Career Education Corporation — Q3 2015 Form 10-Q
Entity note: The filing identifies the registrant as Career Education Corporation, not Perdoceo Education Corp. The reporting period ended September 30, 2015; financial figures below are in U.S. dollars, generally millions unless noted.
Business context and reporting period
Career Education operated Colorado Technical University (CTU), American InterContinental University (AIU), and a Transitional Group of campuses being taught out or divested. Its strategy was to focus resources on the two predominantly online universities while exiting Career College campuses and pursuing a sale of its Le Cordon Bleu (LCB) culinary campuses.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Year to date 2015 | Year to date 2014 |
|---|---|---|---|---|
| Revenue | $162.1 | $182.8 | $519.2 | $567.2 |
| Operating loss | $(10.8) | $(31.7) | $(44.7) | $(64.9) |
| Loss from continuing operations | $(11.5) | $(32.8) | $(45.8) | $(67.9) |
| Net loss | $(45.2) | $(48.0) | $(90.8) | $(152.7) |
| Net loss per diluted share | $(0.67) | $(0.71) | $(1.34) | $(2.27) |
- Q3 operating margin was a 6.7% loss, compared with a 17.4% loss a year earlier. Lower costs, including cost containment and the wind-down of campuses, more than offset lower revenue.
- Q3 University Group revenue rose 1.4% to $136.1 million; operating income increased to $20.3 million from $6.5 million. CTU revenue rose 3.7%, while AIU revenue fell 2.3%.
- Q3 consolidated adjusted EBITDA was $3.2 million, versus $(30.5) million in Q3 2014. This is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- Cash from operating activities was $5.6 million in Q3, according to management; year-to-date operating cash flow was negative $21.0 million, versus negative $101.1 million in 2014. Year-to-date cash usage included real estate, legal and former-CEO separation payments.
- At September 30, cash and cash equivalents were $68.9 million, restricted cash $13.7 million, and short-term investments $116.8 million; together these totaled $199.4 million. Total assets were $448.9 million and stockholders’ equity was $194.4 million.
- No borrowings were outstanding under the $120 million revolving facility; the facility matures June 30, 2016. The company reported compliance with its covenants. Its revolving-credit obligations are secured by cash collateral.
Material changes versus the prior comparable period
- Q3 continuing-operations revenue declined 11.4%, while total student enrollment fell 14.1%. The Transitional Group’s revenue declined 46.5%; University Group revenue increased 1.4%.
- University Group total enrollment was up 0.3%, but new enrollments declined 3.5% in Q3. CTU’s Q3 new enrollment was nearly flat; AIU’s fell 9.7%.
- Lower advertising, admissions, and other costs improved operating results. The prior-year quarter also included an $8.6 million insurance recovery, while 2015 corporate costs included restructuring and new-CEO compensation.
- Net loss improved year over year, but Q3 discontinued-operations loss increased to $33.7 million from $15.2 million, principally reflecting a $33.4 million LCB impairment charge. YTD net loss also benefited from lower discontinued-operations losses versus 2014.
Outlook, management commentary, and risks
- Management expected approximately $190 million of cash, cash equivalents, restricted cash, and short- and long-term investments at year-end 2015. It expected the balance to be lower in 2016, primarily due to the timing and possible payment associated with an LCB sale, and to grow in 2017 and beyond. These are estimates dependent on stated assumptions, not guarantees.
- Management expected positive full-year 2015 adjusted EBITDA for University Group and Corporate. It projected adjusted EBITDA losses for Transitional Group and discontinued operations of approximately $85–$90 million in 2015, $90 million in 2016, $70 million in 2017, and $45 million in 2018.
- Management was in exclusive discussions with an LCB buyer and expected a definitive agreement by year-end 2015 and, subject to regulatory approval, closing in early 2016. It anticipated a payment to the buyer. The filing recorded a $33.4 million impairment based on indications of interest, using a Level 3 fair-value estimate.
- Teach-outs were expected to conclude at most remaining campuses by 2017, with the rest by 2018. Management estimated a further $20–$25 million of future charges for remaining lease obligations associated with teach-outs. Total net contractual operating lease obligations were $320.2 million.
- Liquidity and operations depend significantly on Title IV student-aid funding; approximately 77% of tuition cash receipts came from Title IV programs. The Department of Education (ED) inquiry into placement-rate disclosures and the institutions’ recertification process remained unresolved. All institutions were on Heightened Cash Monitoring 1 (HCM1); more restrictive ED payment conditions could delay receipts and increase liquidity needs.
- The company disclosed a broad FTC civil investigative demand received in August 2015 and inquiries from state attorneys general concerning recruitment, placement, licensing, and lending practices. It said it could not estimate their potential impact. ED could impose fines, restrictions, or other sanctions; the company also reported ongoing litigation and a $2.6 million accrual for estimated legal fees and settlements.
- ED financial-responsibility composite scores for 2013 and 2014 were each 1.5, the threshold for meeting the standard without additional oversight. Management said profitability declines and asset write-downs had adversely affected the score and that it was evaluating steps to remain financially responsible.
- The filing reported a $0.8 million reserve related to an OIG audit matter. It also identified an LCB Austin 2012 cohort default rate above 30%, which the company was appealing; the company believed the rate would fall below 30% after appeal.
Important facts for investors to verify
- Confirm the registrant identity and ticker/company mapping: this filing is for Career Education Corporation.
- Track University Group enrollment, especially AIU new enrollments, and whether growth offsets continued Transitional Group contraction.
- Monitor actual operating cash flow and cash/investment balances against management’s year-end 2015 and 2016 estimates.
- Verify whether an LCB sale agreement and regulatory approvals were obtained, its final terms and buyer payment, and any further valuation changes.
- Follow ED recertification, HCM1 status, financial-responsibility scores, Title IV eligibility, and the LCB Austin default-rate appeal.
- Assess outcomes and potential financial or operational effects of the FTC and state investigations, litigation, lease obligations, and remaining restructuring costs.