Business context and reporting period
Career Education Corporation (the company identified in the filing; now associated with Perdoceo Education) filed this Form 10-Q for the quarter and nine months ended September 30, 2017. Its continuing business was concentrated in online-focused universities Colorado Technical University (CTU) and American InterContinental University (AIU); the Culinary Arts and Transitional Group campuses were being taught out. All 16 Le Cordon Bleu campuses completed their teach-outs during the quarter.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $145.0m | $167.6m | $453.3m | $549.1m |
| Operating income (loss) | $4.5m | ($0.7m) | $23.4m | $23.6m |
| Income (loss) from continuing operations | $3.5m | ($0.5m) | $13.8m | $15.2m |
| Net income (loss) | $3.0m | ($0.7m) | $12.5m | $14.2m |
| Basic and diluted EPS | $0.04 | ($0.01) | $0.18 | $0.21 |
- Q3 operating margin was 3.1%, versus negative 0.4% a year earlier; nine-month operating margin was 5.2%, versus 4.3%. Q3 net income margin was approximately 2.1%.
- Cash used in operating activities was $29.1m for the first nine months, versus $16.3m provided in the comparable 2016 period. Investing activities used $6.1m; financing activities provided $1.4m.
- At September 30, cash, restricted cash and short-term investments totaled $175.9m, down from $207.2m at December 31, 2016. This included $16.3m of unrestricted cash and $151.8m of unrestricted short-term investments. Total assets were $501.2m and stockholders’ equity was $339.4m.
- No revolving-credit borrowings were outstanding. The company had a $95m revolving facility maturing December 31, 2018; borrowings must be secured with 100% cash collateral. The filing reports compliance with the credit agreement’s covenants.
Material changes versus the prior comparable period
- Q3 revenue fell 13.5% and nine-month revenue fell 17.4%, principally reflecting lower enrollment as the Career Schools campuses wound down. Excluding Culinary Arts and Transitional Group, revenue rose 1.4% in Q3 and 0.1% year to date.
- Total company enrollment declined 9.9% year over year at quarter-end, but University Group enrollment increased 2.5%. University Group Q3 revenue grew 1.4% and operating income rose 36.9% to $29.8m before corporate costs. CTU Q3 new enrollments increased 10.9%; AIU total enrollments increased 5.7%, while AIU new enrollments decreased 2.8%.
- Q3 consolidated operating results improved to income from a loss a year earlier, supported by stronger University Group performance and lower expenses. University Group and Corporate adjusted operating income was $26.2m, compared with $18.8m. These adjusted figures are non-GAAP measures.
- Nine-month net income declined despite nearly flat operating income, with higher income-tax expense contributing. The 2016 comparison included a $2.1m favorable adjustment from completion of a federal tax audit.
- Cash and investments declined primarily due to $32.0m of legal-settlement payments in Q1 2017, along with lease-exit and incentive-compensation payments. The accrued legal fees and settlements balance fell to $2.2m from $34.5m at year-end 2016.
Outlook, commentary and key risks
- Management expected 2017 adjusted operating income for University Group and Corporate of $100m–$105m, versus $89.3m in 2016, and expected new and total enrollment growth at both universities in Q4 2017.
- Management forecast adjusted operating losses for the teach-out segments of $40m–$45m in 2017 and $10m–$15m in 2018. It expected year-end 2017 cash, restricted cash and available-for-sale short-term investments, net of borrowings, of $160m–$165m, with the balance expected to increase in 2018. Management said it expected cash use to moderate and cash generation to begin in 2018.
- Guidance depended on enrollment trends, staffing, lease recoveries and working-capital movements, and assumed no material changes in the legal or regulatory environment. Management cautioned actual results could differ materially.
- Regulatory exposure remains significant. All institutions operated under provisional program participation agreements; AIU and CTU agreements were due to expire September 30, 2018. The company remained on Heightened Cash Monitoring 1 (HCM1) status, and approximately 77% of tuition cash receipts came from Title IV funding. A move to reimbursement or HCM2 could delay federal funding and require the company to use its own cash to fund operations.
- Legal and regulatory matters include a putative class action, a False Claims Act case in which the U.S. government declined intervention, state attorneys general investigations, and a Department of Education inquiry and audit matters. The company said it could not reasonably estimate potential losses for several matters; an unfavorable outcome could materially affect results, cash flows or financial position.
- Remaining net contractual operating lease obligations were $159.4m, including $97.2m for teach-out campuses and discontinued operations. The company estimated a further $4m–$6m of future charges for remaining continuing-operations lease obligations when campuses close, in addition to charges already recorded.
- Management expected adoption of the new lease standard to materially affect the presentation of financial condition, including recognition of right-of-use assets and lease liabilities. The company was still assessing the revenue-recognition standard’s effects and said it could not yet reasonably estimate quantitative impacts.
Most important facts for investors to verify
- Whether university enrollment gains, retention and operating improvements persist after the teach-outs and AIU calendar redesign effects.
- Whether the company meets its adjusted operating-income, teach-out-loss and year-end liquidity outlook, and how non-GAAP adjustments reconcile to GAAP results.
- Cash conversion and liquidity trends, including the impact of lease-exit payments, working capital and any further legal settlements.
- Developments in Title IV eligibility, provisional program agreements, HCM1 status and the company’s dependence on federal student-aid funding.
- Updates to litigation, government investigations, audit exposures and unaccrued potential losses, as well as the estimated remaining lease obligations.