Strayer Education, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. The filing identifies the registrant as Strayer Education, Inc.; this differs from the requested company name, Strategic Education, Inc., and should be verified.
Business context and results
Strayer University provides undergraduate and graduate education through campuses and online. About 97% of revenue came from tuition. Third-quarter summer-term enrollment was 52,221, up 23% year over year; nine-month average enrollment rose 22% to 54,432.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $147.6m | $114.4m | $464.8m | $364.8m |
| Operating income | $38.2m | $27.3m | $156.9m | $120.0m |
| Net income | $23.3m | $16.7m | $95.4m | $73.2m |
| Diluted EPS | $1.72 | $1.21 | $6.98 | $5.29 |
| Operating margin | 25.9% | 23.8% | 33.8% | 32.9% |
| Net margin | 15.8% | 14.6% | 20.5% | 20.1% |
Q3 revenue increased 29%, operating income and net income each rose 40%, and diluted EPS rose 42%. Management attributed revenue growth principally to enrollment growth and a 5% tuition increase effective at the start of 2010. For the nine months, revenue increased 27% and net income 30%.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $141.4m, versus $89.8m a year earlier. It included approximately $34m of fall-term tuition receipts accelerated into Q3 after private lenders set a September 30 deadline while exiting the Title IV loan business.
- Capital expenditures were $32.1m, compared with $22.1m. Cash and cash equivalents were $84.1m and marketable securities $40.7m at September 30; combined, $124.8m.
- The company reported no debt. A $15m credit facility was undrawn. Management said available cash, operating cash generation and, if needed, the facility should meet requirements for at least 12 months.
- Operating lease commitments totaled $251.1m, including $33.2m due within one year. Current assets were $325.3m and current liabilities $237.7m.
- Cash dividends paid in the first nine months totaled $31.2m. The board subsequently raised the quarterly dividend from $0.75 to $1.00 per share. The company spent $73.2m on repurchases through September 30; a new authorization of up to $150m over 14 months was approved October 26, 2010.
Costs, outlook and material developments
For Q3, instruction costs were 33.2% of revenue versus 35.1% a year earlier, and marketing and admissions were 23.5% versus 24.0%; both improved as a share of revenue. General and administration rose to 17.3% from 17.1%, reflecting higher compensation and administrative costs. Bad debt expense was 4.2% of revenue versus 4.5%; adjusted days sales outstanding was 13 days versus 15.
The company planned eight campus openings in 2011, including three scheduled for the winter term in Cincinnati, Dayton and Milwaukee. No specific financial earnings guidance was provided. The 2010 results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- The Department of Education notified the company in August 2010 of a Title IV program review; its application to continue participating in Title IV programs was pending. Outcomes and timing were uncertain.
- New federal rules addressing program integrity were issued in October 2010, and further gainful-employment rules were expected. The company warned that regulatory changes could affect operations and Title IV eligibility.
- The Department of Education had raised compliance concerns regarding Middle States, Strayer University’s accreditor, with a December 15, 2010 deadline. Loss of federal recognition could jeopardize Title IV participation.
- Congressional scrutiny of for-profit education and a putative securities class action filed October 15, 2010 were disclosed. The company said it would contest the lawsuit and did not expect ordinary-course litigation to materially affect results.
- Investment income remained modest; the company identified interest-rate and investment-value risks, but said a 10% rate change would not materially affect investment-related earnings, fair values or cash flows.
Important facts for investors to verify
- Confirm the registrant identity, given the mismatch between the requested company name and the filing’s stated name.
- Track enrollment growth, student retention, tuition pricing and bad-debt trends against the strong reported growth.
- Assess the timing and outcome of the Title IV review and pending participation application, federal rulemaking, and accreditor-related developments.
- Distinguish recurring operating cash generation from the approximately $34m of tuition receipts received earlier than usual.
- Review the planned campus expansion, lease commitments, higher dividend and expanded repurchase authorization alongside cash needs.