PERDOCEO EDUCATION Corp quarterly report, Q3 FY2012

Career Education Corporation (CEC) — Form 10-Q summary

Entity note: The supplied filing is for Career Education Corporation, not a registrant named Perdoceo Education Corp. It reports the quarter ended September 30, 2012, and was filed November 8, 2012. Unless stated otherwise, amounts below are in U.S. dollars.

Business context and reporting period

CEC operated career-focused colleges and universities through online, campus and hybrid programs, serving more than 80,000 students at over 90 campuses in the U.S. and Europe. Its six reporting segments were CTU, AIU, Health Education, Culinary Arts, Art & Design, and International. Results for the schools sold in 2011 are classified as discontinued operations.

Financial performance and position

Metric	Q3 2012	Q3 2011	First nine months 2012	First nine months 2011
Revenue	$332.8 million	$428.4 million	$1,135.9 million	$1,445.0 million
Operating income (loss)	$(48.2) million	$19.9 million	$(109.7) million	$208.1 million
Operating margin	(14.5)%	4.6%	(9.7)%	14.4%
Net income (loss)	$(33.1) million	$10.6 million	$(81.3) million	$139.0 million
Diluted EPS	$(0.50)	$0.14	$(1.23)	$1.84
Cash provided by operating activities	Not separately presented for quarter	Not separately presented for quarter	$32.5 million	$209.4 million

Q3 revenue fell 22.3%; new student starts declined 23% and total student population fell 22% year over year. The steepest segment revenue declines were Health Education (36%), Culinary Arts (26%) and Art & Design (24%).
Q3 operating expenses were $381.0 million. Nine-month results included $85.7 million of goodwill and asset impairment charges, primarily $41.9 million in Health Education and $41.5 million in Art & Design, plus a $19.0 million insurance recovery. The impairment charge materially affected reported earnings.
At September 30, cash and cash equivalents were $242.8 million and short-term investments were $130.5 million, totaling $373.3 million, down from $441.2 million at year-end 2011. This includes $70.2 million restricted for certain European not-for-profit schools.
Total assets were $1.145 billion and stockholders’ equity was $671.7 million. Current assets were $545.0 million versus current liabilities of $310.8 million. CEC reported no borrowings under its credit agreement; capital lease obligations were minimal. The $185 million U.S. credit agreement expired October 31, 2012; replacement-facility discussions were ongoing.
Nine-month investing cash flow was $(4.4) million, including $29.5 million of capital expenditures; financing cash flow was $(62.0) million, including $56.4 million of share repurchases. Cash decreased $37.8 million over the period.

Material changes and management commentary

Management attributed weaker enrollment and revenue to regulatory scrutiny and negative publicity, a weak employment environment, slower student decision-making, new admissions requirements, enrollment caps, and program and campus teach-outs. Domestic career-school new starts fell 34% in Q3.
CEC recorded goodwill and asset impairments after lower cash-flow expectations, revenue and earnings performance, and student interest raised impairment indicators for Health Education and Art & Design. Goodwill fell from $212.6 million at year-end to $131.9 million at September 30.
Management estimated the combined 2012 operating loss for Health Education, Culinary Arts and Art & Design at $140 million to $160 million, excluding impairments, legal settlements and other unusual items. It expected near-term operating results to remain under pressure into 2013. No consolidated revenue or earnings guidance was provided.
After quarter-end, on November 5, CEC decided to teach out 23 domestic campuses, expected to contribute approximately $124.3 million in 2012 revenue and $62.0 million in operating loss. Most are expected to cease operations by Q1 2014. CEC also announced approximately 900 position reductions, targeting annual savings of $45 million to $55 million and an estimated $7 million pretax severance charge in Q4 2012. Additional teach-out lease and severance costs were not yet quantified.
Management said it expected to meet the 90-10 Rule at all institutions by December 31, 2012, after operational changes and delaying receipt of approximately $19.7 million of Title IV funds until early 2013; as much as $25 million could be delayed for the full year. All institutions were on Heightened Cash Monitoring 1 (HCM1) status.
CEC reported that ACICS had vacated its show-cause directive, but many campuses remained under increased oversight; 14 campuses were below the ACICS 2012 minimum placement standard. Ten ACCSC-accredited campuses and three Health Education campuses faced show-cause proceedings. Further adverse regulatory or accreditation outcomes could restrict Title IV funding or operations.

Risks, contingencies and unusual items

CEC faced federal and state regulatory inquiries and investigations concerning placement-rate practices, disclosures, marketing and other conduct, including inquiries involving the U.S. Department of Education, SEC, and attorneys general in several states. Management said outcomes and potential financial impacts could not be estimated.
Student, securities, derivative, employment and False Claims Act litigation remained pending. CEC generally said potential losses could not be reasonably estimated and had not accrued liabilities for the unresolved matters, apart from specified settlements and accruals. The filing reported $11.3 million accrued for estimated legal fees and settlements.
CEC paid approximately $3.6 million on behalf of CTU students following a Veterans Affairs review and said the matter was resolved. It also recorded Q3 settlement amounts of approximately $0.4 million for certain California Culinary Academy claims and $2.1 million for claims involving California School of Culinary Arts.
Management warned that an adverse finding could lead to fines, reimbursement obligations, additional monitoring, letters of credit, accreditation actions, or reduced or lost Title IV eligibility. A shift to HCM2 or reimbursement funding could materially delay federal cash receipts.
CEC’s 2011 consolidated federal financial-responsibility composite score was 2.3; management projected a risk of entering the “zone” for 2012. Its credit agreement expired without a replacement in place at filing, adding uncertainty to available liquidity and potential letter-of-credit capacity.
CEC held $10.6 million of auction-rate municipal securities with failed auctions and a cumulative unrealized loss of approximately $0.5 million; management considered the impairment temporary but noted liquidity risk.

Important facts for investors to verify

Whether enrollment, student starts, revenue and operating cash flow stabilized after the reported declines.
Whether CEC obtained replacement credit capacity after the October 31 expiration, and the amount of cash restricted to secure outstanding letters of credit.
Actual 90-10 Rule compliance, Title IV cash timing, and any changes to HCM1 status or financial-responsibility scores.
Results of ACICS, ACCSC and ABHES reviews, placement-rate performance, and any effect on accreditation, campus operations or student-aid eligibility.
Implementation costs and realized savings from the 23-campus teach-outs and workforce reductions, including lease exit and severance costs.
Developments in litigation and state, federal and SEC inquiries, including any losses or settlements that become estimable.
Whether further impairment charges were recorded in the annual assessment, particularly for remaining career-school goodwill and indefinite-lived intangible assets.