f10q062012_strayeredu.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q

 
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2012
 
Commission File No. 0-21039 
 

Strayer Education, Inc.
(Exact name of registrant as specified in this charter)

 
Maryland
52-1975978
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
2303 Dulles Station Boulevard
Herndon, VA
20171
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (703) 561-1600

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
 
Large accelerated filer
x
Accelerated filer
¨
       
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of July 25, 2012, there were outstanding 11,874,290 shares of Common Stock, par value $0.01 per share, of the Registrant.



 
 
 
 
 
STRAYER EDUCATION, INC.
INDEX
FORM 10-Q
 
   
PART I — FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
 
   
Unaudited Condensed Consolidated Balance Sheets at December 31, 2011 and June 30, 2012
3
   
Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2012
4
   
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2011 and 2012
  4
   
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2011 and 2012
  5
   
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2012
  6
   
Notes to Unaudited Condensed Consolidated Financial Statements
  7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  16
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
  20
   
Item 4. Controls and Procedures
  20
   
PART II — OTHER INFORMATION
 
   
Item 1. Legal Proceedings
  21
   
Item 1A. Risk Factors
  21
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  21
   
Item 3. Defaults Upon Senior Securities
  21
   
Item 5. Other Information
  21
   
Item 6. Exhibits
  21
   
SIGNATURES
  22
   
CERTIFICATIONS
 
EX-31.1                                                                                                                                            
 
EX-31.2                                                                                                                                            
 
EX-32.1                                                                                                                                            
 
EX-32.2                                                                                                                                            
 
EX-101 INSTANCE DOCUMENT                                                                                                                                            
 
EX-101 SCHEMA DOCUMENT                                                                                                                                            
 
EX-101 CALCULATION LINKBASE DOCUMENT                                                                                                                                            
 
EX-101 LABELS LINKBASE DOCUMENT                                                                                                                                            
 
EX-101 PRESENTATION LINKBASE DOCUMENT                                                                                                                                            
 
EX-101 DEFINITION LINKBASE DOCUMENT                                                                                                                                            
 
 
 
2

 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
   
December 31,
2011
   
June 30,
2012
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 57,137     $ 48,690  
Tuition receivable, net of allowances for doubtful accounts of $7,279 and $7,317 at December 31, 2011 and June 30, 2012, respectively
    25,006       24,218  
Income taxes receivable
    394       136  
Other current assets
    12,131       11,886  
Total current assets
    94,668       84,930  
Property and equipment, net
    121,149       118,836  
Deferred income taxes
    3,326       4,708  
Goodwill
    6,800       6,800  
Other assets
    5,190       4,869  
Total assets
  $ 231,133     $ 220,143  
                 
LIABILITIES & STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 34,039     $ 25,757  
Unearned tuition
    15,364       3,161  
Other current liabilities
    281       281  
Current portion of term loan
    27,500       30,000  
Total current liabilities
    77,184       59,199  
Revolving credit facility
    20,000       15,000  
Term loan, less current portion
    70,000       55,000  
Other long-term liabilities
    21,656       21,697  
Total liabilities
    188,840       150,896  
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, par value $0.01; 20,000,000 shares authorized; 11,792,456 and 11,874,290 shares issued and outstanding at December 31, 2011 and June 30, 2012, respectively
    118       119  
Additional paid-in capital
    295       5,731  
Retained earnings
    42,491       63,955  
Accumulated other comprehensive income (loss)
    (611 )     (558 )
Total stockholders’ equity
    42,293       69,247  
Total liabilities and stockholders’ equity
  $ 231,133     $ 220,143  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
   
For the three months
ended June 30,
   
For the six months
ended June 30,
 
   
2011
   
2012
   
2011
   
2012
 
                         
Revenues
  $ 163,789     $ 146,254     $ 335,745     $ 295,786  
Costs and expenses:
                               
Instruction and educational support
    76,373       75,652       151,349       149,416  
Marketing
    16,241       15,053       32,283       30,522  
Admissions advisory
    6,450       6,453       13,641       13,246  
General and administration
    14,580       12,928       29,102       25,576  
Income from operations
    50,145       36,168       109,370       77,026  
Investment income
    26       2       144       3  
Interest expense
    1,167       1,109       1,350       2,317  
Income before income taxes
    49,004       35,061       108,164       74,712  
Provision for income taxes
    19,357       13,849       42,726       29,511  
Net income
  $ 29,647     $ 21,212     $ 65,438     $ 45,201  
Earnings per share:
                               
Basic
  $ 2.54     $ 1.86     $ 5.36     $ 3.96  
Diluted
  $ 2.53     $ 1.85     $ 5.34     $ 3.94  
Weighted average shares outstanding:
                               
Basic
    11,692       11,430       12,215       11,425  
Diluted
    11,737       11,483       12,263       11,480  
 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(in thousands)
 
   
For the three months
ended June 30,
   
For the six months
ended June 30,
 
   
2011
   
2012
   
2011
   
2012
 
Net income
  $ 29,647     $ 21,212     $ 65,438     $ 45,201  
Other comprehensive income:
                               
Change in fair value of derivative instrument, net of income tax
    (645 )     94       (645 )     53  
Unrealized loss on investment, net of income tax
                (40 )      
Comprehensive income
  $ 29,002     $ 21,306     $ 64,753     $ 45,254  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(in thousands, except share data)
 
