Strategic Education, Inc. (Strayer Education, Inc.) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing registrant is Strayer Education, Inc.; it operates Strayer University, with campus and online programs, as a single reporting segment. Financial statements are unaudited.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $124.3m | $135.9m | $420.0m | $471.6m |
| Operating income | $7.8m | $24.4m | $84.9m | $133.8m |
| Operating margin | 6.3% | 18.0% | 20.2% | 28.4% |
| Net income | $4.1m | $13.9m | $49.3m | $79.4m |
| Diluted EPS | $0.36 | $1.20 | $4.29 | $6.58 |
Q3 revenue fell 9% year over year; operating income fell 68%, net income 71%, and diluted EPS 70%. For the nine months, revenue declined 11%, operating income 36.6%, and net income 38%. Average enrollment for the nine-month period declined 10% to 48,521. Q3 summer-term enrollment declined 7% to 44,236: new enrollments rose 9%, while continuing enrollments fell 11%; global online enrollments increased 8%.
Q3 instruction and educational support costs rose 7% to $73.0m, reaching 58.7% of revenue versus 50.2%, largely reflecting new-campus faculty and staff costs and lower revenue. Marketing, admissions, and general and administrative expenses were broadly flat to slightly higher in dollars, but each increased as a share of revenue. The nine-month effective tax rate was 39.5% (39.6% prior year).
Cash flow, liquidity and debt
For the nine months, operating cash flow was $57.2m, down from $122.7m; capital expenditures were $18.2m versus $24.9m. Cash declined to $45.6m at September 30 from $57.1m at year-end 2011. The company paid $35.6m in dividends and made no share repurchases during the period; $80m of repurchase authorization remained.
At September 30, total debt was $102.5m: $77.5m term loan and $25.0m revolver borrowings. The company reported $75m available under its $100m revolver at quarter-end and said cash, operating cash generation, and available borrowing capacity should cover requirements for at least 12 months. The term loan’s interest rate was fixed at approximately 3.6% through a swap; revolving borrowings remained exposed to variable rates. The company was in compliance with its credit covenants.
Subsequent to quarter-end, the company borrowed $10m on October 9 and repaid the entire $35m revolver balance on October 23. On November 8, it entered a new facility with a $100m revolver and $125m term loan, maturing December 31, 2016, with a conditional option to increase commitments by up to $50m. The new term loan was swapped to an effective rate of approximately 3.1%. It includes financial covenants, including a maximum total leverage ratio of 2.00:1.00, minimum coverage ratio of 1.75:1.00, and minimum Department of Education composite score of 1.5.
Outlook, risks and notable items
- Management attributed enrollment weakness in part to sustained high unemployment and reduced confidence in job prospects, and said it could not predict whether enrollment would decline further, stabilize, or improve.
- The filing repeats a conditional business-model scenario first announced in October 2011, based on new-student enrollment ranging from 10% below to 10% above 2011. It indicated revenue of $570m–$610m, operating margins of 21%–26%, and diluted EPS of $6.00–$8.00 across those scenarios. These are scenario estimates, not a newly stated unconditional forecast.
- The company opened a San Antonio campus for fall 2012 and planned three additional openings, subject to regulatory approval, toward its stated goal of eight new campuses in 2012.
- Gainful-employment regulations had been mostly vacated by a federal court; the Department of Education’s motion for reconsideration was pending. Illustrative Department data released in June 2012 showed all University programs complying with the regulations.
- Bad debt expense was 4.2% of Q3 revenue versus 3.8% a year earlier; days sales outstanding rose to 18 from 14.
- A securities class action dismissal was on appeal; a related shareholder derivative action had been dismissed. Management did not expect these matters to materially affect financial condition or results, but outcomes remain uncertain.
- Management cited enrollment, Title IV compliance, accreditation and state requirements, regulatory developments, competition, campus and program expansion, student financing, and general economic conditions as risks. It reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Track new and continuing enrollment separately, and assess whether enrollment declines and higher bad debt persist.
- Check whether new-campus investment can be absorbed without further deterioration in operating margins and cash generation.
- Verify the effects and covenant terms of the November 2012 refinancing, including debt service, interest-rate protection, and compliance.
- Monitor regulatory developments affecting Title IV funding, gainful-employment rules, and the company’s Department of Education composite score.
- Compare subsequent results with the filing’s conditional scenario assumptions; do not treat those scenarios as current guaranteed guidance.