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STRA > SEC Filings for STRA > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for STRAYER EDUCATION INC


3-May-2013

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

Certain of the statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as elsewhere in this report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such statements may be identified by the use of words such as "expect," "estimate," "assume," "believe," "anticipate," "will," "forecast," "plan," "project," or similar words. These statements are based on the Company's current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause the actual results to differ materially from those expressed in or implied by such statements. The assumptions, risks and uncertainties include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements, rulemaking by the Department of Education and increased focus by the U. S. Congress on for-profit education institutions, competitive factors, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to implement our growth strategy, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the Company's Annual Report on Form 10-K and its other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking statements, except as may be required by law.

Additional Information

We maintain a website at http://www.strayereducation.com. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Results of Operations

In the first quarter of 2013, we generated $137.5 million in revenue, a decrease of 8% compared to the same period in 2012. Income from operations was $29.9 million for the first quarter of 2013, a decrease of 27% compared to the same period in 2012. Net income was $17.2 million in the first quarter of 2013, a decrease of 28%, compared to the same period in 2012. Diluted earnings per share was $1.59 for the first quarter of 2013 compared to $2.09 for the same period in 2012, a decrease of 24%.

Key enrollment trends by quarter were as follows:

Enrollment % Change vs. Prior Year

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Although we do not know for sure why our recent enrollment trends and that of the proprietary higher education sector generally have been negative, we believe that sustained levels of high unemployment and the resulting lower confidence in job prospects are contributing factors. The average 19% decline in our new students in 2011 had an adverse impact on 2012 enrollment since there were fewer students from 2011 continuing their education in 2012. We believe it will take several quarters of new student growth in order to achieve overall enrollment growth.

We cannot predict future enrollments or whether new student enrollment will decline further, stabilize or increase in response to the economy or other factors. We can describe what we think our business model may look like financially under different enrollment scenarios. We implemented a 3% tuition increase in 2013 but we expect roughly flat revenue per student in 2013 due to the University's continued mix shift towards graduate and corporate sponsored students, as well as continued targeted use of scholarships. At 2012 enrollment levels, we also would expect Strayer University's expenses to grow 1% to 2% in 2013, reflecting the annualization of operating costs at the eight new campuses opened during 2012, but that no additional campuses are currently planned for 2013. We expect that at the 2012 revenue level, anticipated 2013 expenses would lead to a 19-20% operating margin in 2013, and EPS in the $5.40-$5.60 range. Each 1% increase (or decrease) in revenue from 2012 levels in 2013 will have an approximate 50 basis points positive (or negative) impact on operating margin, and an approximate $0.20 positive (or negative) impact on earnings per share. Finally, this model assumes an effective tax rate of 39.5% and 11,500,000 diluted shares outstanding.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Enrollment. Enrollment at Strayer University for the 2013 winter term, which began January 7, 2013 and ended March 18, 2013, decreased 5% to 47,926 students compared to 50,432 students for the same term in 2012. New student enrollments decreased 5% and continuing student enrollments also decreased 5%. Global online students increased 9% while students taking 100% of their classes online (including campus based students) decreased 3%.

Revenues. Revenues decreased 8% to $137.5 million in the first quarter of 2013 from $149.5 million in the first quarter of 2012, principally due to 5% lower enrollments and 3% lower revenue per student.

Instruction and educational support expenses. Instruction and educational support expenses decreased slightly to $73.4 million in the first quarter of 2013 from $73.8 million in the first quarter of 2012. Instruction and educational support expenses as a percentage of revenues increased to 53.4% in the first quarter of 2013 from 49.3% in the first quarter of 2012, largely due to the decline in tuition revenues.

Marketing expenses. Marketing expenses increased by $2.2 million, or 15%, to $17.7 million in the first quarter of 2013 from $15.5 million in the first quarter of 2012 largely due to our expansion into new markets. Marketing expenses as a percentage of revenues increased to 12.9% in the first quarter of 2013, from 10.3% in the third quarter of 2012, largely due to these expenses increasing while tuition revenues declined.

