Career Education Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is for Career Education Corporation; amounts below are in millions of dollars unless noted. Financial statements are unaudited.
Business context
The company operated Colorado Technical University (CTU), American InterContinental University (AIU), and a Transitional Group of schools being taught out or divested. On May 1, 2015, the board approved teaching out the remaining 15 Sanford-Brown campuses and pursuing divestitures of Briarcliffe College, Brooks Institute, and Missouri College. Management said its strategy is to focus on CTU and AIU, which predominantly serve adult students online.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $174.8 | $186.2 | $357.1 | $384.3 |
| Operating loss | $(9.3) | $(11.3) | $(33.9) | $(33.2) |
| Loss from continuing operations | $(9.5) | $(13.5) | $(34.3) | $(35.2) |
| Loss from discontinued operations | $(11.3) | $(33.0) | $(11.4) | $(69.5) |
| Net loss | $(20.7) | $(46.6) | $(45.6) | $(104.7) |
| Net loss per share | $(0.31) | $(0.69) | $(0.67) | $(1.56) |
- Q2 consolidated operating margin was negative 5.3%, versus negative 6.0% a year earlier. University Group operating income rose 50% to $29.4 million, with a 21.3% operating margin versus 14.6%.
- Q2 revenue declined 6.1%; management attributed the decrease mainly to the 6.4% decline in total enrollment, including the wind-down of Career Colleges. University Group revenue rose 2.6%, and its total enrollment grew 2.3% year over year.
- For the six months, operating cash use was $26.6 million, compared with $81.3 million in 2014. Investing cash use was $4.7 million and financing provided $0.4 million. Cash and cash equivalents fell by $30.6 million to $63.3 million.
- At June 30, cash, restricted cash, and short-term investments totaled $196.7 million, including $13.4 million restricted cash. Current assets were $315.9 million and current liabilities $177.0 million.
- No borrowings were outstanding under the $120 million revolving facility at June 30; it matures June 30, 2016 and requires 100% cash collateral for loans and letters of credit. The company had repaid $10 million borrowed in late 2014.
- Gross operating lease obligations were $372.8 million; disclosed net obligations after contracted sublease income were $341.9 million. Stockholders’ equity was $238.5 million.
Changes, outlook, and unusual items
- Q2 operating loss improved by $1.9 million year over year, primarily from lower Transitional Group costs and cost containment, partly offset by restructuring expense. Six-month operating loss worsened by $0.7 million.
- Restructuring included $12.6 million of Q2 severance and related charges. Management estimated total charges of $32–$38 million for the May 2015 actions, including approximately $20–$25 million of future real-estate charges; separate legacy teach-out real-estate charges were also anticipated. Severance cash payments may extend through 2018, and some lease costs through 2023.
- Management projected approximately $375 million of cost reductions by the end of 2018 versus annualized Q2 2015 operating expenses for continuing and discontinued operations, excluding impairments. It expected mid-single-digit consolidated operating margins in 2016, positive 2015 adjusted EBITDA for University Group and Corporate, and cash, restricted cash, and investment balances above $190 million in 2015. These are forward-looking estimates dependent on enrollment, divestitures, lease recoveries, regulatory conditions, and other assumptions; 2016-and-beyond projections assume the Le Cordon Bleu (LCB) sale is completed.
- LCB campuses remained held for sale. A $9.7 million Q2 impairment was recorded based on management estimates of future cash flows and discount rates. Management expected an agreement before year-end 2015 and, subject to regulatory approval, closing by early 2016. The filing notes that failure to complete the sale could require changes to the transformation plan.
- Brooks Institute was sold June 16, 2015 for no consideration; the company recorded a $0.9 million loss. A definitive agreement to sell Missouri College was signed, with closing expected in Q3 2015. Briarcliffe was being marketed. The filing states the Missouri College results remained in continuing operations and LCB results in discontinued operations.
- Accounting guidance effective in 2015 narrowed discontinued-operations classification. Accordingly, certain completed teach-outs remain in continuing operations; prior-period presentation was not recast for this change, which affects comparability.
- Management cited modest University Group enrollment growth, improving university profitability, investments in academic outcomes and adaptive-learning technology, and increased corporate partnership enrollments. On July 31, 2015, Todd Nelson was named president and CEO, expected to join August 12.
Risks and contingencies
- The company depended substantially on Title IV student aid; approximately 77% of tuition cash receipts came from Title IV funding in the first half of both 2015 and 2014. Its institutions were on ED Heightened Cash Monitoring 1 (HCM1) status, and the company was cooperating with a Department of Education inquiry into placement-rate disclosures. Sanctions, delayed funds, or a move to more restrictive payment status could pressure liquidity.
- Management reported composite financial-responsibility scores of 1.5 for 2013 and 2014, the threshold for responsibility without additional oversight. It warned that losses, asset write-downs, campus closures, or failure to sell LCB could impair future compliance; required letters of credit might not be available on acceptable terms.
- Multiple state attorneys general were investigating recruitment, placement statistics, licensing results, and student lending practices. The company said outcomes and potential impacts could not be reasonably estimated. It also disclosed student, False Claims Act, and employment litigation; some matters had no recorded liability because potential losses could not be estimated.
- The company had accrued $1.9 million for estimated legal fees and settlements and $0.8 million related to a CTU Department of Education audit matter. A $150.4 million deferred-tax valuation allowance was reported at year-end 2014 and continued at June 30, 2015.
- Management expected continued operating cash use, while identifying enrollment, regulatory compliance, divestiture execution, real-estate costs, litigation, and cost savings as key uncertainties.
Important facts for investors to verify
- Progress and realized proceeds from LCB and Career College divestitures, including regulatory approvals and any further impairment charges.
- Actual enrollment, retention, revenue, and operating-margin trends at CTU and AIU, including the effect of AIU’s changed new-enrollment methodology.
- Cash burn, liquidity against management’s stated targets, cash-collateral requirements, and the June 2016 revolving-facility maturity.
- Actual restructuring charges, cash payments, lease exits, sublease recoveries, and whether projected cost savings and 2016 margin goals are achieved.
- Developments in ED oversight and recertification, HCM1 status, financial-responsibility scores, state investigations, and material litigation.
- Comparability of reported results given the 2015 discontinued-operations accounting change and the differing treatment of campuses being taught out or sold.