Business context and reporting period
The filing is Career Education Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The supplied metadata names Perdoceo Education Corp.; the filing itself identifies Career Education Corporation as the registrant. The company operated career-focused schools offering online, on-ground and hybrid programs, with more than 100,000 students. Reporting segments were CTU, AIU, Health Education, Culinary Arts, Art & Design and International.
Financial results and position
Unless noted otherwise, amounts are in USD millions. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $431.3 | $524.1 | $1,471.9 | $1,581.3 |
| Operating income | $15.8 | $39.5 | $211.7 | $225.7 |
| Operating margin | 3.7% | 7.5% | 14.4% | 14.3% |
| Income from continuing operations | $11.3 | $27.9 | $140.6 | $151.3 |
| Net income | $10.6 | $26.1 | $139.0 | $145.7 |
| Diluted EPS | $0.14 | $0.33 | $1.84 | $1.79 |
| Operating cash flow | Not presented by quarter | $209.4 | $217.5 |
- Q3 revenue declined 17.7%; operating income fell 60.0%, and net income fell 59.3%. Year-to-date revenue was down 6.9%, operating income down 6.2%, and net income down 4.6%.
- Q3 results included a $5.0 million accrual for potential government-fund reimbursements at CTU and $11.4 million of legal costs. The prior-year quarter included $47.3 million of legal settlement charges, including a $40.0 million Culinary Arts settlement charge, and elevated bad-debt expense.
- Year-to-date bad-debt expense was $40.9 million versus $77.9 million, reflecting, among other factors, the discontinuation of extended payment plans for new students. Depreciation and amortization rose to $63.3 million from $51.6 million; impairment charges were $2.7 million.
- At September 30, cash and cash equivalents were $289.1 million and short-term investments $160.0 million, totaling $449.1 million, approximately unchanged from year-end 2010. Current assets were $615.1 million and current liabilities $413.7 million.
- The company reported no borrowings under its U.S. credit agreement, $6.9 million of letters of credit outstanding and $178.1 million of available borrowing capacity. Capital lease obligations totaled about $1.2 million; the filing also reports deferred rent and other liabilities. Restricted cash at certain European not-for-profit schools was $61.1 million.
- Year-to-date investing cash use was $74.0 million, including $67.4 million of capital expenditures. Financing cash use was $133.7 million, including $137.0 million of share repurchases. The company repurchased 6.2 million shares year to date and had $153.3 million remaining under its repurchase authorization.
Material changes and segment performance
- New student starts fell 22% in Q3 to 31,230; student population declined 12% to 104,400. Nine-month starts declined 17% to 87,940. Domestic segments generally saw weaker starts and enrollment, while International grew.
- Q3 segment revenue declined across all domestic segments: CTU 13.6%, AIU 24.2%, Health Education 7.4%, Culinary Arts 32.0% and Art & Design 18.7%. International revenue rose 29.9%, including a favorable currency effect.
- Health Education recorded a Q3 operating loss of $3.6 million, compared with $12.8 million of income a year earlier. Culinary Arts returned to $3.8 million of Q3 operating income from a prior-year loss that included the settlement charge. International had a Q3 operating loss of $7.2 million, attributed largely to summer seasonality and fixed costs.
- For the first nine months, revenue growth in Health Education and International was outweighed by declines at AIU, Culinary Arts, CTU and Art & Design. Culinary Arts’ year-to-date operating income improved to $30.7 million from a $3.3 million loss, largely reflecting prior-year legal and bad-debt charges.
- During Q2 the company reclassified certain accreditation rights from indefinite-lived to definite-lived following its institutional consolidation plans, recording a $2.5 million non-cash impairment charge; it also recorded a $0.2 million goodwill impairment.
Outlook, management commentary and risks
- Management expected similar new-start trends to continue in Q4 2011 and warned that declining starts would further reduce student population and pressure operating margins as students progress through their programs.
- The company expected approximately $6.0 million of Q4 2011 expense related to executive separation agreements. CEO Gary McCullough resigned effective October 31, 2011; Chairman Steven Lesnik became CEO. Several other senior leaders also departed.
- Management cited weaker student interest amid economic conditions, negative industry publicity, longer student decision timelines and regulatory changes. Initiatives included revised admissions requirements and readiness programs, changes to Culinary Arts and Art & Design models, and voluntary transparency standards.
- The company’s investigation found improper placement-rate determination practices at certain Health Education schools and unsupported or non-compliant placements at Health Education and Art & Design schools. Only 13 of 49 ACICS-accredited schools in those segments met the accreditor’s 65% placement-rate standard for 2010–2011. Potential accreditation oversight or other actions could affect programs, enrollment and operations.
- Regulatory and legal exposures include New York and Florida attorney general investigations; a False Claims Act case; student class and mass actions; and federal education reviews. The company stated that it could not reasonably estimate potential losses for several matters. It accrued $5.0 million for potential CTU veterans’ benefit reimbursements. An approximately $40.8 million California Culinary Academy class settlement had been paid, but final court approval remained pending.
- Federal Title IV funding is a key dependency: approximately 84% of U.S. schools’ tuition cash receipts in the first nine months came from Title IV funding. Risks include 90-10 rule compliance, gainful-employment requirements, accreditation, state authorization for online programs, student-loan servicing and potential enrollment effects. Management said it expected to meet cash needs for at least 12 months using operating cash, existing balances and, if needed, its credit facility.
- Management began an annual impairment assessment and cautioned that projected results and cash flows could be lower than the prior year. No specific earnings or revenue guidance was provided. Management also said interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether continued declines in new starts and student population translate into further revenue and margin deterioration.
- Outcomes of placement-rate reviews, the ACICS response and the continuing review of other domestic schools; confirm whether additional campuses face accreditation consequences.
- Developments in state attorney general investigations, federal program reviews, litigation and the $5.0 million veterans’ benefits matter, including any exposure beyond recorded accruals.
- Progress and operational effects of consolidating as many as 19 institutions or OPEIDs into one institution, and the resulting 90-10 and Title IV compliance position.
- Impairment-test results, Q4 executive separation costs and the extent to which available liquidity is affected by restricted cash, repurchases, lease obligations and other contingencies.