Strayer Education, Inc. — Q2 2015 Form 10-Q
Period: Quarter and six months ended June 30, 2015; unaudited. The filing identifies the registrant as Strayer Education, Inc., rather than Strategic Education, Inc. The company operates Strayer University, offering undergraduate and graduate programs online and at physical campuses.
Financial performance
Amounts below are in millions, except per-share data and enrollment. Comparisons are with the corresponding 2014 periods.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $109.8 | $112.7 | $221.6 | $229.2 |
| Operating income | $20.9 | $24.0 | $40.8 | $49.9 |
| Net income | $11.9 | $13.7 | $23.3 | $28.5 |
| Diluted EPS | $1.11 | $1.29 | $2.17 | $2.68 |
| Operating margin | 19.1% | 21.3% | 18.4% | 21.8% |
- Q2 revenue fell 3%, with enrollment down 1% and revenue per student down 2%. First-half revenue also declined 3%; average enrollment fell 1%.
- Q2 operating income and net income each declined 13%; first-half operating income fell 18% and net income fell 18%. First-half diluted EPS was down 19%.
- Q2 marketing expense rose 10% to $14.7 million. First-half marketing expense rose 6% to $31.4 million. Instruction expense was nearly flat in dollars, but rose as a share of revenue to 54.0% in Q2 and 53.7% for the first half.
- Operating cash flow was $43.5 million for the first half, versus $45.2 million. Capital expenditures were $7.1 million versus $2.3 million, leaving cash flow after capital expenditures of $36.4 million versus $42.9 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $195.6 million; current assets were $225.3 million and current liabilities $60.5 million. Total assets were $336.0 million and stockholders’ equity $120.7 million.
- Debt at June 30 was $115.6 million, all under the term loan; there were no revolver borrowings. The company reported compliance with existing credit-facility covenants.
- On July 2, after quarter-end, the company prepaid the term loan using approximately $116 million of cash and terminated its interest-rate swap. The amended facility provides a $150 million revolving commitment, an option for up to $50 million in additional commitments or term loans, and a July 2020 maturity. Transaction fees were approximately $0.9 million.
- Management said cash, operating cash generation and available borrowing capacity should be sufficient for at least 12 months. The company reported $182.8 million of operating lease commitments, including $37.7 million due within one year.
Material changes, outlook and risks
- The company attributed lower revenue per student primarily to its 2014 undergraduate tuition reduction of approximately 20% for new students and the Graduation Fund, which may provide eligible students up to a further 25% reduction. Management expects undergraduate revenue per student to continue declining as more students enter under the new pricing structure.
- Graduate revenue declined 8% in Q2 and 7% in the first half, mainly because graduate enrollment fell 11% in both comparisons. Q2 spring-term enrollment was 40,875, down 1% year over year.
- The 2013 restructuring closed 20 locations and reduced staffing. Management estimated these actions lowered 2014 operating expenses by approximately $50 million. The remaining restructuring liability was $24.3 million at June 30, 2015.
- The Department of Education’s gainful-employment regulation became effective July 1, 2015. Management said it could not yet determine the full financial or operational impact; potential effects include administrative costs, enrollment, program eligibility and reputation. The University’s Title IV participation agreement was provisional through June 30, 2017, with approval requirements for certain substantial changes. One program review remained without a determination letter; other identified reviews were closed, including one involving a payment of less than $500.
- Management cited uncertain enrollment trends, competition, affordability, student financing and regulatory compliance as risks. It gave no numerical earnings or revenue guidance. There were no pending material legal proceedings, and the filing reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Confirm the registrant identity: the supplied metadata says Strategic Education, Inc., but this filing is for Strayer Education, Inc.
- Track enrollment, revenue per student and the continuing effects of undergraduate pricing and the Graduation Fund.
- Assess gainful-employment outcomes, Title IV eligibility, the provisional participation agreement and any remaining program-review findings.
- Verify the July 2 loan prepayment, swap termination, amended facility terms and resulting liquidity after the cash use and transaction fees.
- Monitor lease-loss estimates and restructuring liabilities, which depend partly on projected sublease income and market conditions.