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Total
 
Balance at December 31, 2010
    13,316,822     $ 133     $ 1,206     $ 174,625     $ 40     $ 176,004  
Tax shortfall associated with stock-based compensation arrangements
                (872 )                 (872 )
Repurchase of common stock
    (1,370,121 )     (14 )     (4,224 )     (178,426 )           (182,664 )
Restricted stock grants, net of forfeitures
    62,062       1                         1  
Stock-based compensation
                6,328                   6,328  
Common stock dividends
                      (25,183 )           (25,183 )
Change in net unrealized gains and losses on marketable securities, net of income tax
                            (40 )     (40 )
Change in fair value of derivative instrument, net of income tax
                            (645 )     (645 )
Net income
                      65,438             65,438  
Balance at June 30, 2011
    12,008,763     $ 120     $ 2,438     $ 36,454     $ (645 )   $ 38,367  
 
                            Accumulated        
                Additional           Other        
   
Common Stock
    Paid-in     Retained     Comprehensive        
   
Shares
   
Amount
    Capital     Earnings     Income (Loss)    
Total
 
Balance at December 31, 2011
    11,792,456     $ 118     $ 295     $ 42,491     $ (611 )   $ 42,293  
Tax shortfall associated with stock-based compensation arrangements
                (393 )                 (393 )
Restricted stock grants, net of forfeitures
    81,834       1       (1 )                  
Stock-based compensation
                5,830                   5,830  
Common stock dividends
                      (23,737 )           (23,737 )
Change in fair value of derivative instrument, net of income tax
                            53       53  
Net income
                      45,201             45,201  
Balance at June 30, 2012
    11,874,290     $ 119     $ 5,731     $ 63,955     $ (558 )   $ 69,247  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
For the six months ended June 30,
 
   
2011
   
2012
 
             
Cash flows from operating activities:
           
Net income
  $ 65,438     $ 45,201  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of gain on sale of assets
    (140 )     (140 )
Amortization of deferred rent
    599       148  
Gain on sale of marketable securities
    (66 )      
Amortization of deferred financing costs
    264       399  
Depreciation and amortization
    10,165       11,749  
Deferred income taxes
    (256 )     (1,531 )
Stock-based compensation
    6,328       5,830  
Changes in assets and liabilities:
               
Tuition receivable, net
    (338 )     788  
Other current assets
    (874 )     357  
Other assets
    36       (133 )
Accounts payable and accrued expenses
    (2,936 )     (7,752 )
Income taxes payable and income taxes receivable
    4,433       (136 )
Unearned tuition
    4,503       (12,203 )
Other long-term liabilities
    277       84  
Net cash provided by operating activities
    87,433       42,661  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (18,062 )     (9,871 )
Purchases of marketable securities
    (2 )      
Proceeds from the sale of marketable securities
    12,388        
Net cash used in investing activities
    (5,676 )     (9,871 )
                 
Cash flows from financing activities:
               
Common dividends paid
    (25,183 )     (23,737 )
Repurchase of common stock
    (182,664 )      
Proceeds from revolving credit facility
    95,000       28,000  
Payments on revolving credit facility
    (80,000 )     (33,000 )
Proceeds from term loan
    100,000        
Payments on term loan
          (12,500 )
Payment of deferred financing costs
    (2,459 )      
Net cash used in financing activities
    (95,306 )     (41,237 )
Net decrease in cash and cash equivalents
    (13,549 )     (8,447 )
Cash and cash equivalents – beginning of period
    64,107       57,137  
Cash and cash equivalents – end of period
  $ 50,558     $ 48,690  
Non-cash transactions:
               
Purchases of property and equipment included in accounts payable
  $ 2,267     $ 585  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 
 
STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information as of June 30, 2011 and 2012 is unaudited.
 
1.          Nature of Operations
 
Strayer Education, Inc. (the “Company”), a Maryland corporation, conducts its operations through its wholly owned subsidiary, Strayer University (the “University”). The University is an accredited institution of higher education that provides undergraduate and graduate degrees in various fields of study through 96 campuses in Alabama, Arkansas, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Washington, D.C., and online. With the Company’s focus on the student, regardless of whether he or she chooses to take classes at a physical campus or online, it has only one reporting segment.
 
2.          Significant Accounting Policies
 
Financial Statement Presentation
 
The consolidated financial statements include the accounts of the Company and its only subsidiary, the University. All inter-company accounts and transactions have been eliminated in the consolidated financial statements.
 
All information as of December 31, 2011 and June 30, 2011 and 2012, and for the three and six months ended June 30, 2011 and 2012 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the full fiscal year.
 
Revenues
 
The Company’s educational programs are offered on a quarterly basis. Approximately 96% of the Company’s revenues during the six months ended June 30, 2012 consisted of tuition revenue. Tuition revenue is recognized in the quarter of instruction. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, scholarships and employee tuition discounts. At the start of each academic term, a liability (unearned tuition) is recorded for academic services to be provided and a tuition receivable is recorded for the portion of the tuition not paid upfront in cash. Any cash received prior to the start of an academic term is also recorded as unearned tuition. Revenues also include application fees, placement test fees, withdrawal and other administrative fees, textbook-related income and other income, which are recognized when earned.
 
Fair Value
 
The Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework for measuring fair value, establishes a fair value hierarchy based upon the observability of inputs used to measure fair value, and expands disclosures about fair value measurements. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Under ASC 820-10, fair value of an investment is the price that would be received to sell an asset or to transfer a liability to an entity in an orderly transaction between market participants at the measurement date. The hierarchy gives the highest priority to assets and liabilities with readily available quoted prices in an active market and lowest priority to unobservable inputs which require a higher degree of judgment when measuring fair value, as follows:
 
 
Level 1 assets or liabilities use quoted prices in active markets for identical assets or liabilities as of the measurement date;
 
 
Level 2 assets or liabilities use observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities; and
 
 
Level 3 assets or liabilities use unobservable inputs that are supported by little or no market activity.
 
