Career Education Corporation (now Perdoceo Education Corporation): Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014; comparisons are with Q3 2013. The filing reports Career Education Corporation, which operated online and campus-based postsecondary schools, including CTU, AIU, Career Colleges and Culinary Arts. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $227.5 | $244.2 | $697.4 | $777.7 |
| Operating loss | $(44.9) | $(54.9) | $(116.9) | $(121.5) |
| Net loss | $(48.0) | $(87.1) | $(152.7) | $(133.7) |
| Net loss per share | $(0.71) | $(1.30) | $(2.27) | $(2.00) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(101.1) | $(77.8) |
- Margins: Operating margin was negative 19.7% in Q3 2014 versus negative 22.5% a year earlier; for the nine months it was negative 16.8% versus negative 15.6%. Revenue fell 6.8% in Q3 and 10.3% year to date.
- Liquidity: At September 30, cash, cash equivalents and short-term investments totaled $250.9 million, including $13.2 million of restricted cash. Current assets were $336.3 million and current liabilities $193.7 million.
- Debt and leases: No revolving-credit borrowings were outstanding at quarter end. The $70 million facility was increased to $120 million on October 31, 2014, with a $190 million minimum three-month average cash and investments covenant, subject to stated adjustments; maturity remains June 30, 2016. Net contractual operating-lease obligations were $453.3 million, including ongoing and teach-out/discontinued operations.
- Balance sheet: Total assets were $624.0 million versus $805.0 million at year-end 2013; stockholders’ equity was $305.7 million versus $455.4 million. The company reported a $141.2 million deferred-tax valuation allowance.
Changes and operating trends
- Q3 operating loss narrowed by $10.0 million year over year, though revenue and total enrollment declined. General and administrative costs decreased, including an $8.6 million insurance recovery; impairment charges rose to $14.5 million from $11.6 million.
- Ongoing operations’ revenue declined 3.9% in Q3, excluding Transitional Schools. Total student enrollment fell 4.5% overall; new enrollments rose 14.4% in University Schools, but management said a new orientation process affected the enrollment calculation.
- CTU revenue increased 0.3% in Q3 and Culinary Arts revenue increased 0.5%; AIU revenue fell 7.8% and Career Colleges revenue fell 11.1%. Culinary Arts’ Q3 new-enrollment increase was partly due to a shift in start dates.
- Nine-month net loss increased despite a narrower operating loss, in part because 2013 included substantial income-tax benefits. Q3 2013 discontinued-operations loss also included $39.9 million of tax expense related to the planned sale of the International Schools segment.
- The company completed three campus teach-outs in Q3 and announced teach-outs for three additional Sanford-Brown campuses. It reported $22.0 million of year-to-date asset impairment in the cash-flow reconciliation; the income statement reported $21.9 million.
Outlook, commentary and principal risks
- Management expected ongoing operations to achieve positive adjusted EBITDA in Q4 2014 and for full-year 2015. It projected adjusted EBITDA of approximately negative $71 million for Transitional and Discontinued Operations in 2014 and negative $62 million in 2015. These are non-GAAP measures, not net-income or cash-flow guidance.
- Management expected ongoing cash requirements for at least the next 12 months to be met primarily through operating cash and existing balances, while also expecting continued net operating cash usage. It cited potential further cost reductions and strategic alternatives.
- Federal Title IV funds represented approximately 77.4% of school tuition cash receipts for the nine months. Schools remained on Heightened Cash Monitoring 1; adverse Department of Education findings or a move to stricter reimbursement/HCM2 status could delay funding and strain liquidity.
- The new gainful-employment regulation could put some Culinary and Art & Design programs at risk of losing Title IV eligibility. Management was still assessing program exposure and said it could not predict which programs would fail or enter the “zone.”
- Other material uncertainties include state attorney-general investigations, student and employment litigation, accreditation and cohort-default-rate requirements, and remaining lease costs from campus closures. The company had accrued $6.0 million for estimated legal fees and settlements; additional losses could not be reliably estimated in some matters.
- Impairment testing reduced the carrying values of the Le Cordon Bleu and Sanford-Brown trade names by $1.5 million each in Q3; further declines in forecasts could prompt additional impairments. A municipal auction-rate security remained illiquid, with a $0.5 million cumulative unrealized loss.
Important facts for investors to verify
- Whether enrollment trends and revenue stabilize, particularly at AIU and Career Colleges, and how much reported new-enrollment growth reflects the changed measurement process or timing shifts.
- Whether ongoing operations meet the adjusted EBITDA outlook, and how the non-GAAP measure reconciles to GAAP results and cash generation.
- Available unrestricted liquidity, cash burn, and continued compliance with the amended credit facility’s minimum-cash covenant.
- Department of Education findings, Title IV funding status, composite financial-responsibility scores, and the effect of gainful-employment rules on individual programs.
- Future campus-closure costs, lease obligations, impairment charges, litigation or regulatory outcomes, and the company’s ability to meet its turnaround objectives.