inc. provides post-secondary education and job-skill development programs through its U.S. Higher Education, Education Technology Services, and Australia/New Zealand segments - The company's mission is to close the skills gap by providing a direct path between learning and employment21 - The three reportable segments are U.S. Higher Education (USHE), Education Technology Services, and Australia/New Zealand22 Revenue Recognition Revenue is primarily tuition, recognized ratably, with U.S. Higher Education as the largest segment, and a $45.3 million contract liability for the Graduation Fund as of June 30, 2023 Revenue by Segment (in thousands) | Segment | Q2 2022 | Q2 2023 | H1 2022 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | U.S. Higher Education | $190,026 | $202,679 | $385,792 | $399,574 | | Australia/New Zealand | $67,543 | $65,472 | $116,055 | $106,975 | | Education Technology Services | $15,995 | $19,529 | $30,572 | $37,737 | | Consolidated Revenue | $273,564 | $287,680 | $532,419 | $544,286 | - The contract liability for the Graduation Fund, which provides free courses to eligible students, was $45.3 million at the end of the period, down from $46.8 million at the beginning of the year6365 Restructuring and Related Charges The company incurred $8.4 million in severance and $5.1 million in lease impairment charges for the first half of 2023, partially offset by a $2.1 million gain from a campus sale - For the six months ended June 30, 2023, the company incurred $8.4 million in severance charges and $5.1 million in right-of-use lease asset impairment charges7071 - A gain of $2.1 million was recognized in Q2 2023 from the sale of property and equipment of a closed campus71 Goodwill and Intangible Assets As of June 30, 2023, the company held $1.24 billion in goodwill and $253.4 million in net intangible assets, with no impairment charges recorded for the first half of 2023 Goodwill by Segment as of June 30, 2023 (in thousands) | Segment | Goodwill Balance | | :--- | :--- | | U.S. Higher Education | $632,075 | | Australia / New Zealand | $505,907 | | Education Technology Services | $100,000 | | Total | $1,237,982 | - No impairment charges for goodwill or intangible assets were recorded during the three and six months ended June 30, 20237982 Long-Term Debt The company has a $350 million revolving credit facility with $101.3 million outstanding as of June 30, 2023, amended to replace LIBOR, and remains in compliance with all financial covenants - As of June 30, 2023, the company had $101.3 million outstanding under its $350 million Revolving Credit Facility97 - In June 2023, the credit facility was amended to replace LIBOR with alternative benchmark rates, including Term SOFR, for U.S. dollar-denominated loans98 Segment Reporting This note details segment performance, showing U.S. Higher Education as the largest revenue contributor but with declining operating income, while Education Technology Services grew in both revenue and operating income for the first half of 2023 Segment Income from Operations (in thousands) | Segment | H1 2022 | H1 2023 | | :--- | :--- | :--- | | U.S. Higher Education | $27,334 | $16,330 | | Australia/New Zealand | $11,572 | $7,109 | | Education Technology Services | $10,015 | $11,962 | | Consolidated Income from Operations | $35,306 | $15,468 | Regulation This section details regulatory updates including the resumption of federal student loan repayments, the amended 90/10 Rule, proposed Gainful Employment and Financial Responsibility rules, and potential changes to SARA - Federal student loan interest began accruing on September 1, 2023, with repayments resuming in October 2023117 - The new 90/10 regulations, effective for fiscal years starting January 1, 2023, expand the definition of federal revenue to include military and veterans' education benefits, increasing compliance risk118119 - The Department of Education has proposed new rules on Financial Value Transparency and Gainful Employment, which would establish debt-to-earnings and earnings premium tests for programs to maintain Title IV eligibility123 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting Q2 2023 revenue growth driven by USHE enrollment, but a decline in operating income due to lower USHE earnings and restructuring costs, alongside strong liquidity and decreased operating cash flow - Q2 2023 USHE enrollment increased 4.7% to 80,353, while Australia/New Zealand enrollment decreased 4.6% to 17,966 compared to Q2 2022141144 - For Q2 2023, bad debt expense was 4.4% of revenue, compared to 3.2% for the same period in 2022158203 Adjusted (Non-GAAP) Results | Metric | Q2 2022 | Q2 2023 | H1 2022 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Adjusted Income from Operations ($M) | $29.5 | $27.2 | $48.9 | $35.4 | | Adjusted Net Income ($M) | $20.5 | $19.7 | $33.5 | $25.5 | | Adjusted Diluted EPS | $0.85 | $0.82 | $1.39 | $1.06 | - Net cash provided by operating activities for H1 2023 decreased to $40.7 million from $80.7 million in H1 2022, driven by lower earnings and working capital changes198 - In H1 2023, the company paid $29.5 million in dividends and repurchased $10.0 million of common stock202 Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from its $101.3 million variable-rate debt and foreign currency risk, with 19.7% of H1 2023 revenue in foreign currencies, where a 10% adverse change would reduce revenue by $10.7 million - The company had $101.3 million in variable-rate debt outstanding at June 30, 2023. A 100 basis point rate increase would add $3.5 million in annual interest expense if the full $350 million facility were utilized206 - Revenues from foreign currencies (primarily Australian Dollar) accounted for 19.7% of consolidated revenues for the first six months of 2023208 Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the quarter210 - No material changes to internal control over financial reporting were identified during the quarter210 PART II — OTHER INFORMATION Legal Proceedings The company is involved in routine litigation, with management believing the outcomes will not materially adversely affect its financial position, results, or cash flows - The company states that the ultimate outcome of current legal matters is not expected to have a material adverse effect on its consolidated financial position211 Risk Factors This section updates key regulatory risks, including the amended 90/10 Rule which now includes all federal education assistance, and potential changes to SARA that could restrict for-profit institutions' participation - The 90/10 Rule was amended to include all federal education assistance, such as military tuition assistance and veterans' benefits, in the 90% revenue calculation, effective for fiscal years starting on or after January 1, 2023213 - In 2022, Strayer University's 90/10 ratio was 80.57% and Capella University's was 65.30% under the old formula213 - Proposed changes to the State Authorization Reciprocity Agreement (SARA) could eliminate the ability of for-profit institutions to participate, which would require seeking authorization in each state individually and could materially harm the business221222 Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2023, the company repurchased 129,073 shares for $10.0 million, with $236.8 million remaining for repurchases through December 31, 2023 Share Repurchases in Q2 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2023 | — | $— | | May 2023 | 44,371 | $78.87 | | June 2023 | 84,702 | $76.73 | | Total | 129,073 | $77.47 | - As of June 30, 2023, $236.8 million remained under the share repurchase authorization, which expires on December 31, 2023223 Other Information The company will hold annual 'Say-on-Pay' votes, amended CEO Karl McDonnell's employment agreement for a five-year term with a base salary of $961,175, and reported no Rule 10b5-1 trading plan changes by directors or officers - The company will hold annual 'Say-on-Pay' advisory votes based on the results of the 2023 Annual Meeting of Stockholders224 - CEO Karl McDonnell's employment agreement was amended on July 26, 2023, extending his term for five years with a base salary of $961,175225 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the second quarter of 2023226 Exhibits This section lists all exhibits filed with the Form 10-Q, including the amended employment agreement for CEO Karl McDonnell, the revolving credit facility amendment, and CEO/CFO certifications - Key exhibits filed include the amended employment agreement for CEO Karl McDonnell (Exhibit 10.3) and the Fourth Amendment to the Revolving Credit Agreement (Exhibit 10.2)227