The Company’s assets and liabilities that are subject to fair value measurement are categorized in one of the three levels above. Fair values are based on the inputs available at the measurement dates, and may rely on certain assumptions that may affect the valuation of fair value for certain assets or liabilities.
 
 
7

 
 
Goodwill and Indefinite-Lived Intangible Assets
 
Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. Indefinite-lived intangible assets, which include a trade name, are recorded at fair market value on their acquisition date. An indefinite life was assigned to the trade name because it has the continued ability to generate cash flows indefinitely.
 
Goodwill and the indefinite-lived intangible assets are assessed at least annually for impairment during the three-month period ending September 30, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount. No impairment occurred during the quarter ended June 30, 2012.
 
Accounting for Derivatives Instruments and Hedging Activities
 
On the date that the Company enters into a derivative contract, it designates the derivative as a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash flow hedge). All derivatives are recognized in the balance sheet at their fair value.
 
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded, net of income tax, in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings.
 
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively.
 
Net Income Per Share
 
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options and restricted stock. The dilutive effect of stock awards was determined using the treasury stock method. Under the treasury stock method, all of the following are assumed to be used to repurchase shares of the Company’s common stock: (1) the proceeds received from the exercise of stock options, (2) the amount of compensation cost associated with the stock awards for future service not yet recognized by the Company, and (3) the amount of tax benefits that would be recorded in additional paid-in capital when the stock awards become deductible for income tax purposes. Stock options are not included in the computation of diluted earnings per share when the stock option exercise price of an individual grant exceeds the average market price for the period. During the three and six months ended June 30, 2012, the Company had no issued and outstanding stock options that were included in the calculation. During the three and six months ended June 30, 2011, all issued and outstanding stock options were included in the calculation.
 
Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share (in thousands).
 
   
For the three months
ended June 30,
   
For the six months
ended June 30,
 
   
2011
   
2012
   
2011
   
2012
 
Weighted average shares outstanding used to compute basic earnings per share
    11,692       11,430       12,215       11,425  
Incremental shares issuable upon the assumed exercise of stock options
    15             16        
Unvested restricted stock
    30       53       32       55  
Shares used to compute diluted earnings per share
    11,737       11,483       12,263       11,480  
 
 
8

 
 
3.          Acquisition
 
On December 27, 2011, the Company completed an acquisition (the “Acquisition”) of certain assets which support the operations of the Jack Welch Management Institute (“JWMI”), an online leadership education program that offers a differentiated executive MBA degree and executive certificates. Simultaneous with the Acquisition, the Company entered into a License and Participation Agreement with Mr. Welch. The Company paid $7.0 million in the acquisition. The Company received $2.8 million from Mr. Welch representing his economic interest in JWMI, and the Company will make deferred payments to the sellers valued at $2.2 million as of June 30, 2012. These amounts are included in other long-term liabilities in the Company’s unaudited condensed consolidated balance sheets. The Company will make additional payments to Mr. Welch as he provides services to the Company on behalf of JWMI under the License and Participation Agreement.
 
In connection with the Acquisition, the Company acquired course content valued at $0.8 million which will be amortized over its estimated useful life of five years. The Company has also recorded indefinite-lived intangible assets of $1.6 million, which are included in other assets in the Company’s unaudited condensed consolidated balance sheets. The Acquisition resulted in recording $6.8 million of goodwill, representing the excess of the purchase price over the fair value assigned to the underlying assets acquired.
 
JWMI’s operating results are included in the unaudited condensed consolidated financial statements from the date of the Acquisition. The results of operations of JWMI would not have had a material impact on the Company’s reported financial results if the Acquisition had been completed on January 1, 2011.
 
4.          Term Loan and Revolving Credit Facility
 
On January 3, 2011, the Company entered into a $100 million revolving credit agreement. On April 4, 2011, the Company entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the “Credit Facility”) providing for a $100 million revolving credit facility and a $100 million term loan facility. The revolving portion of the Credit Facility, which includes a letter of credit subfacility of $50 million, matures on March 31, 2014, and amends and subsumes (as part of the new facility) the Company’s previous $100 million revolving credit agreement. The term loan portion of the Credit Facility matures on March 31, 2014, and, commencing December 31, 2011, includes required quarterly amortization payments in the amount of $2.5 million on December 31, 2011, $5.0 million on March 31, 2012, and $7.5 million on June 30, 2012, and at the end of each quarter thereafter prior to the final maturity date. Borrowings under the Credit Facility bear interest at LIBOR or a base rate, plus a margin ranging from 2.25% to 2.75%, depending on the Company’s leverage ratio. In addition, an unused commitment fee ranging from 0.30% to 0.40%, depending on the Company’s leverage ratio, accrues on unused amounts under the revolving credit facility. The Credit Facility is collateralized by substantially all of the personal property assets of the Company and its subsidiary. The Credit Facility contains customary affirmative, negative and financial maintenance covenants, representations, warranties, events of default and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Credit Facility. The Company was in compliance with all the terms of the Credit Facility at June 30, 2012.
 
During the quarter ended June 30, 2012, the Company paid cash interest of $0.9 million.
 
As of June 30, 2012, the Company had outstanding $85.0 million under the term loan facility and $15.0 million under the revolving credit facility.  On July 17, 2012, the Company repaid $15.0 million representing the entire outstanding amount of the revolving credit facility.
 
