Business context and reporting period
This is Strayer Education, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2013; the filing does not identify Strategic Education, Inc. as the registrant. Strayer operates Strayer University, offering undergraduate and graduate programs through campuses and online, and reports one segment. Comparisons below are with the corresponding 2012 periods unless noted.
Financial performance and position
| Metric | Q3 2013 | First nine months 2013 |
|---|---|---|
| Revenue | $110.0 million, down 11% | $379.5 million, down 10% |
| Operating income | $6.6 million, down 16%; 6.0% margin | $62.8 million, down 26%; 16.5% margin |
| Net income | $3.1 million, down 23% | $35.4 million, down 28% |
| Diluted EPS | $0.30, versus $0.36 | $3.32, versus $4.29 |
| Operating cash flow | Not provided separately for the quarter | $72.2 million, versus $57.2 million |
| Capital expenditures | Not provided separately for the quarter | $7.1 million, versus $18.2 million |
At September 30, cash and cash equivalents were $85.2 million, up from $47.5 million at December 31, 2012. Total debt was $122.7 million, consisting of the term loan; the $100 million revolving facility was undrawn. The company had $70 million of share-repurchase authorization remaining. It reported compliance with credit-facility covenants and said available cash, operating cash generation and, if needed, revolving-credit availability should cover requirements for at least 12 months.
Material changes versus the prior comparable period
- Summer-term enrollment fell 13% to 38,627; continuing enrollment declined 12% and new-student enrollment declined 17%. Average enrollment for the first nine months decreased 9%.
- Q3 revenue per student increased 1.4%, partially offsetting enrollment declines; for the first nine months, revenue per student declined 1%.
- Q3 instruction and educational support costs fell 13%, while marketing costs were nearly flat, increasing marketing expense to 21.0% of revenue from 18.6%. Nine-month marketing expense rose 6% despite lower revenue.
- Q3 bad-debt expense was 4.5% of revenue versus 4.2%; days sales outstanding improved to 16 from 18.
- During the first nine months, Strayer repurchased $25.0 million of shares and made no dividend payments. Cash flow from operations increased despite lower earnings, largely due to timing of tuition payments and cash taxes.
Outlook, risks and unusual items
- Beginning in October 2013, Strayer planned to close approximately 20 physical locations, subject to regulatory approval, and reduce campus and corporate staffing. The locations served about 5% of enrollment, or approximately 2,300 fall-term students; most affected students already took all classes online. Management estimated $45–55 million of one-time Q4 2013 charges, including $30–40 million for closures and up to $15 million for workforce reductions, with approximately $10 million expected to reduce Q4 operating cash flow. It estimated annual operating-expense savings of about $50 million beginning in 2014. Estimates were preliminary.
- Management attributed sector enrollment weakness in part to persistent unemployment, reduced confidence in job prospects and competition from lower-cost institutions. It said several quarters of new-student growth may be needed to restore overall enrollment growth.
- The filing described a prior, enrollment-based 2013 model—excluding the new cost actions—that projected a 19–20% operating margin and $5.40–$5.60 EPS at 2012 revenue levels. These were not presented as updated guidance; management said Q4 charges would significantly reduce 2013 margin and EPS and that future enrollment effects were uncertain.
- Federal student-aid availability and evolving gainful-employment rules are material regulatory risks. The company said it could not determine the impact of any final gainful-employment rules. It also highlighted dependence on Title IV funding and potential adverse effects of future changes to student-aid programs.
- The term loan’s interest rate was fixed through swaps at an effective 2.85–3.35%, depending on leverage. There were no pending material legal proceedings, and no material changes to previously reported risk factors other than the added Title IV funding risk.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Strayer Education, Inc., not Strategic Education, Inc.
- Track enrollment, especially new-student trends, retention and the extent to which students at closing campuses continue online.
- Verify final closure and severance charges, regulatory approvals, cash costs and realization of the estimated 2014 savings.
- Monitor Title IV and gainful-employment rule developments and their potential effects on student financing and enrollment.
- Assess debt repayment and covenant capacity alongside operating cash flow, lease commitments and the undrawn revolver.