Business context and reporting period
Perdoceo Education Corporation operates Colorado Technical University (CTU) and the American InterContinental University System (AIUS), offering primarily online postsecondary programs. This Form 10-Q covers the quarter and nine months ended September 30, 2022; financial amounts below are in millions unless stated otherwise. The company acquired substantially all assets of California Southern University on July 1, 2022, adding it to AIUS.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $168.4 | $174.0 | $519.1 | $533.2 |
| Operating income | $29.3 | $37.9 | $107.0 | $114.4 |
| Operating margin | 17.4% | 21.8% | 20.6% | 21.5% |
| Net income | $22.1 | $27.8 | $79.9 | $85.2 |
| Diluted EPS | $0.32 | $0.39 | $1.16 | $1.19 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $107.6 | $144.2 |
Q3 net margin was 13.1% versus 16.0% in the prior-year quarter; YTD net margin was 15.4% versus 16.0%. Cash, cash equivalents, restricted cash and short-term investments totaled $525.2 at September 30, 2022, compared with $499.4 at December 31, 2021. Unrestricted cash and cash equivalents were $147.1; available-for-sale short-term investments were $375.9. The portfolio had $6.0 of gross unrealized losses at quarter-end. There were no borrowings under the $125.0 revolving credit facility, which matures September 2024. Operating lease liabilities totaled $36.3, including $6.0 current. YTD investing cash outflow was $255.7, including $207.6 net purchases of available-for-sale investments, $39.0 for acquisitions and $9.1 in capital expenditures. Financing cash outflow was $27.8, including $23.1 of share repurchases.
Material changes versus prior comparable periods
- Q3 revenue declined 3.2% and operating income fell 22.5%; YTD revenue declined 2.6% and operating income fell 6.5%. Management attributed the revenue declines mainly to the lagged effect of lower enrollments, partly offset by acquisitions and, YTD, CTU’s academic-calendar redesign.
- At September 30, total student enrollment was down 2.1% year over year to 41,700: CTU increased 2.7% to 26,500, while AIUS declined 9.5% to 15,200.
- Q3 CTU revenue fell 6.9% and operating income fell 23.6%. AIUS revenue rose 2.4%, including CalSouthern; excluding that acquisition, AIUS revenue would have declined. AIUS operating income increased 15.1% in the quarter.
- Q3 educational services and facilities expense increased 16.1%, while general and administrative expense decreased 2.3%, including lower marketing and bad-debt expense. YTD bad-debt expense declined 11.2% to $32.3, although the student-receivable allowance rose to $43.7 from $39.3 at year-end 2021.
- YTD comprehensive income was $73.7 versus $84.8, including a $5.8 unrealized investment loss. YTD share repurchases totaled $23.1 for 2.1 million shares; $26.8 remained under the program at September 30.
Outlook, commentary, risks and unusual items
- Management expected 2022 revenue and operating income to be lower than 2021, excluding positive effects of acquisitions or the academic-calendar redesign; it did not provide specific full-year revenue or earnings guidance. It expected CTU enrollment to increase and AIUS enrollment to decline at year-end, and said expense adjustments would not fully offset expected revenue declines.
- Management forecast a 2022 effective tax rate of 26.5%–27.5% and capital expenditures of approximately 2% of revenue. It expected to generate cash in the remainder of 2022 and meet anticipated cash needs for at least 12 months using operating cash flow and existing balances.
- On October 27, 2022, the company learned that a sealed False Claims Act qui tam complaint alleged issues involving CTU and AIU federal financial-aid credit-hour requirements and their learning management system. A DOJ Civil Investigative Demand received in April sought related information. The company said it was cooperating. Legal-fee accruals were $2.0 at September 30; the filing does not quantify a potential loss from the inquiry.
- New Department of Education rules published in October and November 2022 are scheduled to take effect July 1, 2023. They include changes to the 90-10 rule and borrower-defense processes. The company said it could not determine their ultimate impact. A separate broad federal student-loan forgiveness plan was subject to litigation and an injunction at the time discussed in the filing.
- Key business risks include enrollment declines, dependence on Title IV funding (about 79% of tuition cash receipts YTD), regulatory and accreditation compliance, and potential changes to federal student-aid eligibility. The credit facility also requires minimum domestic unrestricted cash, cash equivalents and short-term investments equal to aggregate loan commitments and includes restrictions on certain payments.
- CalSouthern’s preliminary purchase price was $40.0; the preliminary allocation included $21.6 of goodwill and $17.4 of identified intangible assets. The allocation remained subject to final valuation.
Important facts for investors to verify
- Subsequent enrollment trends at CTU and AIUS, and whether retention improvements translate into revenue and margin stabilization.
- Developments in the DOJ inquiry and sealed qui tam complaint, including any estimated exposure, remediation or regulatory action.
- Implementation and financial effects of the 2023 Department of Education rules, particularly 90-10 and borrower-defense requirements.
- Student receivable collection performance, the adequacy of the $43.7 allowance, and the trend in bad-debt expense.
- Final CalSouthern purchase-price allocation, realized performance and integration costs.
- Investment portfolio credit quality and whether unrealized losses remain temporary; also confirm liquidity and compliance with revolving-credit covenants.