Interest Rate Swap
 
On April 4, 2011, the Company entered into an interest rate swap arrangement (the “Swap”) in order to minimize the interest rate exposure on the entire balance of the term loan facility. The interest rate swap fixes the variable interest rate on the associated debt at approximately 3.6% rather than being subject to fluctuations in the LIBOR rate. The term of the Swap is three years, matching the term of the underlying term loan facility. The Swap has been designated as a cash flow hedge and has been deemed effective in accordance with the Derivatives and Hedging Topic, ASC 815. The Company expects the Swap to continue to be deemed effective for the duration of the Swap. The fair value of the Swap is included in other long-term liabilities in the Company’s unaudited condensed consolidated balance sheets.
 
 
9

 
 
Debt and short-term borrowings consist of the following as of June 30, 2012 (in thousands):
 
Term loan
  $ 85,000  
Revolving credit facility
    15,000  
Total debt
    100,000  
         
Less: Current portion of long-term debt
    30,000  
Long-term debt
  $ 70,000  
 
Aggregate debt maturities as of June 30, 2012 are as follows:
 
2012
  $ 15,000  
2013
    30,000  
2014
    40,000  
    $ 85,000  
 
5.          Fair Value Measurement
 
Assets and liabilities measured at fair value on a recurring basis consist of the following as of June 30, 2012 (in thousands):
 
         
Fair Value Measurements at Reporting Date Using
 
   
June 30, 
2012
   
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 7,608     $ 7,608     $     $  
Total assets at fair value on a recurring basis
  $ 7,608     $ 7,608     $     $  
Liabilities:
                               
Other liabilities:
                               
Interest rate swap
  $ 918     $     $ 918     $  
Deferred payments
    2,152                   2,152  
Total liabilities at fair value on a recurring basis
  $ 3,070     $     $ 918     $ 2,152  
 
 
10

 
 
Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2011 (in thousands):
 
   
December 31,
2011
   
Fair Value Measurements at Reporting Date Using
 
   
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 7,606     $ 7,606     $     $  
Total assets at fair value on a recurring basis
  $ 7,606     $ 7,606     $     $  
                                 
Liabilities:
                               
Other liabilities:
                               
Interest rate swap
  $ 1,010     $     $ 1,010     $  
Deferred payments
    2,200                   2,200  
Total liabilities at fair value on a recurring basis
  $ 3,210     $     $ 1,010     $ 2,200  
 
The Company measures the above items on a recurring basis at fair value as follows:
 
 
Money market funds — Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds and are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders’ equity. Realized gains and losses from the sale of marketable securities are based on the specific identification method. The Company’s remaining cash and cash equivalents held at December 31, 2011 and June 30, 2012, approximate fair value and is not disclosed in the above tables because of the short-term nature of the financial instruments.
 
 
Interest rate swap — The Company has an interest rate swap with a notional amount of $85.0 million as of June 30, 2012, used to minimize the interest rate exposure on a portion of the Company’s variable rate debt. The interest rate swap is used to fix the variable interest rate on the associated debt. The swap is classified within Level 2 and is valued using readily available pricing sources which utilize market observable inputs including the current variable interest rate for similar types of instruments.
 
 
Deferred payments — Classified within Level 3 as there is no liquid market for similarly priced instruments, and valued using a discounted cash flow model that encompassed significant unobservable inputs to estimate the operating results of the Acquisition. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the program matures.
 
At June 30, 2012, the carrying value of the Company’s debt was $100.0 million. All of the Company’s debt is variable interest rate debt and the carrying amount approximates fair value.
 
 
11

 
 
The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods, and no assets or liabilities were transferred between levels of the fair value hierarchy during the six months ended June 30, 2011 or 2012. Assets measured at fair value on a non-recurring basis as of December 31, 2011 and June 30, 2012, include $6.8 million of goodwill and $1.6 million of other indefinite-lived intangible assets resulting from the Acquisition. The changes in the fair value of the Company’s Level 3 liability during the six months ended June 30, 2012 are as follows (in thousands):
 
   
Deferred
Payments
 
Balance at December 31, 2011
  $ 2,200  
Amounts earned
     (50
Adjustments to fair value
     2  
Transfers in or out of Level 3
     
Balance at June 30, 2012
  $ 2,152  
 
6.          Stockholders’ Equity
 
Authorized stock
 
The Company has authorized 20,000,000 shares of common stock, par value $0.01, of which 11,792,456 and 11,874,290 shares were issued and outstanding as of December 31, 2011 and June 30, 2012, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none of which has been issued or outstanding since 2004.  The Company’s annual cash dividend is $4.00 per share, or $1.00 per share quarterly.
 
Stock-based compensation
 
As required by the Stock Compensation Topic, ASC 718, the Company measures and recognizes compensation expense for all share-based payment awards, including employee stock options and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values. Stock-based compensation expense recognized in the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2011 and 2012, is based on awards ultimately expected to vest and, therefore, has been adjusted for estimated forfeitures. The Company is required to estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate used is based on historical experience.
 
Stock-based compensation plans
 
In April 2011, the Company’s stockholders approved the Strayer Education, Inc. 2011 Equity Compensation Plan (the “Plan”), which replaced the Company’s 1996 equity compensation plan (the “1996 Plan”) and made 300,000 new shares available for issuance as equity compensation. In addition, shares previously available for issuance under the 1996 Plan were effectively carried over and made available for issuance under the Plan, for a total of approximately 350,000 shares that were made available for issuance as equity compensation under the Plan. The Plan provides for the granting of restricted stock, stock options intended to qualify as incentive stock options, options that do not qualify as incentive stock options, and other forms of equity compensation and performance-based awards to employees, officers and directors of the Company, or to a consultant or advisor to the Company, at the discretion of the Board of Directors. Vesting provisions are at the discretion of the Board of Directors. Options may be granted at option prices based at or above the fair market value of the shares at the date of grant. The maximum term of the awards granted under the Plan is ten years.
 
