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STRA > SEC Filings for STRA > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for STRAYER EDUCATION INC

Form 10-Q for STRAYER EDUCATION INC


1-Nov-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 third quarter of 2013, we generated $110.0 million in revenue, a decrease of 11% compared to the same period in 2012. Income from operations was $6.6 million for the third quarter of 2013, a decrease of 16% compared to the same period in 2012. Net income was $3.1 million in the third quarter of 2013, a decrease of 23% compared to the same period in 2012. Diluted earnings per share was $0.30 for the third quarter of 2013 compared to $0.36 for the same period in 2012, a decrease of 17%.

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 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, as well as increased competition from lower-cost institutions, are contributing factors. The decline in our new students in prior years has had and will continue to have an adverse impact on 2013 enrollment since there are fewer students from prior years continuing their education in 2013. We believe it will take several quarters of new student growth in order to achieve overall enrollment growth.

In October 2013, we began to implement cost reduction initiatives intended to better align our resources with our current student enrollments. These cost reduction initiatives, which will occur primarily in the fourth quarter of 2013, include the closing of approximately 20 physical locations, subject to regulatory approval, and reductions in the number of campus-based and corporate employees. The campuses, predominantly located in the Midwest, currently serve approximately 5% of the University's enrollment, or about 2,300 students in the fall term. Affected students, a majority of whom already take 100% of their classes online, will be offered support to continue their education online. We estimate that during the three months ended December 31, 2013, we will incur a total of between $45-55 million in one-time charges to implement these initiatives. Of this amount, approximately $30-40 million is related to the closing of the physical locations for net lease and related facility costs, including the noncash write-down of assets to net realizable value. In addition, we estimate we will incur up to approximately $15 million of charges related to workforce reductions. Severance costs primarily will be paid on or before December 31, 2013. These cost reduction initiatives are expected to reduce our annual operating expenses by an estimated $50 million beginning in 2014. These estimates are preliminary and are subject to change as we finalize the terms of our campus closings and severance arrangements.

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 previously predicted that, excluding the impact of the cost reduction initiatives, we also would expect Strayer University's expenses to grow 1% to 2% for the full year ended December 31, 2013, reflecting the annualization of operating costs at the eight new campuses opened during 2012. No additional campuses are planned for 2013. We previously predicted that, at the 2012 revenue level and excluding the impact of the cost reduction initiatives, anticipated 2013 expenses would have led 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 was predicted to 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 assumed an effective tax rate of 39.5% and 11,500,000 diluted shares outstanding. The one-time charges during the three months ending December 31, 2013 arising from the cost reduction initiatives will significantly reduce operating margin and EPS in 2013. We cannot predict what impact the cost reduction initiatives will have on future enrollments or revenue, or the portion of the students currently attending the campuses being closed that may continue as online students.

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Enrollment. Enrollment at Strayer University for the 2013 summer term, which began July 1, 2013 and ended September 16, 2013, decreased 13% to 38,627 students compared to 44,236 students for the same term in 2012. Across the Strayer University campus and online system, continuing student enrollments decreased 12%, while new student enrollments decreased 17%.

Revenues. Revenues decreased 11% to $110.0 million in the third quarter of 2013 from $124.3 million in the third quarter of 2012, principally due to lower enrollments, partially offset by a 1.4% increase in revenue per student in 2013.

Instruction and educational support expenses. Instruction and educational support expenses decreased $9.3 million, or 13%, to $63.7 million in the third quarter of 2013 from $73.0 million in the third quarter of 2012, largely due to lower faculty and staff costs related to lower enrollment. Instruction and educational support expenses as a percentage of revenues decreased to 57.9% in the third quarter of 2013 from 58.7% in the third quarter of 2012.

Marketing expenses. Marketing expenses decreased slightly to $23.1 million in the third quarter of 2013 from $23.2 million in the third quarter of 2012. Marketing expenses as a percentage of revenues increased to 21.0% in the third quarter of 2013, from 18.6% in the third quarter of 2012, due to these expenses remaining largely unchanged while tuition revenues declined.

