Career Education Corporation (Perdoceo Education) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company operated Colorado Technical University (CTU) and American InterContinental University (AIU), predominantly serving adult learners through online programs. Financial amounts below are in U.S. dollars; unless stated otherwise, dollar figures are in millions.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $156.4 | $142.0 | $314.3 | $290.1 |
| Operating income | $0.2 | $11.3 | $30.2 | $31.8 |
| Operating margin | 0.1% | 8.0% | 9.6% | 11.0% |
| Continuing-operations income (loss) | $(0.5) | $8.9 | $24.7 | $26.7 |
| Net income (loss) | $(0.6) | $8.8 | $24.2 | $26.3 |
| Diluted EPS | $(0.01) | $0.12 | $0.34 | $0.37 |
- Q2 revenue rose 10.1%; six-month revenue rose 8.3%. Growth reflected higher enrollment and, at AIU, more revenue-earning days.
- The $30.0 million FTC settlement charge substantially reduced reported Q2 operating income. Company-reported adjusted operating income was $32.8 million for the quarter versus $23.8 million a year earlier; adjusted diluted EPS was $0.39 versus $0.23. These are non-GAAP measures.
- Q2 general and administrative expense increased to $128.7 million from $98.3 million. Bad debt expense rose to $11.4 million from $6.7 million; six-month bad debt expense was $23.2 million versus $13.7 million.
- Six-month operating cash flow was $53.4 million, compared with $14.8 million. Investing activities used $32.3 million, largely reflecting net purchases of short-term investments; capital expenditures were $1.4 million.
- At June 30, cash, restricted cash and short-term investments totaled $280.2 million, including $51.1 million of unrestricted cash and $228.8 million of short-term investments. Total assets were $561.8 million and stockholders’ equity was $381.2 million.
- No revolving-credit borrowings were outstanding. The company had a $50 million facility, secured by cash and marketable securities. Adoption of lease accounting resulted in $55.6 million of operating lease liabilities ($13.4 million current and $42.2 million non-current); these are not reported as borrowings.
Business trends and changes versus prior period
- University Group new student enrollments increased 4.2% in Q2 and 25.0% year to date; total enrollments were up 5.4% at June 30. CTU Q2 new enrollments rose 7.0%, while AIU Q2 new enrollments were nearly flat, partly because AIU had about 17% fewer enrollment days. AIU’s year-to-date new enrollments rose 52.6%, with academic-calendar timing contributing.
- CTU Q2 revenue increased 3.5% to $96.6 million; AIU revenue increased 23.2% to $59.9 million. Segment operating results included FTC reserves of $18.6 million at CTU and $11.4 million at AIU.
- Management attributed underlying operating improvement, excluding the FTC charge, to enrollment and revenue growth and lower losses at closed campuses, partly offset by higher bad debt expense and continued technology and student-service investments.
- ASC 842 lease accounting was adopted January 1, 2019, recognizing right-of-use assets and lease liabilities; prior-year balances were not restated. Management said adoption materially affected balance-sheet presentation but not operating results.
Outlook, commentary and risks
- For full-year 2019, management projected revenue growth of approximately 4%–5%, operating income of $77–$81 million, adjusted operating income of $118–$122 million, diluted EPS of $0.80–$0.84 and adjusted diluted EPS of $1.20–$1.24. University Group new enrollments were expected to grow 8%–10% for the year.
- For Q3 2019, management projected operating income of $23.5–$24.5 million, adjusted operating income of $26–$27 million and diluted and adjusted EPS of $0.23–$0.25. Management expected employee-related costs to be modestly higher in the second half.
- The FTC settlement agreement was executed July 26, 2019, after quarter-end. It requires $30 million in monetary relief and enhanced lead-source and telemarketing compliance measures, with principal provisions lasting 20 years. The agreement was subject to FTC and court approval; the company stated it did not admit wrongdoing. The charge was recorded in Q2.
- Approximately 310 Oregon arbitration claims remained active; the company said it could not reasonably estimate a potential loss and recorded no liability for unresolved claims. The filing also describes other government requests, lawsuits and investigations; adverse outcomes could materially affect the business.
- CTU and AIU received Title IV program participation renewals through March 31, 2021; CTU was removed from provisional certification, while AIU remained provisional because of open reviews. About 80% of tuition cash receipts in the first half came from Title IV funding.
- Management identified enrollment, Title IV eligibility and funding, regulation and accreditation, student retention and outcomes, competition, legal settlements, and the pending Trident acquisition as important risks or uncertainties. The Trident transaction was expected to close by year-end, subject to approvals, for an estimated $35–$44 million cash purchase price; its results were excluded from guidance.
Important facts for investors to verify
- Whether the FTC settlement received final approval, how and when the $30 million payment is made, and the ongoing cost and effectiveness of required compliance measures.
- Whether enrollment growth continues, especially at AIU, and whether rising bad debt expense and receivable allowances stabilize.
- AIU’s continued Title IV provisional status, institutional certifications, and the effect of state-authorization and other regulatory developments.
- The status, final price, regulatory approvals and expected contribution of the Trident acquisition.
- Whether full-year guidance assumptions are achieved, including student interest, operating costs, legal and regulatory outcomes, and the projected tax rate.