Perdoceo Education Corporation (Nasdaq: PRDO) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Dollar amounts below are in millions unless stated otherwise. The company operates Colorado Technical University (CTU) and the American InterContinental University System (AIU), offering primarily online postsecondary education and professional-development programs.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $174.0 | $169.1 | $533.2 | $516.2 |
| Operating income | $37.9 | $32.1 | $114.4 | $106.7 |
| Operating margin | 21.8% | 19.0% | 21.5% | 20.7% |
| Net income | $27.8 | $39.9 | $85.2 | $97.2 |
| Diluted EPS | $0.39 | $0.56 | $1.19 | $1.36 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $144.2 | $137.8 |
- Q3 net income fell 30.5% despite higher operating income, principally reflecting a $9.6 million tax provision versus a $7.2 million tax benefit in Q3 2020. The prior-year period benefited from a $16.0 million release of a valuation allowance.
- Nine-month net income declined 12.4%; the 2020 comparison likewise included the valuation-allowance release. The 2021 effective tax rate was 25.5% year to date, versus 11.5% in 2020.
- At September 30, cash, cash equivalents, restricted cash and short-term investments totaled $481.0 million, including $5.2 million restricted cash. Total current assets were $537.1 million and current liabilities $134.4 million. The filing reports no borrowings under the revolving credit facility.
- Operating cash flow was $144.2 million for the first nine months. Investing activities provided $24.3 million, including net proceeds from available-for-sale investments, while financing activities used $6.6 million. Cash, cash equivalents and restricted cash increased $161.9 million to $271.6 million; short-term investments were $209.4 million at period end.
- The company reported no funded debt at quarter end. Operating lease liabilities totaled $47.8 million ($10.0 million current and $37.7 million non-current).
Changes versus prior comparable periods
- Q3 revenue rose 2.9% and nine-month revenue rose 3.3%. CTU Q3 revenue increased 5.9%, while AIU revenue decreased 1.6%. CTU’s academic-calendar redesign increased revenue-earning days and positively affected comparisons.
- At September 30, total student enrollment was down 0.9% year over year to 42,600: CTU increased 7.5% to 25,800, while AIU declined 11.6% to 16,800.
- Q3 operating income increased 18.0%; lower advertising, admissions and bad-debt expense helped, while administrative expense rose, including legal fees. Q3 operating margin improved to 21.8% from 19.0%.
- Nine-month revenue and operating income also benefited from a longer comparison period for Trident, acquired in March 2020, and from the 2021 acquisitions. DigitalCrafts and Hippo contributed from their respective August and September 2021 acquisition dates; the filing says their consolidated operating contributions were not material.
- Operating cash flow increased from $137.8 million to $144.2 million year to date. Cash used for acquisitions was $56.9 million in 2021, compared with $39.8 million for Trident in the 2020 period.
Outlook, management commentary and risks
- Management expects a 2021 full-year effective tax rate of 26.0%–26.5% and capital expenditures of approximately 2.0% of revenue. It expects to generate cash in 2021 and believes existing cash and operating cash flow will meet requirements for at least the next 12 months.
- Management said pandemic-related effects, student pauses or deferrals, and changes to marketing and recruitment processes may weigh on enrollment in the short term. It expects enrollment changes to affect revenue with a lag. Management described the student behavior changes as potentially temporary, but did not provide numerical revenue or earnings guidance.
- Management is investing in technology, analytics and student-serving processes, with infrastructure and platform enhancements expected to take multiple years. It said the initiatives are intended to improve student experience, retention and outcomes.
- The company acquired DigitalCrafts for a preliminary purchase price of $18.4 million and Hippo Education for $43.3 million. The preliminary contingent consideration totals $3.2 million, with payments expected in early 2024 based on financial metrics and a combined maximum of $6.5 million. Purchase-price allocations remain provisional. Management said it is pursuing similar-sized acquisition opportunities and anticipates another acquisition by the end of 2022.
- A new $125 million senior secured revolving facility, maturing September 8, 2024, replaced the former $50 million facility. It was undrawn at quarter end. The facility includes covenants, collateral and restrictions, including conditions affecting acquisitions and share repurchases.
- Management identified regulatory and funding dependence as significant risks: approximately 81% of tuition cash receipts year to date came from Title IV programs. Potential changes to Title IV eligibility, 90/10 and other standards, borrower-defense rules, and student-loan discharge requirements could affect enrollment, costs, liquidity or business operations.
- The Department notified the company that it has several thousand borrower-defense applications involving its institutions, including closed institutions. The company has begun responding; outcomes are uncertain. Legal-fee accruals were $1.6 million at September 30, 2021. The filing also describes student complaints and other litigation and says an adverse outcome could have a material impact, although management did not expect the matters then known to materially affect results.
- Federal student-loan payment forbearance was extended through January 31, 2022. Management anticipated a favorable near-term effect on cohort default rates but said the longer-term effect after repayment resumes was unclear. The Department’s ongoing rulemaking could change institutional eligibility and other requirements.
- The board extended the $50 million repurchase program through February 28, 2022. Approximately $22.9 million remained available at September 30; 0.4 million shares were repurchased for $5.4 million year to date, with none repurchased in Q3.
Most important facts for investors to verify
- Whether CTU’s enrollment growth and AIU’s decline persist, particularly after separating calendar timing and acquisition effects from underlying trends.
- How revenue, operating margins, bad debt and cash conversion develop as student enrollment, recruitment and marketing strategies change.
- Whether the 26.0%–26.5% tax-rate outlook and approximately 2.0%-of-revenue capital expenditure estimate remain on track.
- The final purchase-price allocations and contingent consideration for DigitalCrafts and Hippo, and the operating contribution of the acquired programs.
- The Department’s treatment of borrower-defense applications and potential changes to Title IV, 90/10, discharge and other regulatory requirements.
- Whether liquidity and capital-allocation plans remain consistent with the revolving facility’s covenants, including restrictions on repurchases and acquisitions.