Career Education Corporation (CEC) — Q1 2011 Form 10-Q
Reporting period: Quarter ended March 31, 2011; unaudited. The filing identifies the registrant as Career Education Corporation, not Perdoceo Education Corp. Amounts below are in millions of dollars unless otherwise stated.
Business context and reporting period
CEC operated career-focused schools through online, on-ground and hybrid programs, serving approximately 119,100 students. From January 1, 2011, it reported six segments—CTU, AIU, Health Education, Culinary Arts, Art & Design, and International—after splitting the former University segment; prior periods were recast.
Financial and operating results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $543.4 | $529.4 | +2.6% |
| Operating income / margin | $113.2 / 20.8% | $89.4 / 16.9% | +26.6%; +3.9 percentage points |
| Income from continuing operations | $73.6 | $57.1 | +28.8% |
| Net income | $73.0 | $55.2 | +32.3% |
| Diluted EPS | $0.95 | $0.66 | Up |
| Operating cash flow | $59.7 | $53.5 | Up |
Revenue growth reflected a 2% increase in student population, while new student starts fell 14% to 31,830. General and administrative expense declined 8.8%, including lower bad-debt and administrative costs; educational services and facilities expense rose 6.1%, and depreciation and amortization rose 22.1%. The effective tax rate was 36.3%, versus 36.1%. Discontinued operations generated a $0.6 million after-tax loss, compared with $1.9 million.
Segment highlights: CTU revenue rose 6.4% and operating income rose to $36.3 million; AIU revenue fell 10.7% and operating income fell to $27.6 million. Health Education revenue increased 12.0%, Culinary Arts revenue declined 1.1% while operating income improved, Art & Design revenue rose 2.7%, and International revenue rose 14.5%. Student population increased overall 2%, but declined at AIU and Art & Design.
Liquidity and capital: Cash, cash equivalents and short-term investments totaled $399.1 million at quarter-end, down from $449.2 million at year-end; $57.8 million of cash was restricted for certain European not-for-profit schools. The company reported no borrowings under its U.S. credit agreement, $5.2 million of letters of credit, and $179.8 million of available credit. Current assets were $571.3 million and current liabilities $391.4 million. Total liabilities were approximately $572.9 million; the filing reports no material funded debt. Capital expenditures were $23.8 million. Financing cash outflow was $89.1 million, primarily reflecting $89.9 million of share repurchases. CEC said it expected to meet cash needs for at least 12 months using operating cash flow, cash balances and, if needed, its credit facility.
Material changes and unusual items
- Operating income included a $7.0 million insurance recovery related to previously settled legal matters and a $1.4 million gain on real estate sale. The prior-year quarter included an $8.1 million bad-debt reserve charge and $3.7 million of lease termination charges.
- CEC paid $40.0 million in Q1 toward an approximately $40.8 million settlement of California Culinary Academy student litigation, accrued in 2010.
- CEC repurchased 4.1 million shares for $89.9 million at an average $21.69 per share; approximately $200.5 million remained authorized. The quarter-end share count and weighted-average shares were lower than a year earlier.
- Repurchases increased Blum Capital Partners’ voting interest above 20%, triggering accelerated vesting under older equity plans and approximately $0.6 million of compensation expense.
- Cash and short-term investments declined, mainly due to buybacks and annual incentive payments. Q1 net cash decreased $50.2 million.
Outlook, commentary, risks and contingencies
Management cited a weak economy, negative sector publicity and greater competition as pressures on starts and retention. It continued cost-efficiency and student-outcome initiatives. The Culinary Arts model was shifting toward a 12-month certificate program, with lower tuition and discontinued extended payment plans for new students; CEC also discontinued new extended payment plans in other segments. It expected up to three additional U.S. Health Education campuses to open in 2011. No numerical revenue or earnings guidance was provided.
Key risks include significant dependence on federal Title IV funding, new and pending federal and state rules (including gainful-employment, incentive-compensation, credit-hour and distance-education authorization requirements), and possible effects on program eligibility, enrollment and costs. Approximately 84% of U.S. school tuition cash receipts in Q1 came from Title IV funding; for FY2010, approximately 90% of U.S.-based students participated in Title IV programs. AIU’s Department of Education review included two disputed systemic findings concerning online attendance documentation; a final determination was pending. A CTU federal audit and a Florida Attorney General investigation were also ongoing.
Other contingencies include student class actions, a False Claims Act suit, TCPA claims and employment litigation. Most listed cases had uncertain outcomes and no loss range could be reasonably estimated; CEC had not accrued liabilities for those matters. A Pennsylvania wage-and-hour matter had an estimated $0.2 million loss and a settlement agreement in principle. Discontinued-school lease obligations totaled $46.7 million at quarter-end. Auction-rate municipal securities of $11.3 million remained illiquid and Level 3 valued, with a cumulative unrealized loss of approximately $0.4 million that management considered temporary.
Important facts for investors to verify
- Whether new-student-start declines persist and whether overall enrollment growth can be sustained, particularly at AIU and Art & Design.
- How regulatory changes and pending reviews affect Title IV eligibility, online state approvals, allowable recruiting practices, and gainful-employment program metrics.
- Whether reported earnings growth is sustainable after adjusting for the insurance recovery, asset-sale gain and prior-year bad-debt and lease charges.
- Cash generation and liquidity after substantial buybacks, capital expenditures, earnout payments and remaining discontinued-school lease obligations.
- Outcomes and potential financial exposure from unresolved litigation, regulatory reviews and the extended-payment-plan receivables.
- The effect of continued repurchases on share count, cash available for operations, and equity-award vesting provisions.