Business context and reporting period
Strayer Education, Inc. (the registrant named in the filing) operates Strayer University, offering undergraduate and graduate programs online and at physical campuses. This unaudited Form 10-Q covers the quarter ended March 31, 2014, compared with the quarter ended March 31, 2013.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $116.5 million | $137.5 million | Down 15% |
| Operating income | $25.9 million | $29.9 million | Down 13% |
| Operating margin | 22.2% | 21.8% | Up 0.4 percentage points |
| Net income | $14.8 million | $17.2 million | Down 14% |
| Diluted EPS | $1.40 | $1.59 | Down 12% |
| Operating cash flow | $33.2 million | $31.4 million | Up $1.8 million |
| Capital expenditures | $1.0 million | $2.4 million | Down $1.4 million |
Cash and cash equivalents were $126.2 million at March 31, 2014, up from $94.8 million at year-end 2013. Total debt was $121.1 million, including $3.9 million current and $117.2 million long-term; no revolving credit balance was outstanding. The company had $100 million available under its revolver and reported compliance with credit covenants. It stated that available cash, operating cash flow and potential revolver borrowings should cover requirements for at least 12 months.
Material changes and operating trends
Winter-term enrollment fell 14% to 41,098 students. New student enrollment declined 2%, while continuing enrollment declined 17%. Management attributed sector-wide enrollment weakness to factors including unemployment, uncertainty about job prospects, competition and college costs. Lower average enrollment was the principal reason revenue declined.
Instruction and educational support expense fell 19% to $59.1 million, and admissions advisory expense fell 23% to $4.1 million, primarily reflecting lower personnel and facility costs after the 2013 restructuring. Marketing expense declined 8% but rose as a share of revenue to 14.0%. General and administrative expense was nearly flat at $11.0 million and increased as a share of revenue to 9.5%. Bad-debt expense was 4.3% of revenue versus 4.0%; days sales outstanding improved to 14 from 15.
Operating cash flow increased despite lower net income, which management attributed largely to less cash used for working capital. Cash flow included favorable changes in taxes payable and deferred revenue; these working-capital movements are relevant when assessing the quarter’s cash generation.
Outlook, risks and unusual items
- Management reduced undergraduate tuition for new students by 20% beginning in the 2014 winter term and introduced a Graduation Fund offering qualifying students one free course for every three completed. Management noted that a greater mix of students eligible for lower tuition could reduce future revenue per student.
- The 2013 restructuring closed approximately 20 physical locations and reduced staffing. Management estimated annual expense savings of about $50 million beginning in 2014, subject to assumptions about subleasing and mitigating lease costs. The remaining restructuring liability was $39.1 million at March 31, 2014, principally lease-related; some obligations extend through 2022.
- The Department of Education issued a proposed gainful-employment rule in March 2014. Potential consequences include added disclosures and reporting, increased administrative burdens, effects on enrollment, and loss of Title IV eligibility for programs that fail specified measures. The company said the final impact could not yet be determined.
- Contractual operating lease payments totaled $206.8 million, in addition to $121.1 million of term-loan payments. No new campuses were planned for 2014. The company did not repurchase shares in Q1; $70.0 million of repurchase authorization remained. It did not intend to pay a regular dividend in 2014.
- Management cited enrollment trends, Title IV and other regulatory compliance, accreditation and state requirements, competition, student financing, and economic conditions as risks. It reported no pending material litigation and no material changes to previously disclosed risk factors other than updates concerning proposed gainful-employment rules.
Important facts for investors to verify
- Whether new-student enrollment stabilizes and whether continuing enrollment recovers from its 17% decline.
- Whether the 20% tuition reduction and Graduation Fund improve recruitment and persistence without materially weakening revenue per student or margins.
- Actual restructuring savings versus management’s approximately $50 million annual estimate, including sublease proceeds and remaining lease obligations.
- Final gainful-employment regulations and their effect on program eligibility for Title IV funding, disclosures and enrollment.
- Cash-flow sustainability after considering working-capital movements, scheduled debt amortization and substantial operating-lease commitments.