Filing summary
Entity and period: The supplied filing is Career Education Corporation’s Form 10-K for the fiscal year ended December 31, 2016, filed February 23, 2017. It identifies the registrant as Career Education Corporation, not Perdoceo Education Corp. The filing covers the full year; fourth-quarter figures are noted separately below.
Business context
CEC operated American InterContinental University (AIU) and Colorado Technical University (CTU), primarily serving adult learners through online programs. It was winding down its Culinary Arts and Transitional Group campuses, while directing resources toward the universities. At year-end, total enrollment was approximately 36,600, including 33,600 in the University Group.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $704.4 million | $847.3 million |
| Operating loss; operating margin | $32.3 million; (4.6%) | $92.2 million; (10.9%) |
| Net income (loss) | $(18.7) million | $51.9 million |
| Cash from operating activities | $5.9 million | $(21.7) million |
| Cash, restricted cash and short-term investments, year-end | $207.2 million | $231.6 million |
- Revenue declined 16.9%, largely reflecting the teach-outs and a 15.3% decline in total enrollment. University Group revenue rose 2.3%; enrollment there increased 5.3%. CTU revenue increased 6.1%, while AIU revenue declined 4.3%.
- The operating loss narrowed by $59.8 million, helped by lower costs and prior-year impairment charges. The 2016 result included $32.0 million in legal settlement and related attorney-fee charges. University Group operating income fell 24.9%, to $69.8 million, including those charges.
- The 2015 net profit was substantially affected by a $147.5 million income-tax benefit, including a $109.8 million partial release of a deferred-tax valuation allowance. In 2016, the tax benefit was $16.6 million.
- Consolidated adjusted EBITDA, a non-GAAP measure, was $41.9 million versus negative $4.5 million. University Group and Corporate adjusted EBITDA was $91.7 million versus $83.7 million.
- Year-end current assets were $248.2 million and current liabilities $169.2 million; working capital was $79.0 million. CEC had no revolving-credit borrowings at year-end, against a $95 million facility maturing December 2018; borrowings and letters of credit require 100% cash collateral. The facility requires at least $110 million in domestic cash, cash equivalents and permitted investments.
- Gross operating lease commitments were $184.9 million, partially offset by $16.3 million of contracted sublease income. The filing also estimated $20–$30 million of additional future lease-exit charges for remaining teach-outs.
Fourth quarter
Q4 2016 revenue was $155.3 million, operating loss $55.9 million and net loss $32.9 million. Q4 included $32.0 million of legal charges and $22.5 million of unused-space charges. Q4 2015 revenue was $199.9 million, operating loss $3.9 million and net income $142.7 million; the latter included the significant tax benefit noted above.
Outlook, commentary and key risks
- Management expected University Group and Corporate operating income and adjusted operating income to grow in 2017 and 2018. It forecast adjusted operating losses of $50–$60 million for the teach-out segments in 2017 and $10–$20 million in 2018.
- Management projected year-end 2017 cash, restricted cash and short-term investments, net of borrowings, of $150–$160 million, including the planned $10 million settlement and $22 million in related legal-fee payments; it expected the balance to grow in 2018. Forecasts assume modest University enrollment growth, expected teach-out progress and no material change in the legal or regulatory environment.
- Management said the teach-outs were on track, with most remaining campuses expected to close in 2017 and the rest by 2018. It anticipated teach-out operating losses as expenses to support remaining students exceed declining revenue.
- Title IV funding is a major exposure: approximately 76% of tuition cash receipts came from Title IV in 2016; the filing reports about $510 million in Title IV cash receipts. All institutions were on Heightened Cash Monitoring 1 (HCM1); AIU and CTU were operating month-to-month while ED reviewed recertification applications.
- Other material uncertainties include pending state and federal inquiries, an ED inquiry concerning disclosures, the financial and enrollment effects of gainful-employment rules, and potential consequences of borrower-defense regulations. Several continuing university programs were in the gainful-employment “zone”; each university also had one active program that failed the initial test, and those programs had stopped enrolling new students.
- CEC reported a $34.5 million accrual for estimated legal fees and settlements at year-end. A False Claims Act matter was settled in February 2017 for $10 million payable to the United States and $22 million for relators’ attorneys’ fees; the filing states these amounts had been accrued in 2016. Other investigations and litigation remained unresolved, with outcomes or possible losses not clearly estimable in the filing.
- Bad-debt expense increased to $32.0 million from $22.2 million, and management expected pressure to continue, partly due to Title IV cash-management changes and student collection challenges. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing is for Career Education Corporation (ticker CECO), despite the request metadata naming Perdoceo.
- Track ED decisions on AIU and CTU recertification, HCM status, and any additional reporting, funding delays or collateral requirements.
- Assess whether University enrollment, retention and collections support the 2017–2018 operating and cash outlook, especially as total company enrollment contracts during teach-outs.
- Verify settlement payments, remaining legal contingencies, lease-exit costs and the effect of teach-out obligations on cash.
- Review deferred-tax-asset realizability and any future valuation allowance changes, as these affected reported earnings and may affect regulatory financial-responsibility measures.