Career Education Corporation (now Perdoceo Education Corp.) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless stated otherwise, financial amounts are in millions of dollars. The company operates Colorado Technical University (CTU), American InterContinental University (AIU), and campuses being taught out.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $145.7 | $145.0 | $435.8 | $453.3 |
| Operating income | $19.3 | $4.5 | $51.1 | $23.4 |
| Operating margin | 13.2% | 3.1% | 11.7% | 5.2% |
| Net income | $14.9 | $3.0 | $41.1 | $12.5 |
| Diluted EPS | $0.21 | $0.04 | $0.58 | $0.18 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $18.3 | $(29.1) |
Q3 revenue rose 0.5%; nine-month revenue fell 3.9%, primarily because teach-out campuses contributed less revenue. Excluding those campuses, revenue increased 2.9% in Q3 and 1.9% year to date. University Group revenue grew 2.9% in Q3, while operating income declined 8.3% as student-support investments, bad debt expense, and restructuring costs offset revenue growth. Consolidated operating income improved substantially, mainly as losses and occupancy costs at teach-out campuses declined.
University Group total enrollment increased 5.8% year over year at quarter-end; new enrollments rose 39.0% in Q3 and 6.6% year to date. AIU’s Q3 new enrollment increase of 96.8% was significantly affected by its academic calendar redesign and more enrollment days; management expected a corresponding Q4 decline.
Cash, debt, and liquidity
- Cash, cash equivalents, restricted cash, and short-term investments totaled $193.0 at September 30, 2018, versus $180.1 at December 31, 2017. Unrestricted cash and cash equivalents were $32.0.
- Operating cash flow was $18.3 for the first nine months, versus cash used of $29.1 a year earlier. Management attributed the improvement in part to legal-settlement payments of $17.1 in 2018 versus $32.0 in 2017, as well as lower teach-out losses.
- No revolving-credit borrowings were outstanding. The $95 million facility required 100% cash collateral and was scheduled to mature December 31, 2018.
- Current assets were $240.1 and current liabilities $91.6 at September 30. The company reported no material expected impact on earnings or cash flows from a 10% interest-rate change.
Outlook and management commentary
- Full-year 2018 guidance: operating income of $71–$76 million; adjusted operating income of $101–$106 million; year-end cash, cash equivalents, restricted cash, and short-term investments of $215–$220 million.
- Q4 2018 guidance: operating income of $19.9–$24.9 million and adjusted operating income of $25.6–$30.6 million. Management expected total-company operating income, adjusted operating income, and ending cash to grow in 2019 versus 2018.
- Management expected CTU Q4 new enrollments to grow year over year. It expected AIU Q4 new enrollments to decline significantly due to calendar timing, followed by stronger growth in Q1 2019, and forecast AIU revenue growth in Q4 and for full-year 2018.
- Guidance assumes continued prospective-student interest and benefits from student-serving initiatives, among other factors; it excludes legal and regulatory liabilities that are not considered probable and estimable. Management cautioned that actual results could differ materially.
Risks, contingencies, and notable items
- Regulatory dependence: Approximately 78% of tuition cash receipts in the first nine months came from Title IV federal student-aid programs. Eligibility, funding timing, regulatory changes, or required financial protection could materially affect operations and liquidity.
- Regulatory developments: The Department of Education removed HCM1 cash-monitoring status from AIU, CTU, and the company’s other remaining institutions on September 27, 2018, restoring advance payment. Borrower-defense and gainful-employment rules remained uncertain; related rulemaking and legal proceedings were ongoing.
- Legal matters: The company reported 325 active Oregon arbitrations alleging misrepresentations by a closed culinary school; it had not accrued a liability and could not estimate potential loss. Multi-state attorneys general and FTC inquiries remained unresolved; the FTC had requested additional information and the company agreed to toll the statute of limitations. The company stated that adverse outcomes could result in penalties or operating changes. Accrued estimated legal fees and settlements were $0.9 million, down from $8.7 million at year-end.
- Restructuring and teach-outs: Q3 included $1.9 million of severance and related costs. Two remaining teach-out campuses, with approximately 10 students, were expected to cease operations by year-end 2018. The company reported $11.2 million of remaining lease-exit obligations for continuing operations.
- Accounting and leases: Adoption of ASC 606 changed balance-sheet presentation and disclosures but did not affect revenue recognition or prior-period results. The company expected adoption of the new lease standard in 2019 to materially increase reported lease assets and liabilities, with no significant effect on results of operations.
Most important facts for investors to verify
- Whether enrollment growth, especially at AIU after the academic-calendar timing effect, translated into sustained revenue and retention gains.
- Whether Q4 and full-year operating income and liquidity targets were achieved, and whether the stated 2019 growth outlook held.
- Developments and potential financial exposure from the Oregon arbitrations, FTC inquiry, and multi-state attorney general investigations.
- Continued Title IV eligibility and the impact of final borrower-defense and gainful-employment requirements.
- Collections, bad debt trends, and the effect of the increase in reported student receivables, which management attributed partly to ASC 606 presentation and timing of Title IV deposits.
- Credit-facility status at its December 31, 2018 maturity and the company’s lease obligations, including the expected 2019 lease-accounting presentation changes.