Perdoceo Education Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Perdoceo operates Colorado Technical University (CTU) and the American InterContinental University System (AIUS), primarily serving students through online postsecondary programs. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $195.6 | $183.0 | +6.9% |
| Operating income | $43.3 | $43.7 | -0.8% |
| Operating margin | 22.2% | 23.9% | -1.7 percentage points |
| Net income | $34.5 | $32.1 | +7.5% |
| Diluted EPS | $0.50 | $0.46 | +8.7% |
| Operating cash flow | $4.6 | $22.2 | Down $17.6 |
| Capital expenditures | $1.9 | $4.7 | Lower |
Net margin was 17.6%, versus 17.5%. Interest income rose to $3.8 million from $0.3 million, supporting pretax income growth despite slightly lower operating income. The effective tax rate was 26.7%, compared with 26.8%. Adjusted operating income, a non-GAAP measure, was $53.1 million versus $50.9 million; adjusted diluted EPS was $0.58 versus $0.50.
Revenue growth included contributions from acquisitions completed in 2022; excluding those acquisitions, management said revenue would have been relatively flat. CTU revenue grew 10.0% to $124.5 million and AIUS revenue grew 1.9% to $70.8 million. Total reported student enrollment increased 0.8% to 37,900: CTU was flat at 23,500 and AIUS rose 2.1% to 14,400. Management cautioned that academic-calendar timing affected comparisons.
At March 31, 2023, cash, cash equivalents, restricted cash and short-term investments totaled $520.3 million, including $9.5 million of restricted cash. Total assets were $963.0 million and stockholders’ equity was $761.2 million. There were no borrowings under the $125 million revolving credit facility; it matures September 8, 2024. Operating lease liabilities totaled $31.9 million, current and non-current combined. The company reported no material interest-rate sensitivity from a 10% rate change.
Material changes and cash flows
- Operating cash flow fell to $4.6 million from $22.2 million, primarily due to the timing of working-capital payments. Net cash decreased $19.6 million during the quarter.
- Investing activities used $21.4 million, compared with $146.9 million in Q1 2022; the earlier period included substantially higher net purchases of available-for-sale investments and a $7.0 million acquisition payment.
- Bad-debt expense declined 21.6% to $10.8 million, mainly reflecting improvement at AIUS. As a share of revenue, it fell to 5.5% from 7.5%.
- Operating expenses increased 9.3% to $152.3 million. Educational services and facilities expense rose 20.5%, while administrative expense rose 20.5%; lower bad debt and marketing expenses partly offset increases.
- Q1 2023 included $0.6 million of asset impairment expense. Legal fee expense related to specified matters was $4.6 million, versus $2.3 million a year earlier.
- The company repurchased approximately 60,000 shares under its public program for about $0.8 million during the quarter. Approximately $26.0 million remained authorized at March 31, 2023; the program expires September 30, 2023.
Outlook, risks and contingencies
Management expects full-year 2023 revenue to be modestly higher than 2022, citing acquisitions, CTU’s academic-calendar redesign and underlying retention and engagement improvements. It expects year-end student enrollment to be lower than at year-end 2022, primarily because of the CTU calendar redesign and operational changes at AIUS. Management expects a 2023 effective tax rate of 26.0%–27.0% and capital expenditures of 1%–2% of revenue. The company expects to generate cash during the remainder of 2023 and believes existing cash and operating cash flows can meet requirements for at least the next 12 months. These are forward-looking expectations, not guarantees.
Perdoceo faces significant regulatory and enrollment risks, including continued eligibility for federal Title IV student aid, accreditation and state requirements, changes to borrower-defense rules, competition, and potential changes in student demand. Management notes that a reduction or delay in Title IV funding, or a requirement to post a significant letter of credit, could materially affect operations and financial condition.
The Department of Justice issued a Civil Investigative Demand concerning CTU’s compliance with federal financial-aid credit-hour requirements for five entry-level courses and its learning management system. The company later learned that related allegations against CTU and AIU were included in a sealed False Claims Act qui tam complaint. The company is cooperating with the DOJ. Accrued estimated legal fees were $4.9 million at March 31, 2023, versus $1.7 million at year-end 2022. The filing states that the ultimate outcomes are uncertain and an unfavorable outcome could materially affect the business, reputation, financial position or cash flows.
The 2022 Coding Dojo acquisition’s preliminary purchase price allocation remains subject to adjustment. Contingent consideration was recorded at $12.7 million, with payments tied to financial metrics and a maximum aggregate amount of $15.0 million. The company also maintained a $22.2 million valuation allowance against certain deferred tax assets and estimated that unrecognized tax benefits could decrease by up to $6.4 million over the next 12 months.
Key facts for investors to verify
- Progress and resolution of the DOJ inquiry and sealed False Claims Act matter, including possible financial, regulatory and reputational consequences.
- Whether retention, enrollment and revenue trends meet management’s outlook, particularly after calendar and operational changes.
- Cash conversion: operating cash flow was materially below net income in Q1, with management attributing the difference mainly to working-capital timing.
- Credit quality and bad-debt trends, including whether the Q1 improvement—particularly at AIUS—continues.
- Completion of the Coding Dojo purchase-price allocation and the eventual contingent-consideration payments.
- Liquidity and capital allocation, including compliance with revolving-credit covenants, share repurchases and investment portfolio values.