In February 2012, the Company’s Board of Directors approved grants of 72,013 shares of restricted stock to certain individuals. These shares, which vest over a five- to seven-year period, were granted pursuant to the Plan. The Company’s stock price closed at $115.55 on the date of these restricted stock grants.
 
In April 2012, the Company’s Board of Directors approved grants of 10,728 shares of restricted stock. These shares, which vest over a three-year period, were awarded to various non-employee members of the Company’s Board of Directors, as part of the Company’s annual director compensation program. The Company’s stock price closed at $83.88 on the date of these restricted stock grants.
 
Dividends paid on unvested restricted stock are reimbursed to the Company if the recipient terminates his or her employment prior to vesting in the award.
 
 
12

 
 
Restricted Stock
 
The table below sets forth the restricted stock activity for the six months ended June 30, 2012:
 
   
Number of
shares
   
Weighted-
average
grant
price
 
Balance, December 31, 2011
    380,944     $ 194.26  
Grants
    82,741     $ 111.44  
Vested shares
    (20,004 )   $ 217.77  
Forfeitures
    (907 )   $ 132.23  
Balance, June 30, 2012
    442,774     $ 178.39  
 
Stock Options
 
The table below sets forth the stock option activity for the six months ended June 30, 2012, and other stock option information at June 30, 2012:
 
   
Number of
shares
   
Weighted-
average
exercise
price
   
Weighted-
average
remaining
contractual
life (yrs.)
   
Aggregate
intrinsic
value (1)
(in thousands)
 
Balance, December 31, 2011
    100,000     $ 107.28       1.1        
Grants
                           
Exercises
                           
Forfeitures
                           
Balance, June 30, 2012
    100,000     $ 107.28       0.6     174  
Exercisable, June 30, 2012
    100,000     $ 107.28       0.6     174  

(1)
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the respective trading day and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the respective trading day. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
 
Valuation and Expense Information Under Stock Compensation Topic ASC 718
 
At June 30, 2012, total stock-based compensation cost which has not yet been recognized was $45.1 million, all for unvested restricted stock. This cost is expected to be recognized over the next 61 months on a weighted-average basis.
 
The following table summarizes the stock-based compensation expense recorded for the three and six months ended June 30, 2011 and 2012 by expense line item (in thousands):
 
   
For the three months
ended June 30,
   
For the six months
ended June 30,
 
   
2011
   
2012
   
2011
   
2012
 
Instruction and educational support
  $ 972     $ 891     $ 1,823     $ 1,562  
Marketing
    16             35        
Admissions advisory
                       
General and administration
    2,447       2,549       4,470       4,268  
Stock-based compensation expense included in operating expense
    3,435       3,440       6,328       5,830  
Tax benefit
    1,357       1,359       2,500       2,302  
Stock-based compensation expense, net of income tax
  $ 2,078     $ 2,081     $ 3,828     $ 3,528  
 
 
13

 
 
The following table summarizes information regarding all share-based payment arrangements for the six months ended June 30, 2011 and 2012 (in thousands):
 
   
For the six months ended
June 30,
 
   
2011
   
2012
 
Proceeds from stock options exercised
  $     $  
Tax shortfall related to exercise of stock options and vesting of restricted stock
  $ (872 )   $ (393 )
Intrinsic value of stock options exercised (1) 
  $     $  
 

(1)
Intrinsic value of stock options exercised is estimated by taking the difference between the Company’s closing stock price on the date of exercise and the exercise price, multiplied by the number of options exercised for each option holder and then aggregated.
 
7.          Other Long-Term Liabilities
 
Other long-term liabilities consist of the following as of December 31, 2011 and June 30, 2012 (in thousands):
 
   
2011
   
2012
 
Deferred rent
  $ 10,302     $ 11,081  
Lease incentives
    4,088       3,630  
Deferred gain on sale of campus building
    1,256       1,116  
Fair value of interest rate swap (see Note 5)
    1,010       918  
Deferred payments (see Note 3)
    5,000       4,952  
    $ 21,656     $ 21,697  
 
Deferred Rent
 
In accordance with ASC 840-20, the Company records rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a long-term liability.
 
Lease Incentives
 
In conjunction with the opening of new campuses, the Company, in some instances, was reimbursed by the lessors for improvements made to the leased properties. In accordance with the Operating Leases Subtopic, ASC 840-20, these improvements were capitalized as leasehold improvements and a long-term liability was established for the reimbursements. The leasehold improvements and the long-term liability are amortized on a straight-line basis over the corresponding lease terms, which range from five to 10 years.
 
Deferred Gain on Sale of Campus Building
 
In June 2007, the Company sold its Loudoun, Virginia campus building for $5.8 million. The Company is leasing back most of the campus building over a 10-year period. In conjunction with this sale and lease back transaction, the Company realized a gain of $2.8 million before tax, which is deferred and recognized over the 10-year lease term.
 
8.          Income Taxes
 
The Fair Value Measurements and Disclosures Topic, ASC 740, requires the Company to determine whether uncertain tax positions should be recognized within the Company’s financial statements. As a result of the implementation of ASC 740, no material adjustment in the liability for unrecognized income tax benefits was recognized. The amount of unrecognized tax benefits at June 30, 2012 is immaterial. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2012, the amount of accrued interest related to uncertain tax positions was immaterial. The tax year 2011 is open for Federal tax examination, and the tax years 2008-2011 remain open to examination by the state and local taxing jurisdictions in which the Company is subject.
 
