PERDOCEO EDUCATION Corp quarterly report, Q2 FY2018

Business context and reporting period

Career Education Corporation (the registrant named in this filing) reported results for the quarter and six months ended June 30, 2018. Its principal businesses are online-focused Colorado Technical University (CTU) and American InterContinental University (AIU); remaining “All Other Campuses” were in teach-out. Three campuses completed teach-out in the quarter, and the remaining campuses were expected to finish during 2018.

Key financial results

Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 periods; balance-sheet comparisons are with December 31, 2017.

Q2 revenue declined 2.9%, while first-half revenue fell 5.9%. Revenue from the University Group rose 3.2% in Q2 and 1.4% year to date; the overall decline reflected the winding down of campuses that no longer enroll students. CTU revenue rose 2.3% in Q2, while AIU revenue rose 5.1%.

Operating income improved despite lower revenue, supported by lower teach-out costs and a $2.5 million recovery for past claims. Q2 University Group operating income decreased 12.4% to $25.5 million, reflecting student-support investments and a $1.2 million facilities optimization charge. Q2 All Other Campuses operating loss narrowed to $12.2 million from $14.2 million.

First-half operating cash flow improved by $49.0 million year over year, primarily because the prior-year period included $32.0 million of legal settlement payments, alongside lower teach-out losses and steadier University Group performance.

Financial position and liquidity

• At June 30, cash, cash equivalents, restricted cash and short-term investments totaled $190.1 million, versus $180.1 million at year-end 2017. This included $33.2 million of unrestricted cash and $151.6 million of short-term investments; $5.4 million was restricted cash and investments.
• Current assets were $230.7 million and current liabilities $105.9 million. The company reported no borrowings under its $95 million revolving credit facility; borrowings would require 100% cash collateral. The facility was scheduled to mature December 31, 2018.
• There was no material reported funded debt. Net cash increased $15.1 million in the first half to $34.0 million, including unrestricted and restricted cash.
• Net operating lease obligations were $110.3 million, including $31.2 million associated with teach-out campuses and discontinued operations. The company also reported $14.3 million of remaining lease obligations for vacated space in continuing operations.

Material changes, outlook and management commentary

• Q2 new enrollments increased 5.8% at CTU and 9.0% at AIU. Total enrollments rose 3.3% at CTU but declined 13.8% at AIU, which management attributed to timing effects from its academic calendar redesign. Total University Group enrollment declined 2.8% year over year at quarter-end.
• Management attributed improving enrollment and student outcomes to investments in student services, admissions and advising centers, corporate partnerships, and technology. Corporate partnerships represented approximately 11% of University Group enrollment.
• 2018 outlook: operating income of $74.5–$81.5 million and adjusted operating income of $99–$106 million. For Q3, operating income was forecast at $21.0–$22.5 million and adjusted operating income at $23.5–$25.0 million. Adjusted figures are non-GAAP.
• Year-end 2018 cash, cash equivalents, restricted cash and short-term investments were forecast at $215–$220 million. Management expected operating income and adjusted operating income to grow in 2019 and year-end cash to increase versus 2018. The company expected 2018 capital expenditures of approximately 1%–2% of revenue and a full-year effective tax rate of 23%–26%.
• Outlook depended on continued student interest and positive effects from student-support initiatives, and assumed no material legal or regulatory changes. Management cautioned that actual results could differ materially.

Risks, contingencies and unusual items

• Legal exposure remains significant. The WCI class settlement and attorneys’ fees resulted in approximately $11.1 million for class claims and $4.9 million in attorneys’ fees and costs; $3.0 million had been paid by June 30, with the remaining $13.0 million expected to be paid in Q3. Separately, 325 individual Oregon arbitration claims had been filed by July 25; the company said potential loss could not be reasonably estimated and recorded no liability for those claims.
• Accrued legal fees and settlements totaled $13.8 million at June 30. State attorney general inquiries, an FTC investigation (including a July 2018 information request), and a Department of Education inquiry remained unresolved. The company could not estimate the potential impact of several investigations; unfavorable outcomes could materially affect operations, finances, cash flow or reputation.
• The company depends substantially on federal Title IV funding: approximately 78% of first-half 2018 tuition cash receipts came from Title IV sources. Changes to funding eligibility, timing, regulatory requirements, or required letters of credit could adversely affect the business. The filing discussed proposed borrower-defense rules and related potential institutional recoupment, but stated the impact was uncertain.
• Student receivables, net, rose 32% from year-end, partly due to adoption of ASC 606, which changed presentation and increased reported receivables and deferred revenue without affecting revenue or operating results. The allowance for doubtful accounts was $24.3 million.
• The 2018 U.S. corporate tax-rate reduction and discrete tax items contributed to a lower effective tax rate than in 2017. The company maintained a $50.5 million valuation allowance against specified tax credits and state net operating losses.
• Management expected the new lease accounting standard to materially increase reported right-of-use assets and lease liabilities, while not significantly affecting results of operations.

Investor verification priorities

1. Track CTU and AIU enrollment, retention, bad-debt trends and whether student-service investments translate into durable revenue and margins.
2. Monitor Q3 and full-year performance against guidance, including the distinction between GAAP operating income and adjusted operating income.
3. Verify cash generation and year-end liquidity after settlement payments, and confirm the status or replacement of the credit facility due to mature December 31, 2018.
4. Follow the WCI settlement payments, Oregon arbitrations, government investigations and any resulting reserve changes or operational restrictions.
5. Assess Title IV funding exposure and regulatory developments, including borrower-defense and financial-responsibility requirements.
6. Evaluate the quality and collectability of student receivables and the effect of ASC 606 presentation changes when comparing periods.