ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below and other items in this Quarterly Report on Form 10-Q contain “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “plan,” “may,” “should,” ”will,” “continue to,” “focused on” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022 that could cause our actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Among the factors that could cause actual results to differ materially from those expressed in, or implied by, our forward-looking statements are the following:
•declines in enrollment or interest in our programs;
•our continued compliance with and eligibility to participate in Title IV Programs under the Higher Education Act of 1965, as amended, and the regulations thereunder (including the 90-10, financial responsibility and administrative capability standards prescribed by the U.S. Department of Education (the “Department”)), as well as applicable accreditation standards and state regulatory requirements;
•the impact of various versions of “borrower defense to repayment” regulations;
•rulemaking by the Department or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions;
•the success of our initiatives to improve student experiences, retention and academic outcomes;
•our continued eligibility to participate in educational assistance programs for veterans and other military personnel;
•the impact of management changes; and
•changes in the overall U.S. economy.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help investors understand the results of operations, financial condition and present business environment. The MD&A is organized as follows:
•Consolidated Results of Operations
•Segment Results of Operations
•Summary of Critical Accounting Policies and Estimates
•Liquidity, Financial Position and Capital Resources
OVERVIEW
Our accredited academic institutions offer a quality postsecondary education primarily online to a diverse student population, along with campus-based and blended learning programs. The Company’s academic institutions – Colorado Technical University (“CTU”) and the American InterContinental University System (“AIUS” or “AIU System”) – provide degree programs from the associate through doctoral level as well as non-degree seeking and professional development programs. Our academic institutions offer students industry-relevant and career-focused academic programs that are designed to meet the educational needs of today’s busy adults. CTU and AIUS continue to show innovation in higher education, advancing personalized learning technologies like their intellipath® learning platform and using data analytics and technology to serve and educate students while enhancing overall learning and academic experiences. Perdoceo is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.
16
Our reporting segments are determined in accordance with Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”)Topic 280 – Segment Reporting and are based upon how the Company analyzes performance and makes decisions. Each segment represents a postsecondary education provider that offers a variety of academic programs. We organize our business across two reporting segments: CTU and AIUS.
Regulatory Environment and Political Uncertainty
We operate in a highly regulated industry, which has significant impacts on our business and creates risks and uncertainties. In recent years, Congress, the Department, states, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have all scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry, including issues surrounding student debt as well as publicly reported student outcomes that may be used as part of an institution’s recruiting and admissions practices, and reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged the Department, DoD and the VA and its state approving agencies to take action to limit or terminate the participation of institutions such as ours in existing tuition assistance programs. In addition, targeted loan relief to student borrowers is a stated priority for the Department, and consumer advocacy groups and others are focusing their lobbying and other efforts relating to student debt forgiveness on for-profit colleges and universities, encouraging loan discharge applications and complaints by former students.
The current administration, as well as Congress, are pursuing significant legislative, regulatory and administrative actions affecting our business. A loss or material reduction in Title IV Programs or the amount of student financial aid for which our students are eligible would materially impact our student enrollments and profitability and could impact the continued viability of our business as currently conducted.
We encourage you to review Item 1, “Business,” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K to learn more about our highly regulated industry and related risks and uncertainties, in addition to the MD&A in our 2023 Quarterly Reports on Form 10-Q.
Note Regarding Non-GAAP measures
We believe it is useful to present non-GAAP financial measures which exclude certain significant and non-cash items as a means to understand the performance of our core business. As a general matter, we use non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of our core business, assist with preparing the annual operating plan, and measure performance for some forms of compensation. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance.
We believe certain non-GAAP measures allow us to compare our current operating results with respective historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance. We believe the items we are adjusting for are not normal operating expenses necessary to run our business. In evaluating the use of non-GAAP measures, investors should be aware that in the future we may incur expenses similar to the adjustments presented below. Our presentation of non-GAAP measures should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. A non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income, operating income, earnings per diluted share, or any other performance measure derived in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our liquidity.
Non-GAAP financial measures, when viewed in a reconciliation to respective GAAP financial measures, provide an additional way of viewing the Company's results of operations and the factors and trends affecting the Company's business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.
2023 First Quarter Overview
During the quarter ended March 31, 2023 ("current quarter"), we remained focused on serving and educating our students. We continued to see improvements in student retention at both CTU and AIUS. This improvement, in part, has been supported by various prospective student enrollment and student outreach changes implemented in the last two years that focus on enrolling learners who we believe will be more successful at one of our academic institutions.
