PERDOCEO EDUCATION Corp annual report, FY2014

Business context and reporting period

Career Education Corporation (CEC), now associated with the Perdoceo Education name in the request, filed this Form 10-K for the fiscal year ended December 31, 2014. It provides career-focused postsecondary education online, on campus and through hybrid programs. Its continuing businesses were Colorado Technical University (CTU), American InterContinental University (AIU), Career Colleges and a Transitional Group of campuses being taught out. The filing recasts prior periods for discontinued operations, so comparisons below use the filing’s comparable presentation.

During 2014 CEC completed 21 campus teach-outs and sold two campuses. In the fourth quarter, its board approved a plan to sell 16 Le Cordon Bleu (LCB) culinary campuses; LCB was classified as discontinued operations and held for sale.

Financial and operating performance

• Continuing revenue fell 11.7%; management attributed the decline principally to an 8.0% decrease in total enrollment. Excluding the Transitional Group, revenue declined approximately 8.5%.
• Total continuing enrollment at year-end was about 41,400, down from 45,000. University Group enrollment declined 1.2%; Career Colleges declined 15.0%. University new-student enrollment rose 15.2%, although management noted a change in orientation and enrollment-count methodology contributed to the reported increase.
• Operating loss narrowed by $8.1 million, reflecting cost reductions and lower legal expenses, partly offset by higher impairment charges. Goodwill and asset impairment expense for continuing operations was $16.9 million, versus $8.7 million in 2013.
• Q4 continuing revenue was $174.2 million, operating loss $7.8 million and net loss $25.5 million. Ongoing-operations adjusted EBITDA, a non-GAAP measure excluding the Transitional Group and discontinued operations, was $15.6 million versus $10.2 million in Q4 2013.
• LCB reported 2014 revenue of $172.6 million and a discontinued-operations loss of $66.3 million. Total discontinued-operations loss also reflects other sold or taught-out businesses.

Liquidity, debt and obligations

• At December 31, 2014, cash, restricted cash and short-term investments totaled $239.6 million, down from $362.6 million a year earlier. This comprised $93.8 million unrestricted cash, $22.9 million restricted cash and $122.9 million short-term investments.
• Working capital was $179.6 million. CEC had $10.0 million drawn under a $120.0 million revolving facility, with $98.4 million stated remaining availability; loans and letters of credit are secured by 100% cash collateral. The facility matures June 30, 2016 and includes a minimum domestic cash-and-investment covenant, generally $190 million on a three-month average, subject to specified adjustments.
• Net cash used in investing activities was $107.6 million, including net purchases of investments; capital expenditures were $13.2 million. The filing reports $348.9 million of net contractual operating-lease obligations after expected sublease income, across ongoing, transitional and discontinued operations.
• CEC reported a preliminary 2014 ED financial-responsibility composite score of 1.5, the threshold described as financially responsible without additional conditions. The score remained exposed to losses and asset impairments.

Material changes versus the prior comparable period

• Revenue continued to contract, but management said the rate of decline was easing. University new-student enrollment improved, while Career Colleges enrollment and revenue remained under pressure.
• Operating loss improved year over year, but net loss widened, largely because discontinued-operations losses increased. Cash used in operations also worsened by $32.8 million.
• CEC reported more than $300 million of operating-expense reductions since 2012, including over $100 million of improvement during 2014. An $8.6 million insurance recovery benefited 2014; prior-year results included larger legal settlement costs.
• A 2014 change in accounting for revenue from withdrawing students reduced revenue by $9.4 million and bad-debt expense by $7.5 million, increasing continuing-operations loss by $1.9 million. The adjustment was recorded in Q4; prior periods were not restated.
• The deferred-tax valuation allowance reached $150.4 million, up $67.5 million from year-end 2013, reflecting the company’s cumulative loss position and uncertainty about realizing deferred tax assets.

Outlook, management commentary and risks

• For 2015, management expected modest University Group enrollment growth, positive full-year adjusted EBITDA from ongoing operations, approximately $40 million of expense reductions from actions taken in 2014, continued reductions in real-estate obligations and year-end cash, restricted cash and short-term investments above $190 million. Management cautioned that expected adjusted EBITDA growth could be minimal after additional corporate costs are allocated to continuing operations.
• Management expected Transitional Group and discontinued-operations adjusted EBITDA of approximately negative $62 million for 2015, with losses and cash use expected to decline as teach-outs progress. Four of the 12 remaining Transitional Group campuses were expected to close in 2015.
• CEC had no buyer secured for LCB when it filed and anticipated completing the sale by the end of 2015. It said a failed sale could affect its financial-responsibility score and the planned strategic focus.
• Regulatory and funding exposure is substantial: approximately 78% of tuition cash receipts in 2014 came from Title IV funding; the company reported about $695 million of Title IV cash receipts. All institutions were on Heightened Cash Monitoring 1 status, and an ED inquiry regarding possible placement-rate misrepresentation remained pending. A move to more restrictive reimbursement or HCM2 status could delay cash receipts.
• New gainful-employment rules may threaten Title IV eligibility for some programs; CEC identified certain Culinary Arts and Art & Design programs as higher risk. Accreditation placement and retention standards, state authorization, the 90-10 rule, recertifications and student-loan outcomes also pose risks. CEC said its preliminary 2014 review found no OPEID above the 90% 90-10 limit.
• Multiple state attorneys general inquiries, False Claims Act and student litigation, and regulatory matters remained unresolved. The filing states potential outcomes may be material but that possible losses for several matters could not be reasonably estimated. Accrued estimated legal fees and settlements were $2.3 million at year-end.
• Scott Steffey resigned as CEO in February 2015; Chairman Ronald McCray became interim CEO while a permanent successor search was underway. The separation agreement provided for a $2.5 million payment, largely for awards and amounts previously accrued.

Most important facts for investors to verify

1. Whether the LCB sale closed on expected terms and how proceeds, remaining lease obligations and any sale-related losses affected liquidity and regulatory financial-responsibility measures.
2. Whether CEC achieved its 2015 enrollment, cost-reduction, cash-balance and positive ongoing adjusted-EBITDA objectives; reconcile non-GAAP EBITDA with GAAP results and cash flow.
3. Developments in ED’s inquiry, HCM1 status, Title IV recertifications, gainful-employment eligibility, accreditation outcomes and each institution’s 90-10 compliance.
4. Cash burn, unrestricted liquidity, cash-collateral requirements and compliance with the credit facility’s cash covenant, alongside the substantial lease commitments.
5. Enrollment and operating trends at CTU, AIU and Career Colleges, including the durability of reported new-student growth after the methodology change and ongoing Career Colleges losses.
6. Changes in legal and regulatory contingencies, tax-asset realizability and impairment assumptions; the filing does not provide a clear estimate of possible losses for several pending matters.