Business context and reporting period
Strayer Education, Inc. (the registrant named in the filing; not Strategic Education, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. It operates Strayer University, a single-segment higher-education business offering campus and online programs. The filing states that 96% of first-half 2013 revenue was tuition.
Financial results
Amounts are in millions except per-share data. Q2 and first-half results are compared with the corresponding 2012 periods.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $132.0 | $146.3 | $269.5 | $295.8 |
| Operating income | $26.3 | $36.2 | $56.2 | $77.0 |
| Net income | $15.0 | $21.2 | $32.2 | $45.2 |
| Diluted EPS | $1.42 | $1.85 | $3.01 | $3.94 |
| Operating margin | 19.9% | 24.7% | 20.8% | 26.0% |
| Net margin | 11.4% | 14.5% | 12.0% | 15.3% |
Q2 enrollment was 46,130, down 9% year over year: continuing enrollment fell 8% and new enrollment fell 14%. First-half average enrollment declined 7% to 47,028, while revenue per student declined 2%.
For the six months, operating cash flow was $51.6 million versus $42.7 million; capital expenditures were $5.0 million versus $9.9 million. Management attributed stronger operating cash flow despite lower earnings mainly to tuition-payment timing and favorable timing of tax payments. Cash and cash equivalents were $67.5 million at June 30, 2013, up from $47.5 million at year-end 2012.
At June 30, total debt was $123.4 million, all under the term loan; no revolving-credit borrowings were outstanding. The company had a $100 million revolving facility available and $3.1 million of term-loan principal due over the next four quarters. Current assets were $102.3 million and current liabilities $36.0 million. Management said available cash, operating cash flow, and potential revolver borrowings were expected to meet requirements for at least 12 months.
Changes versus the prior comparable period
- Q2 revenue fell 10%, operating income 27%, net income 29%, and diluted EPS 23%; first-half revenue fell 9%, operating income 27%, net income 29%, and diluted EPS 24%.
- Lower enrollment drove revenue declines. Instruction costs fell more slowly than revenue, while marketing expense increased 8% in Q2 and 11% for the first half, largely reflecting markets opened in the prior 12 months. These trends compressed margins.
- First-half share repurchases totaled $25.0 million; 495,085 shares were repurchased, and $70.0 million of authorization remained at June 30. No dividend was paid in the first half of 2013; the company paid $23.7 million in dividends in the first half of 2012.
- Interest expense increased 21% in Q2 and 14% in the first half, attributed to higher average debt outstanding.
Outlook, risks and other notable items
Management said it could not predict whether enrollment would decline further, stabilize, or recover, and believed several quarters of new-student growth would be needed to restore overall enrollment growth. It cited sustained high unemployment and weaker confidence in job prospects as possible contributors to sector enrollment declines.
Management’s conditional 2013 model assumed 2012 enrollment and revenue levels: expenses were expected to rise 1%–2%, operating margin to be 19%–20%, and EPS to be $5.40–$5.60. It expected roughly flat revenue per student despite a 3% tuition increase, citing a mix shift toward graduate and corporate-sponsored students and targeted scholarships. Each 1% change in revenue versus 2012 was estimated to affect operating margin by about 50 basis points and EPS by about $0.20. Assumptions included a 39.5% tax rate and 11.5 million diluted shares. These are scenario estimates, not a guarantee of results.
Regulatory matters include pending Department of Education rulemaking on gainful employment and other topics. The company identified Title IV funding changes as a risk to enrollment, financial condition, results, and cash flows. It reported compliance with credit-facility covenants, no impairment of goodwill during the period, no pending material litigation, and effective disclosure controls. No material changes to previously disclosed risk factors were reported apart from the added Title IV funding risk.
Important facts for investors to verify
- Whether enrollment, especially new-student enrollment, stabilizes and whether revenue per student meets management’s assumptions.
- Whether cost reductions can offset further revenue declines, given higher marketing intensity and rising instruction costs as a share of revenue.
- Actual full-year results versus the conditional 2013 margin and EPS scenario, including its enrollment, revenue, tax-rate, and diluted-share assumptions.
- Title IV funding and Department of Education rulemaking developments, and the company’s continued compliance with applicable requirements and loan covenants.
- Debt repayment and liquidity needs, share repurchases, and any future dividend decisions.