Business context and reporting period
Strayer Education, Inc. (the registrant named in the filing; the request metadata identifies Strategic Education, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The company operates Strayer University, offering undergraduate and graduate programs through 92 campuses and online, and reports one segment. Comparisons below are with the three months ended March 31, 2011 unless noted.
Financial and operating results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $149.5 million | $172.0 million | Down 13% |
| Operating income | $40.9 million | $59.2 million | Down 31% |
| Operating margin | 27.3% | 34.4% | Down 7.1 percentage points |
| Net income | $24.0 million | $35.8 million | Down 33% |
| Diluted EPS | $2.09 | $2.80 | Down 25% |
| Operating cash flow | $36.5 million | $67.2 million | Down $30.7 million |
| Capital expenditures | $4.1 million | $11.4 million | Down $7.3 million |
- Revenue fell primarily because average enrollment declined 12%. Winter-term enrollment was 50,432, down 12%; new students declined about 8% and continuing students about 13%. Global online enrollment decreased 17%.
- Operating expenses declined more slowly than revenue. Instruction and educational support costs were $73.8 million, or 49.3% of revenue versus 43.6%; marketing was 10.3% of revenue versus 9.3%, and admissions advisory was 4.5% versus 4.2%. Management attributed the higher expense ratios largely to faculty and facility costs not falling as quickly as tuition revenue.
- Net cash from operations was $36.5 million; less capital expenditures of $4.1 million, implied operating cash flow after capex was approximately $32.4 million. The filing does not label this measure as free cash flow.
- Cash and cash equivalents were $52.7 million at March 31, 2012, down from $57.1 million at year-end 2011 and $71.1 million at March 31, 2011. Current assets were $89.4 million and current liabilities $83.9 million.
- Total debt was $92.5 million: $30.0 million current and $62.5 million long-term; no revolver balance remained at quarter-end. Cash less debt was approximately negative $39.8 million. The term loan is hedged by a swap that fixes the rate at approximately 3.6%; debt matures by March 2014. The company reported compliance with credit-facility covenants.
- Quarterly cash dividends paid were $11.9 million ($1.00 per share). No shares were repurchased in the quarter; $80.0 million of repurchase authorization remained.
Material changes and unusual items
- Interest expense increased to $1.2 million from $0.2 million, reflecting higher average borrowings. The effective tax rate remained 39.5%.
- Operating cash flow was lower year over year, including a $14.1 million reduction from unearned tuition, compared with an $11.8 million cash source in Q1 2011. Income-tax-related cash receipts/payables were a $15.4 million source in Q1 2012 versus $21.5 million in Q1 2011.
- The company repaid $20.0 million drawn on its revolver and made a $5.0 million term-loan payment during the quarter. In April 2012 it borrowed and subsequently repaid $13.0 million under the revolver.
- The December 2011 acquisition of assets supporting the Jack Welch Management Institute included $6.8 million of goodwill and $1.6 million of indefinite-lived intangible assets. Deferred acquisition payments were valued at $2.2 million at March 31, 2012.
- A putative securities class action was dismissed on March 20, 2012; the plaintiff appealed. The company did not expect the matter to materially affect financial condition or results, but the appeal’s outcome was uncertain.
Outlook, commentary, and risks
- Management said high unemployment and weak confidence in job prospects may be contributing to negative enrollment trends. The 19% decline in new students in 2011 was expected to weigh on 2012 enrollment; management could not predict whether enrollment would decline further, stabilize, or improve.
- The filing presents scenario-based business-model estimates, not a single definitive forecast. Assuming new-student enrollment versus 2011 of -10%, 0%, or +10%, the company modeled total enrollment changes of -9%, -6%, or -3%; revenue of $570 million, $590 million, or $610 million; operating margins of 21%–22%, 23%–24%, or 25%–26%; and diluted EPS of $6.00–$6.20, $6.90–$7.10, or $7.80–$8.00, respectively. Assumptions include a 3% tuition increase, planned investment in faculty, marketing and admissions, 11.7 million diluted shares, and a 39.5% tax rate.
- The company planned eight campus openings in 2012, subject to regulatory approval; four were planned for the summer term, including two in Minneapolis. Management said available cash, operating cash flow and, if needed, revolver borrowings should cover requirements for at least 12 months.
- Federal gainful-employment regulations were scheduled to take effect July 1, 2012; a program could lose Title IV eligibility beginning in 2015 if it failed the applicable tests. The company said it lacked enough guidance and data to estimate the potential impact.
- Key risks identified include enrollment trends, student financing, Title IV and other regulatory compliance, accreditation, competitive conditions, approvals for new campuses and programs, and broader economic conditions. Management reported no material change to the risk factors in its 2011 Form 10-K.
Important facts for investors to verify
- Whether enrollment, particularly new-student and online enrollment, stabilizes and how it affects revenue and operating leverage.
- Actual results against the enrollment-based scenario estimates, including the underlying assumptions and planned campus-opening costs.
- Cash generation and working-capital movements, especially unearned tuition and income-tax-related cash flows.
- Debt repayment schedule, covenant compliance, interest-rate exposure on any revolver borrowings, and liquidity after dividends and planned investment.
- The eventual impact of gainful-employment rules and the outcome of the securities-litigation appeal.
- The filing is for Strayer Education, Inc.; confirm the intended issuer because the request metadata names Strategic Education, Inc.