Business context and reporting period
Career Education Corporation (Nasdaq: CECO), now known as Perdoceo Education Corp., filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Its principal businesses are Colorado Technical University (CTU) and American InterContinental University (AIU), predominantly online universities serving adult learners.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $155.0 | $145.7 | $469.3 | $435.8 |
| Operating income | $24.3 | $19.3 | $54.4 | $51.1 |
| Operating margin | 15.7% | 13.2% | 11.6% | 11.7% |
| Net income | $18.2 | $14.9 | $42.5 | $41.1 |
| Diluted EPS | $0.25 | $0.21 | $0.59 | $0.58 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $85.4 | $18.3 |
- Q3 revenue increased 6.4%; YTD revenue increased 7.7%. University Group total enrollment was up 6.1% year over year at quarter-end.
- YTD bad-debt expense rose to $32.0 million from $21.7 million, reflecting higher reserve rates and write-offs. The allowance for doubtful student accounts was $29.0 million at September 30.
- At quarter-end, unrestricted cash was $47.4 million, restricted cash $30.0 million, and short-term investments $234.4 million; combined balances were $311.8 million. The restricted funds related to the FTC settlement and were paid to the FTC in October.
- No borrowings were outstanding under the $50 million revolving credit facility. Operating lease liabilities totaled $67.0 million ($12.1 million current; $54.9 million non-current). The company reported $401.9 million of stockholders’ equity.
Material changes versus the prior comparable period
- Q3 operating income rose 26.0%, despite a $7.1 million Oregon arbitration reserve; adjusted operating income, a non-GAAP measure, was $34.0 million versus $25.8 million.
- YTD operating income increased 6.5%, while University Group operating income decreased slightly to $83.2 million from $84.2 million. Results included $30.0 million reserved for the FTC settlement and $7.1 million for Oregon arbitrations.
- YTD operating cash flow improved to $85.4 million from $18.3 million. Management attributed the increase primarily to improved university performance and reduced losses at teach-out campuses.
- AIU revenue grew faster than CTU: Q3 increases were 12.2% and 3.1%, respectively. AIU’s YTD enrollment and revenue comparisons benefited partly from its academic-calendar redesign and additional enrollment/revenue-earning days.
- ASC 842 lease accounting was adopted January 1, 2019, bringing significant right-of-use assets and lease liabilities onto the balance sheet; management said the adoption did not materially affect operating results.
Guidance, outlook, commentary and risks
- 2019 guidance: revenue growth of approximately 6.0%–6.5%; operating income of $81.9–$83.9 million; adjusted operating income of $130–$132 million; diluted EPS of $0.84–$0.86; and adjusted diluted EPS of $1.32–$1.34. Adjusted figures are non-GAAP.
- Management expected full-year University Group new-student enrollment growth of 12%–13%, with both universities expected to grow new and total enrollments in Q4. It cited student-retention initiatives, admissions/advising support, technology and data analytics as contributors.
- Outlook depends on sustained prospective-student interest and successful operating initiatives, and assumes no material legal or regulatory changes or significant settlement-related operating impacts. Trident acquisition results and stock repurchases were excluded from guidance.
- The FTC settlement became effective by court order on October 9, 2019; the company had accrued $30 million and escrowed that amount. The Oregon class settlement, also reserved at $7.1 million, remained subject to court approval, then expected in Q1 2020.
- The company agreed to acquire substantially all assets of Trident University for $35–$44 million, subject to regulatory approval and other closing conditions; closing was expected by year-end 2019 or early 2020. On November 4, the board authorized up to $50 million of share repurchases through December 31, 2021.
- Key risks include Title IV funding eligibility and timing, federal and state regulation (including borrower-defense rules), enrollment and retention trends, scrutiny of for-profit education, legal matters, competition, and Trident approval/integration. Approximately 80% of YTD tuition cash receipts came from Title IV programs.
Important facts for investors to verify
- Whether the Oregon settlement received final court approval and whether the FTC payment and related settlement terms had any further financial or operating effects.
- Enrollment growth and retention at CTU and AIU against guidance, including the impact of AIU’s academic calendar and enrollment-day comparisons.
- Student receivables, allowance adequacy and bad-debt trends, particularly at AIU.
- Compliance with Title IV and other regulatory requirements, and any developments in borrower-defense or other government inquiries.
- Trident’s regulatory approval, final purchase price and closing, and the effect on liquidity and earnings.
- Cash and investment availability after settlement payments, lease commitments, credit-facility covenants, and any execution of the new repurchase authorization.