Career Education Corporation — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012; filed May 10, 2012. The filing names the registrant as Career Education Corporation, notwithstanding the company label in the request. Amounts below are in U.S. dollars.
Business context and results
CEC operated career-focused schools and universities through online, on-ground and hybrid programs, serving approximately 95,000 students. Its six reporting segments were CTU, AIU, Health Education, Culinary Arts, Art & Design and International. Results for the prior period were recast to present the Istituto Marangoni schools, sold in November 2011, as discontinued operations.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $434.1 million | $531.7 million | Down 18.3% |
| Operating income | $46.6 million | $108.9 million | Down 57.2% |
| Operating margin | 10.7% | 20.5% | Down 9.8 percentage points |
| Income from continuing operations | $46.4 million | $70.6 million | Down 34.2% |
| Net income | $52.1 million | $73.0 million | Down 28.7% |
| Diluted EPS | $0.78 | $0.95 | Down $0.17 |
| Operating cash flow | $17.4 million | $59.7 million | Down $42.3 million |
Revenue and operating income contracted amid lower student starts and enrollment across domestic segments. New student starts fell 27% overall and student population declined 18%. Domestic career institutions’ starts fell 34%. International revenue rose 16.3%, partly due to tuition increases, but was reduced by $2.0 million from currency effects.
Financial position and cash flow
- At March 31, cash and cash equivalents were $229.4 million and short-term investments were $160.5 million, totaling $389.9 million, versus $441.2 million at year-end. Cash decreased $51.2 million during the quarter.
- Cash from operations was $17.4 million; investing used $15.7 million, including $12.3 million of capital expenditures; financing used $56.5 million, primarily for $56.4 million of share repurchases.
- CEC reported no borrowings under its U.S. credit agreement, with $6.7 million of letters of credit outstanding and $178.3 million of stated borrowing availability. The $185 million facility was due to expire October 31, 2012. Management warned that 2012 operating income could cause covenant noncompliance unless covenants were waived or modified; renewal and terms were uncertain.
- Current assets were $581.0 million and current liabilities $293.3 million. The balance sheet included $73.4 million of cash restricted for certain European not-for-profit schools. Lease obligations associated with discontinued operations totaled $43.6 million.
Material changes, outlook and unusual items
- CEC reported a $19.0 million insurance recovery in Q1 2012, recorded in Corporate and Other. Q1 2011 included a $7.0 million insurance recovery and a $1.4 million real-estate sale gain. The reported operating-income comparison includes these items.
- The continuing-operations effective tax rate was 0.9%, versus 36.3% a year earlier. Management attributed the unusually low rate mainly to the earnings mix of foreign and not-for-profit institutions and state tax factors. Discontinued operations added $5.6 million of net income, including a $6.3 million tax benefit despite a pretax loss.
- Management expected the combined domestic career-school group to incur a 2012 operating loss of $100–$120 million, excluding possible impairments, legal settlements and other unusual items. No broader numerical revenue or earnings guidance was provided in the supplied filing text.
- Management cited weak student demand, students’ reluctance to take on debt, industry criticism and regulatory-driven program changes as near-term pressures. It described priorities of resolving regulatory matters, simplifying the organization and strengthening differentiated brands. Actions included centralizing functions, planning to reduce strategic business units from six to three, and adding more than 60 career-services personnel.
- CEC was monitoring goodwill impairment risk at Health Education and Art & Design; each had about $42 million of goodwill. Management said it identified no Q1 triggering event indicating fair value below carrying value, but planned continued monitoring.
Regulatory, legal and other risks
- ACICS placed 60 campuses under increased oversight for placement-rate issues; four campuses were on probation, together representing about 3.6% of 2011 consolidated revenue. After quarter-end, on May 3, 2012, CEC reported ACICS had vacated its show-cause directive covering 71 campuses, while maintaining oversight measures for campuses with low placement rates.
- CEC preliminarily calculated 2011 90/10 Rule rates ranging from 61.1% to 94.5% and notified the Department of Education that six OPEIDs exceeded 90%. Those institutions were placed on two-year provisional certification. Continued or repeated failure could threaten Title IV eligibility.
- State attorneys general investigations were underway in New York, Florida, Illinois and Oregon. The filing says their scope and outcomes could not be predicted and potential monetary or operational impacts could not be reasonably estimated.
- Other material matters included securities and shareholder derivative litigation, student claims involving placement and admissions representations, a False Claims Act action, and employment claims. CEC generally said losses could not be reasonably estimated and, for those matters, had not recorded specific liabilities. It had accrued $16.6 million for estimated legal fees and settlements overall.
- A VA review of CTU’s certification of student housing benefits had an estimated potential reimbursement of about $5.0 million, accrued in 2011; reviews at other CTU locations were also underway.
Key facts for investors to verify
- Whether enrollment, student starts and revenue stabilize, especially at Health Education, Culinary Arts and Art & Design, and whether management’s $100–$120 million domestic career-school loss outlook is achieved.
- Progress on ACICS oversight and probation, placement outcomes, 90/10 Rule compliance, OPEID consolidation and any resulting Title IV or accreditation consequences.
- Credit-facility renewal or replacement, covenant amendments or waivers, and liquidity needs given the October 2012 maturity and lower operating cash flow.
- Cash deployment and repurchases: the quarter’s $56.4 million buyback reduced shares outstanding, while cash and short-term investments fell by $51.3 million.
- Developments in state investigations, student and securities litigation, the VA matter, and the size and timing of any related costs, penalties or operational restrictions.