Career Education Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. The filing identifies the registrant as Career Education Corporation (CEC). Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
CEC operated approximately 90 campuses in the U.S. and Europe and served 116,630 students, including students at online campuses. It reorganized its schools into five reportable segments—University, Culinary Arts, Health Education, International and Transitional Schools—and changed its shared-service cost allocation method; prior-period segment information was revised for comparability.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $529.7 | $432.9 | +22.4% |
| Operating income / margin | $88.1 / 16.6% | $51.2 / 11.8% | +71.9% |
| Income from continuing operations | $56.0 | $33.9 | +65.1% |
| Net income | $55.2 | $23.3 | +137.4% |
| Diluted EPS | $0.66 | $0.26 | — |
| Operating cash flow | $53.5 | $48.7 | +$4.8 |
- Net income included a discontinued-operations loss of $0.7 million, versus $10.6 million in Q1 2009; this materially contributed to the increase in net income.
- Cash and cash equivalents were $215.9 million at March 31, 2010; short-term investments were $206.2 million, for combined cash and short-term investments of $422.2 million, down from $484.9 million at year-end 2009. Cash fell principally due to stock repurchases and annual incentive payments.
- CEC had no borrowings under its U.S. credit agreement, $174.9 million of available credit and $10.1 million of outstanding letters of credit. Capital lease obligations were approximately $2.3 million. No conventional debt borrowings were reported.
- Capital expenditures were $19.8 million. Financing cash outflow was $89.4 million, primarily reflecting $89.6 million of treasury-stock purchases. CEC repurchased about 3.4 million shares at an average $26.71 per share.
- Student receivables, net, totaled $78.6 million current and $20.5 million non-current. Bad-debt expense rose to $26.4 million from $9.9 million; the quarter included an $8.1 million increase in reserves for extended-payment-plan and terminated recourse-loan receivables.
Material changes and segment trends
- New student starts increased 32% and student population increased 23% year over year. Management attributed revenue growth to enrollment increases across core segments.
- University revenue rose 21.6% to $290.7 million and operating margin improved to 23.6% from 17.8%. Culinary Arts revenue grew 23.2% and the segment moved from a $1.2 million operating loss to $8.2 million of operating income, despite higher bad debt. Health Education revenue rose 25.0%, while operating income grew 12.3%. International revenue increased 22.7%, including a $2.5 million favorable foreign-exchange effect.
- Educational services and facilities costs grew 9.3%; general and administrative costs increased 20.8%, with bad-debt expense the most pronounced increase. Overall operating expenses rose more slowly than revenue, supporting operating-margin expansion.
- CEC acquired the North American Le Cordon Bleu education-brand rights in 2009; $37.3 million of estimated earnout remained at quarter-end. On April 15, 2010, it acquired International University of Monaco for approximately $12.2 million, including assumed shareholder loans.
Outlook, risks and unusual items
- Management said it expected growth momentum to continue, emphasizing online education, bachelor’s and master’s enrollment, University brands and expansion of Health Education. It planned to open two to four additional Health Education schools during the balance of 2010. The filing gives no formal consolidated revenue or earnings guidance.
- CEC expected approximately $7.0 million of 2010 costs related to leases for the closure and teach-out of AIU–Los Angeles, scheduled to finish by Q4 2010. Discontinued operations had $68.3 million of liabilities at March 31, including $65.2 million of remaining lease obligations.
- A new Schaumburg corporate-center lease creates a $48.1 million obligation through 2022; planned capital improvements total approximately $52 million over two years, mostly in 2010. Q1 included $3.7 million of pretax lease-termination costs tied to the consolidation.
- Major risks include dependence on Title IV student-aid programs, potential changes to federal rules concerning incentive compensation, “gainful employment,” credit hours and student-loan debt, and ongoing accreditation and Department of Education reviews. AIU’s accreditor reported no cited violations or recommended sanctions from its January 2010 advisory visit, but its final report was pending and a focused visit was recommended for 2011–2012.
- The filing disclosed student class actions and a False Claims Act case, as well as pending federal program reviews involving AIU and other schools. CEC said outcomes could not be predicted and adverse outcomes could materially affect operations, reputation, cash flows or financial position.
- CEC held $11.5 million of auction-rate municipal securities classified as Level 3; failed auctions created liquidity risk and an approximately $0.8 million unrealized loss. Management considered the impairment temporary.
Important facts for investors to verify
- Whether the higher bad-debt expense and reserve increase adequately reflect repayment performance, particularly in Culinary Arts extended payment plans.
- Enrollment quality and persistence, including whether strong starts translate into retained students and collected tuition.
- Outcomes and timing of AIU’s HLC review, pending ED program reviews, and the announced federal rulemaking affecting Title IV eligibility and operating practices.
- Cash requirements for buybacks, new facilities, capital improvements, Le Cordon Bleu earnouts and campus closures, alongside the level of unrestricted liquidity.
- Potential exposure from litigation and remaining lease obligations, and whether the expected AIU–Los Angeles closure costs remain near management’s estimate.