Perdoceo Education Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless noted, financial amounts below are in millions of dollars. Perdoceo operates Colorado Technical University (CTU) and the American InterContinental University System (AIUS), primarily offering online postsecondary education.
Financial performance
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $167.7 | $175.5 | $350.6 | $359.2 |
| Operating income | $33.9 | $36.0 | $77.6 | $76.6 |
| Operating margin | 20.2% | 20.5% | 22.1% | 21.3% |
| Net income | $25.8 | $26.6 | $57.8 | $57.4 |
| Diluted EPS | $0.37 | $0.37 | $0.83 | $0.80 |
| Operating cash flow | Not provided for quarter | $54.8 | $82.7 |
Q2 revenue fell 4.5% and operating income 5.6% year over year; net income declined 3.3%. YTD revenue fell 2.4%, while operating income increased 1.4% and net income 0.8%. Adjusted operating income, a non-GAAP measure, was $41.9 million in Q2 versus $42.3 million; adjusted diluted EPS was $0.42 versus $0.41.
Q2 revenue was $100.5 million at CTU, down 1.5%, and $66.9 million at AIUS, down 8.6%. Enrollment at June 30 was 40,100, down 7.0% year over year: CTU down 2.3% to 26,000 and AIUS down 14.5% to 14,100. YTD CTU revenue increased 2.8%, partly reflecting its academic calendar redesign; AIUS revenue declined 9.5%.
Liquidity, cash flow and capital
- Cash, cash equivalents, restricted cash and short-term investments totaled $516.8 million at June 30, 2022, versus $499.4 million at year-end 2021. This included $149.9 million of cash and restricted cash and $366.8 million of short-term investments.
- YTD operating cash flow was $54.8 million, down from $82.7 million; management attributed the decline primarily to timing of Title IV cash receipts. Investing cash outflow was $209.6 million, including net purchases of available-for-sale investments, $6.8 million of capital expenditures and a $7.0 million deposit for a pending acquisition. Financing cash outflow was $20.4 million, including $15.7 million of share repurchases.
- No borrowings were outstanding on the $125 million revolving credit facility, which matures in September 2024. The company also reported operating lease liabilities of $39.3 million. Management expects existing liquidity and operating cash generation to meet requirements for at least the next 12 months.
- The company repurchased 1.5 million shares for $15.7 million YTD; $34.3 million remained under the $50 million authorization at June 30. Approximately 67.8 million shares were outstanding on August 2, 2022.
Changes, outlook and notable items
- Lower enrollment, especially at AIUS, was the principal driver of Q2 revenue decline. Management said lingering pandemic effects and changes to marketing processes weighed on enrollment, while student engagement improved more than expected. Reduced marketing, admissions and bad debt expenses partly offset lower revenue; administrative expense increased, primarily due to legal and acquisition-related costs.
- Management expects full-year 2022 enrollment, revenue and operating income to be lower than 2021, excluding positive impacts from acquisitions or the academic calendar redesign. It expects the pace of enrollment decline to moderate during the remainder of 2022, but does not expect cost adjustments to fully offset anticipated revenue declines. Full-year effective tax rate guidance is 25.5%–26.5%; capital expenditures are expected to be about 2% of revenue.
- On July 1, 2022, Perdoceo completed the acquisition of substantially all assets and academic programs of California Southern University for approximately $40 million net of cash received. Cal Southern reported unaudited trailing-12-month revenue of approximately $17.8 million.
- On April 8, 2022, the Department of Justice issued a Civil Investigative Demand seeking information about CTU’s compliance with federal financial-aid credit-hour requirements for five entry-level courses and its learning management system, covering January 2017 to present. The company is cooperating. The filing reports $2.9 million accrued for estimated legal fees; ultimate outcomes and potential losses in legal matters remain uncertain.
- The Department’s proposed borrower-defense rules and a proposed settlement in the Sweet v. Cardona litigation could increase loan forgiveness and potential recovery claims against institutions. Perdoceo institutions are on the settlement’s list for streamlined or automatic review of pending applications. The company said the outcome and potential financial effect are uncertain. Other proposed rules include changes to the 90-10 rule and ownership-change requirements.
- Approximately 79% of aggregate tuition cash receipts YTD came from Title IV funding. Management cautions that reductions or delays in Title IV funds, required letters of credit, regulatory changes, or enrollment weakness could materially affect operations and liquidity.
- Available-for-sale investments had $3.0 million of gross unrealized losses at June 30; YTD other comprehensive loss on investments was $2.8 million. Q2 included a $0.2 million asset impairment charge.
Key facts for investors to verify
- Enrollment trends and whether the expected moderation in declines occurs, particularly at AIUS; assess resulting revenue and margin performance.
- Final Department of Education rules, the Sweet v. Cardona settlement, DOJ inquiry developments, and any resulting institutional liability or compliance costs.
- Cal Southern integration, purchase accounting, and contribution relative to its reported $17.8 million trailing revenue.
- Timing and sustainability of operating cash flow, Title IV receipts, and the value and liquidity of the investment portfolio.
- Progress against full-year outlook and whether expense reductions can offset some of the expected revenue decline.