Business context and reporting period
Career Education Corporation (the issuer named in this 10-K; not “Perdoceo Education Corp” in the request metadata) reported for the fiscal year ended December 31, 2017. Its ongoing University Group consists of Colorado Technical University (CTU) and American InterContinental University (AIU), principally online providers. The All Other Campuses segment comprises institutions being taught out; the company completed all Le Cordon Bleu teach-outs and expected its seven remaining campuses to close in 2018.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $596.4 million | $704.4 million |
| Operating income (loss) | $34.1 million | ($32.3 million) |
| Operating margin | 5.7% | (4.6%) |
| Pretax income (loss) | $36.3 million | ($31.4 million) |
| Net income (loss) | ($31.9 million) | ($18.7 million) |
| Cash from (used in) operating activities | ($21.8 million) | $6.5 million |
- Revenue fell 15.3%, mainly as teach-out campuses contracted. University Group revenue rose 1.3% to $569.6 million; University Group year-end enrollment increased 3.3% to approximately 34,700. Total company enrollment declined 4.9% to approximately 34,800 as All Other Campuses enrollment fell to about 100.
- University Group operating income increased to $117.6 million from $69.8 million. All Other Campuses recorded a $61.4 million operating loss, improved from $77.1 million.
- 2017 net loss included $67.1 million of income tax expense, including a $52.7 million charge from revaluing deferred tax assets and state tax positions after enactment of the Tax Cuts and Jobs Act. Fourth-quarter net loss was $44.4 million; quarterly revenue was $143.1 million and operating income was $10.7 million. The quarter included the $52.7 million tax charge and a $6.5 million legal settlement.
- At year-end, cash, restricted cash and short-term investments totaled $180.1 million, including $18.1 million unrestricted cash and $156.2 million short-term investments. Working capital was $98.0 million. Total liabilities were $150.9 million; stockholders’ equity was $296.2 million.
- There were no credit-facility borrowings at year-end. The revolving facility permits up to $95 million, matures December 31, 2018, and requires 100% cash collateral; the agreement also requires at least $110 million in domestic cash, cash equivalents and permitted investments. The company reported $5.1 million of facility letters of credit, fully collateralized.
- Capital expenditures were $6.3 million. Net operating lease obligations were $93.0 million, including $58.9 million for ongoing operations and $34.1 million for teach-out and discontinued operations.
Material changes versus the prior comparable period
- Operating results improved by $66.5 million, from an operating loss to operating income, reflecting lower teach-out costs, operating efficiencies and a $32.0 million legal settlement recorded in 2016 versus $6.5 million in 2017.
- Despite operating improvement, net loss widened to $31.9 million from $18.7 million, principally because the 2017 tax provision reflected the TCJA deferred-tax revaluation.
- Operating cash flow shifted from $6.5 million provided in 2016 to $21.8 million used in 2017, including payment of $32.0 million in legal settlements and higher lease-exit and incentive-compensation payments.
- The company continued shifting resources toward its universities, reporting growth in University Group enrollment and revenue while closing legacy campuses. Advertising expense declined to $136.1 million from $154.9 million; bad-debt expense declined to $27.6 million from $32.0 million.
Outlook, risks and unusual items
- Management’s 2018 outlook was adjusted operating income of $99–$106 million for the total company, including $110–$115 million for University Group and Corporate and an adjusted loss of $9–$11 million for All Other Campuses. It expected year-end 2018 cash, cash equivalents, restricted cash and short-term investments of $220–$225 million, with an increase in 2019, and expected adjusted operating income to grow in 2019.
- For first-quarter 2018, CTU expected new enrollments to increase year over year. AIU expected a roughly 40% decrease due to its redesigned academic calendar, with growth expected to more than offset that decline over the second and third quarters combined. Forecasts depend on enrollment trends, student initiatives, lease recoveries and no material adverse legal or regulatory changes; management cautioned actual results may differ.
- Federal student aid is a major dependency: 78% of tuition cash receipts in 2017 came from Title IV funding; approximately 86% of U.S.-based students who studied during the year participated in Title IV programs. All institutions were operating under provisional program participation agreements; CTU and AIU agreements expired September 30, 2018, with recertification applications due by June 30, 2018.
- Regulatory exposure includes pending inquiries from state attorneys general in 21 states plus the District of Columbia, an ongoing FTC inquiry, an open AIU ED program review, and ED’s HCM1 cash-monitoring status. The company said it could not reasonably estimate the potential impact of the state investigations. Changes to gainful-employment and borrower-defense rules remained uncertain; five continuing University Group programs were in the gainful-employment “zone,” including Criminal Justice programs representing about 17% of University Group enrollment. Preliminary 2017 90-10 calculations showed no institution above the 90% limit.
- Accrued legal fees and settlements were $8.7 million at year-end. A WCI class settlement had estimated class-member payments of at least $2.8 million and up to approximately $14.0 million, plus court-determined attorneys’ fees and costs agreed to be within $3.75–$8.0 million; the recorded reserves were at the low ends of those ranges. The final approval hearing was scheduled for June 8, 2018.
- The 2017 tax provision was unusually high relative to pretax income, and deferred tax assets fell to $98.1 million from $158.3 million. The company maintained a $50.5 million valuation allowance against certain deferred tax assets. The federal tax rate reduction to 21% was expected to lower the effective tax rate, but management did not expect significant cash savings due to anticipated use of net operating loss carryforwards.
Important facts for investors to verify
- Whether CTU and AIU obtained timely ED recertification and whether their provisional status or HCM1 monitoring changed.
- Actual cash generation, unrestricted liquidity and compliance with the credit agreement’s $110 million minimum-liquidity covenant as the facility approached its December 2018 maturity.
- Whether enrollment, retention and University Group operating results met management’s 2018–2019 outlook, particularly AIU’s calendar-related enrollment pattern.
- Final costs and outcomes of the WCI settlement, state attorney general and FTC inquiries, the AIU program review, and other legal or regulatory matters.
- Whether gainful-employment rules, Title IV funding, or student-aid eligibility materially affected programs or enrollment, especially Criminal Justice.
- Whether the company realized its projected tax benefits and cash balance, including the effect of deferred-tax valuation allowances and lease obligations.