Business context and reporting period
Career Education Corporation (CEC) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. CEC operated online and campus-based postsecondary schools, including Colorado Technical University (CTU), American InterContinental University (AIU), Career Colleges and Culinary Arts. The filing uses continuing-operations presentation for schools being taught out; nine Sanford-Brown campuses completed teach-outs in Q1, and the 2013 comparison was recast for discontinued operations and the revised segment structure.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $243.1 million | $284.5 million |
| Operating loss | $47.9 million | $25.0 million |
| Operating margin | (19.7%) | (8.8%) |
| Loss from continuing operations | $47.4 million | $19.8 million |
| Net loss | $58.1 million | $15.2 million |
| Basic and diluted loss per share | $0.87 | $0.23 |
| Cash used in operating activities | $35.4 million | $14.2 million |
| Capital expenditures | $3.5 million | $4.1 million |
- Revenue declined 14.5%; excluding Transitional Schools, it fell about 10.4%. Management attributed the decline primarily to lower enrollment.
- Educational services and facilities expense fell 16.2% to $86.1 million, but general and administrative expense was essentially flat at $189.8 million. Legal settlement costs contributed to administrative expense.
- Discontinued operations produced a $10.7 million loss, versus $4.6 million income in Q1 2013. The 2014 result included about $8.1 million for remaining leases at campuses completing teach-out.
- At March 31, cash, cash equivalents and short-term investments totaled $315.5 million, down from $362.9 million at December 31, 2013. Total assets were $741.5 million; current liabilities were $205.4 million.
- CEC had no borrowings under its $70 million revolving credit facility, which matures June 30, 2016. The company also had $12.9 million of restricted cash securing letters of credit. Lease and other obligations remain material; the filing does not present a single total-debt figure.
- Cash and cash equivalents decreased by $54.6 million during the quarter. Operating and investing cash outflows were $35.4 million and $19.0 million, respectively.
Material changes and segment trends
- Total student enrollment was 55,700, down 12% year over year; new enrollment was 16,030, down 6%. Excluding teach-out campuses, total enrollment declined 8%.
- University Schools revenue fell 10.8% to $139.6 million and operating income fell to $10.6 million from $19.1 million. CTU remained profitable; AIU reported a $3.6 million operating loss, compared with $3.1 million income.
- Career Schools revenue declined 9.9% to $95.3 million, with an operating loss of $35.2 million versus $27.1 million. Culinary Arts new enrollment fell 18%; Career Colleges new enrollment fell 6%.
- Transitional Schools revenue fell 63.5% to $8.1 million, while operating loss widened to $12.1 million from $10.6 million. CEC said 20 campus teach-outs were expected during 2014.
- CEC changed its segment reporting effective January 2014, combining former health and design/technology operations into Career Colleges. It also replaced its student readiness program with a new orientation process and recast prior University new-enrollment figures.
Outlook, risks and unusual items
- Management said Q1 results were in line with expectations despite severe winter weather and reported improving application, conversion and enrollment trends. It anticipated possible University enrollment growth in the second half of 2014 and expected Career Schools total enrollment to improve as Culinary Arts associate-program students progressed.
- CEC targeted at least $75 million of lower operating expenses in fiscal 2014 versus 2013. It estimated the 20 campuses expected to close in 2014 would generate about $36 million of operating losses; approximately $20–$25 million of additional lease charges could arise as remaining campuses close.
- Management expected to meet cash requirements for at least the next 12 months using operating cash and existing balances, but anticipated near-term operating cash pressure and approximately $25 million of accrued legal settlement payments in Q2 2014.
- Regulatory exposure is significant: about 77% of Q1 tuition cash receipts came from Title IV funding. CEC’s schools were on Department of Education Heightened Cash Monitoring 1 status; a move to reimbursement or HCM2 could delay federal funding and increase cash needs. CEC’s preliminary 2013 financial-responsibility composite score was 1.5, with management expecting downward pressure for 2014.
- A proposed federal gainful-employment rule could threaten Title IV eligibility for some programs, particularly culinary arts and design. The company was also responding to state attorney general inquiries and SEC and Department of Education inquiries, including matters related to placement-rate practices.
- CEC recorded $28.9 million of accrued legal fees and settlements at March 31, 2014, versus $20.3 million at year-end. The Ross securities settlement was approved in April; the company paid $5.0 million and expected another approximately $3.8 million under a related settlement, while seeking insurance recovery. Coverage for some amounts was disputed.
- A $7.4 million auction-rate municipal bond remained illiquid after repeated failed auctions and carried approximately $0.5 million of unrealized losses. Management considered the impairment temporary.
- CEC maintained an $82.5 million deferred-tax valuation allowance and recognized a $0.2 million tax provision despite its pretax loss. The company noted that litigation, regulatory outcomes and Title IV access could materially affect results, cash flows and liquidity.
Important facts for investors to verify
- Whether enrollment conversion and retention trends translate into the anticipated second-half University growth and stabilization in Career Schools.
- Progress against the $75 million cost-reduction target and the timing, losses and lease charges associated with campus closures.
- Cash burn, Q2 settlement payments, remaining liquidity and compliance with credit-facility covenants.
- Department of Education monitoring status, the 2014 composite score, and any changes to Title IV funding or program eligibility.
- Final outcomes and cash exposure from the securities, student, False Claims Act and state regulatory matters, including disputed insurance recoveries.