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STRA > SEC Filings for STRA > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for STRAYER EDUCATION INC

Form 10-Q for STRAYER EDUCATION INC


9-May-2014

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 2014, we generated $116.5 million in revenue, a decrease of 15% compared to the same period in 2013. Income from operations was $25.9 million for the first quarter of 2014, a decrease of 13% compared to the same period in 2013. Net income was $14.8 million in the first quarter of 2014, a decrease of 14% compared to the same period in 2013. Diluted earnings per share was $1.40 for the first quarter of 2014 compared to $1.59 for the same period in 2013, a decrease of 12%.

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, the resulting lower confidence in job prospects, competition, and the high cost of a college education are all contributing factors. The 16% decline in our new students in 2013 will have an adverse impact on 2014 enrollment since there will be fewer students from 2013 continuing their education in 2014. 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. However, we have introduced a number of initiatives in response to these declining enrollment trends. Recognizing that affordability is an important factor in a prospective student's decision to seek a college degree, we reduced our undergraduate tuition for new students by 20% beginning in our 2014 winter academic term. As an extra incentive to encourage our students to continue their studies through to graduation, we introduced our Graduation Fund in mid-2013. Under this program, qualifying students receive one free course for every three courses taken. The free courses earned are redeemable in one's final academic year.

In 2013, we undertook some restructuring initiatives, including the closing of approximately 20 physical locations. The revenue impact of these initiatives is not known since the University is making online classes available to these students. However, we estimate these actions will save us approximately $50 million in expenses per year beginning in 2014. This figure is based upon various assumptions about our ability to sublease or otherwise mitigate lease costs, which may be greater or less than expected. A description of factors that may affect the contract lease costs included in the expected savings is set forth in Note 3 of the unaudited condensed consolidated financial statements under the caption "Restructuring and Related Charges." We believe these measures and others that are embedded in our strategic priorities will allow us to continue to deliver high quality, affordable education which should result in growth for the University over the long-term.

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Enrollment. Enrollment at Strayer University for the 2014 winter term, which began January 6, 2014 and ended March 24, 2014, decreased 14% to 41,098 students compared to 47,926 students for the same term in 2013. New student enrollments decreased 2% and continuing student enrollments decreased 17%.

Revenues. Revenues decreased 15% to $116.5 million in the first quarter of 2014 from $137.5 million in the first quarter of 2013, principally due to lower average enrollment. In late 2013, we introduced a new pricing structure for new undergraduate students which could significantly reduce their cost of tuition. A shift in enrollment toward students eligible for the lower tuition will result in lower revenue per student in the future.

Instruction and educational support expenses. Instruction and educational support expenses decreased $14.3 million, or 19%, to $59.1 million in the first quarter of 2014 from $73.4 million in the first quarter of 2013, primarily due to lower personnel and facility costs following the restructuring in the fourth quarter of 2013. Instruction and educational support expenses as a percentage of revenues decreased to 50.8% in the first quarter of 2014 from 53.4% in the first quarter of 2013.

Marketing expenses. Marketing expenses decreased by $1.4 million, or 8%, to $16.3 million in the first quarter of 2014 from $17.7 million in the first quarter of 2013. Marketing expenses as a percentage of revenues increased to 14.0% in the first quarter of 2014, from 12.9% in the first quarter of 2013, due to these expenses declining at a lower rate than tuition revenues.

Admissions advisory expenses. Admissions advisory expenses decreased by $1.3 million, or 23%, to $4.1 million in the first quarter of 2014 from $5.4 million in the first quarter of 2013, primarily as a result of lower personnel costs from the restructuring in the fourth quarter of 2013. Admissions advisory expenses as a percentage of revenues decreased slightly to 3.5% in the first quarter of 2014 from 3.9% in the first quarter of 2013.

General and administration expenses. General and administration expenses decreased $0.1 million, or 1%, to $11.0 million in the first quarter of 2014 from $11.1 million in the first quarter of 2013 primarily due to lower personnel and facility costs following the restructuring in the fourth quarter of 2013 offset by other corporate expenses. General and administration expenses as a percentage of revenues increased to 9.5% in the first quarter of 2014 from 8.1% in the first quarter of 2013.

Income from operations. Income from operations decreased $4.0 million, or 13%, to $25.9 million in the first quarter of 2014 from $29.9 million in the first quarter of 2013, due to the aforementioned factors.

Interest expense. Interest expense increased slightly to $1.4 million in the first quarter of 2014 compared to $1.3 million in the first quarter of 2013.


Provision for income taxes. Income tax expense decreased $1.6 million, or 14%, to $9.8 million in the first quarter of 2014 from $11.4 million in the first quarter of 2013, 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 2014 and 2013.

Net income. Net income decreased $2.4 million, or 14%, to $14.8 million in the first quarter of 2014 from $17.2 million in the first quarter of 2013 due to the factors discussed above.

Liquidity and Capital Resources

At March 31, 2014, we had cash and cash equivalents of $126.2 million compared to $94.8 million at December 31, 2013 and $50.8 million at March 31, 2013. At March 31, 2014, most of our excess cash was invested in bank overnight deposits and money market funds.

We are party to a 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, which was amended in November 2012 and has a maturity date of December 31, 2016. 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 an interest rate swap arrangement that fixes 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 three months ended March 31, 2013 and 2014, we paid cash interest of $1.1 million and $1.2 million, respectively. At March 31, 2014, we had $121.1 million outstanding under the term loan and no balance outstanding under the revolving credit facility. We are obligated to repay $3.9 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 March 31, 2014.

For the three months ended March 31, 2014, we generated $33.2 million net cash from operating activities compared to $31.4 million for the same period in 2013. Our net cash from operating activities increased in the three months ended March 31, 2014 compared to the same period in 2013, even though our net income was lower, largely due to less cash used to service working capital during the quarter. Capital expenditures were $1.0 million for the three months ended March 31, 2014 compared to $2.4 million for the same period in 2013. We do not plan to open any new campuses during 2014.

We had $70.0 million of share repurchase authorization remaining at March 31, 2014. No shares were repurchased in the first quarter of 2014. We did not pay a regular quarterly dividend in 2013 and do not intend to pay one in 2014.

In the first quarter of 2014, bad debt expense as a percentage of revenues was 4.3% compared to 4.0% for the same period in 2013. Days sales outstanding was 14 days at the end of the first quarter of 2014 compared to 15 days at the end of the first quarter of 2013.

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. Currently, we maintain our cash in mostly FDIC-insured bank accounts. Excess cash is invested in money market funds, which is included in cash and cash equivalents at March 31, 2013 and 2014. Interest income was negligible during the three months ended March 31, 2014 and we did not earn interest income in the three months ended March 31, 2013.


The table below sets forth our contractual commitments associated with operating leases and the revolving credit and term loan facilities as of March 31, 2014. 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   $ 206,764        42,100        71,683       50,435    42,546
Term loan            121,094         3,906       117,188            -         -
Total              $ 327,858        46,006       188,871       50,435    42,546

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