Career Education Corporation (Perdoceo Education Corp. in request metadata) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; filed August 9, 2017. The filing identifies the registrant as Career Education Corporation (CEC). Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
CEC operates Colorado Technical University (CTU) and American InterContinental University (AIU), predominantly online, and is teaching out its Culinary Arts and Transitional Group campuses as it focuses on its two universities. The teach-out campuses no longer enroll new students. Three Transitional Group campuses completed teach-out during Q2.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $146.2 | $182.6 | $308.3 | $381.5 |
| Operating income | $9.1 | $17.3 | $18.9 | $24.3 |
| Operating margin | 6.2% | 9.5% | 6.1% | 6.4% |
| Continuing-operations income | $4.7 | $12.6 | $10.3 | $15.7 |
| Net income | $4.3 | $11.8 | $9.5 | $14.9 |
| Diluted EPS | $0.06 | $0.17 | $0.13 | $0.22 |
- Q2 revenue fell 19.9%; the company attributed the decline mainly to the planned wind-down of Career Schools. Excluding Culinary Arts and Transitional Group, revenue declined 3.5% in Q2 and 0.5% year to date.
- Q2 total student enrollments were down 12.0% year over year to 33,600. University Group enrollments increased 3.2%; CTU declined 0.9% and AIU increased 11.5%.
- AIU’s academic-calendar redesign shifted revenue timing: Q2 had 77 earning days versus 84 a year earlier. CEC said this also contributed to quarterly variability.
- Q2 University Group and Corporate adjusted operating income, a non-GAAP measure, was $25.9 million versus $33.8 million. Adjusted operating loss for the teach-out segments was $11.2 million versus $4.2 million.
- Six-month operating cash flow was a use of $34.2 million, compared with $6.6 million provided a year earlier. CEC cited $32.0 million of legal-settlement payments in Q1 and changes in operating assets and liabilities.
- At June 30, cash, cash equivalents, restricted cash and short-term investments totaled $172.1 million, including approximately $8.5 million restricted. This was down from $207.2 million at year-end 2016. Total assets were $506.5 million; stockholders’ equity was $334.9 million.
- No revolving-facility borrowings were outstanding. The facility provides up to $95 million, matures December 31, 2018, and borrowings must be secured by 100% cash collateral. CEC reported compliance with its covenants. Interest expense was $0.1 million in Q2 and $0.2 million year to date.
Changes, outlook and management commentary
- Compared with Q2 2016, operating income declined 47.3% and net income declined 63.8%. CEC cited lower revenue, AIU calendar timing, investment in Phoenix admissions and advising centers, higher University Group bad-debt expense, and expense timing. Lower costs at teach-out campuses partly offset these pressures.
- The effective tax rate rose to 52.0% in Q2 and 48.2% year to date, compared with 26.8% and 35.8%, respectively. The 2017 rates reflected tax reserves, nondeductible expenses, and an unfavorable stock-compensation accounting adjustment; the 2016 comparison benefited from a favorable tax-audit adjustment.
- Management said first-half performance exceeded expectations and maintained its full-year outlook. It forecast Q3 University Group and Corporate adjusted operating income of $22–$24 million and full-year 2017 adjusted operating income of $100–$105 million. These are non-GAAP measures, not GAAP operating-income guidance.
- CEC forecast 2017 adjusted operating losses of $45–$55 million for Culinary Arts and Transitional Group, and $10–$15 million in 2018. Management expected CTU new-student enrollment growth in Q3; AIU new enrollments to decline in Q3, primarily due to calendar redesign, with growth in Q4 expected to more than offset that decline.
- Management projected year-end 2017 cash, cash equivalents, restricted cash and available-for-sale short-term investments, net of borrowings, of $155–$160 million, and expected cash to increase in 2018. It said cash use should moderate through the remainder of 2017 and turn positive in 2018.
- CEC expected most teach-outs to finish by year-end 2017, with remaining campuses completing in 2018. It estimated an additional $15–$18 million of future lease-exit charges for continuing-operations campuses after closure, subject to assumptions including sublease income.
Risks, contingencies and unusual items
- Title IV funding is a key exposure: approximately 77% of tuition cash receipts came from Title IV programs. All institutions were on provisional program participation agreements; AIU and CTU were operating month to month pending recertification. A shift to reimbursement or heightened cash monitoring could delay federal-fund receipts and increase cash needs.
- CEC disclosed ongoing federal and state regulatory matters, including a Department of Education inquiry, an OIG audit review, state attorneys general inquiries, and an FTC inquiry. The FTC had made no further inquiry since March 2017. The SEC notified CEC in June 2017 that it had concluded its investigation of the company’s 2014 discontinued-operations classification and was not recommending action.
- Other litigation includes a putative class action relating to a former culinary school and a False Claims Act action. CEC said it could not reasonably estimate potential losses for these matters. Accrued legal fees and settlements were $2.5 million at June 30, down from $34.5 million at December 31, 2016; the filing attributes operating cash use partly to settlement payments.
- CEC had an accrued $1.0 million reserve related to the CTU OIG matter; the filing says this excludes a separate requested file review whose outcome was uncertain. State investigations could result in penalties or operational changes, but potential impacts could not be estimated.
- Gross operating lease obligations were $183.4 million, offset by $17.7 million of executed sublease income. Net obligations were $165.7 million, including $104.6 million for teach-out campuses and discontinued operations.
- CEC identified forthcoming lease-accounting guidance as expected to materially affect its balance-sheet presentation. It was still assessing the impact of the revenue-recognition standard, effective for CEC beginning January 2018, but did not then expect a significant impact on results of operations.
Investor facts to verify
- Whether University Group enrollment and operating performance support the $100–$105 million full-year adjusted-income outlook, and how AIU’s calendar redesign affects quarterly revenue.
- Whether cash use moderates as projected, given the $34.2 million first-half operating cash outflow, remaining settlements, lease commitments and planned year-end liquidity range.
- Updates to Title IV eligibility, provisional agreements, HCM1 status, the Department of Education inquiry and OIG review, including any effect on cash timing or operations.
- Actual teach-out completion costs, lease-exit charges, sublease recoveries and the forecast $45–$55 million 2017 adjusted operating loss for teach-out segments.
- Changes in student-receivable reserves and bad-debt expense, which increased as a share of revenue, and any material developments in litigation or state investigations.