Business context and reporting period
This is Career Education Corporation’s (CEC) Form 10-K for the fiscal year ended December 31, 2012, filed February 28, 2013. The request identifies Perdoceo Education Corp.; the supplied filing is for Career Education Corporation, so the issuer identity should be verified. CEC operated more than 90 campuses in the U.S. and Europe, offering online, on-campus and hybrid career-focused programs. Its brands included Colorado Technical University, American InterContinental University, Le Cordon Bleu, Sanford-Brown and INSEEC.
CEC reorganized reporting in 2012 into University Schools, Career Schools, International and Transitional Schools. Transitional Schools includes campuses being taught out; they no longer enroll new students but remain in continuing operations until they close. Prior periods were recast for comparison.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1.489 billion | $1.873 billion |
| Operating income (loss) | $(183.8) million | $40.7 million |
| Operating margin | (12.3)% | 2.2% |
| Net income (loss) | $(142.8) million | $18.6 million |
| Diluted earnings (loss) per share | $(2.15) | $0.25 |
| Cash from operating activities | $(16.8) million | $230.5 million |
| Capital expenditures | $37.9 million | $78.3 million |
Revenue fell 20.5%. Operating expenses included $127.0 million of goodwill and asset impairment charges; the year also included a $19.0 million insurance recovery. The income tax benefit was $46.8 million. Impairment charges and tax items materially affect comparability of reported earnings.
At year-end, cash, cash equivalents and short-term investments totaled $402.3 million, including $97.9 million of restricted cash. Unrestricted cash and cash equivalents were $240.6 million, and short-term investments were $63.9 million. Some cash was held by foreign subsidiaries or designated for European not-for-profit schools and was not freely available for general U.S. operations. Working capital was $190.8 million.
CEC borrowed $80.0 million under a revolving credit facility in December 2012, at a 5.25% weighted-average rate, secured by 110% cash collateral; the facility matures January 31, 2014. The company said it anticipated repaying the borrowing during 2013. Total contractual cash obligations were $719.6 million, including $639.4 million of operating and capital lease obligations and the $80.0 million facility borrowing.
Material changes versus the prior comparable period
- Student population declined 23%, from approximately 98,800 to 76,000; new student starts fell 28%. Domestic new starts were down 30%.
- Revenue declined across all domestic segments. Career Schools revenue fell 26.2%, University Schools 14.4%, and Transitional Schools 35.7%; International revenue increased 2.1%, including an adverse $10.6 million currency effect.
- University Schools operating income fell to $75.8 million from $183.9 million. Career Schools operating loss widened to $169.8 million from $96.8 million; Transitional Schools operating loss widened to $103.3 million from $41.0 million.
- Operating cash flow moved from $230.5 million provided in 2011 to $16.8 million used in 2012. Cash and short-term investments declined to $402.3 million from $441.2 million; restricted cash increased to $97.9 million from zero reported at year-end 2011.
- CEC repurchased 6.1 million shares for $56.4 million in 2012, compared with 8.1 million shares for $150.4 million in 2011.
Outlook, management commentary, risks and unusual items
Management described near-term conditions as challenging, citing regulatory scrutiny, weak economic conditions, negative industry publicity, slower student decisions and reduced demand. It said its restructuring and brand initiatives were intended to support a return to profitable growth over the long term, while cautioning that results would take time to improve.
- CEC decided to teach out 23 additional domestic campuses and reduce its workforce by approximately 900 positions; five other campuses were already in teach-out. Most closures were expected by the second quarter of 2014. The workforce action was completed in January 2013 and was expected to generate $45–$55 million in annual savings.
- CEC recorded $29.5 million of asset impairment charges and $14.9 million of severance and related costs associated with 2012 actions. It estimated approximately $78 million of gross remaining lease obligations for the campuses being closed, before estimated sublease income; further charges were expected as closures complete.
- Management estimated a 2013 Transitional Schools operating loss of approximately $70–$80 million, excluding remaining lease obligation charges and other unusual items. No clear consolidated earnings or revenue guidance is provided in the supplied filing text.
- CEC said all institutions were on Heightened Cash Monitoring 1 (HCM1) status following an Education Department action in December 2011. A move to reimbursement or HCM2 status could delay Title IV cash receipts and require CEC to fund operations from its own cash.
- Title IV funding is a central exposure: approximately 91% of U.S.-based students who were in a program during 2012 participated in Title IV aid programs, and about 80% of U.S. tuition cash receipts came from Title IV funds. CEC’s preliminary 2012 review indicated no OPEID exceeded the 90% revenue limit, versus six OPEIDs in 2011; the 2012 calculation was preliminary.
- Accreditation and student-outcome risks remain significant. Fifty-five of 70 ACICS-accredited campuses had increased oversight for placement or retention results; four campuses were on probation. CEC also reported that 51 of 56 ABHES-accredited programs with reported placement rates fell below the applicable standard, and it was appealing withdrawal of accreditation for three medical-assisting programs.
- Regulatory and legal matters include an Education Department inquiry into placement-rate disclosures, a SEC inquiry, state attorney general investigations, and pending student, securities, derivative and employment litigation. CEC generally said it could not estimate potential losses for these matters. It estimated potential liability from a CTU Education Department audit at no more than $3 million; the file review was pending. A separate Veterans Affairs matter was described as resolved after $3.6 million was paid on behalf of students.
- The consolidated financial-responsibility composite score was preliminarily estimated at 1.6 for 2012, above the 1.5 threshold for financial responsibility without additional conditions, but management expected declining profitability to continue pressuring the score in 2013.
- CEC expected its pending sale of AIU London to close in the first half of 2013 and anticipated a pretax charge of approximately $7 million.
Important facts an investor should verify
- Confirm the issuer and filing are correctly matched: the supplied 10-K is for Career Education Corporation, not Perdoceo Education Corp.
- Review the audited financial statements and notes for cash availability, the restricted-cash collateral, credit facility terms, lease commitments and operating cash flow.
- Track enrollment, new starts and segment performance, especially the continuing losses and closure costs in Career and Transitional Schools.
- Verify the final 90-10 calculations, composite score, HCM1 status and outcomes of placement-rate and accreditation reviews.
- Monitor Education Department, SEC and state investigations, litigation exposures, and the pending CTU audit review; many potential losses were not estimable in the filing.
- Assess whether planned cost savings, campus teach-outs and the AIU London sale proceed as expected, and whether further impairments or restructuring charges arise.