Business context and reporting period
The supplied filing is Strayer Education, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. This does not match the request metadata naming Strategic Education, Inc.; verify the issuer before relying on this summary. Strayer operated Strayer University, with 92 campuses and online programs, in a single reporting segment.
Financial results
Amounts below are in millions of dollars, except per-share data and enrollment.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $135.9 | $147.6 | $471.6 | $464.8 |
| Operating income | $24.4 | $38.2 | $133.8 | $156.9 |
| Net income | $13.9 | $23.3 | $79.4 | $95.4 |
| Diluted EPS | $1.20 | $1.72 | $6.58 | $6.98 |
| Operating margin | 18.0% | 25.9% | 28.4% | 33.8% |
| Net margin | 10.3% | 15.8% | 16.8% | 20.5% |
| Operating cash flow | Not stated for quarter | $122.7 | $141.4 |
- Q3 revenue fell 8%, operating income 36%, net income 40%, and diluted EPS 30% year over year. Nine-month revenue rose 1%, while operating income fell 15% and net income fell 17%.
- Q3 summer-term enrollment declined 8% to 47,790: continuing enrollment was down 5%, new enrollment down 21%, and global online enrollment down 12%. Average nine-month enrollment fell 1% to 53,791.
- Q3 instruction and educational support expense rose 4% to $68.2 million; as a share of revenue it increased to 50.2% from 44.6%. Nine-month expense rose 12% to $219.5 million, or 46.5% of revenue versus 42.0%.
- Cash and cash equivalents were $57.1 million at September 30, 2011, down from $64.1 million at year-end 2010. Marketable securities were nil at quarter-end, versus $12.4 million at year-end. The company reported $122.7 million of nine-month operating cash flow and $24.9 million of capital expenditures.
- At September 30, debt comprised a $100 million term loan and $5 million drawn on a $100 million revolver; the $5 million revolver balance was repaid October 25. The term loan and revolver mature March 31, 2014. Scheduled term-loan principal payments begin December 2011. A swap fixes the term-loan rate at approximately 3.6%; revolving borrowings bear a floating rate.
- Nine-month repurchases totaled $182.7 million for 1,370,121 shares at an average $133.32 per share; dividends paid were $37.2 million. The remaining buyback authorization was increased from $25 million at quarter-end to $100 million afterward.
Changes, outlook, risks and unusual items
- Management attributed Q3 revenue weakness principally to lower enrollment, partly offset by a tuition increase effective at the start of 2011. Higher faculty and academic-support costs weighed on margins; nine-month costs also reflected campus, IT and depreciation expenses.
- No specific financial guidance was provided. Management said cash, operating cash generation and, if needed, revolver availability should cover requirements for at least the next 12 months. It completed three fall 2011 campus openings, fulfilling its plan for eight openings during 2011.
- The Department of Education’s gainful-employment rule becomes effective July 1, 2012; programs failing the required tests could lose Title IV eligibility, with the first possible ineligibility in 2015. Management was assessing potential effects.
- Risks highlighted include enrollment growth, Title IV and other regulatory compliance, accreditation, competition, student financing, campus expansion and broader economic conditions. The company disclosed a securities class action and a shareholder derivative action; it considered them without merit and did not expect a material financial effect. The class-action motion to dismiss was pending, and the derivative case was stayed.
- The filing reclassified operating-expense categories and changed tuition receivable/unearned-tuition presentation retrospectively; management said these presentation changes did not affect income, EPS, working capital or operating cash flow. The interest-rate swap had a $1.4 million fair-value liability at quarter-end, with a $0.8 million after-tax fair-value change reflected in other comprehensive income for the nine months.
Important facts to verify
- Confirm that this Strayer Education filing—not a Strategic Education filing—is the intended issuer and reporting period.
- Review enrollment trends, especially the 21% drop in new students and the decline in online enrollment, and assess implications for future revenue.
- Check term-loan amortization, covenant compliance, available revolver capacity and the effects of debt service alongside dividends and repurchases.
- Assess potential program-level exposure to gainful-employment regulations and the status and eventual outcome of the disclosed lawsuits.
- Reconcile reported cash and liquidity with the substantial share repurchases and the company’s stated 12-month funding outlook.