Admissions advisory expenses. Admissions advisory expenses decreased $1.3 million, or 20%, to $5.2 million in the third quarter of 2013 from $6.5 million in the third quarter of 2012, largely due to lower personnel costs. Admissions advisory expenses as a percentage of revenues decreased to 4.7% in the third quarter of 2013 from 5.2% in the third quarter of 2012.

General and administration expenses. General and administration expenses decreased $2.3 million, or 17%, to $11.5 million in the third quarter of 2013 from $13.8 million in the third quarter of 2012, largely due to lower personnel costs. General and administration expenses as a percentage of revenues decreased to 10.4% in the third quarter of 2013 from 11.1% in the third quarter of 2012, due to these expenses decreasing at a higher rate than tuition revenues.

Income from operations. Income from operations decreased $1.2 million, or 16%, to $6.6 million in the third quarter of 2013 from $7.8 million in the third quarter of 2012, due to the aforementioned factors.

Interest expense. Interest expense increased by $0.3 million, or 32%, to $1.4 million in the third quarter of 2013 compared to $1.1 million in the third quarter of 2012, due to higher average debt outstanding in the quarter.

Provision for income taxes. Income tax expense decreased $0.6 million, or 22%, to $2.1 million in the third quarter of 2013 from $2.7 million in the third 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% for the third quarter of 2013 compared to 39.5% for the same period in 2012.

Net income. Net income decreased $1.0 million, or 23%, to $3.1 million in the third quarter of 2013 from $4.1 million in the third quarter of 2012 due to the factors discussed above.


Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Enrollment. Average enrollment decreased 9% to 44,228 students for the nine months ended September 30, 2013 compared to 48,521 students for the same period in 2012.

Revenues. Revenues decreased 10% to $379.5 million in the nine months ended September 30, 2013 from $420.0 million in the nine months ended September 30, 2012, principally due to 9% lower enrollments and 1% lower revenue per student.

Instruction and educational support expenses. Instruction and educational support expenses decreased $14.0 million, or 6%, to $208.4 million in the nine months ended September 30, 2013 from $222.4 million in the nine months ended September 30, 2012, largely due to lower faculty and staff costs related to lower enrollments. These expenses as a percentage of revenues increased to 54.9% for the nine months ended September 30, 2013 from 52.9% in the nine months ended September 30, 2012, largely due to these expenses declining at a lower rate than tuition revenues.

Marketing expenses. Marketing expenses increased $3.3 million, or 6%, to $57.0 million in the nine months ended September 30, 2013 from $53.7 million in the nine months ended September 30, 2012, largely due to the full year impact in 2013 of new markets opened in 2012. These expenses as a percentage of revenues increased to 15.0% for the nine months ended September 30, 2013 from 12.8% in the nine months ended September 30, 2012, largely due to marketing expenses increasing while tuition revenues declined.

Admissions advisory expenses. Admissions advisory expenses decreased $3.9 million, or 20%, to $15.8 million in the nine months ended September 30, 2013 from $19.7 million in the nine months ended September 30, 2012, largely due to lower personnel costs. Admissions advisory expenses as a percentage of revenues decreased to 4.2% for the nine months ended September 30, 2013 from 4.7% in the nine months ended September 30, 2012.

General and administration expenses. General and administration expenses decreased $3.8 million, or 10%, to $35.5 million in the nine months ended September 30, 2013 from $39.3 million in the nine months ended September 30, 2012, largely due to lower personnel-related costs, including stock-based compensation expense, and lower professional services and other administrative expenses. General and administration expenses as a percentage of revenues were 9.4% for the nine months ended September 30, 2013 and September 30, 2012.

Income from operations. Income from operations decreased $22.1 million, or 26%, to $62.8 million in the nine months ended September 30, 2013 from $84.9 million in the nine months ended September 30, 2012 due to the aforementioned factors.

