Business context and reporting period
Career Education Corporation (CEC), the registrant named in this filing, reported unaudited results for the quarter and six months ended June 30, 2014. CEC operated online, on-ground and hybrid postsecondary schools, including Colorado Technical University (CTU), American InterContinental University (AIU), career colleges and Le Cordon Bleu. The filing presents results of certain closed or sold campuses as discontinued operations.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $229.3 | $259.5 | $470.7 | $536.8 |
| Operating loss | $(33.3) | $(49.7) | $(75.2) | $(69.3) |
| Loss from continuing operations | $(35.6) | $(22.8) | $(77.2) | $(39.8) |
| Discontinued-operations loss, net of tax | $(11.0) | $(8.6) | $(27.5) | $(6.8) |
| Net loss | $(46.6) | $(31.4) | $(104.7) | $(46.6) |
| Basic and diluted loss per share | $(0.69) | $(0.47) | $(1.56) | $(0.70) |
- Q2 operating margin improved to negative 14.5% from negative 19.1%; the six-month operating margin deteriorated to negative 16.0% from negative 12.9%. Net margin was negative 20.3% in Q2 and negative 22.2% year to date.
- Q2 revenue declined 11.6% year over year; revenue excluding Transitional Schools declined 8.5%. Six-month revenue declined 12.3%.
- Cash used in operating activities was $81.3 million for the six months, versus $67.0 million in 2013. Cash used in investing was $100.2 million, including a $92.9 million net outflow for purchases of available-for-sale investments. Capital expenditures were $7.0 million. Net cash decreased $180.3 million.
- At June 30, cash and cash equivalents were $150.5 million, including $11.9 million restricted; short-term investments were $124.1 million. Unrestricted cash and cash equivalents were $138.6 million. Total assets were $667.5 million, down from $805.0 million at year-end 2013.
- No borrowings were outstanding under the $70 million revolving credit facility, scheduled to mature June 30, 2016; CEC reported compliance with its covenants. The filing reports no outstanding funded debt, but substantial lease obligations remain.
Changes, operating developments and outlook
- Operating expenses fell $46.5 million in Q2, primarily from lower general and administrative costs, including advertising, and reduced student-related and occupancy costs. The Q2 operating loss narrowed despite lower revenue and a larger impairment charge. Year-to-date operating loss widened.
- At June 30, total enrollment was 49,000, down 8.2% year over year. University Schools enrollment declined 4.4%; Career Schools declined 5.4%; Culinary Arts enrollment rose 3.9%. Q2 University new-student enrollments rose 11.8%, but management cautioned that a new orientation process affected comparability.
- CEC recorded a $7.4 million impairment of the Le Cordon Bleu trade name, leaving a $19.9 million carrying value. AIU’s interim goodwill impairment test found no impairment. The company also recorded about $6.1 million for remaining leases at campuses that completed teach-outs, within discontinued operations.
- CEC completed teach-outs at eight campuses and sold Everblue Training Institute and SBI Pittsburgh in Q2. Management expected most remaining campus closures to be completed by Q3 2014, with four additional teach-outs anticipated in the second half. The buyers of the two sold campuses assumed approximately $3.7 million of lease obligations.
- Management expected University Schools’ total enrollment to turn positive year over year in the second half of 2014, and expected lower cash use in the second half than in the first half. It anticipated increased Q3 advertising and marketing spending for the back-to-school period. CEC said existing cash, operating cash flow and credit-facility availability should meet requirements for at least the next 12 months, while noting short-term pressure on operating cash flow.
Risks, contingencies and other notable matters
- CEC depends substantially on federal Title IV student aid: 77.3% of tuition cash receipts in the first half of 2014 came from Title IV funding. Its schools remained on Heightened Cash Monitoring 1 (HCM1) status during the Department of Education (ED) inquiry into placement-rate disclosures. ED could impose sanctions, delay funds or move schools to more restrictive reimbursement or HCM2 status, which could increase funding needs.
- Seventeen of 21 ED identification numbers were seeking recertification; eligibility continued month to month pending ED decisions. Management warned that a failure to meet ED requirements could affect Title IV eligibility. The consolidated financial-responsibility composite score was 1.5 for 2013; management expected downward pressure for 2014 and 2015 and said it may consider additional measures, including cost reductions or changes to capital structure.
- CEC faced inquiries by attorneys general in multiple states concerning recruiting, placement statistics, licensing and student lending. The company said their scope and outcome were uncertain and potential impacts could not be estimated. Massachusetts regulations issued in June 2014 were expected to adversely affect prospective-student enrollment there; Massachusetts represented about 1% of enrollment and first-half continuing-operations revenue.
- Legal matters included student and False Claims Act litigation. CEC recorded a $3.0 million reserve for a settlement with 74 plaintiffs in California Culinary Academy cases. A separate California settlement framework covering about 950 plaintiffs had estimated total liability of $15.5–$17.5 million. Other material-case losses were not estimable in the filing. The SEC notified CEC on June 26, 2014 that it had concluded its investigation and would not recommend action.
- A $82.5 million deferred-tax valuation allowance was maintained; the company reported tax expense despite pretax losses. An auction-rate municipal security had an unrealized loss of about $0.5 million and remained exposed to liquidity risk.
Important facts for investors to verify
- Whether student enrollment and revenue trends improve, particularly at AIU, Career Colleges and Culinary Arts; consider the filing’s caution that the revised orientation process affects new-enrollment comparisons.
- Whether cash burn moderates as management expected, and how much liquidity is available after restricted cash, investment liquidity and ongoing lease commitments.
- ED’s outcomes on HCM1, pending recertifications, placement-rate inquiries and financial-responsibility requirements, including possible effects on Title IV funding and access to liquidity.
- The ultimate cost and timing of litigation settlements, state investigations and remaining campus lease obligations; several potential exposures were not reasonably estimable.
- Whether Le Cordon Bleu’s operating performance supports its remaining trade-name value, and whether further impairments or changes to the deferred-tax valuation allowance are required.