Strategic Education, Inc. — filing summary
Entity and period: The supplied filing is Strayer Education, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, not a filing under the name Strategic Education, Inc. It reports full-year results and includes unaudited fourth-quarter data.
Business context
Strayer Education operated Strayer University, serving working adults through online and campus-based undergraduate and graduate programs. Average enrollment was 43,969 in 2013; fall-term enrollment was 43,192, and approximately 60% of fall students took all courses online. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $503.6 million | $562.0 million |
| Operating income | $32.7 million | $113.6 million |
| Operating margin | 6.5% | 20.2% |
| Net income | $16.4 million | $65.9 million |
| Diluted EPS | $1.55 | $5.76 |
| Operating cash flow | $84.1 million | $82.1 million |
| Capital expenditures | $8.7 million | $24.7 million |
Net margin was 3.3%, versus 11.7% in 2012. Revenue fell 10%, principally as average enrollment declined 11%; new-student enrollment fell 16%. Bad-debt expense was 4.4% of revenue, up from 4.2%.
At year-end, cash and cash equivalents were $94.8 million, working capital was $82.2 million, and total assets were $254.3 million. Term debt was $121.9 million, including $3.1 million due within one year; no revolver borrowings were outstanding, leaving $100 million available. The company reported compliance with its credit-facility covenants. Management said available cash, operating cash flow and, if needed, the revolver should fund requirements for at least 12 months.
Material changes and unusual items
- Operating income declined 71% and net income declined 75% year over year. Results included $54.7 million of fourth-quarter restructuring charges, chiefly for lease obligations and employee separation. The company characterized approximately $33.0 million as after-tax charges, or $3.10 per share.
- The restructuring closed approximately 20 physical locations and reduced campus and corporate staffing. The related year-end liability was $44.8 million, principally non-cancelable leases extending through 2022. Management estimated annual expense savings of approximately $50 million beginning in 2014, dependent in part on subleasing or otherwise mitigating lease costs.
- Fourth-quarter 2013 revenue was $124.1 million; operating loss was $30.1 million and net loss was $19.0 million, largely reflecting restructuring charges.
- Cash rose from $47.5 million to $94.8 million, while operating cash flow was broadly stable. The filing attributes the cash-flow result partly to non-cash restructuring charges, timing of student tuition receipts and favorable timing of tax payments.
- The company repurchased $25.0 million of shares in 2013, paid no regular dividend, and said it did not intend to pay a regular dividend in 2014.
Outlook, commentary and risks
- Management said 2014 enrollment was likely to be lower than historical levels and noted that the 2013 decline in new students would weigh on continuing enrollment. It said several quarters of new-student growth would be needed to return to overall enrollment growth.
- Beginning with the 2014 winter term, tuition for new undergraduate students was reduced 20%; the company warned that a shift toward these lower-priced students could reduce revenue per student. The Graduation Fund also offers qualifying bachelor’s students one free course for every three courses taken, redeemable in the final academic year.
- Management expected 2014 capital expenditures of $10–12 million and had no current plan to open new campuses in 2014. It expected marketing expense could rise as a percentage of revenue.
- Title IV funding is a central business risk: the filing says the majority of 2013 consolidated revenue came from Title IV funds. Strayer University’s provisional Program Participation Agreement ran through September 30, 2014, and the company planned to apply for a new agreement by June 2014. A 2013 Department of Education review concluded with no material adverse findings or additional actions.
- Regulatory uncertainty included potential new gainful-employment rules, state authorization requirements for online programs, and possible changes to the 90/10 rule. The University’s 90/10 calculation for 2013 was not yet finalized and audited; the filing cites approximately 74% for 2012.
- Other risks include continued enrollment declines, competition and affordability pressures, regulatory or accreditation changes, student financing and collection issues, and execution of planned lease mitigation and cost savings. No pending material legal proceedings were reported.
Most important facts to verify
- Confirm the issuer identity: the source filing names Strayer Education, Inc., while the request metadata names Strategic Education, Inc.
- Track enrollment, new-student starts, persistence and revenue per student after the tuition reduction and campus closures.
- Test whether the estimated $50 million of annual savings is realized, particularly whether lease costs can be reduced through subleases or buyouts.
- Review renewal of the provisional Title IV participation agreement and the final audited 2013 90/10 result, alongside subsequent regulatory developments.
- Monitor liquidity and debt repayment, covenant compliance, and operating cash flow as earnings declined and lease obligations remained substantial.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2013.