Filing identity and business context
Important metadata discrepancy: The supplied filing is for Strayer Education, Inc., not Strategic Education, Inc. It is an unaudited Form 10-Q for the quarter ended June 30, 2011, covering the three and six months ended June 30. Strayer operated Strayer University, offering undergraduate and graduate programs through campuses and online; tuition represented approximately 98% of first-half revenue.
Financial results and liquidity
Unless stated otherwise, amounts are in millions of dollars. Comparisons are with the corresponding 2010 period.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $163.8 | $159.3 | $335.7 | $317.2 |
| Operating income | $50.1 | $58.7 | $109.4 | $118.6 |
| Net income | $29.6 | $35.7 | $65.4 | $72.0 |
| Diluted EPS | $2.53 | $2.60 | $5.34 | $5.25 |
| Operating margin | 30.6% | 36.8% | 32.6% | 37.4% |
- Q2 revenue rose 3%, while operating income fell 15% and net income fell 17%. First-half revenue rose 6%, while operating income fell 8% and net income fell 9%. First-half diluted EPS increased as the weighted-average share count declined following repurchases.
- Operating costs increased faster than revenue. Instruction and educational support expense rose 15% in Q2 and 17% in the first half; bad debt expense was 4.1% of Q2 revenue versus 3.6% a year earlier.
- First-half operating cash flow was $87.4 million, versus $87.9 million. Capital expenditures were $18.1 million, versus $22.6 million.
- Cash and cash equivalents were $50.6 million at June 30, down from $64.1 million at year-end 2010; marketable securities were zero, compared with $12.4 million at year-end. Cash, cash equivalents and marketable securities totaled $50.6 million, versus $76.5 million at year-end.
- At June 30, debt comprised a $100 million term loan and $15 million drawn on a $100 million revolving facility. The company repaid the $15 million revolver balance on July 18, 2011. The term loan’s rate was fixed at approximately 3.6% through an interest-rate swap; the filing reports a $1.1 million swap liability.
- Management said available cash, operating cash generation and, if needed, revolving-credit borrowings should meet requirements for at least 12 months. The company reported compliance with credit-facility terms at June 30 and $85 million of revolver availability at that date.
Material developments and management commentary
- Spring-term enrollment was essentially flat at 55,974 versus 55,970. New-student enrollment declined 19%, while continuing-student enrollment increased 4%; average enrollment for the first half rose 2%.
- Management attributed revenue growth principally to stable enrollment, higher average first-half enrollment and a tuition increase effective at the start of 2011. Higher faculty and academic staff compensation, campus costs, IT costs and bad debt pressured margins.
- The company repurchased 1.37 million shares for $182.7 million in the first half, including 433,936 shares for $55.5 million in Q2. The remaining authorization at June 30 was $25 million. First-half dividends paid were $25.2 million.
- Strayer completed its planned eight campus openings for 2011, including three campuses opening for the fall term. It reported 92 campuses including those three new locations.
- The Department of Education’s final gainful-employment regulation was issued June 13, 2011, with an effective date of July 1, 2012. A program could lose Title IV eligibility if it failed the specified alternative measures in three of four consecutive years; the earliest potential ineligibility date was 2015. Management was assessing the impact.
- The company disclosed a putative securities class action and a shareholder derivative action. It said it believed the claims were without merit, would contest them, and did not expect a material financial effect. The derivative action was stayed pending resolution of the motion to dismiss in the class action.
- Management identified risks including enrollment growth, Title IV and other regulatory compliance, accreditation, competition, student financing, new-campus execution and broader economic conditions. No full-year numerical guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Confirm the intended issuer: this filing names Strayer Education, Inc., despite the request metadata naming Strategic Education, Inc.
- Track enrollment trends, especially the decline in new-student enrollment, and whether tuition increases can offset enrollment and cost pressures.
- Assess continued margin compression, bad debt trends and the pace of faculty, campus and marketing expense growth.
- Review debt repayment, liquidity after the large share repurchases and dividends, credit-facility covenants, and the effect of any future revolver borrowing.
- Monitor the gainful-employment regulation’s program-level implications and the status and outcomes of the disclosed litigation.