Business context and reporting period
This is Career Education Corporation’s (CEC; ticker CECO) Form 10-K for the fiscal year ended December 31, 2011, filed February 27, 2012—not a quarterly report. The filing describes a postsecondary education operator with more than 90 campuses and online programs in the U.S. and Europe, serving about 99,000 continuing-operations students at year-end. The filing is by Career Education Corporation; it does not identify the issuer as Perdoceo Education Corp.
CEC reported six segments: Colorado Technical University (CTU), American InterContinental University (AIU), Health Education, Culinary Arts, Art & Design, and International. Results were recast after a segment reorganization and the sale of Istituto Marangoni in November 2011.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1,884.5 million | $2,089.2 million |
| Operating income; margin | $39.2 million; 2.1% | $240.9 million; 11.5% |
| Income from continuing operations | Loss of $4.2 million | Income of $162.8 million |
| Net income | $18.6 million | $157.8 million |
| Operating cash flow | $230.5 million | $272.3 million |
| Capital expenditures | $78.3 million | $127.3 million |
Revenue declined 9.8%; new student starts fell 18%, and year-end student population declined 14%. Operating income fell sharply, in part because FY 2011 included $191.5 million of goodwill and asset impairments, versus $71.8 million in 2010. The 2011 charge included $168.4 million of goodwill impairment and a $20.4 million Le Cordon Bleu trade-name impairment. The effective tax rate on continuing operations was 110.0%, largely because much of the impairment was nondeductible.
Net income included $22.8 million from discontinued operations, including a $27.1 million pretax gain on the Istituto Marangoni sale. Thus, the reported net profit contrasts with a loss from continuing operations.
At December 31, 2011, cash, cash equivalents and short-term investments totaled $441.2 million; working capital was $281.0 million; total assets were $1,316.1 million and total liabilities were $510.0 million. CEC had no borrowings under its $185 million U.S. credit facility, with $6.7 million of letters of credit outstanding; the facility was due to expire October 31, 2012. Capital lease obligations were about $1.1 million. Operating lease commitments totaled $716.4 million. Cash included $74.5 million restricted for certain European not-for-profit schools; foreign subsidiaries held $154.7 million of cash and short-term investments.
U.S. student tuition cash receipts were heavily reliant on Title IV funding: approximately 83% in 2011. CEC repurchased 8.1 million shares for about $150.4 million during the year.
Material changes versus the prior comparable period
- Revenue fell from $2,089.2 million to $1,884.5 million, as domestic enrollment weakened; management cited economic conditions, negative industry publicity, longer student decision timelines and regulatory changes.
- Domestic segment revenue declined across the board, particularly AIU (-18.6%) and Culinary Arts (-19.0%); International revenue increased 24.6%. Health Education and Culinary Arts reported operating losses of $89.6 million and $65.0 million, respectively, including significant impairments.
- CEC attributed lower 2011 bad-debt expense ($55.7 million versus $106.9 million) partly to ceasing extended payment plans for new students and to prior-year reserve adjustments. It had committed to about $110.2 million of such plans; $7.3 million was reflected in net student receivables at year-end.
- Operating cash flow declined about 15% year over year. Capital spending fell 38.5%, primarily because 2010 included investment in a new campus support center.
- CEC sold Istituto Marangoni for $49.8 million gross proceeds ($16.7 million net of cash divested) and acquired Everblue Training Institute for approximately $9.9 million.
Outlook, commentary, risks and unusual items
Management said revenue declines and related pressures were expected to continue through at least the first half of 2012. It provided no clear numeric revenue or earnings guidance. Management expected actions addressing placement rates and the 90-10 Rule to weigh on 2012 results, especially in Health Education and Culinary Arts.
- 90-10 Rule: CEC notified the Department of Education that six OPEIDs exceeded the 90% Title IV revenue threshold for FY 2011. Those institutions, representing approximately $180 million of revenue and $12 million of operating income, faced provisional certification for two years and possible sanctions. Management said other OPEIDs were near the threshold.
- Accreditation and placement rates: ACICS deferred a show-cause matter concerning placement-rate controls until its April 2012 meeting. While it remained pending, ACICS would not accept applications for new programs or additional locations. CEC had introduced additional placement verification controls. The filing states that only 13 of 49 relevant Health Education and Art & Design schools met ACICS’s 65% placement standard for the 2010–2011 cohort under CEC’s internal definitions.
- Regulatory reviews and contingencies: The company disclosed multiple federal, state and accreditor inquiries, litigation and program reviews, including New York, Florida and Illinois attorney general investigations; pending ED reviews involving AIU and CTU; and a VA review of CTU. CEC accrued $5.0 million for estimated CTU reimbursements related to veterans’ housing allowances. It stated that it could not estimate potential losses for several legal and regulatory matters.
- Other accreditation matters: Brown College–Mendota Heights received an ACCSC show-cause directive. Briarcliffe’s accreditation continuation was limited to no more than one year pending requested reporting.
- Student outcomes and retention: Consolidated retention declined to 63.0% in 2011 from 66.6% in 2010. CEC said it was tightening admissions, reviewing programs and expanding career-services efforts; these changes could also reduce enrollment.
- Leadership and controls: CEO Gary McCullough resigned effective October 31, 2011; Chairman Steven Lesnik assumed the CEO role. Management reported effective disclosure controls and internal control over financial reporting, and the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the identity and corporate lineage of the historical issuer: this 2011 filing is for Career Education Corporation, not a filing under the name Perdoceo Education Corp.
- Track resolution and consequences of the six FY 2011 90-10 exceedances, pending OPEID consolidation, and any additional OPEIDs approaching the limit.
- Review the outcome of ACICS’s show-cause process and subsequent validation of placement-rate data, including any effects on accreditation, program approvals or enrollment.
- Assess whether enrollment, new starts, retention and revenue stabilized after the 2011 declines, and whether management’s 2012 expectations were met.
- Separate continuing-operations performance from discontinued-operations gains and impairment charges; confirm the sustainability of cash generation and the recoverability of assets and student receivables.
- Monitor the October 2012 credit-facility expiry, substantial operating lease commitments, legal and regulatory exposures, and the restrictions on a portion of reported cash.