Business context and reporting period
Career Education Corporation (CEC) reported for the three months ended March 31, 2015. Its operations included online-focused Colorado Technical University (CTU) and American InterContinental University (AIU), Career Colleges, and campuses in teach-out. The filing is issued under the name Career Education Corporation.
Financial performance and position
- Revenue: $182.3 million, down 8.0% from $198.2 million in Q1 2014. Total student enrollment fell 7.7% to 43,300; continuing-operations enrollment trends varied by segment.
- Operating results: Operating loss was $24.6 million versus $21.9 million; operating margin was negative 13.5% versus negative 11.1%. The 2015 loss included $6.0 million of asset impairment charges. Excluding impairments, management said operating loss improved 15.1%.
- Net results: Net loss was $24.9 million ($0.37 per diluted share), compared with $58.1 million ($0.87 per share). The prior-year result included a $36.5 million discontinued-operations loss; Q1 2015 discontinued-operations loss was $0.1 million.
- Cash flow: Operating cash use was $20.2 million, versus $35.4 million in Q1 2014. Investing cash use was $3.9 million and financing cash use was $0.8 million. Cash and cash equivalents ended the quarter at $69.2 million.
- Liquidity and debt: Cash, restricted cash and short-term investments totaled $206.4 million, including $13.9 million restricted cash and $123.2 million short-term investments. No credit-facility borrowings were outstanding at quarter-end; CEC had repaid $10.0 million borrowed in Q4 2014. Its $120 million revolving facility matures June 30, 2016 and requires 100% cash collateral for loans and letters of credit.
- Other metrics: CTU and AIU together generated $138.2 million revenue and $11.7 million operating income, up 7.6%. Career Colleges generated $39.8 million revenue and a $22.1 million operating loss. CEC recorded a $0.2 million income-tax benefit and maintained a $150.4 million deferred-tax valuation allowance.
Material changes versus the prior comparable period
- University Group revenue declined 0.9%, while operating income increased 7.6% to $11.7 million. Career Colleges revenue declined 16.9%, and its operating loss widened 58.8% to $22.1 million. New student enrollment in Career Colleges fell 34.2%.
- Advertising expense increased 4% to $60.6 million, while total general and administrative expense declined 6% to $139.1 million. Depreciation and amortization fell 32% to $6.8 million.
- Q1 2015 asset impairments included $1.7 million for the Sanford-Brown trade name and approximately $4.3 million for property and equipment.
- New discontinued-operations accounting took effect January 1, 2015 and narrowed which campus closures qualify. CEC did not recast prior periods; some results therefore remain in continuing operations, limiting comparability.
Outlook, commentary, risks and unusual items
- Management outlook: CEC expected positive full-year 2015 adjusted EBITDA for University Group and Corporate, modest University enrollment growth, and year-end cash, restricted cash and investments above $190 million. It also reiterated expected negative 2015 adjusted EBITDA of $62 million for Transitional Group and discontinued operations. Consolidated adjusted EBITDA was negative $11.8 million in Q1 2015, versus positive $2.6 million in Q1 2014; this is a non-GAAP measure.
- Post-quarter restructuring: On May 1, 2015, the board approved teach-outs of the remaining 15 Sanford-Brown campuses and pursuit of sales for Briarcliffe College, Brooks Institute and Missouri College; unsold campuses would also be taught out. CEC estimated $40–$50 million of restructuring costs, primarily severance and lease-exit costs, with cash expenditures extending through 2023. Management said the actions were expected to be accretive to 2015 earnings excluding restructuring charges and not to impair credit-agreement compliance. Estimates depend on campus-sale, closure and cost-realignment assumptions.
- Regulatory and funding exposure: The Department of Education (ED) was investigating possible misrepresentation of placement rates; CEC institutions remained on Heightened Cash Monitoring 1 (HCM1) and were seeking recertification. Approximately 76% of Q1 2015 tuition cash receipts came from Title IV funding. ED could impose sanctions, delay funding, or move schools to more restrictive payment status. CEC’s preliminary 2014 financial-responsibility composite score was 1.5, the threshold cited for financial responsibility without additional oversight.
- Legal and other contingencies: State attorneys general in multiple states were investigating consumer-protection and related practices; outcomes and potential monetary or operational effects were not estimable. CEC disclosed student, employment and False Claims Act litigation, and recorded $3.1 million for estimated legal fees and settlements. A separate $0.8 million reserve related to an ED review of CTU file matters.
- Other risks and unusual items: CEC expected continued operating cash use, though management anticipated improved cash trends. It disclosed a long-term auction-rate security with approximately $0.5 million cumulative unrealized losses and ongoing market-liquidity risk. Campuses in teach-out and held-for-sale categories carry material lease obligations.
Important facts for investors to verify
- Progress on the Career Colleges teach-outs and proposed divestitures, including approvals, timing, proceeds and actual restructuring costs.
- Enrollment, revenue and operating-margin trends at CTU and AIU, and whether University Group profitability and cash-flow targets are achieved.
- ED inquiry, Title IV recertification and HCM1 developments; potential effects on funding timing, liquidity and financial-responsibility status.
- Cash usage, year-end liquidity guidance, credit-facility terms and the scale and timing of lease-exit payments.
- Developments in state investigations, litigation and other contingencies, including whether losses become estimable or require additional reserves.