Career Education Corporation — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. The filing identifies the registrant as Career Education Corporation (CEC). CEC operated Colorado Technical University (CTU) and American InterContinental University (AIU), while Culinary Arts and Transitional Group campuses were being taught out.
Financial performance
| Metric | Q1 2016 | Q1 2015 / change |
|---|---|---|
| Revenue | $198.9 million | $227.0 million; down 12.4% |
| Operating income (loss) | $7.0 million | $(24.4) million |
| Operating margin | 3.5% | (10.7)% |
| Net income (loss) | $3.0 million | $(24.9) million |
| Diluted EPS | $0.04 | $(0.37) |
| Operating cash flow | $(10.6) million | $(20.2) million |
| Adjusted EBITDA (non-GAAP) | $13.2 million | $(11.8) million |
Revenue fell mainly because total enrollment declined 16.9%, reflecting the teach-outs and divestitures of Career Schools. Excluding Culinary Arts and Transitional Group, revenue rose 4.9%. General and administrative expense decreased to $123.6 million from $163.7 million, including lower advertising and administrative costs; bad-debt expense rose to $9.6 million from $4.3 million. The filing attributes part of the increase to financial-aid verification delays and updated collectability estimates. Q1 2016 operating income included a $2.4 million bad-debt adjustment for a specific student group.
Segments and enrollment
- University Group: Revenue increased 4.9% to $144.9 million; operating income rose to $21.1 million from $11.7 million. CTU revenue was $92.0 million, up 8.0%, and enrollment grew 4.9%. AIU revenue was $53.0 million, roughly flat, while enrollment declined 6.7%. University total enrollment increased 0.3%, but new student enrollment fell 4.9%.
- Culinary Arts: Revenue declined 13.6% to $38.6 million; operating income was $3.1 million versus $0.2 million. Campuses were in teach-out and were expected to complete this process during 2017.
- Transitional Group: Revenue declined 65.2% to $15.3 million; operating loss narrowed to $11.5 million from $30.5 million. Remaining campuses were expected to complete teach-outs by 2018.
Liquidity, debt and cash flow
At March 31, 2016, cash and cash equivalents were $47.5 million, restricted cash $11.7 million, and short-term investments $122.9 million. Including long-term investments, management reported cash, restricted cash and investments of $189.5 million. The company had no borrowings outstanding after repaying $38.0 million in Q1. Its revolving facility was reduced to $95 million, matures December 31, 2018, and requires 100% cash collateral for borrowings. The filing states management expects available cash and operating cash generation to meet requirements for at least the next 12 months; operating cash flow remains subject to seasonal trends. Net operating lease obligations totaled approximately $233.0 million.
Outlook, risks and unusual items
- Management said Q1 results were in line with expectations, plans to continue investing in the universities and managing campus teach-outs, and expects year-over-year quarterly performance to become more normalized in the second half of 2016. No specific quantified full-year guidance was provided.
- Management expects improving cash trends as teach-out costs decline, university performance improves and expense and real-estate obligations are reduced. It also cautioned that teach-out campuses may see further performance deterioration as costs to serve remaining students exceed revenue.
- CEC estimated $50–$60 million of future remaining lease-obligation charges for continuing-operations restructuring, to be recorded as campuses close; this is in addition to approximately $23.6 million recorded through Q1 2016. Discontinued-operation lease obligations were $17.7 million at quarter-end, with expirations extending to 2020.
- Regulatory exposure is material: approximately 76% of institutional tuition cash receipts came from Title IV funding. Institutions were operating under provisional program participation agreements, with recertification applications due by September 30, 2016. ED inquiries, heightened cash monitoring, state attorneys general investigations and an FTC inquiry could affect Title IV eligibility, cash timing, operations or result in penalties. Management could not estimate potential losses for several investigations and lawsuits.
- Other notable items: the Q1 effective tax rate was 57.2%, affected by tax reserves and state deferred-tax-asset valuation allowances; a $7.4 million auction-rate security remained illiquid, with a cumulative unrealized loss of approximately $0.5 million that management considered temporary. The company reported disclosure controls effective as of March 31, 2016.
Important facts for investors to verify
- Progress and outcomes of ED recertification, Title IV eligibility, HCM1 status and government investigations, including potential cash-flow or operating restrictions.
- Whether university enrollment and retention trends improve, particularly given lower new-student enrollment and higher bad-debt expense.
- Actual cash generation versus management’s outlook, and the availability and cash-collateral requirements of the revolving credit facility.
- Timing and ultimate cost of campus teach-outs, lease exits and the estimated $50–$60 million of future restructuring-related lease charges.
- Developments in litigation and regulatory matters for which potential losses were not estimable, and the realization of deferred tax assets.