Career Education Corporation (CEC) — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2011. The filing is for Career Education Corporation, the registrant named in the report. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
CEC operated career-focused schools and universities in the U.S. and Europe, serving more than 100,000 students through online, on-ground and hybrid programs. Effective January 1, 2011, it reported six segments: CTU, AIU, Health Education, Culinary Arts, Art & Design, and International; prior periods were recast for comparison.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $497.2 | $527.7 | $1,040.6 | $1,057.2 |
| Operating income | $82.7 | $96.8 | $195.9 | $186.2 |
| Operating margin | 16.6% | 18.3% | 18.8% | 17.6% |
| Income from continuing operations | $55.8 | $66.3 | $129.3 | $123.4 |
| Net income | $55.4 | $64.3 | $128.4 | $119.5 |
| Diluted EPS | $0.73 | $0.80 | $1.69 | $1.46 |
- Q2 revenue declined 5.8%; operating income fell 14.5% and net income fell 13.9%. Management cited fewer new student starts, a 3% lower student population, and lower revenue per student in AIU and Culinary Arts.
- Six-month revenue declined 1.6%, while operating income increased 5.2% and net income increased 7.4%. Lower bad-debt and administrative costs and a $7.0 million insurance recovery aided results; the prior-year comparison included elevated bad-debt expense and lease-termination costs.
- Q2 operating margin contracted 1.7 percentage points. For the six-month period, margin improved 1.2 points. The Q2 included $2.7 million of non-cash goodwill and asset impairment charges.
- Six-month operating cash flow was $114.8 million, compared with $47.9 million a year earlier. Investing cash use was $50.4 million and financing cash use was $127.3 million; financing included $129.9 million of share repurchases. Cash and cash equivalents decreased $60.7 million during the period.
- At June 30, cash and short-term investments totaled $388.8 million, down from $449.2 million at year-end. Current assets were $558.9 million and current liabilities $361.5 million. CEC reported no credit-agreement borrowings; $178.3 million remained available, with $6.7 million of letters of credit outstanding. Capital lease obligations totaled about $1.3 million.
- CEC repurchased 5.9 million shares year to date for $129.9 million, at an average $21.94 per share; $160.5 million remained authorized. It had not paid cash dividends.
Material changes and segment trends
- Q2 segment revenue and operating income diverged: AIU revenue fell 18.3% and operating income fell to $26.3 million from $40.0 million; Health Education revenue rose 1.7%, but operating income fell to $3.4 million from $11.6 million. CTU revenue declined 2.4% while operating income improved to $34.0 million.
- Culinary Arts revenue declined 10.3%, but operating income improved modestly; Art & Design revenue declined 9.0% with a modest operating-income increase. International revenue increased 25.0%, including favorable currency effects, and operating income rose to $5.4 million.
- Q2 new student starts fell 14% overall to 24,880; student population fell 3% to 101,700. Six-month starts were down 14% to 56,710. AIU and Art & Design had particularly notable enrollment declines.
- Management attributed lower bad-debt expense partly to discontinuing extended payment plans for new students. Remaining net receivables under those plans were $8.0 million; the allowance rate was approximately 75%.
Outlook, risks, contingencies and unusual items
- Management expected similar trends in new student starts to continue through Q3 and Q4 2011, with enrollment declines subsequently affecting student populations. No quantitative earnings or revenue guidance was provided.
- Management’s priorities included cost and shared-services reviews, changes to Art & Design, shifting marketing toward higher-quality leads, and readiness assessments for prospective students. A Culinary Arts model shift toward shorter, lower-tuition certificate programs was substantially implemented.
- New federal rules effective July 1, 2011 affected incentive compensation, state authorization, online attendance and other Title IV requirements. Gainful-employment rules introduce program-level debt metrics; the earliest potential loss of Title IV eligibility was 2015. Management said it believed substantially all AIU, CTU and Health Education programs met the published metrics, while Art & Design plans were under review.
- CEC disclosed that it identified improper practices at certain Health Education schools concerning calculation of student placement rates. Independent counsel was investigating, and CEC had begun reviewing placement-rate determinations across its domestic schools. The New York Attorney General was investigating a broad range of practices. Potential outcomes include penalties, litigation, accreditation consequences or loss of state or Title IV eligibility; the company could not predict the outcome.
- Other material matters included student class actions, a False Claims Act case, TCPA litigation, and pending education-department and inspector-general reviews. CEC had recorded a $0.2 million estimate for an employment-litigation settlement; it said loss ranges for several other cases could not be reasonably estimated.
- A $40.0 million payment during Q1 related to a previously accrued legal settlement. Discontinued operations recorded a six-month net loss of $1.0 million and had $44.3 million of liabilities, principally remaining lease obligations. Accreditation-rights impairments were $2.5 million; a further $0.2 million goodwill impairment related to a CTU campus scheduled to cease operations no later than 2015.
- CEC held $11.1 million of auction-rate municipal securities classified as Level 3, with auctions failing for more than two years; it reported a cumulative unrealized loss of approximately $0.7 million and considered the impairment temporary. Cash included $53.9 million restricted for certain European not-for-profit schools.
- Management stated available liquidity and expected operating cash flows, existing cash and potential credit-facility borrowings to meet requirements for at least the next 12 months. Approximately 84% of U.S. tuition cash receipts in the first half came from Title IV funding.
Important facts for investors to verify
- Progress and findings of the placement-rate review and New York and Florida attorney-general investigations, including any regulatory or accreditation actions.
- Enrollment, retention and revenue-per-student trends, especially at AIU, Health Education and Art & Design, and the effect of SOAR implementation.
- School and program compliance with the 90-10 rule and gainful-employment requirements, and the effect of revised Title IV and incentive-compensation rules.
- Final outcomes or potential financial exposure from pending litigation, agency reviews and discontinued-campus lease obligations.
- Cash generation after substantial repurchases, restricted cash availability, and the remaining Le Cordon Bleu earnout, estimated at $14.0 million within 12 months.