Strayer Education, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing identifies the registrant as Strayer Education, Inc.; the request metadata names Strategic Education, Inc.
Business context and operating performance
The company operates Strayer University, offering undergraduate and graduate programs online and at physical campuses. Tuition accounted for approximately 96% of revenue in the first half of 2014.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $112.7 million | $132.0 million | $229.2 million | $269.5 million |
| Operating income | $24.0 million | $26.3 million | $49.9 million | $56.2 million |
| Net income | $13.7 million | $15.0 million | $28.5 million | $32.2 million |
| Diluted EPS | $1.29 | $1.42 | $2.68 | $3.01 |
| Operating margin | 21.3% | 19.9% | 21.8% | 20.9% |
| Net margin | 12.1% | 11.4% | 12.4% | 12.0% |
Q2 revenue fell 15%, while operating income and net income each fell 9%. For the first half, revenue declined 15%, operating income 11%, and net income 12%. Management attributed the revenue decreases principally to lower enrollment and lower revenue per student, partly reflecting reduced undergraduate tuition. Q2 enrollment was down 10% to 41,327 students; new enrollment rose 1%, while continuing enrollment fell 13%. Average enrollment for the first half declined 12% to 41,213.
Expenses decreased across major categories, primarily following the 2013 restructuring and lower enrollment. Instruction and educational support expense as a share of revenue improved to 53.0% from 54.0% in Q2 and to 51.9% from 53.7% for the first half. The effective tax rate was 39.8% in both comparative periods.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $136.1 million at June 30, 2014, up from $94.8 million at December 31, 2013.
- First-half operating cash flow was $45.2 million, compared with $51.6 million in 2013. Capital expenditures were $2.3 million, versus $5.0 million.
- Term loan debt was $120.3 million, including $4.7 million current; no revolving-credit borrowings were outstanding. The $100 million revolver was available. Debt matures December 31, 2016, with $112.5 million scheduled in 2016.
- The term loan’s rate is effectively fixed by an interest-rate swap at 2.85%–3.35%, depending on leverage. The company reported compliance with credit-facility covenants at quarter-end.
- Current assets were $166.5 million and current liabilities $49.3 million. Management said cash, operating cash generation and, if needed, the revolver should meet requirements for at least 12 months.
Material changes, outlook, and risks
- The 2013 restructuring closed approximately 20 physical locations and reduced staffing. The company estimated annual expense savings of approximately $50 million beginning in 2014, dependent in part on assumptions about subleasing and mitigating lease costs. Remaining restructuring liabilities were $34.3 million at June 30, 2014, chiefly lease-related; lease obligations extend in some cases through 2022.
- The company lowered undergraduate tuition for new students by 20% beginning with the 2014 winter term and offered qualifying students a free course for every three courses successfully completed. Management said sustained unemployment, confidence in job prospects, competition, and college costs may be contributing to weak enrollment, and that several quarters of new-student growth may be needed for overall enrollment growth.
- No formal earnings or enrollment guidance was provided. The company did not plan to open campuses in 2014, did not intend to pay a regular dividend in 2014, and made no share repurchases in the first half. Repurchase authorization remaining was $70 million.
- The Department of Education proposed gainful-employment rules; the company could not determine their eventual impact. A new on-site Department of Education program review was announced July 30, 2014, scheduled to begin August 18 and covering aid years 2012–2013 and 2013–2014, as well as campus security and drug-free-school compliance. The University’s provisional participation agreement had been extended month-to-month after a new agreement application was submitted; loss of Title IV eligibility could materially harm the business.
- Other risks cited include enrollment trends, competition, student financing, regulatory and accreditation compliance, and broader economic conditions. The filing reported no pending material litigation. Goodwill impairment indicators were not identified at June 30, 2014.
Important facts for investors to verify
- Whether new-student growth continues and offsets declines in continuing enrollment, including the effect of lower tuition on revenue per student.
- Whether the estimated $50 million in annual restructuring savings is achieved and whether lease sublease assumptions or related liabilities change.
- Results of the announced Department of Education review, renewal of the participation agreement, and any final gainful-employment rules.
- Cash generation and liquidity relative to the large $112.5 million term-loan maturity scheduled for 2016.