Interest expense. Interest expense increased $0.6 million, or 19%, to $4.0 million in the nine months ended September 30, 2013 from $3.4 million in the nine months ended September 30, 2012, due to higher average debt outstanding in the period.

Provision for income taxes. Income tax expense decreased $8.8 million, or 27%, to $23.4 million in the nine months ended September 30, 2013 from $32.2 million in the nine months ended September 30, 2012, primarily due to the decrease in income before taxes discussed above. Our effective tax rate was 39.8% for the nine months ended September 30, 2013 compared to 39.5% for the nine months ended September 30, 2012.

Net income. Net income decreased $13.9 million, or 28%, to $35.4 million in the nine months ended September 30, 2013 from $49.3 million in the nine months ended September 30, 2012 because of the factors discussed above.

Liquidity and Capital Resources

At September 30, 2013, we had cash and cash equivalents of $85.2 million compared to $47.5 million at December 31, 2012 and $45.6 million at September 30, 2012. At September 30, 2013, most of our excess cash was invested in bank overnight deposits and money market funds.

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 our existing term loan facility. The amended credit facility is used for general corporate purposes including share repurchases. The amended credit facility is guaranteed by the University and is secured by substantially all of the personal property and assets of the Company and the guarantor.


The term loan portion of the amended credit facility requires quarterly principal payments of $781,250 beginning in March 2013 through December 2014, and $1,562,500 beginning in March 2015. Any remaining principal is payable in full on December 31, 2016. Borrowings bear interest at LIBOR or a base rate plus a margin ranging from 2.00% to 2.50%, depending on our leverage ratio. For the term loan facility, we are party to interest rate swap arrangements that fix the interest rate on the entire term loan facility at an effective rate ranging from 2.85% to 3.35%, depending on the Company's leverage ratio. An unused commitment fee ranging from 0.30% to 0.40%, depending on our leverage ratio, accrues on unused amounts under the revolving portion of the amended credit facility. During the nine months ended September 30, 2012 and 2013, we paid cash interest of $2.8 million and $3.4 million, respectively. We had no outstanding balance under the prior revolving credit facility on the day of closing. At September 30, 2013, we had $122.7 million outstanding under the term loan and no balance outstanding under the revolving credit facility. We are obligated to repay $3.1 million of the term loan over the next four calendar quarters.

The amended credit facility contains customary covenants, representations, warranties, events of default and remedies upon default. In addition, we must satisfy certain financial maintenance covenants, including a total leverage ratio, a coverage ratio and a U.S. Department of Education financial responsibility composite score. We were in compliance with all applicable covenants related to the amended credit facility as of September 30, 2013.

For the nine months ended September 30, 2013, we generated $72.2 million net cash from operating activities compared to $57.2 million for the same period in 2012. Our net cash from operating activities increased in the nine months ended September 30, 2013 compared to the same period in 2012, even though our net income was lower, largely due to a change in 2012 in the timing of student tuition payments by a third party. The increase is also attributable to the favorable timing of cash tax payments compared to the prior year. We began to implement a number of cost reduction initiatives in the fourth quarter of 2013, which we expect will reduce cash flow from operations by approximately $10 million during the three months ending December 31, 2013. Capital expenditures were $7.1 million for the nine months ended September 30, 2013 compared to $18.2 million for the same period in 2012, as 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 nine months ended September 30, 2013, and we had $70.0 million of share repurchase authorization remaining at September 30, 2013.

In the third quarter of 2013, bad debt expense as a percentage of revenues was 4.5% compared to 4.2% for the same period in 2012. Days sales outstanding was 16 days at the end of the third quarter of 2013 compared to 18 days at the end of the third 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 September 30, 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   $ 227,297     $  42,010     $ 76,479     $  56,124   $ 52,684
Term loan            122,656         3,125       11,719       107,812          -
Total              $ 349,953     $  45,135     $ 88,198     $ 163,936   $ 52,684


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