Career Education Corporation (CEC) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Financial statements are unaudited. The filing is by Career Education Corporation; the supplied company metadata identifies Perdoceo Education Corp., so confirm the issuer/entity mapping.
Business context
CEC operated more than 90 campuses and online programs in the U.S. and Europe, serving approximately 118,205 students at September 30. It reported five segments: University, Health Education, Culinary Arts, International, and Transitional Schools. Student population grew 16% year over year; nine-month new student starts rose 17%. The company acquired International University of Monaco in April 2010 and reorganized segment reporting during the first quarter.
Financial performance and liquidity
Amounts below are in millions except per-share data.
- Q3 revenue: $524.2, up 14.4% year over year. Operating income was $38.3, nearly flat versus $38.1; operating margin fell to 7.3% from 8.3%. Continuing-operations income was $26.9, essentially unchanged. Net income was $26.1, up 25.7%, including a smaller discontinued-operations loss. Diluted EPS was $0.33 versus $0.25.
- Nine-month revenue: $1,581.8, up 19.0%. Operating income was $221.8, up 75.4%, with margin of 14.0% versus 9.5%. Continuing-operations income was $148.0 versus $84.3; net income was $145.7 versus $50.5. Diluted EPS was $1.79 versus $0.58.
- Margins and expense pressures: Q3 general and administrative expense rose 22.5% to $308.6, including $47.3 of legal charges and higher bad-debt expense. Q3 bad-debt expense was $31.9 versus $14.2; nine-month expense was $77.9 versus $39.2. Culinary Arts’ Q3 operating loss was $23.9, including a $40.0 legal charge and $7.3 of additional bad-debt expense.
- Cash flow: Nine-month operating cash flow was $217.5, essentially level with $217.4 in 2009. Investing used $59.5, including $81.9 of capital expenditures; financing used $158.6, including $154.9 of share repurchases. Cash and cash equivalents declined slightly to $283.5.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $442.5, down from $484.9 at year-end 2009. Current assets were $593.1 and current liabilities $476.8. No borrowings were outstanding under the U.S. credit agreement; $176.3 of availability remained after $8.7 of letters of credit. Continuing-operations capital lease obligations totaled approximately $2.1. The filing says existing cash, operating cash flow, and available credit should meet requirements for at least 12 months.
- Other balance-sheet items: Student receivables were $78.8 net, with materially higher allowance balances. Deferred tuition revenue rose to $210.6 from $184.4. Stockholders’ equity was $921.3. CEC repurchased 5.4 million shares for $154.9 during the nine months; none were repurchased in Q3.
Changes versus the prior comparable period
- Growth was led by University and Health Education; Q3 segment revenue increased 11.7% and 21.7%, respectively. Health Education student population increased 24% and Culinary Arts’ increased 20%.
- University Q3 operating margin improved to 22.3% from 17.5%; Health Education improved to 11.6% from 10.0%. Culinary Arts moved to a $23.9 operating loss from $6.8 of income, largely due to legal and bad-debt charges. International’s Q3 revenue declined 1.8%, partly reflecting unfavorable currency movements.
- Nine-month earnings growth reflects stronger revenue and operating leverage, lower discontinued-operations losses, and comparison with prior-year performance-based compensation expense. Q3 operating income was constrained by current-quarter legal charges and bad debt, despite student and revenue growth.
- Capital expenditures increased 62.8% year over year to $81.9 for the nine months, driven by new campuses and the campus support center. Share repurchases reduced cash and outstanding shares.
Outlook, commentary, and risks
- CEC gave no specific revenue or earnings guidance. Management expected to fund working capital, capital spending, and commitments for at least the next 12 months through operations, cash, and, if needed, its credit facility.
- Management expected AIU–Los Angeles to complete its teach-out in Q4 2010 and estimated approximately $9.0 of additional lease-related charges in that quarter. Six new campuses had opened during 2010; a Portland campus opened in October.
- A new campus support-center lease creates a $48.1 obligation through 2022. CEC planned approximately $52.0 of related capital improvements through 2011 and expected annual base-rent savings of approximately $2.5 starting in 2011. Remaining Le Cordon Bleu earnout was estimated at $28.9.
- Q3 legal expense included $40.0 for settlement of the Amador and Adams student actions; a formal agreement was executed November 1, subject to court approval. Other pending student, False Claims Act, and text-message class-action matters, along with regulatory reviews, could result in additional costs or restrictions; outcomes were uncertain.
- AIU’s preliminary Department of Education review cited six findings, including two systemic findings concerning online attendance documentation and Title IV fund returns. CEC disputed those findings; a final determination was pending. A CTU federal audit was ongoing. AIU’s accreditor scheduled a focused visit for September 2011.
- New Department of Education regulations issued October 29, 2010 were expected to take effect mostly July 1, 2011; further gainful-employment rules were expected in 2011 and could take effect in 2012 or later. CEC identified potential effects on recruiting compensation, state authorization, online offerings, disclosure obligations, and program eligibility, with Culinary Arts and Art & Design identified as potentially most affected.
- Title IV funding is a key exposure: approximately 83% of U.S. school tuition cash receipts in the first nine months came from Title IV sources. Student extended-payment plans also carry credit risk: CEC reported $97.8 of commitments and a $48.5 allowance on earned receivables; it said failure to collect the remaining $21.2 net balance could result in an additional $21.2 expense.
- CEC reported $11.9 of illiquid auction-rate securities, valued using Level 3 inputs, with approximately $0.4 of cumulative unrealized loss. It considered the impairment temporary and stated it did not expect restricted European-school cash to impair operating funding.
Investor verification priorities
- Confirm issuer identity and the relationship between the filing’s Career Education Corporation and the supplied Perdoceo Education Corp. metadata.
- Track court approval and payment of the $40.0 settlement, plus resolution and potential accruals for other litigation.
- Assess bad-debt trends, especially Culinary Arts’ extended-payment receivables, reserve assumptions, and collections against the $21.2 net exposure.
- Monitor final outcomes of AIU and CTU regulatory reviews, accreditation visits, and implementation of Title IV and gainful-employment rules.
- Verify Q4 AIU–Los Angeles closure costs, planned campus-support-center spending, and whether expected rent savings and liquidity remain on track.