Career Education Corporation (CEC) — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2012. The filing is by Career Education Corporation; the supplied company name, Perdoceo Education Corp, does not match the issuer named in this historical filing.
Business context and reporting period
CEC operated more than 90 campuses in the United States and Europe and served more than 75,000 students through online, on-ground and hybrid programs. Its six reporting segments were CTU, AIU, Health Education, Culinary Arts, Art & Design and International. The 2011 comparison was recast to report the sold Istituto Marangoni schools as discontinued operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $369.0 | $484.9 | $803.1 | $1,016.6 |
| Operating income (loss) | $(108.1) | $79.3 | $(61.5) | $188.2 |
| Operating margin | (29.3%) | 16.4% | (7.7%) | 18.5% |
| Continuing-operations income (loss) | $(93.9) | $53.4 | $(47.4) | $124.0 |
| Net income (loss) | $(100.2) | $55.4 | $(48.2) | $128.4 |
| Diluted earnings (loss) per share | $(1.52) | $0.73 | $(0.72) | $1.69 |
- Q2 operating results included $83.4 million of goodwill impairment, $1.0 million of trade-name impairment and $1.2 million of other asset impairment. Total goodwill and asset impairment expense was $85.6 million.
- Six-month operating results included a $19.0 million insurance recovery; the prior-year period included a $7.0 million insurance recovery and a $1.4 million real-estate sale gain.
- Operating cash flow was $16.6 million for the first six months, versus $114.8 million a year earlier. Investing cash outflow was $28.8 million and financing cash outflow was $56.5 million, including $56.4 million of share repurchases. Cash and cash equivalents decreased $71.3 million to $209.3 million.
- At June 30, cash, cash equivalents and short-term investments totaled $369.9 million, down from $441.2 million at year-end. Of cash, $63.3 million was restricted for certain European not-for-profit schools. Current assets were $531.2 million and current liabilities $270.2 million.
- CEC reported no credit-agreement borrowings and $6.7 million of letters of credit outstanding. Its $185 million U.S. credit facility had $178.3 million of stated availability and expired October 31, 2012. CEC said it complied with covenants but could not predict renewal terms or availability.
- Year-to-date capital expenditures were $20.0 million, compared with $47.9 million in 2011. CEC repurchased 6.1 million shares for $56.4 million at an average $9.29 per share; $183.3 million remained authorized.
Material changes and segment trends
- Q2 revenue fell 23.9% year over year; six-month revenue fell 21.0%. Management attributed the declines to lower student interest, longer enrollment decision times, weak economic conditions, regulatory scrutiny and negative industry publicity.
- Q2 new student starts fell 40% to 15,000, while student population fell 24% to 77,600. For the six-month period, starts fell 33% to 38,090. Domestic ground-based starts declined 56% in Q2.
- Revenue declined across all segments in Q2. Health Education revenue fell 31.0% and Art & Design fell 29.3%; each recorded a substantial impairment-related operating loss. CTU and AIU remained profitable but reported lower revenue and operating income. International revenue fell 15.9% in Q2, partly due to $3.3 million of unfavorable currency effects; six-month International revenue rose 3.2%, despite $5.3 million of unfavorable currency effects.
- Goodwill impairment of $41.9 million in Health Education and $41.5 million in Art & Design reduced goodwill from $212.6 million at year-end to $130.9 million. Management cited weaker cash flows, revenue and earnings versus projections, and lower new-student interest as impairment indicators.
- CEC decided to teach out AIU’s Weston campus and three Health Education campuses: Landover, Milwaukee and Collinsville. It recorded related asset impairment and $1.5 million of severance and retention costs.
Outlook, risks and unusual items
- Management gave no numerical earnings or revenue guidance. It expected industry and enrollment pressures to continue weighing on results for the remainder of 2012, while describing its longer-term goal as returning to sustainable growth.
- Accreditation and student-placement matters are significant risks. ACICS vacated its show-cause directive covering 71 CEC institutions, but 60 campuses faced increased oversight and four were on probation. ACCSC separately directed its ten accredited campuses to show cause; required information was due September 7, 2012. The campuses remained accredited, but new-program and campus restrictions applied.
- CEC said the Department of Education had moved all institutions to Heightened Cash Monitoring 1 and was investigating possible misrepresentation involving historical placement rates. A move to Heightened Cash Monitoring 2 could delay Title IV cash receipts. The SEC was also conducting an inquiry into placement-rate matters.
- Six OPEIDs exceeded the 90-10 Rule threshold in fiscal 2011 and were placed on provisional certification for two years. CEC said U.S. schools received approximately 81% of tuition cash receipts from Title IV funding in the first six months of 2012. It planned measures including tuition changes, program caps and delayed receipt of up to $25 million of Title IV funds until 2013.
- CEC disclosed state attorney general investigations in New York, Florida, Illinois and Oregon, and multiple student, shareholder, securities and employment lawsuits. The filing states that potential losses for several matters could not be reasonably estimated. A $15.7 million accrual covered estimated legal fees and settlements; a separate $5.0 million accrual related to a Veterans Affairs review of CTU benefit certifications.
- A settlement resolving two text-message class actions had preliminary approval, with final approval scheduled for October 23, 2012. CEC had recorded a $6.0 million charge in 2011; class payments were subject to valid claims and attorneys’ fees remained unresolved.
- Management cited an expected repatriation of approximately $40.5 million of foreign cash in Q3 2012 following the Istituto Marangoni sale. Other foreign earnings were described as permanently reinvested, and repatriation could have tax consequences.
Most important facts for investors to verify
- Progress on enrollment, student retention and revenue trends, especially at domestic ground-based schools.
- Outcomes of the ACCSC show-cause process, ACICS campus oversight and probation, placement-rate audits, and related ED and SEC inquiries.
- Title IV exposure: compliance with the 90-10 Rule, provisional-certification conditions, cash-monitoring status and any delays in federal aid receipts.
- Renewal or replacement of the credit facility that expired October 31, 2012, including borrowing capacity and covenant terms.
- Whether cash generation can sustain operations, campus teach-outs, lease obligations, litigation costs and continued repurchases; also verify restrictions on cash and the planned foreign-cash repatriation.
- Potential changes to litigation and regulatory loss estimates, including VA reviews, student claims and the effect of any adverse accreditation or funding decisions.