Business context and reporting period
This is Strayer Education, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014, filed November 3, 2014. The company operates Strayer University, offering undergraduate and graduate education through campuses and online, and reports one segment. The request metadata names Strategic Education, Inc.; that is not the registrant named in this 2014 filing.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. Third-quarter and nine-month results are compared with the corresponding 2013 periods.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $100.8 | $110.0 | $330.0 | $379.5 |
| Operating income | $9.2 | $6.6 | $59.1 | $62.8 |
| Operating margin | 9.1% | 6.0% | 17.9% | 16.5% |
| Net income | $5.0 | $3.1 | $33.4 | $35.4 |
| Diluted EPS | $0.46 | $0.30 | $3.15 | $3.32 |
| Operating cash flow | Not separately provided | Not separately provided | $62.1 | $72.2 |
- Q3 revenue fell 8%; operating income rose 39%, net income rose 57%, and diluted EPS rose 53%. The improvement in quarterly profit reflected lower operating costs, including restructuring-related savings, despite declining revenue.
- For the first nine months, revenue declined 13%, operating income 6%, net income 6%, and diluted EPS 5%. Nine-month net margin was approximately 10.1%, compared with 9.3% in 2013.
- Cash and equivalents were $150.5 million at September 30, 2014, up from $94.8 million at December 31, 2013. Current assets were $182.7 million and current liabilities $58.8 million. Operating cash flow was lower year over year, which management attributed mainly to lower net income, lease payments, and timing of tax payments, partly offset by higher deferred revenue. Capital expenditures were $4.1 million.
- Total debt was $119.5 million, all under the term loan; there were no revolver borrowings and $100 million was available. The loan matures December 31, 2016; $5.5 million was classified current. An interest-rate swap fixed the term-loan rate at an effective 2.85%–3.35%. The company reported compliance with its credit covenants.
- Total assets were $295.5 million and stockholders’ equity was $77.7 million at quarter-end. Operating lease commitments totaled $199.9 million. The company stated that cash, operating cash flow and, if needed, revolver availability should cover requirements for at least 12 months.
Material changes and management commentary
- Summer-term enrollment declined 6% to 36,403. New enrollments increased 2%, while continuing enrollments fell 8%. Average enrollment for the first nine months declined 10% to 39,609.
- Q3 revenue per student fell 3%; management attributed the undergraduate decline principally to a roughly 20% tuition reduction for new undergraduate students and the Graduation Fund. Undergraduate revenue fell 14% in Q3 and 19% for the nine-month period. Graduate revenue increased 5% in Q3 and 2% year to date, supported by higher revenue per student, partly offset by lower enrollment.
- A 2013 restructuring included closing approximately 20 locations and workforce reductions. Management estimated annual expense savings of approximately $50 million beginning in 2014, subject to assumptions about lease-cost mitigation and subleasing. Restructuring liabilities were $29.7 million at September 30, 2014, mainly lease and related costs; lease obligations extend in some cases through 2022.
- Undergraduate tuition reductions and the Graduation Fund are expected to reduce revenue per student by approximately 4% in 2014 and 4%–5% in 2015. Management said new-student growth had begun to appear and, if enrollment trends continue, total enrollment could grow in Q1 or Q2 2015, with revenue growth roughly two quarters later.
Outlook, risks and contingencies
- Management forecast 2015 revenue flat to down 2% and operating expenses flat to up 2%, assuming enrollment trends continue; it expected earnings growth after 2015 under that scenario. The company expected a 2014 effective tax rate of approximately 39.5%, full-year 2014 capital expenditures of approximately $8 million, and 2015 capital expenditures of $10 million–$12 million. No new campuses were planned for the remainder of 2014.
- Strayer University received a provisional Department of Education Program Participation Agreement on October 1, 2014, allowing Title IV participation through June 30, 2017. The provisional status arose from open program reviews and requires Department approval for specified substantial changes. One review was closed with no further action; determination letters for three other reviews were pending.
- The Department published final gainful-employment regulations on October 31, 2014; the company said it was assessing the rules and could not yet determine their financial or operational impact. The filing also identifies compliance with Title IV, accreditation and state requirements, recertification, student financing, competition, enrollment trends, and regulatory changes as material risks.
- There were no pending material legal proceedings reported. The company disclosed $1.4 million of unrecognized tax benefits at September 30, 2014 and noted that relevant federal, state and local tax years remained open to examination.
Important facts for investors to verify
- Whether enrollment and new-student trends improved as management anticipated, and how the tuition reductions and Graduation Fund affect revenue per student and persistence.
- Whether restructuring savings approach the estimated $50 million annually, including actual sublease income, lease settlements, and remaining lease liabilities.
- The outcomes of the three pending Department of Education program reviews, the implications of provisional Title IV participation, and the impact of the final gainful-employment regulations.
- Progress on the 2015 outlook, including revenue, operating expenses, cash generation, capital spending, and the company’s ability to meet debt and lease obligations.
- The use of the remaining $70 million share-repurchase authorization, which was extended through December 31, 2015; no shares were repurchased in the first nine months of 2014.