Perdoceo Education Corporation (filed as Career Education Corporation) — Q1 2019
Business context and period. The 10-Q covers the three months ended March 31, 2019, with comparisons to Q1 2018. The company operates Colorado Technical University (CTU) and American InterContinental University (AIU), primarily serving adult students through online programs. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $157.9 | $148.1; up 6.6% |
| Operating income | $30.0 | $20.5; up 46.0% |
| Operating margin | 19.0% | 13.9% |
| Income from continuing operations | $25.2 | $17.9 |
| Net income | $24.8 | $17.5 |
| Net margin | 15.7% | 11.8% |
| Diluted EPS | $0.35 | $0.25 |
| Operating cash flow | $12.9 | $11.1 |
- Revenue growth reflected higher enrollments at both universities. CTU revenue rose 2.6% to $97.1 million; AIU revenue rose 14.4% to $60.8 million, also benefiting from more revenue-generating days.
- Bad debt expense increased to $11.7 million from $7.0 million, or 7.4% of revenue versus 4.7%. The company attributed the increase to higher receivables, higher reserve rates reflecting recent performance, and more AIU write-offs.
- Cash, restricted cash and short-term investments totaled $239.9 million at March 31, up from $229.2 million at year-end. Short-term investments accounted for $200.8 million. Student receivables, net, were $30.8 million, including current and non-current balances.
- No borrowings were outstanding under the $50 million revolving credit facility. The company reported $61.9 million of operating lease liabilities ($14.6 million current and $47.3 million non-current); these are lease obligations, not reported borrowings.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities to the balance sheet; prior-year amounts were not restated. Management said the adoption did not materially affect operating results.
Material changes versus the prior period
- Total University Group enrollment was up 8.2% year over year at quarter-end. New enrollments rose 14.3% at CTU and 124.7% at AIU; AIU’s comparison benefited from approximately 60% more enrollment days due to its academic calendar redesign.
- Operating income improved with revenue growth and lower closed-campus losses, partly offset by increased bad debt and continued investments in technology and student-serving operations. Q1 2018 included $3.5 million of Surrett legal settlements.
- Adjusted operating income, a non-GAAP measure, was $33.0 million versus $25.9 million; adjusted diluted EPS was $0.36 versus $0.28. These measures exclude specified items and should be considered alongside GAAP results.
- Cash from operations included $5.0 million of payments under agreements resolving the multi-state attorneys general inquiry. The company reported a $397,000 loss from discontinued operations, compared with a $382,000 loss.
Outlook, commentary and risks
- Full-year 2019 outlook was unchanged: revenue growth of approximately 3%–4%; 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. Full-year University Group new enrollments were expected to grow 3%–5%.
- For Q2 2019, management forecast operating income of $27–$28.5 million and diluted EPS of $0.28–$0.30. It expected CTU new enrollments to grow mid-single digits and AIU new enrollments to decline year over year, primarily due to approximately 16% fewer enrollment days.
- Guidance assumes no material changes in the legal or regulatory environment and no significant impact from the FTC inquiry, Oregon arbitrations or other ongoing matters. It excludes the pending Trident acquisition and potential legal or regulatory liabilities not then considered probable and estimable. Management cautioned that actual results could differ.
- The company agreed to acquire substantially all assets of Trident University for a cash price of $35–$44 million, dependent on Trident’s results, plus certain employee-related expenses and a working-capital adjustment. Closing was expected by year-end 2019, subject to regulatory approvals and other conditions; management expected the deal to be immediately accretive.
- Material legal uncertainty remains. Approximately 315 Oregon arbitration claims allege misrepresentations; the company said it could not reasonably estimate potential losses and had not accrued a liability for those claims. FTC discussions were ongoing, with possible monetary and operational relief; the company also could not estimate a loss range. Accrued legal fees and settlements were $1.7 million at quarter-end.
- Key business risks include enrollment trends, Title IV eligibility and funding, regulatory and accreditation requirements, student retention and outcomes, litigation, and scrutiny of for-profit education. Approximately 79% of tuition cash receipts in both comparative quarters came from Title IV funding.
Important facts for investors to verify
- Whether enrollment growth—particularly AIU’s calendar-driven Q1 increase—continues in subsequent quarters, and whether it converts to sustained revenue growth.
- Whether bad debt expense and receivables reserve rates stabilize or rise further, given the sharp year-over-year increase.
- Updates on the FTC inquiry, Oregon arbitrations, and other legal matters, including any settlement, required operational changes, or financial exposure.
- Trident’s final purchase price, regulatory approvals, closing timing, funding, and realized contribution to earnings.
- Continued Title IV eligibility and compliance, and any effects of borrower-defense, distance-learning authorization, or other regulatory changes.
- Liquidity and lease commitments: the $50 million facility is secured by cash and marketable securities, and the filing reports substantial operating lease obligations.