Business context and reporting period
Perdoceo Education Corporation operates Colorado Technical University (CTU) and American InterContinental University (AIU), primarily online postsecondary institutions. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are to the corresponding 2019 periods unless noted. AIU’s 2020 results include Trident University from its March 2 acquisition date.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $176.0 | $156.4 | $347.0 | $314.3 |
| Operating income | $37.4 | $0.2 | $74.7 | $30.2 |
| Operating margin | 21.2% | 0.1% | 21.5% | 9.6% |
| Net income (loss) | $28.2 | $(0.6) | $57.3 | $24.2 |
| Diluted EPS | $0.40 | $(0.01) | $0.80 | $0.34 |
| Cash provided by operating activities | Not presented quarterly | $109.4 | $53.4 |
Adjusted operating income, a non-GAAP measure, was $41.7 million in Q2 2020 versus $32.8 million in Q2 2019; adjusted diluted EPS was $0.41 versus $0.34. First-half adjusted operating income was $82.5 million versus $65.8 million, and adjusted diluted EPS was $0.82 versus $0.69.
At June 30, the company held $345.8 million in cash, restricted cash and short-term investments, including $4.0 million of restricted escrow cash. Unrestricted cash and cash equivalents were $91.5 million and short-term investments were $250.3 million. It had no revolver borrowings; the available credit facility is $50 million and matures January 2022. Operating lease liabilities totaled $60.5 million. Current assets were $394.1 million and current liabilities $110.4 million. Net student receivables were $35.6 million, with a $37.1 million allowance against current gross receivables.
Material changes versus prior comparable periods
- Q2 revenue rose 12.5%; first-half revenue increased 10.4%. Management attributed growth to enrollment gains at both universities and Trident’s addition to AIU.
- Q2 operating income increased substantially from $0.2 million, but the comparison is heavily affected by the $30 million FTC settlement expense recorded in Q2 2019. Q2 2020 had no significant legal settlement. Adjusted operating income increased by $8.9 million.
- Total student enrollment was up 20.1% year over year at June 30. Q2 new enrollments increased 45.3%; CTU total enrollment rose 4.0%, while AIU rose 52.7%, including Trident and organic growth. AIU’s Q2 new-enrollment comparison also benefited from approximately 50% more enrollment days.
- Operating cash flow increased to $109.4 million from $53.4 million for the first half, reflecting stronger operating results and the timing of $39.3 million in Title IV funds received in January that management said historically arrived in the prior year’s fourth quarter.
- Investing cash outflow was $105.5 million, including the $38.1 million initial Trident payment and net purchases of available-for-sale investments. Financing cash outflow was $17.0 million, including $17.3 million of share repurchases.
Outlook, commentary and risks
Management’s 2020 outlook was full-year operating income of $135–$139 million, adjusted operating income of $151–$155 million, diluted EPS of $1.44–$1.48 and adjusted diluted EPS of $1.48–$1.52. For Q3 2020, it forecast operating income of $31–$32 million, adjusted operating income of $35–$36 million, diluted EPS of $0.33–$0.34 and adjusted diluted EPS of $0.34–$0.35. The outlook assumes continued enrollment growth, no material changes in the legal or regulatory environment, no significant additional COVID-19 impact, and an approximately 26% effective tax rate. Management expected 2020 capital expenditures of approximately 1.5% of revenue.
Management said COVID-19 had not materially affected Q2 operating results: students continued online and employees worked remotely. It cautioned that the pandemic’s duration and effects on student interest, collections, corporate partners, vendors, operations and forecasting remained uncertain.
Key risks include dependence on Title IV student aid, enrollment trends, regulatory and accreditation compliance, borrower-defense rules, and scrutiny of for-profit education. Management reported that the VA notified the company on July 2, 2020 that the VA matter was satisfactorily resolved and new student enrollments would remain approved. The company also disclosed informal government inquiries and other litigation; it had accrued $2.0 million for estimated legal fees and settlements at June 30, down from $7.3 million at year-end. It stated that an adverse outcome in legal matters could materially affect its business or financial results.
Trident’s final purchase price was $43.8 million; a further $5.7 million payment was made in July. The preliminary allocation included $31.0 million of goodwill, substantially all expected to be tax-deductible. A $1.9 million loan-discharge reserve was assumed in the acquisition. The company maintained a $45.0 million valuation allowance against foreign tax credits and state net operating losses.
Most important facts for investors to verify
- How much reported earnings growth reflects underlying operating improvement versus the absence of the prior-year FTC settlement; review GAAP and adjusted measures together.
- Whether enrollment growth, particularly at AIU, persists after accounting for Trident and differences in academic-calendar enrollment days.
- Whether student receivable collections and credit-loss allowances remain adequate; first-half bad-debt expense was $25.2 million and the current allowance was $37.1 million.
- Whether the 2020 outlook’s enrollment, regulatory, tax and COVID-19 assumptions remain valid, and whether Trident integration and purchase accounting change.
- Developments in Title IV eligibility and regulatory matters, pending legal contingencies, and the company’s substantial reliance on federal student-aid funding.
- Liquidity and capital allocation, including the $4.0 million escrow, July Trident payment, remaining repurchase authorization of approximately $28.8 million, and credit-facility covenants.