Business context and reporting period
Career Education Corporation (the registrant named in this filing; the request metadata identifies Perdoceo Education Corp.) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company operated Colorado Technical University (CTU) and American InterContinental University (AIU), while teaching out its Culinary Arts and Transitional Group campuses. The two universities were predominantly online.
Financial results and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
| Metric | Q1 2017 | Q1 2016 | Change or context |
|---|---|---|---|
| Revenue | $162.1 | $198.9 | Down 18.5%; primarily reflects the teach-outs |
| Operating income | $9.8 | $7.0 | Operating margin 6.0% vs. 3.5% |
| Income from continuing operations | $5.6 | $3.1 | — |
| Net income | $5.2 | $3.0 | Includes discontinued-operation losses of $0.4 vs. $0.1 |
| Diluted EPS | $0.07 | $0.04 | — |
| Cash used in operating activities | $39.1 | $10.2 | Higher use primarily reflects $32.0 of legal-settlement payments |
- Revenue and segments: University Group revenue increased 2.3% to $148.3 million; CTU and AIU revenue rose 2.2% and 2.4%, respectively. Culinary Arts revenue fell 73.4% and Transitional Group revenue fell 77.0% as campuses wound down. Total student enrollment declined 16.4% year over year, while University Group enrollment increased 0.6%.
- Expenses and profitability: Total operating expenses fell to $152.3 million from $191.9 million. Educational services and facilities expense declined to $40.2 million from $61.5 million, and general and administrative expense declined to $108.2 million from $123.6 million. The effective tax rate was 44.6%, versus 57.2%.
- Cash and investments: Cash, restricted cash and short-term investments totaled $166.6 million at March 31, 2017, including $13.3 million of unrestricted cash and $143.3 million of short-term investments. The comparable total at year-end 2016 was $207.2 million.
- Debt and liquidity: There were no borrowings under the $95 million revolving credit facility; it matures December 31, 2018, and borrowings must be secured by 100% cash collateral. The company reported compliance with its credit covenants and stated that it expected to meet cash needs for at least the next 12 months using operating cash flows and existing balances.
- Other balance-sheet items: Total assets were $509.7 million, compared with $559.6 million at December 31, 2016. Current liabilities were $123.2 million, versus $169.2 million. No separate debt balance was reported as outstanding under the revolving facility.
Material changes, outlook, and management commentary
- Management attributed the overall revenue decline chiefly to a 16.4% decline in total enrollment associated with divesting or teaching out Career Schools. It cited improved University Group revenue and expense efficiencies as drivers of higher operating income.
- Management said University Group adjusted operating income was $25.7 million for the quarter, up from $19.8 million. This is a non-GAAP measure. It expected quarterly results to vary during 2017, partly because of AIU’s academic-calendar redesign and investment in Phoenix admissions and advising centers.
- 2017 outlook: Adjusted operating income for University Group and Corporate of $100 million to $105 million; adjusted operating loss for the teach-out segments of $50 million to $60 million; and year-end cash, cash equivalents, restricted cash and available-for-sale short-term investments, net of borrowings, of approximately $150 million to $160 million. Management expected cash usage to moderate in 2017 and cash generation to begin in 2018.
- 2018 outlook: Adjusted operating loss for the teach-out segments of $10 million to $20 million; management expected University Group and Corporate adjusted operating income to grow from 2017 levels. These are forward-looking, non-GAAP expectations, dependent on stated assumptions including modest University Group enrollment growth, expected teach-out progress, lease recovery and no material changes in the legal or regulatory environment.
- Management expected most teach-out campuses to complete by the end of 2017, with the remainder closing at varying dates through 2018. It warned that teach-out segment operating losses could increase as student revenue declines faster than the costs of serving remaining students.
Risks, contingencies, and unusual items
- Legal settlement: The company paid $10 million to the United States and $22 million for relators’ legal fees and costs in a False Claims Act matter in February 2017. The matter was dismissed with prejudice; the company stated the settlement was not an admission of liability. It had reserved $32 million at year-end 2016.
- Regulatory and litigation exposure: The filing describes ongoing state attorneys general and FTC inquiries, an ED inquiry concerning placement-rate disclosures, and other litigation. The company said potential outcomes or losses for several matters could not be reasonably estimated. It also reported an ED OIG audit matter with a $1.0 million reserve; additional requested review work had uncertain exposure.
- Title IV dependency: Approximately 75% of institutional cash receipts from tuition payments came from Title IV funding in Q1 2017. The company said changes to eligibility, payment timing, cash-monitoring status, or required letters of credit could materially affect operations and liquidity. Its institutions had provisional program participation agreements or were awaiting recertification decisions.
- Restructuring and leases: The filing estimated an additional $15 million to $20 million of future charges for remaining lease obligations as teach-out campuses close, beyond approximately $57.4 million recorded from 2015 through Q1 2017. Net contractual lease obligations were $170.4 million, including $108.3 million for teach-out campuses and discontinued operations.
- Other notable items: The Q1 2017 tax provision included a $0.3 million favorable effect from adopting share-based compensation guidance. The company maintained a $49.7 million valuation allowance against certain tax credits and state net operating losses as of year-end 2016 and continued it at March 31, 2017.
- The company said adoption of the new lease standard was expected to materially affect its financial-statement presentation, particularly through recognition of lease assets and liabilities. Its assessment of the new revenue standard was ongoing; it did not expect a material revenue-recognition impact but had not finalized its assessment.
Most important facts an investor should verify
- Whether University Group enrollment and revenue trends continue, considering the disclosed changes in cancelled-student recording and AIU calendar timing.
- Whether the $150 million to $160 million year-end liquidity outlook and expected 2018 cash generation are achieved, particularly given operating cash use and lease payments.
- Developments in ED recertification, Title IV participation and cash-monitoring requirements, as well as state and federal investigations and litigation.
- Actual costs and timing of campus teach-outs, remaining lease obligations, sublease recoveries and the estimated $15 million to $20 million of additional lease-related charges.
- Performance against non-GAAP guidance, including the assumptions and reconciliations to GAAP measures; the filing does not provide full-year GAAP earnings guidance.