Career Education Corporation (CEC) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed November 6, 2013. The filing identifies the registrant as Career Education Corporation. Prior periods were recast to present International Schools as discontinued operations following the decision to sell them.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $251.3 million | $316.2 million | $810.9 million | $1,047.8 million |
| Operating loss | $68.6 million | $40.4 million | $159.4 million | $108.3 million |
| Operating margin | (27.3%) | (12.8%) | (19.7%) | (10.3%) |
| Loss from continuing operations | $43.4 million | $26.1 million | $96.1 million | $79.4 million |
| Net loss | $87.1 million | $33.1 million | $133.7 million | $81.3 million |
| Net loss per share | $1.30 | $0.50 | $2.00 | $1.23 |
| Cash from operating activities | Not separately stated for the quarter | Used: $77.8 million | Provided: $32.5 million |
Unless noted otherwise, financial figures are in U.S. dollars. Revenue and operating results above reflect continuing operations; net loss includes discontinued operations. Discontinued operations reported revenue of $20.1 million and a net loss of $43.6 million in Q3, and revenue of $95.9 million and a net loss of $37.5 million year to date. The Q3 discontinued-operations loss included $39.9 million of tax expense triggered by the planned sale of foreign subsidiaries.
- Liquidity: At September 30, cash, cash equivalents and short-term investments totaled $95.7 million, including $30.9 million unrestricted cash, $12.6 million restricted cash and $52.2 million short-term investments. The filing reports no borrowings under the revolving credit facility; the $80 million drawn in late 2012 was repaid in Q1 2013. Total assets were $985.2 million and stockholders’ equity was $491.1 million.
- Cash flow and investment: Year-to-date investing cash outflow was $7.5 million; capital expenditures were $16.6 million. Financing activities provided $5.9 million, including the release of restricted cash associated with the repaid facility. Cash and cash equivalents at period end were $30.9 million.
- Impairments and expenses: Q3 included $11.6 million of goodwill and asset impairment, primarily a $10.7 million Le Cordon Bleu trade-name impairment. Year-to-date impairment charges were $15.7 million. The company also recorded $10.3 million of expense for the New York Attorney General settlement and $4.6 million of year-to-date severance and restructuring charges.
Material changes versus the prior comparable periods
- Q3 revenue fell 20.5% and year-to-date revenue fell 22.6%. Management attributed the declines mainly to lower enrollments, student-readiness programs and issues converting applicants into new students.
- New enrollments decreased 18% in Q3 and 24% year to date, including Transitional Schools; excluding those schools, declines were 10% and 16%, respectively. Total enrollment was down 22% at September 30.
- Q3 operating loss widened by $28.2 million year over year; the year-to-date operating loss widened by $51.1 million. Lower expenses only partly offset falling revenue. Prior-year year-to-date results included $85.5 million of impairment charges and a $19.0 million insurance recovery, so comparisons also reflect unusual items.
- Cash used in operating activities shifted from $32.5 million provided in the first nine months of 2012 to $77.8 million used in 2013, reflecting operating losses and legal-settlement and severance payments.
- Segment performance was mixed: Q3 University Schools operating income fell to $3.3 million from $11.4 million; Career Schools’ operating loss widened to $48.5 million from $29.1 million. CTU remained profitable, while AIU reported a Q3 operating loss.
Outlook, risks and contingencies
- Proposed international sale: In October 2013, CEC agreed to sell INSEEC and the International University of Monaco to an Apax-controlled buyer. Management expected the transaction to close by December 27, subject to customary conditions and French antitrust approval. It forecast an approximately $290 million increase in domestic cash and a $120–$130 million gain on sale; these were estimates, not completed results as of the filing.
- Management outlook: CEC expected continued operating cash use during 2013, but projected cash-flow positivity by the end of 2015 excluding nonrecurring items. It forecast approximately $175 million lower 2013 operating expenses, excluding impairment, versus 2012, and a further $75–$100 million of annualized cost reductions in 2014. Management anticipated modest enrollment growth at University Schools and continued stabilization at Career Schools during 2014.
- Teach-outs and leases: The company expected approximately $90 million of 2013 operating losses from Transitional Schools, excluding remaining-lease charges and other unusual items. It estimated roughly $77 million of gross remaining lease obligations for campuses still to be closed; final charges depend on closure timing and estimated sublease income. Five additional campus teach-outs announced in October were expected to generate about $4 million of Q4 impairment and severance charges.
- Regulatory exposure: The company remained subject to Department of Education inquiries and HCM1 cash-monitoring status, an SEC inquiry, and state investigations. A move to HCM2 or reimbursement status could delay Title IV cash receipts and require CEC to fund operations from its own liquidity. About 78% of U.S. tuition cash receipts year to date came from Title IV funding.
- Accreditation and enrollment risk: CEC said 15 of 38 non-teach-out ACICS-accredited campuses expected to fall below placement or retention benchmarks under higher standards; three expected to fall below the placement minimum. Failure to obtain waivers or meet required standards could lead to additional sanctions, including loss of accreditation. Management also cited weak student demand, competition, economic uncertainty and operational intake challenges.
- Legal matters: The company accrued $38.5 million for estimated legal fees and settlements and recorded a $32.5 million insurance-recovery receivable. Proposed securities and derivative settlements were subject to court approval. Several student, employment and False Claims Act matters remained unresolved; the company said it could not reasonably estimate potential losses for several cases and investigations.
- Other unusual exposure: A $7.0 million loss was recorded on the April 2013 sale of AIU London. A municipal auction-rate security valued at $7.4 million remained illiquid, with an approximately $0.5 million unrealized loss; management considered the impairment temporary.
Important facts for investors to verify
- Whether the international-school sale closed on schedule, and the final cash proceeds, gain, taxes and use of proceeds.
- Whether enrollment declines and operating cash burn moderated, and whether cost-reduction targets were achieved without impairing student outcomes.
- Any change in Title IV eligibility, cash-monitoring status, accreditation standing or outcomes of federal and state investigations.
- Final court approval, insurer contributions and cash payments for the proposed litigation settlements, plus developments in cases with unestimable exposure.
- Actual teach-out, severance and remaining-lease costs compared with management estimates.