Business Context and Reporting Period
The filing is a quarterly report for the three months ended March 31, 2013. The registrant identified in the filing is Strayer Education, Inc. (not Strategic Education, Inc.); it operated Strayer University, with 100 campuses and online programs, as a single reporting segment. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial Results and Liquidity
| Metric | Q1 2012 | Q1 2013 |
|---|---|---|
| Revenue | $149.5 | $137.5 |
| Operating income | $40.9 | $29.9 |
| Operating margin | 27.3% | 21.8% |
| Net income | $24.0 | $17.2 |
| Diluted EPS | $2.09 | $1.59 |
| Operating cash flow | $36.5 | $31.4 |
| Capital expenditures | $4.1 | $2.4 |
Cash from operations less capital expenditures was approximately $29.0 million in Q1 2013, versus $32.4 million in Q1 2012. At March 31, 2013, cash and cash equivalents were $50.8 million, current assets were $85.0 million, and current liabilities were $39.4 million. Term-loan debt was $124.2 million, with no revolver borrowings and $100 million available under the revolving facility. The term loan matures December 31, 2016; the company reported compliance with its financial covenants.
Changes Versus the Prior-Year Quarter
- Revenue declined 8%, primarily reflecting 5% lower enrollment and 3% lower revenue per student. Winter-term enrollment fell 5% to 47,926; both new and continuing enrollment declined 5%.
- Operating income fell 27%, net income fell 28%, and diluted EPS fell 24%. Operating margin contracted about 5.5 percentage points.
- Instruction and educational support costs were nearly flat at $73.4 million, but rose to 53.4% of revenue from 49.3%. Marketing expense increased 15% to $17.7 million, while admissions advisory expense fell 21% and general and administration expense fell 12%.
- Operating cash flow decreased to $31.4 million. Cash increased $3.2 million during the quarter, partly because financing outflows were lower than operating cash generation and investing outflows.
- The company repurchased 495,085 shares for $25.0 million at an average $50.49 per share; $70.0 million remained authorized. No dividend was paid in Q1 2013.
Outlook, Commentary, Risks, and Other Items
Management said enrollment weakness across the proprietary higher-education sector may reflect sustained high unemployment and lower confidence in job prospects. It cautioned that enrollment could decline further, stabilize, or improve, and said several quarters of new-student growth may be needed for overall enrollment growth.
Management’s 2013 scenario assumed enrollment at 2012 levels: expenses growing 1%–2%, operating margin of 19%–20%, and EPS of $5.40–$5.60. It expected roughly flat revenue per student despite a 3% tuition increase, citing a shift toward graduate and corporate-sponsored students and targeted scholarships. Each 1% change in revenue versus 2012 was estimated to affect operating margin by about 50 basis points and EPS by about $0.20. These were scenario estimates, not an unconditional forecast.
Regulatory risk remained relevant: federal gainful-employment rules were largely vacated by a court, and the Department of Education announced further negotiated rulemaking on gainful employment and other topics. The filing cited Title IV compliance, accreditation, state regulation, enrollment, student financing, competition, and economic conditions among forward-looking risks. Management said existing cash, operating cash flow, and potential revolver borrowings should meet requirements for at least the next 12 months.
The company had hedged the $124.2 million term loan with interest-rate swaps, fixing the effective rate at 2.85%–3.35%, subject to leverage ratio. The securities class action became final after the appeal deadline expired on March 13, 2013; the filing reported no pending material legal proceedings. After quarter-end, the May 2 annual meeting documents a CEO transition to Karl McDonnell and related employment agreements.
Important Facts for Investors to Verify
- Confirm the issuer identity: this filing names Strayer Education, Inc., whereas the request metadata names Strategic Education, Inc.
- Monitor enrollment and revenue per student, the main drivers management identified for revenue and earnings.
- Compare realized 2013 results with management’s enrollment-based expense, margin, and EPS scenario assumptions.
- Review debt repayment and covenant capacity, the $100 million undrawn revolver, and the timing and price of continued share repurchases.
- Track Department of Education rulemaking and any resulting implications for program eligibility and Title IV funding.