9.          Litigation
 
From time to time, the Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. On October 15, 2010, a putative securities class action was filed in the United States District Court for the Middle District of
 
14

 
 
Florida. On March 20, 2012, the Court granted the Company’s motion to dismiss the complaint for failure to state a claim, and an appeal of that decision is pending in the Eleventh Circuit Court of Appeals.  A shareholder derivative action alleging similar facts was filed in the Circuit Court of Fairfax County, Virginia, which action was voluntarily dismissed by nonsuit on June 12, 2012.  The Company believes these lawsuits are without merit and will contest them vigorously. While the outcome of any legal proceeding cannot be predicted with certainty, the Company does not expect these matters will have a material effect on our financial condition or results of operations.
 
10.        Regulation
 
On June 13, 2011, the Department of Education published its final regulations defining the term “gainful employment.” Under the regulations, a particular program offered by an institution would become ineligible for Title IV funding if it could not pass at least one of three alternative measurements in three out of four consecutive years. The first year that a program could become ineligible is 2015. On June 21, 2012, the Department released illustrative data indicating that all Strayer programs comply with the regulations.  Although the regulations were scheduled to go into effect July 1, 2012, the U.S. District Court in Association of Private Sector Colleges and Universities v. Duncan, vacated most of the regulations on June 30, 2012.  The Department has until August 29, 2012 to file a notice of appeal of the decision. 
 
11.        Subsequent Events
 
On July 17, 2012, the Company repaid $15.0 million under the revolving credit facility.
 
 
15

 
 
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 second quarter of 2012, we generated $146.3 million in revenue, a decrease of 11% compared to the same period in 2011. Income from operations was $36.2 million for the second quarter of 2012, a decrease of 28% compared to the same period in 2011. Net income was $21.2 million in the second quarter of 2012, a decrease of 28%, compared to the same period in 2011. Diluted earnings per share was $1.85 for the second quarter of 2011 compared to $2.53 for the same period in 2011, a decrease of 27%.
 
Key enrollment trends by quarter were as follows:
 
Enrollment
% Change vs Prior Year
 
Although we do not know for sure why our enrollment trends over the last eighteen months 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 19% decline in our new students in 2011 has had and will continue to have an adverse impact on 2012 enrollment since there are fewer students from 2011 continuing their education in 2012.
 
 
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
 
16

 
scenarios. We implemented a 3% tuition increase in 2012 and announced our plan to open eight new campuses in 2012 subject to regulatory approval. Based on this investment plan, assuming we continue to increase our expenditures on faculty, marketing and admissions advisory services as we open new campuses and assuming 11,700,000 diluted weighted average shares outstanding and an effective tax rate of 39.5%, the Company announced in October 2011 that it expects its business model may perform as follows.
 
Assumed new student enrollment (vs. 2011)
    -10%       0%       10%  
Total student enrollment (vs. 2011)
    -9 %     -6 %     -3 %
Revenue (millions)
  $ 570     $ 590     $ 610  
Operating income margin
 
21% to 22
%  
23% to 24
%  
25% to 26
Diluted earnings per share
  $ 6.00 to $6.20     $ 6.90 to $7.10     $ 7.80 to  $8.00  
 
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
 
Enrollment. Enrollment at Strayer University for the 2012 spring term, which began April 2, 2012 and ended June 18, 2012, decreased 9% to 50,896 students compared to 55,974 students for the same term in 2011. Across the Strayer University campus and online system, new student enrollments increased 12% and continuing student enrollments decreased 13%. Global online enrollments decreased 6%. Students taking 100% of their classes online (including campus based students) decreased 6%.
 
Revenues. Revenues decreased 11% to $146.3 million in the second quarter of 2012 from $163.8 million in the second quarter of 2011, principally due to lower enrollments.
 
Instruction and educational support expenses. Instruction and educational support expenses decreased slightly by $0.7 million, or 1%, to $75.7 million in the second quarter of 2012 from $76.4 million in the second quarter of 2011.  Instruction and educational support expenses as a percentage of revenues increased to 51.7% in the second quarter of 2012 from 46.6% in the second quarter of 2011, largely due to faculty and staff costs not decreasing with tuition revenue.
 
Marketing expenses. Marketing expenses decreased $1.1 million, or 7%, to $15.1 million in the second quarter of 2012 from $16.2 million in the second quarter of 2011. Marketing expenses as a percentage of revenues increased to 10.3% in the second quarter of 2012, from 9.9% in the second quarter of 2011, largely due to marketing expenses decreasing at a lower rate than tuition revenue.
 
Admissions advisory expenses. Admissions advisory expenses were $6.5 million for the second quarter of 2012, unchanged from 2011. Admissions advisory expenses as a percentage of revenues increased slightly to 4.4% in the second quarter of 2012 from 3.9% in the second quarter of 2011, largely due to admissions advisory expenses not decreasing with tuition revenue.
 
General and administration expenses. General and administration expenses decreased $1.7 million, or 11%, to $12.9 million in the second quarter of 2012 from $14.6 million in the second quarter of 2011. The decrease is primarily due to a reduction in professional services and other administrative expenses incurred in the second quarter of 2012 compared to the same period in 2011.  General and administration expenses as a percentage of revenues decreased slightly to 8.8% in the second quarter of 2012 from 8.9% in the second quarter of 2011.
 
