Perdoceo Education Corporation — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020; comparisons are with Q1 2019 unless noted. Perdoceo operates Colorado Technical University (CTU) and American InterContinental University (AIU), primarily online postsecondary institutions. AIU includes Trident University from its March 2, 2020 acquisition date.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date | Change or context |
|---|---|---|---|
| Revenue | $171.0 million | $157.9 million | Up 8.3%; tuition and fees were $170.4 million |
| Operating income | $37.3 million | $30.0 million | Up 24.5%; operating margin increased to 21.8% from 19.0% |
| Net income | $29.1 million | $24.8 million | Income from continuing operations was $29.1 million; diluted EPS was $0.41 versus $0.35 |
| Operating cash flow | $48.8 million | $12.9 million | Increase largely reflected $39.3 million of Title IV funds received in January that historically arrived in the prior-year fourth quarter |
| Cash, restricted cash and short-term investments | $285.6 million | $294.2 million at Dec. 31, 2019 | Included $4.0 million restricted in Trident acquisition escrow; unrestricted cash and equivalents were $37.9 million |
| Debt and credit availability | No revolving borrowings | — | $50.0 million revolving facility, secured by cash and marketable securities; matures January 2022 |
Revenue growth reflected enrollment increases and the Trident acquisition. CTU revenue rose 6.7% and operating income rose 16.6%; AIU revenue rose 10.9% and operating income rose 12.8%, with AIU results including Trident only from March 2. Total student enrollment increased 12.3% to 40,200, including Trident. New enrollments rose 16.8% at CTU and fell 14.2% at AIU; management attributed the AIU decline to 31% fewer enrollment days, and said the decline would have been 22.9% excluding Trident.
General and administrative expense increased 4.2% to $103.5 million, including advertising of $35.1 million, admissions of $24.7 million and bad debt expense of $12.9 million. Bad debt expense was 7.5% of revenue, versus 7.4%. The effective tax rate was 24.8%, compared with 20.3%. The quarter included $0.6 million of impairment on a vacated facility after a subtenant stopped paying rent.
Investing cash outflow was $97.9 million, including the $38.1 million initial Trident payment and net purchases of available-for-sale investments. Financing cash outflow was $17.6 million, including $17.3 million spent repurchasing 1.3 million shares at an average $13.48 per share. The expected total Trident purchase price was approximately $44 million, including an estimated additional payment of about $6 million. At March 31, total assets were $606.5 million and stockholders’ equity was $445.1 million. Operating lease liabilities totaled $64.1 million; net future operating lease obligations were $72.6 million.
Guidance, outlook and management commentary
Management maintained an outlook that assumes continued enrollment growth, no material changes in the legal or regulatory environment, and no significant COVID-19 impacts beyond known costs. The outlook includes Trident and known integration and remote-work transition costs, but excludes potential impacts from unresolved legal and regulatory matters and future share repurchases.
- Full-year 2020: operating income of $135–$139 million; adjusted operating income of $151–$155 million; diluted EPS of $1.44–$1.48; adjusted diluted EPS of $1.49–$1.53.
- Q2 2020: operating income of $33–$35 million; adjusted operating income of $38–$40 million; diluted EPS of $0.35–$0.37; adjusted diluted EPS of $0.36–$0.38.
- Management expected CTU new enrollments to grow in Q2 and AIU new enrollments to increase significantly, citing 50% more enrollment days and the Trident acquisition. The company expected its 2020 effective tax rate to be 25.5%–26.5% and capital expenditures to be about 2% of revenue.
Risks, contingencies and unusual items
- COVID-19: Management reported no material Q1 operating impact and said the transition of campus students to online learning and employees to remote work had proceeded without major disruption. It cautioned that the pandemic’s duration and effects on student interest, collections, corporate partners, vendors, operations and forecasting remained uncertain.
- Veterans’ benefits: The VA’s March 9 letter warned that future enrollment of students not already enrolled could be disapproved for VA assistance if the company failed to remedy a deficiency related to previously settled FTC and state attorney general matters. Perdoceo submitted a response; the VA extended the response period through June 7, 2020. About 10% of CTU students and 12% of AIU students used VA benefits as of March 31.
- Education regulation and funding: Perdoceo identified Title IV eligibility, borrower-defense rules, 90-10 compliance, accreditation and political or regulatory changes as significant risks. Approximately 79% of 2019 tuition cash receipts came from Title IV funding; the company said its operations depend heavily on these funds.
- Legal matters: The company reported government information requests and other claims, including student, telephone-consumer and employment matters. The accrued estimated legal fees and settlements balance was $0.4 million at March 31, down from $7.3 million at year-end. Management cautioned that outcomes could still have a material adverse effect. Q1 operating cash flow also reflected a payment related to the Oregon arbitrations matter.
- Acquisition and credit quality: Trident’s preliminary purchase-price allocation included $31.4 million of goodwill and $10.4 million of identifiable intangible assets; the allocation and working-capital adjustment remained subject to finalization. Student receivables were reported net of a $36.1 million allowance for credit losses. The company adopted the expected-credit-loss standard in 2020 and said the adoption’s impact was not material.
Key facts for investors to verify
- Whether the VA accepted Perdoceo’s corrective-action response and whether the matter affected student eligibility or enrollment.
- How COVID-19 affected subsequent enrollment trends, student collections, bad debt expense and the assumptions underlying 2020 guidance.
- Whether AIU’s enrollment performance improved as enrollment days normalized, and the organic contribution of Trident after integration.
- The final Trident purchase price, working-capital adjustment, integration costs and performance contribution.
- Title IV funding and 90-10 compliance, including any regulatory developments or borrower-defense liabilities.
- Cash deployment, share repurchases and liquidity relative to acquisition payments, lease commitments and the secured revolving facility.