Admissions advisory expenses. Admissions advisory expenses decreased by $1.4 million, or 21%, to $5.4 million in the first quarter of 2013 from $6.8 million in the first quarter of 2012. Admissions advisory expenses as a percentage of revenues decreased to 3.9% in the first quarter of 2013 from 4.5% in the first quarter of 2012, largely due to lower personnel costs.

General and administration expenses. General and administration expenses decreased $1.5 million, or 12%, to $11.1 million in the first quarter of 2013 from $12.6 million in the first quarter of 2012, primarily due to a reduction in professional services and stock-based compensation expenses. General and administration expenses as a percentage of revenues decreased slightly to 8.1% in the first quarter of 2013 from 8.5% in the first quarter of 2012.

Income from operations. Income from operations decreased $11.0 million, or 27%, to $29.9 million in the first quarter of 2013 from $40.9 million in the first quarter of 2012, due to the aforementioned factors.

Investment income. We had no investment income in the first quarter of 2013 compared to $1,000 in the first quarter of 2012.

Interest expense. Interest expense increased slightly by $0.1 million, or 7%, to $1.3 million in the first quarter of 2013 compared to $1.2 million in the first quarter of 2012, due to higher average debt outstanding in the quarter partly offset by a lower interest rate.

Provision for income taxes. Income tax expense decreased $4.3 million, or 27%, to $11.4 million in the first quarter of 2013 from $15.7 million in the first quarter of 2012, primarily due to the decrease in income before taxes attributable to the factors discussed above. Our effective tax rate was 39.8% in the first quarter of 2013 compared to 39.5% in the first quarter of 2012.

Net income. Net income decreased $6.8 million, or 28%, to $17.2 million in the first quarter of 2013 from $24.0 million in the first quarter of 2012 due to the factors discussed above.


Liquidity and Capital Resources

At March 31, 2013, we had cash and cash equivalents of $50.8 million compared to $47.5 million at December 31, 2012, and $52.7 million at March 31, 2012. At March 31, 2013, most of our cash was invested in bank overnight deposits.

On November 8, 2012, we entered into a second amended and restated revolving credit and term loan agreement which is secured by our assets and provides for a $100.0 million revolving credit facility and $125.0 million term loan facility with a maturity date of December 31, 2016. Proceeds from the new term loan were used to pay off $77.5 million outstanding under the original term loan facility. We had no outstanding balance under the prior revolving credit facility on the day of closing. At March 31, 2013, we had $124.2 million outstanding under the new term loan and no balance outstanding under the revolving credit facility. In 2013, we are obligated to repay $3.1 million of the term loan.

For the three months ended March 31, 2013, we generated $31.4 million of net cash from operating activities compared to $36.5 million for the same period in 2012. Capital expenditures were $2.4 million for the three months ended March 31, 2013 compared to $4.1 million for the same period in 2012. We do not plan to open any new campuses during 2013. We invested $25.0 million to repurchase common shares in the open market during the three months ended March 31, 2013. We had $70.0 million of share repurchase authorization remaining at March 31, 2013.

In the first quarter of 2013, bad debt expense as a percentage of revenues was 4.0% compared to 3.8% for the same period in 2012. Days sales outstanding was 15 days at the end of the first quarter of 2013 compared to 14 days at the end of the first quarter of 2012.

Currently, we maintain our cash in mostly FDIC-insured bank accounts and invest our excess cash in money market funds. We have available $100 million under our revolving credit facility. We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under the revolving credit facility, will be sufficient to meet our requirements for at least the next 12 months.

The table below sets forth our contractual commitments associated with operating leases, and the revolving credit and term loan facilities as of March 31, 2013. Although they have been paid in the past, dividends are not a contractual commitment and, therefore, have been excluded from this table.

                                                Payments due by period (in thousands)
                                                 Within 1        2-3           4-5        After 5
                                     Total         Year         Years         Years        Years
                Operating leases   $ 234,671     $  40,507     $ 76,066     $  57,790     $ 60,308
                Term loan            124,219         3,125       10,156       110,938            -
                Total              $ 358,890     $  43,632     $ 86,222     $ 168,728     $ 60,308


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