Income from operations. Income from operations decreased $13.9 million, or 28%, to $36.2 million in the second quarter of 2012 from $50.1 million in the second quarter of 2011, due to the aforementioned factors.
 
Investment income. Investment income was $2,000 in the second quarter of 2012 compared to $26,000 in the second quarter of 2011.
 
Interest expense. Interest expense decreased slightly by $0.1 million, or 5%, to $1.1 million in the second quarter of 2012 compared to $1.2 million in the second quarter of 2011, due to lower average debt outstanding in the quarter.
 
Provision for income taxes. Income tax expense decreased $5.6 million, or 28%, to $13.8 million in the second quarter of 2012 from $19.4 million in the second quarter of 2011, primarily due to the decrease in income before taxes attributable to the factors discussed above. Our effective tax rate was 39.5% for the second quarter of 2012 and 2011.
 
Net income. Net income decreased $8.4 million, or 28%, to $21.2 million in the second quarter of 2011 from $29.6 million in the second quarter of 2011 because of the factors discussed above.
 
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
 
Enrollment. Average enrollment decreased 11% to 50,664 students for the six months ended June 30, 2012 compared to 56,791 students for the same period in 2011.
 
Revenues. Revenues decreased 12% to $295.8 million in the six months ended June 30, 2012 from $335.7 million in the six months ended June 30, 2011, principally due to lower enrollments.
 
 
17

 
Instruction and educational support expenses. Instruction and educational support expenses decreased $1.9 million, or 1%, to $149.4 million in the six months ended June 30, 2012 from $151.3 million in the six months ended June 30, 2011.  These expenses as a percentage of revenues increased to 50.5% for the six months ended June 30, 2012 from 45.1% in the six months ended June 30, 2011, largely due to faculty and staff costs not decreasing with tuition revenue.
 
Marketing expenses. Marketing expenses decreased $1.8 million, or 5%, to $30.5 million in the six months ended June 30, 2012 from $32.3 million in the six months ended June 30, 2011. These expenses as a percentage of revenues increased to 10.3% for the six months ended June 30, 2012 from 9.6% in the six months ended June 30, 2011, largely due to marketing costs decreasing at a lower rate than tuition revenue.
 
Admissions advisory expenses. Admissions advisory expenses decreased $0.4 million, or 3%, to $13.2 million in the six months ended June 30, 2012 from $13.6 million in the six months ended June 30, 2011. Admissions advisory expenses as a percentage of revenues increased to 4.5% for the six months ended June 30, 2012 from 4.1% in the six months ended June 30, 2011, largely due to admissions advisory expenses decreasing at a lower rate than tuition revenue.
 
General and administration expenses. General and administration expenses decreased $3.5 million, or 12%, to $25.6 million in the six months ended June 30, 2012 from $29.1 million in the six months ended June 30, 2011. The decrease is primarily due to a reduction in professional services and other administrative expenses. General and administration expenses as a percentage of revenues decreased slightly to 8.6% in the second quarter of 2012 from 8.7% in the second quarter of 2011.
 
Income from operations. Income from operations decreased $32.4 million, or 30%, to $77.0 million in the six months ended June 30, 2012 from $109.4 million in the six months ended June 30, 2011 due to the aforementioned factors.
 
Investment income. Investment income decreased from $0.1 million to approximately $3,000 in the six months ended June 30, 2012. The decrease was principally due to lower investment yields on existing cash balances.
 
Interest expense. Interest expense increased $0.9 million to $2.3 million in the six months ended June 30, 2012 from $1.4 million in the six month ended June 30, 2011 due to an increase in borrowings from the term loan and revolving credit facility, which was executed in April 2011.
 
Provision for income taxes. Income tax expense decreased $13.2 million, or 31%, to $29.5 million in the six months ended June 30, 2012 from $42.7 million in the six months ended June 30, 2011, primarily due to the decrease in income before taxes discussed above. Our effective tax rate was 39.5% for the six months ended June 30, 2012 and 2011.
 
Net income. Net income decreased $20.2 million, or 31%, to $45.2 million in the six months ended June 30, 2012 from $65.4 million in the six months ended June 30, 2011 because of the factors discussed above.
 
Liquidity and Capital Resources
 
At June 30, 2012, we had cash and cash equivalents of $48.7 million compared to $57.1 million at December 31, 2011 and $50.6 million at June 30, 2011. At June 30, 2012, most of our excess cash was invested in bank overnight deposits and money market funds.
 
On April 4, 2011, we entered into an amended and restated revolving credit and term loan agreement.  This credit facility, which is secured by our assets, provides for a $100 million revolving credit facility and a $100 million term loan facility with a maturity date of March 31, 2014. At June 30, 2012, we had $85.0 million outstanding under the term loan facility and $15 million outstanding under the revolving credit facility.  On July 17, 2012, we repaid $15.0 million under the revolving credit facility.
 
For the six months ended June 30, 2012, we reported $42.7 million of net cash provided by operating activities compared to $87.4 million for the same period in 2011. Capital expenditures were $9.9 million for the six months ended June 30, 2011 compared to $18.1 million for the same period in 2011. During the six months ended June 30, 2012, we paid regular, quarterly common stock dividends of $23.7 million ($1.00 per share for each quarterly dividend). The Company had $80.0 million of share repurchase authorization remaining at June 30. 2012.  No shares were repurchased during the second quarter of 2012.
 
In the second quarter of 2012, bad debt expense as a percentage of revenues was 4.4% compared to 4.1% for the same period in 2011. Days sales outstanding was 15 days at the end of the second quarter of 2012 compared to 12 days at the end of the second quarter of 2011.
 
