Strayer Education, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Although the request metadata names Strategic Education, Inc., the filing identifies the registrant as Strayer Education, Inc. This is an annual report; fourth-quarter figures are summarized below.
Business context
Strayer operated Strayer University, serving working adults through online and classroom undergraduate and graduate programs. The University had 100 campuses in 24 states and Washington, D.C.; fall-term enrollment was 51,727, with approximately 60% of students taking all courses online. Tuition accounted for approximately 96% of FY 2012 revenue. The business is substantially reliant on federal Title IV student aid.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $562.0 million | $627.4 million | -10% |
| Operating income | $113.6 million | $179.1 million | -37% |
| Operating margin | 20.2% | 28.6% | -8.4 percentage points |
| Net income | $65.9 million | $106.0 million | -38% |
| Diluted EPS | $5.76 | $8.88 | -35% |
| Operating cash flow | $82.1 million | $154.4 million | -47% |
| Capital expenditures | $24.7 million | $30.0 million | -18% |
Average enrollment fell 8% to 49,323; tuition increases partly offset the enrollment decline. Operating costs did not adjust as quickly as revenue: instruction and educational support expense rose 3% to $300.1 million, while its share of revenue increased from 46.6% to 53.4%. FY 2012 bad-debt expense was 4.2% of revenue, versus 4.0% in 2011. The effective tax rate was 39.5%.
Fourth-quarter 2012 revenue was $141.9 million, operating income $28.7 million, and net income $16.6 million, compared with $155.8 million, $45.4 million, and $26.7 million, respectively, in Q4 2011.
At year-end, cash and cash equivalents were $47.5 million, working capital $46.6 million, total assets $227.8 million, and total liabilities $186.8 million. Debt was $125.0 million, all under the term loan; there was no revolving-facility borrowing and $100 million of revolving capacity available. The term loan matures December 31, 2016, with $3.1 million scheduled for repayment in 2013. The term loan rate was effectively fixed at approximately 3.1% through interest-rate swaps. Operating lease commitments totaled $242.4 million. Management said available cash, operating cash generation, and credit capacity should cover requirements for at least 12 months.
Material changes, outlook, and commentary
- Revenue declined 10% in 2012, following a 1% decline in 2011. Management attributed the decline principally to lower enrollment, including the carryover impact of fewer new students in 2011. Management cited the economy and reduced confidence in job prospects as possible contributors.
- Management’s 2013 planning assumptions were expenses up 1%–2%, roughly flat revenue per student, operating margin of 19%–20% at 2012 revenue levels, and diluted EPS of $5.40–$5.60. The model assumed a 39.5% tax rate and 11.5 million diluted shares. Each 1% revenue change from 2012 levels was estimated to move operating margin by about 50 basis points and EPS by about $0.20.
- A tuition increase of approximately 3% took effect January 1, 2013. Management expected the revenue-per-student effect to be largely offset by student mix and targeted scholarships. No new campuses were planned for 2013; expected 2013 capital expenditures were $15–$20 million.
- The company paid $47.3 million in dividends in 2012, or $4.00 per share, but announced it did not intend to pay a regular quarterly dividend in 2013. It repurchased approximately 485,000 shares for $25.0 million during 2012; $95 million remained authorized at year-end.
Risks, contingencies, and unusual items
- Regulatory oversight: Strayer University operated under a provisional Department of Education Program Participation Agreement through September 30, 2014. The Department cited untimely Title IV disbursements as the basis for provisional status. The agreement requires approval for substantial changes, including new locations.
- Program review: A preliminary Department of Education review asserted that the Associate in Arts in General Studies program was not Title IV-eligible. Strayer disagreed, moved affected students into other programs, and reported that no final determination letter had been received.
- Federal aid exposure: Strayer reported that approximately 76% of cash-basis revenue came from Title IV funds in 2011; the 2012 calculation was not yet finalized and audited. Changes to aid availability, eligibility, or regulation could affect enrollment and revenue.
- Gainful-employment rules: A federal court vacated the debt-metric and reporting provisions in June 2012; the Department’s motion concerning reporting requirements remained pending. Certain disclosure requirements remained in effect. Reinstatement or new rules could increase compliance costs and affect program eligibility or enrollment.
- Other risks include continuing enrollment weakness, increasing competition, regulatory approval delays, student financing constraints, online-system disruptions and data-security incidents. Management reported no pending material legal proceedings; a securities class-action dismissal was affirmed on appeal in December 2012.
- Unusual 2012 cost factors included approximately $2.4 million of one-time costs associated with consolidating certain non-campus functions and a $7.0 million reduction in stock-based compensation after management concluded specified performance conditions were unlikely to be met.
Most important facts for investors to verify
- Subsequent enrollment and new-student trends, and whether the 2013 revenue and EPS assumptions were achieved.
- Final Department of Education findings on the program review, compliance with the provisional agreement, and the University’s continuing Title IV eligibility.
- The finalized 2012 90/10 calculation and any changes in the proportion of revenue derived from federal aid.
- Cash generation, debt repayments, covenant compliance, and the sustainability of liquidity amid declining operating cash flow and substantial lease commitments.
- Dividend policy, share repurchases, and actual 2013 capital spending relative to management’s stated plans.