Career Education Corporation (now Perdoceo Education Corporation) — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a quarterly report; quarterly results are noted separately below. The company’s principal continuing businesses were Colorado Technical University (CTU) and American InterContinental University (AIU), predominantly online providers of career-focused postsecondary education. In 2018, it completed the teach-out of its remaining legacy campuses.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $581.3 million | $596.4 million |
| Operating income | $71.3 million | $34.1 million |
| Operating margin | 12.3% | 5.7% |
| Net income (loss) | $55.2 million | $(31.9) million |
| Diluted earnings (loss) per share | $0.77 | $(0.46) |
| Cash from operating activities | $57.0 million | $(21.8) million |
- Revenue declined 2.5% overall as legacy-campus operations wound down; University Group revenue rose 2.0% to $580.7 million. CTU revenue increased 1.2%, and AIU revenue increased 3.4%.
- Operating income improved mainly because losses and costs at teach-out campuses declined. University Group operating income increased 1.9% to $119.8 million; All Other Campuses recorded a $31.9 million operating loss, improved from $61.4 million.
- Net income rebounded from a 2017 loss that included a $52.7 million tax expense related to the Tax Cuts and Jobs Act. FY2018 effective tax rate was 25.0%, versus 185.2% in 2017.
- Cash, restricted cash and short-term investments totaled $229.2 million at year-end, versus $180.1 million. Working capital was $172.4 million; current assets were $269.4 million and current liabilities $97.1 million.
- No borrowings were outstanding on the $50 million revolving credit facility at year-end. The facility matures in January 2022; borrowings and letters of credit are secured by cash and marketable securities. Net contractual lease obligations were $73.9 million.
Quarterly performance and material changes
In Q4 2018, revenue was $145.5 million, operating income $20.2 million and net income $14.1 million. Q4 2017 revenue was $143.1 million, operating income $10.7 million and net loss $44.4 million. Q4 2018 included a $5.0 million legal settlement; Q4 2017 included a $6.5 million legal settlement and the substantial tax charge from the 2017 tax-law change.
- University Group student enrollment at year-end was approximately 34,400, down 0.9% from 34,700. CTU enrollment rose 2.3% to 22,600; AIU enrollment fell 6.3% to 11,800, with management citing timing effects from AIU’s academic-calendar redesign. University Group new student enrollments increased 2.0%.
- FY2018 included $14.6 million of significant legal settlements and $1.5 million of net severance and related costs. Adjusted operating income, a non-GAAP measure, was $105.2 million, compared with $66.8 million in 2017.
- Operating cash flow improved partly because legal settlement payments were $17.1 million in 2018 versus $32.0 million in 2017. Investing cash outflow was $41.5 million, including net purchases of available-for-sale investments; capital expenditures were $6.7 million.
Outlook, risks and contingencies
- Management’s 2019 guidance: operating income of $102–$107 million, adjusted operating income of $114–$119 million, diluted EPS of $1.08–$1.12 and adjusted diluted EPS of $1.11–$1.15. CTU new enrollments were expected to grow; AIU was expected to see strong Q1 new-enrollment growth, partly reflecting calendar redesign timing.
- The outlook assumes prospective-student interest and student-serving initiatives remain supportive, and assumes no material changes or significant impacts from legal and regulatory matters. Actual results may differ materially.
- Federal student aid is a key exposure: approximately 79% of tuition cash receipts came from Title IV sources in 2018. CTU and AIU were operating under provisional program participation agreements; their agreements had expired September 30, 2018, and recertification applications were pending with the Department of Education. The filing says both institutions’ preliminary 2018 90/10 calculations were below the 90% limit.
- Regulatory uncertainty includes borrower-defense-to-repayment rules and gainful-employment requirements. Several CTU and AIU programs were in the gainful-employment “zone” or had initially failed the standard; the most significant cited programs, Criminal Justice, represented about 16% of University Group enrollment.
- On January 3, 2019, the company entered agreements with attorneys general from 48 states and the District of Columbia, while denying wrongdoing. The agreements included a $5 million payment, a $1.4 million receivable write-off, up to $2 million of third-party administrator costs, and operational and compliance commitments generally lasting six years.
- The FTC inquiry remained unresolved, and the company said it could not reasonably estimate a potential loss. It also disclosed 319 active individual Oregon arbitration claims involving a former culinary school and said potential losses could not be reasonably estimated. Legal and settlement accruals were $6.1 million at year-end; the filing cautions that outcomes could be materially adverse.
Investor facts to verify
- Department of Education decisions and timing on CTU and AIU recertification, and any resulting conditions on Title IV participation.
- Developments and potential financial exposure from the FTC inquiry, Oregon arbitrations and the state attorneys general agreements.
- Whether University Group enrollment growth—especially AIU’s expected recovery after calendar redesign—supports the 2019 guidance.
- Cash generation and liquidity after remaining lease commitments, potential legal costs, and any collateral or letter-of-credit requirements.
- Collection trends and bad debt: FY2018 bad debt expense was $32.0 million, up from $27.6 million in 2017.