Total student enrollments increased 0.8% at March 31, 2023 as compared to March 31, 2022, primarily driven by an increase at AIUS of 2.1% while total student enrollments remained flat at CTU. Excluding the comparability impact due to the academic calendar, we believe total student enrollments would have been higher at CTU and lower at AIUS as compared to the prior year quarter end.
17
During the current quarter we continued to experience growth in our corporate partnership programs, as our teams continue to support corporations around the country in educating and training their employees. The benefits and success of these programs, particularly at CTU, is something we are working to replicate and extend to our recent acquisitions and we will continue to invest in these programs, including technology upgrades aimed to further streamline the overall operating processes related to these partnership programs. In general, these partnerships take time to develop, and students are awarded higher tuition grants from the university to offset their tuition costs, resulting in lower revenue per student in any given period. However, we believe students participating in these programs typically experience higher retention over the course of their program, have better academic outcomes, graduate with no debt and ultimately may lead to a higher life-time value per student.
We believe investments in technology positively impact student experiences and academic outcomes and we remain committed to investing in and upgrading technology to further enhance academic experiences for our students. Over the past two years we have committed various investments in this area and we will continue to execute against those commitments into 2023.
During the current quarter we continued to experience improvements in student retention, in part, due to student loan relief initiatives implemented by the current administration. Additionally, we expect full year revenue to be modestly higher as compared to 2022, resulting from recent acquisitions, the academic calendar redesign at CTU and underlying organic improvements in student retention and engagement. However, total student enrollments at the end of 2023 are expected to be lower as compared to year end 2022, primarily due to the academic calendar redesign at CTU as well as operational changes at AIUS.
Financial Highlights
Revenue for the quarter ended March 31, 2023 increased by 6.9% or $12.6 million as compared to the prior year quarter, resulting from an increase in revenue at both CTU and AIUS. The increase in revenue for the current quarter was driven by the acquisitions completed in 2022 that were not part of the comparative prior year quarter. Excluding these acquisitions, revenue would have been relatively flat as compared to the prior year quarter.
Operating income for the current quarter decreased by 0.8% to $43.3 million as compared to operating income of $43.7 million in the prior year quarter. The decrease in operating income for the current quarter was primarily due to increased legal fees, including legal fees associated with the responses to the Department of Education relating to loan forgiveness applications by former students.
The Company believes it is useful to present non-GAAP financial measures, which exclude certain significant and non-cash items, as a means to understand the performance of its operations. (See tables below for a GAAP to non-GAAP reconciliation.) Adjusted operating income was $53.1 million for the current quarter as compared to $50.9 million for the prior year quarter.
Adjusted operating income and adjusted earnings per diluted share for the quarters ended March 31, 2023 and 2022 is presented below (dollars in thousands, unless otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
Adjusted Operating Income |
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
43,336 |
|
|
$ |
43,693 |
|
|
Depreciation and amortization (1) |
|
|
5,155 |
|
|
|
4,882 |
|
|
Legal fee expense related to certain matters (2) |
|
|
4,619 |
|
|
|
2,347 |
|
|
Adjusted Operating Income |
|
$ |
53,110 |
|
|
$ |
50,922 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
Adjusted Earnings Per Diluted Share |
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
Reported Earnings Per Diluted Share |
|
$ |
0.50 |
|
|
$ |
0.46 |
|
|
Pre-tax adjustments included in operating expenses: |
|
|
|
|
|
|
|
Amortization for acquired intangible assets (1) |
|
|
0.04 |
|
|
|
0.02 |
|
|
Legal fee expense related to certain matters (2) |
|
|
0.07 |
|
|
|
0.03 |
|
|
Total pre-tax adjustments |
|
$ |
0.11 |
|
|
$ |
0.05 |
|
|
Tax effect of adjustments (3) |
|
|
(0.03 |
) |
|
|
(0.01 |
) |
|
Total adjustments after tax |
|
|
0.08 |
|
|
|
0.04 |
|
|
Adjusted Earnings Per Diluted Share |
|
$ |
0.58 |
|
|
$ |
0.50 |
|
|
(1)Amortization relates to definite-lived intangible assets associated with acquisitions.
18
(2)Legal fee expense associated with (i) responses to the Department of Education (the "Department") relating to borrower defense to repayment applications from former students, and (ii) acquisition efforts.
(3)The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate is intended to reflect federal and state taxable jurisdictions as well as the nature of the adjustments.
