Business context and reporting period
This is an unaudited Form 10-Q for the quarter ended June 30, 2012. The filing registrant is Strayer Education, Inc.—not Strategic Education, Inc., as specified in the request metadata. Strayer operates Strayer University, offering undergraduate and graduate programs through 96 campuses and online, and reports one segment.
Financial results and liquidity
Amounts are in millions except per-share data. Comparisons are with the prior-year period.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $146.3 | $163.8 | $295.8 | $335.7 |
| Operating income | $36.2 | $50.1 | $77.0 | $109.4 |
| Operating margin | 24.7% | 30.6% | 26.0% | 32.6% |
| Net income | $21.2 | $29.6 | $45.2 | $65.4 |
| Diluted EPS | $1.85 | $2.53 | $3.94 | $5.34 |
| Operating cash flow | Not separately stated for quarter | $42.7 | $87.4 |
Q2 revenue declined 11%, while operating income and net income each fell 28%. Six-month revenue declined 12%, operating income 30%, and net income 31%. Q2 net margin was 14.5%, versus 18.1% a year earlier. For the six months, net margin was 15.3%, versus 19.5%.
Cash and cash equivalents were $48.7 million at June 30, down from $57.1 million at year-end 2011. Six-month capital expenditures were $9.9 million, compared with $18.1 million in 2011. The company paid $23.7 million in dividends during the six months. At June 30, debt totaled $100 million: $85 million under the term loan and $15 million under the revolver. The term loan’s current portion was $30 million. On July 17, the company repaid the full $15 million revolver balance. The filing says $85 million remained available under the revolver at June 30 and management believed cash, operating cash flow and available borrowing would meet needs for at least 12 months.
Material changes and management commentary
- Spring-term enrollment fell 9% to 50,896; new-student enrollment rose 12%, but continuing enrollment declined 13%. Global online enrollment fell 6%. Six-month average enrollment decreased 11% to 50,664.
- Management attributed enrollment weakness in part to sustained high unemployment and reduced confidence in job prospects, and said the 19% decline in new students in 2011 would continue to weigh on 2012 enrollment.
- Costs did not adjust as quickly as revenue: Q2 instruction and educational support expense declined only 1%, and its share of revenue rose to 51.7% from 46.6%. Marketing and admissions costs also fell more slowly than revenue. Lower general and administrative expense partly offset these pressures.
- Bad-debt expense was 4.4% of Q2 revenue versus 4.1%; days sales outstanding increased to 15 from 12.
- The company opened four campuses for the 2012 summer term and planned four more during the year, subject to regulatory approval. It implemented a 3% tuition increase in 2012.
Outlook, risks and unusual items
The filing does not provide a new, unconditional full-year forecast. It repeats an October 2011 scenario model based on enrollment assumptions: at new-student enrollment 10% below, flat to, or 10% above 2011, it projected revenue of $570 million, $590 million, or $610 million, respectively, and diluted EPS of $6.00–$6.20, $6.90–$7.10, or $7.80–$8.00. Management cautioned that future enrollment could decline further, stabilize or increase; actual results may differ materially.
- Federal gainful-employment rules were largely vacated by a court on June 30, 2012; the Department of Education could appeal. Illustrative Department data released June 21 indicated all Strayer programs complied with the rules. Regulatory requirements, Title IV eligibility, accreditation and state approvals remain important risks.
- Term-loan interest was hedged at approximately 3.6% through a swap. Revolver borrowings remain rate-sensitive; a 100-basis-point LIBOR increase would add up to $1 million in annual interest if the full $100 million facility were drawn.
- A securities class action was dismissed in March 2012, but an appeal was pending. A related shareholder derivative action was voluntarily dismissed in June. The company did not expect these matters to materially affect its financial condition or results.
- The Jack Welch Management Institute acquisition included $6.8 million of goodwill, $1.6 million of indefinite-lived intangible assets and $2.2 million of deferred payments at June 30. The filing reported no goodwill impairment in the quarter.
- The company reported compliance with credit-facility covenants at June 30, 2012. It reported no material changes to previously disclosed risk factors.
Most important facts to verify
- Confirm the intended issuer: this filing is for Strayer Education, Inc., not Strategic Education, Inc.
- Track enrollment—particularly whether new-student growth can offset continuing-student declines—and monitor bad debt and days sales outstanding.
- Assess whether expenses can adjust to lower revenue and whether the planned campus openings earn adequate returns.
- Verify subsequent debt repayment, revolver availability, operating cash generation and the capacity to sustain dividends.
- Follow developments in gainful-employment regulation, Title IV funding, accreditation and the pending securities-case appeal.
- Compare actual full-year results with the filing’s older scenario model; it is not a current guaranteed forecast.