Currently, we invest our cash in bank overnight deposits and money market funds. In addition, as of June 30, 2012, we had available $85 million under our $100 million 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.
 
 
18

 

 
The table below sets forth our contractual commitments associated with operating leases and the revolving credit and term loan facilities as of June 30, 2012. Although they have historically been paid, dividends are not a contractual commitment and, therefore, have been excluded from this table.
 
   
Payments due by period (in thousands)
 
   
Total
   
Within 1
Year
   
2-3
Years
   
4-5
Years
   
After 5
Years
 
Operating leases
  $ 243,641     $ 38,653     $ 76,362     $ 61,155     $ 67,471  
Revolving credit facility
    15,000             15,000              
Term loan
    85,000       30,000       55,000              
Total
  $ 343,641     $ 68,653     $ 146,362     $ 61,155     $ 67,471  
 
New Campuses
 
The Company opened four new campuses for the 2012 summer term.  Two of the new campuses are located in Minneapolis, Minnesota, a new market for Strayer University.  The other two campuses are in Chicago, Illinois and represent the University’s third and fourth campuses in that market.  Subject to regulatory approval, the Company plans to open four new campuses during the remainder of the year for a total of eight new campuses in 2012.
 
 
 
19

 

 
ITEM 3:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company is subject to the impact of interest rate changes and may be subject to changes in the market values of its future investments. The Company invests its excess cash in bank overnight deposits, money market funds and marketable securities. The Company has not used derivative financial instruments in its investment portfolio. Earnings from investments in bank overnight deposits, money market mutual funds, and marketable securities may be adversely affected in the future should interest rates decline, although such a decline may reduce the interest rate payable on any borrowings by the Company under its revolving credit facility. The Company’s future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. As of June 30, 2012, a 1% increase or decrease in interest rates would not have a material impact on the Company’s future earnings, fair values, or cash flows related to investments in cash equivalents or interest earning marketable securities.
 
Changing interest rates could also have a negative impact on the amount of interest expense the Company incurs. On April 4, 2011, the Company entered into a three year Amended and Restated Revolving Credit and Term Loan Agreement providing for a $100 million revolving credit facility and a $100 million term loan facility. Borrowings under the $100 million revolving credit facility bear interest at LIBOR or a base rate plus a margin ranging from 2.25% to 2.75%, depending on the Company’s leverage ratio. Also on April 4, 2011, the Company entered into an interest rate swap arrangement for the $100 million term loan facility that fixes its interest rate on the term loan facility at approximately 3.6% for the duration of the term loan. Although an increase in LIBOR would not affect interest expense on the term loan, it would affect interest expense on any outstanding balance of the revolving credit facility. For every 100 basis points increase in LIBOR, the Company would incur an incremental $1.0 million in interest expense per year assuming the entire $100 million revolving credit facility were utilized.

 
ITEM  4:   CONTROLS AND PROCEDURES
 
a)
Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2012. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company has in place, as of June 30, 2012, effective controls and procedures designed to ensure that information required to be disclosed by the Company (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
b)
Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
20

 
 
PART II — OTHER INFORMATION

 
Item 1.   Legal Proceedings
 
From time to time, we are involved in litigation and other legal proceedings arising out of the ordinary course of our business. On October 15, 2010, a putative securities class action was filed in the United States District Court for the Middle District of Florida. On March 20, 2012, the Court granted our motion to dismiss the complaint for failure to state a claim, and an appeal of that decision is pending in the Eleventh Circuit Court of Appeals.  A shareholder derivative action alleging similar facts was filed in the Circuit Court of Fairfax County, Virginia, which action was voluntarily dismissed by nonsuit on June 12, 2012.  We believe these lawsuits are without merit and will contest them vigorously. While the outcome of any legal proceeding cannot be predicted with certainty, we do not expect these matters will have a material effect on its financial condition or results of operations.
 
Item 1A.   Risk Factors
 
You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business. There have been no material changes to the risk factors previously described in Part I, Item 1A included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Those risks are incorporated herein by this reference. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
 
During the three months ended June 30, 2012, we did not repurchase any shares of common stock under our repurchase program. The remaining authorization for our common stock repurchases was $80 million at June 30, 2012 for use during the remainder of 2012. During the three months ended June 30, 2012, we did not sell any securities that were not registered under the Securities Act of 1933, as amended.
 
Item 3.   Defaults Upon Senior Securities.
 
None
 
Item 5.   Other Information.
 
None
 
Item 6.   Exhibits.
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Act.
   
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Act.
   
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.
INS XBRL Instance Document
   
101.
SCH XBRL Schema Document
   
101.
CAL XBRL Calculation Linkbase Document
   
101.
LAB XBRL Labels Linkbase Document
   
101.
PRE XBRL Presentation Linkbase Document
   
101.
DEF XBRL Definition Linkbase Document
 
 
21

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
STRAYER EDUCATION, INC.
   
 
By: /s/ Mark C. Brown
 
Mark C. Brown
 
Executive Vice President and Chief Financial Officer
 
Date: July 31, 2012
 
 
22

 
 
Exhibit Index
 
Exhibit
 
Description
     
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Act.
     
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Act.
     
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.
 
INS XBRL Instance Document
     
101.
 
SCH XBRL Schema Document
     
101.
 
CAL XBRL Calculation Linkbase Document
     
101.
 
DEF XBRL Definition Linkbase Document
     
101.
 
LAB XBRL Label Linkbase Document
     
101.
 
PRE XBRL Presentation Linkbase Document
 
 
23