Career Education Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing identifies the registrant as Career Education Corporation. Financial amounts below are in U.S. dollars; “million” amounts are rounded.
Business context and reporting period
The company operated Colorado Technical University (CTU) and American InterContinental University (AIU), primarily serving students online, plus an “All Other Campuses” segment in teach-out. It completed the teach-out of one campus during the quarter; six non-LCB campuses remained, with closures expected during 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $148.1 million | $162.1 million |
| Operating income | $20.5 million | $9.8 million |
| Operating margin | 13.9% | 6.0% |
| Income from continuing operations | $17.9 million | $5.6 million |
| Net income | $17.5 million | $5.2 million |
| Diluted earnings per share | $0.25 | $0.07 |
| Operating cash flow | $11.1 million provided | $39.1 million used |
At March 31, cash, cash equivalents, restricted cash and short-term investments totaled $187.6 million, including $5.4 million of restricted balances. Current assets were $225.4 million and current liabilities $114.1 million. The company had no borrowings outstanding under its $95 million revolving credit facility, which matures December 31, 2018 and requires 100% cash collateral. Net contractual operating lease obligations were $90.8 million.
Changes versus the prior comparable period
- Revenue fell 8.7%, primarily because teach-out campuses contributed substantially less revenue. Excluding All Other Campuses, revenue declined 0.4%.
- Operating income more than doubled, reflecting lower teach-out campus costs and improved marketing efficiency. The prior-year operating cash outflow included $32.0 million of legal settlement payments.
- CTU revenue rose 0.6%; CTU total enrollment increased 2.8% and new enrollment 4.6%. AIU revenue fell 2.1%; its new enrollment fell 51.5% and total enrollment 12.8%, with management attributing the quarterly comparison mainly to its academic-calendar redesign and fewer enrollment days.
- Overall student enrollment declined 8.4%. All Other Campuses revenue dropped from $13.8 million to $0.3 million as campuses wound down.
- The effective tax rate declined to 16.4% from 44.6%, reflecting tax-rate changes, excess tax benefits from share-based compensation and release of prior tax reserves.
Outlook, management commentary and risks
Management affirmed its outlook: 2018 adjusted operating income of $99–$106 million for the total company and $110–$115 million for University Group and Corporate; second-quarter adjusted operating income of $19.5–$21.5 million and $22.5–$24.0 million, respectively. Year-end 2018 cash, cash equivalents, restricted cash and short-term investments were expected at $220–$225 million. Management expected total-company adjusted operating income and ending cash to increase in 2019 versus 2018. It also expected AIU full-year 2018 revenue growth and anticipated its Q2 and Q3 new enrollment gains would approximately offset the Q1 decline. Full-year 2018 effective tax rate guidance was 23%–26%.
Management cited ongoing investment in admissions, advising, faculty, student support and technology, while cautioning that quarterly results could vary with expense timing and AIU’s calendar redesign. Outlook assumptions include stable student interest, positive effects from student-serving initiatives, expected real-estate recoveries, no material legal or regulatory changes, and no material change in share-based compensation costs.
- Legal and regulatory matters: The company accrued $11.8 million for estimated legal fees and settlements. A proposed settlement in the Surrett matter was estimated at $6.3 million for class claims; the maximum class-member payment was approximately $14 million, with attorneys’ fees and costs separately subject to a court-set amount in the agreed $3.75–$8.0 million range. Final approval was scheduled for June 8, 2018. Multiple state attorney general inquiries and an FTC inquiry remained unresolved, and the company could not estimate their potential impact.
- Federal oversight: The Department of Education’s final determination on a CTU audit assessed liability consistent with the company’s existing $1.0 million reserve. The company also disclosed ED inquiry/HCM1 status concerning former institutions.
- Other exposures: The company cited dependence on Title IV funding, enrollment levels, regulatory eligibility and litigation outcomes. Approximately 79% of tuition cash receipts came from Title IV funding in Q1 2018. Remaining estimated lease charges for continuing-operations teach-outs were approximately $3 million, in addition to $68.2 million of charges recorded since 2015.
- Accounting change: ASC 606 adoption changed balance-sheet presentation and disclosures, including student receivables and deferred revenue, but did not affect revenue recognition or results of operations.
Important facts for investors to verify
- Whether CTU enrollment and retention gains continue, and whether AIU’s enrollment recovery and full-year revenue growth materialize after the calendar redesign.
- Progress against adjusted operating income and year-end liquidity guidance; note that adjusted operating income is a non-GAAP measure.
- Developments and ultimate costs in the Surrett settlement, other litigation, state investigations, FTC inquiry and Department of Education matters.
- Timing and cost of remaining campus closures, lease obligations and expected sublease recoveries.
- Continued access to Title IV funding and compliance with applicable federal, state and accreditation requirements.