Career Education Corporation (now Perdoceo Education Corp.) — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; this is an annual filing, not a standalone fourth-quarter report. The filing is by Career Education Corporation, the company’s name at the time. Financial comparisons are for continuing operations unless noted.
Business context
CEC operated more than 90 campuses in the U.S. and Europe, serving 116,800 students through online, on-ground and hybrid programs. Its four reporting segments were University, Health Education, Culinary Arts and International. The last Transitional Schools campus completed its teach-out in December 2010 and was reported in discontinued operations.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $2,124.2 million | $1,833.8 million | +15.8% |
| Operating income | $246.4 million | $229.0 million | +7.6% |
| Operating margin | 11.6% | 12.5% | Down 0.9 percentage points |
| Income from continuing operations | $166.6 million | $149.5 million | +11.4% |
| Net income | $157.8 million | $81.2 million | +94.3% |
| Diluted EPS | $1.95 | $0.94 | Up |
| Cash from operations | $272.3 million | $288.3 million | Down $16.0 million |
| Capital expenditures | $127.3 million | $74.1 million | Up $53.2 million |
- Revenue growth reflected an 11% increase in student population and 13% growth in new student starts. Year-end student population was 116,800 versus 105,300.
- Net income included a smaller discontinued-operations loss: $8.8 million in 2010 versus $68.3 million in 2009. Operating margin fell despite higher operating income, in part because general and administrative expense, bad debt and impairment charges increased.
- Bad debt expense rose to $106.9 million from $57.0 million, including higher reserves on extended student payment plans. The allowance for doubtful accounts was $90.9 million at year-end.
- Cash, cash equivalents and short-term investments totaled $449.2 million, down from $484.7 million. Working capital was $155.3 million. The company reported no borrowings under its U.S. credit agreement and $179.8 million of available credit; total liabilities were $626.3 million.
- Operating, investing and financing cash flows were respectively $272.3 million, negative $109.7 million and negative $156.9 million. Financing outflows included $154.9 million of share repurchases. $58.5 million of cash was restricted for certain European not-for-profit schools.
Material changes and unusual items
- Culinary Arts reported a $66.8 million operating loss versus $14.9 million of operating income in 2009. Results included a $67.8 million Le Cordon Bleu trade-name impairment, $1.4 million goodwill impairment, a $40.8 million legal settlement charge and sharply higher bad debt expense. Culinary Arts bad debt expense was $56.2 million, or 14.5% of segment revenue, versus $27.7 million, or 8.3%, in 2009.
- University revenue rose 13.9% to $1,159.3 million and operating margin improved to 24.3% from 19.2%. Health Education revenue increased 21.8% to $441.6 million; International revenue rose 12.3% to $136.1 million, including a $6.5 million adverse currency impact. Each segment’s revenue increased.
- CEC recorded $48.1 million of pretax legal settlement charges, including the $40.8 million Culinary Arts settlement and $7.3 million in University. A further $7.7 million severance charge related to a planned reduction of about 600 U.S. positions was recorded in the fourth quarter.
- Capital spending increased substantially, primarily for the Schaumburg support center and new campuses. The support-center lease created a $48.1 million obligation through 2022; planned improvements totaled about $52.0 million, with $42.2 million incurred by year-end. Management expected annual base-rent savings of about $2.5 million for 12 years beginning in 2011.
- The 2010 results included a $5.9 million bad-debt expense correction for an error in the extended-payment-plan allowance calculation. The company said the error was not material to prior periods individually or in aggregate. The 2009 balance sheet was restated for treasury-share retirement accounting; the correction did not affect net income, cash flows or total equity.
Outlook, risks and contingencies
- Management described 2011 as a challenging transition year, citing a weak economy, declining new-student-start growth and lower average student population. It anticipated continued Health Education campus openings and a 2011 Culinary Arts shift toward a lower-priced 12-month certificate program, with reduced tuition and no extended payment plans for most new students. No numerical revenue or earnings guidance was provided.
- CEC committed approximately $85.4 million through extended student payment plans and estimated up to $20 million of additional commitments to support current students as the plans are phased out. Net earned receivables under these plans were $9.0 million; the allowance rate applied was 75%.
- Federal regulation was a major risk: approximately 82% of U.S. tuition cash receipts came from Title IV funding in 2010, and about 90% of U.S.-based students who participated in programs during the year used Title IV aid. New rules effective mainly July 1, 2011 addressed state authorization, recruitment compensation, credit hours and other matters; proposed gainful-employment rules were pending. Management warned of compliance costs, possible enrollment effects and potential program restrictions, particularly for Culinary Arts and Art & Design.
- AIU disputed two systemic findings in a Department of Education program review concerning online attendance documentation and return of unearned Title IV funds; the final determination and potential liability were unresolved. A CTU federal audit was ongoing. Other disclosed matters included student class actions, a False Claims Act case, text-message and wage-and-hour litigation, and a Florida Attorney General investigation. The filing did not provide estimable loss ranges for several pending cases.
- Accreditation and authorization also merit attention: AIU had a focused HLC visit scheduled for September 2011; Briarcliffe College and Gibbs College–Boston remained provisionally certified by ED. The company warned that online programs could face additional state approval requirements.
- Contractual obligations included $806.9 million of operating leases and $40.8 million of legal settlement payments, primarily due in 2011. CEC reported compliance with credit covenants. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether enrollment trends and 2011 new-student starts stabilized after management’s reported slowdown, and how the trends varied by segment.
- Final outcomes and financial exposure from the AIU and CTU reviews, pending litigation, and new Title IV and state authorization rules.
- Collections and reserve adequacy for extended-payment-plan receivables, including the planned phase-out and related bad-debt expense.
- Whether the Culinary Arts model change improves segment economics and reduces financing-related credit losses, and whether further brand or goodwill impairments arise.
- Cash available for operations after restricted balances, capital spending, lease commitments and share repurchases; also verify the 2009 treasury-share restatement when comparing historical equity data.