CONSOLIDATED RESULTS OF OPERATIONS
The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the quarters ended March 31, 2023 and 2022 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
|
2023 |
|
|
% of Total Revenue |
|
|
2022 |
|
|
% of Total Revenue |
|
|
2023 vs 2022 % Change |
|
|
TOTAL REVENUE |
|
$ |
195,598 |
|
|
|
|
|
$ |
182,959 |
|
|
|
|
|
|
6.9 |
% |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities (1) |
|
|
33,851 |
|
|
|
17.3 |
% |
|
|
28,088 |
|
|
|
15.4 |
% |
|
|
20.5 |
% |
|
General and administrative: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and marketing |
|
|
31,295 |
|
|
|
16.0 |
% |
|
|
32,798 |
|
|
|
17.9 |
% |
|
|
-4.6 |
% |
|
Admissions |
|
|
25,988 |
|
|
|
13.3 |
% |
|
|
22,744 |
|
|
|
12.4 |
% |
|
|
14.3 |
% |
|
Administrative |
|
|
44,646 |
|
|
|
22.8 |
% |
|
|
37,039 |
|
|
|
20.2 |
% |
|
|
20.5 |
% |
|
Bad debt |
|
|
10,757 |
|
|
|
5.5 |
% |
|
|
13,715 |
|
|
|
7.5 |
% |
|
|
-21.6 |
% |
|
Total general and administrative expense |
|
|
112,686 |
|
|
|
57.6 |
% |
|
|
106,296 |
|
|
|
58.1 |
% |
|
|
6.0 |
% |
|
Depreciation and amortization |
|
|
5,155 |
|
|
|
2.6 |
% |
|
|
4,882 |
|
|
|
2.7 |
% |
|
|
5.6 |
% |
|
Asset impairment |
|
|
570 |
|
|
|
0.3 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
NM |
|
|
OPERATING INCOME |
|
|
43,336 |
|
|
|
22.2 |
% |
|
|
43,693 |
|
|
|
23.9 |
% |
|
|
-0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRETAX INCOME |
|
|
47,053 |
|
|
|
24.1 |
% |
|
|
43,834 |
|
|
|
24.0 |
% |
|
|
7.3 |
% |
|
PROVISION FOR INCOME TAXES |
|
|
12,569 |
|
|
|
6.4 |
% |
|
|
11,756 |
|
|
|
6.4 |
% |
|
|
6.9 |
% |
|
Effective tax rate |
|
|
26.7 |
% |
|
|
|
|
|
26.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
34,484 |
|
|
|
17.6 |
% |
|
$ |
32,078 |
|
|
|
17.5 |
% |
|
|
7.5 |
% |
|
(1)Educational services and facilities expense includes costs attributable to the educational activities of our campuses, including: salaries and benefits of faculty, academic administrators and student support personnel, and costs of educational supplies and facilities, such as rents on leased facilities. Also included in educational services and facilities expense are rents on leased administrative facilities, such as our corporate headquarters, and costs of other goods and services provided by our campuses, including costs of textbooks and laptop computers.
(2)General and administrative expense includes operating expenses associated with, including salaries and benefits of personnel in, corporate and campus administration, marketing, admissions, information technology, financial aid, accounting, human resources, legal and compliance. Other expenses within this expense category include costs of advertising and production of marketing materials and bad debt expense.
Revenue
Revenue for the first quarter of 2023 ("current quarter") increased 6.9% or $12.6 million as compared to the prior year quarter supported by a 0.8% increase in total student enrollments. The increase in revenue for the current quarter was driven by the acquisitions completed in 2022 that were not part of the comparative prior year quarter.
Educational Services and Facilities Expense (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 vs 2022 % Change |
|
Educational services and facilities: |
|
|
|
|
|
|
|
|
|
Academics & student related |
|
$ |
31,123 |
|
|
$ |
23,694 |
|
|
31.4% |
|
Occupancy |
|
|
2,728 |
|
|
|
4,394 |
|
|
-37.9% |
|
Total educational services and facilities |
|
$ |
33,851 |
|
|
$ |
28,088 |
|
|
20.5% |
|
The educational services and facilities expense for the current quarter increased by 20.5% or $5.8 million as compared to the prior year quarter. Academics and student related costs increased by 31.4% or $7.4 million for the current quarter as compared to the prior year quarter, primarily driven by a full quarter of expense associated with the 2022 acquisitions as compared to no expense in the prior year quarter. Occupancy expenses for the current quarter improved by 37.9% or $1.7 million as compared to the prior year quarter driven by decreases associated with exited leased facilities.
19
General and Administrative Expense (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 vs 2022 % Change |
|
General and administrative: |
|
|
|
|
|
|
|
|
|
Advertising and marketing |
|
$ |
31,295 |
|
|
$ |
32,798 |
|
|
-4.6% |
|
Admissions |
|
|
25,988 |
|
|
|
22,744 |
|
|
14.3% |
|
Administrative |
|
|
44,646 |
|
|
|
37,039 |
|
|
20.5% |
|
Bad debt |
|
|
10,757 |
|
|
|
13,715 |
|
|
-21.6% |
|
Total general and administrative expense |
|
$ |
112,686 |
|
|
$ |
106,296 |
|
|
6.0% |
|
The general and administrative expense for the current quarter increased by 6.0% or $6.4 million as compared to the prior year quarter, driven by increased administrative and admissions expenses. Partially offsetting the current quarter increases in administrative and admissions expenses were decreased advertising and marketing and bad debt expenses as compared to the prior year quarter.
The administrative expense increased by 20.5% or $7.6 million for the current quarter as compared to the prior year quarter, primarily driven by a full quarter of expense associated with the 2022 acquisitions as compared to no expense in the prior year quarter along with increased legal fees within Corporate and Other. Admissions expense for the current quarter increased by 14.3% or $3.2 million as compared to the prior year quarter, primarily as a result of supporting the increase in total student enrollments along with an increase due to the 2022 acquisitions, as mentioned above.
Advertising and marketing expense for the current quarter decreased by 4.6% or $1.5 million as compared to the prior year quarter, as a result of adjustments to our marketing processes related to identifying prospective student interest within both CTU and AIUS.
Bad debt expense incurred by each of our segments during the quarters ended March 31, 2023 and 2022 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
|
2023 |
|
|
% of Segment Revenue |
|
|
2022 |
|
|
% of Segment Revenue |
|
|
2023 vs 2022 % Change |
|
|
Bad debt expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
7,125 |
|
|
|
5.7 |
% |
|
$ |
7,185 |
|
|
|
6.4 |
% |
|
|
-0.8 |
% |
|
AIUS |
|
|
3,635 |
|
|
|
5.1 |
% |
|
|
6,551 |
|
|
|
9.4 |
% |
|
|
-44.5 |
% |
|
Corporate and Other |
|
|
(3 |
) |
|
NM |
|
|
|
(21 |
) |
|
NM |
|
|
NM |
|
|
Total bad debt expense |
|
$ |
10,757 |
|
|
|
5.5 |
% |
|
$ |
13,715 |
|
|
|
7.5 |
% |
|
|
-21.6 |
% |
|
Bad debt expense decreased by 21.6% or $3.0 million for the current quarter as compared to the prior year quarter, primarily as a result of improvement within AIUS. AIUS' bad debt expense decreased by 44.5% or $2.9 million for the current quarter as compared to the prior year quarter. CTU's bad debt expense remained relatively flat for the current quarter as compared to the prior year quarter. Bad debt as a percentage of revenue improved by 2.0% for the current quarter as compared to the prior year quarter.
We continue to expect quarterly fluctuations in bad debt expense. We regularly evaluate our reserve rates, which includes a quarterly update of our analysis of historical student receivable collectability based on the most recent data available and a review of current known factors which we believe could affect future collectability of our student receivables, such as the number of students that do not complete the financial aid process. Our student support teams have maintained their focus on financial aid documentation collection and are counseling students through the Title IV financial aid process so that they are better prepared to start school. We have also focused on emphasizing employer-paid and other direct-pay education programs such as corporate partnerships as students within these programs typically have lower bad debt expense associated with them.
Operating Income
Operating income decreased slightly by 0.8% or $0.4 million for the current quarter as compared to the prior year quarter as the increase in revenue driven by the prior year acquisitions was more than offset with increased expenses, primarily associated with legal fees and acquisitions.
Provision for Income Taxes
For the quarter ended March 31, 2023, we recorded a provision for income taxes of $12.6 million or 26.7% as compared to a provision for income taxes of $11.8 million or 26.8% for the prior year quarter. The effective tax rate for the quarter ended March 31, 2023 was impacted by the tax effect of share-based compensation and the release of previously recorded tax reserves, the net effect of which decreased the effective tax rate by 0.8%. The effective tax rate for the quarter ended March 31, 2022 was impacted by the tax effect of share-based compensation and the release of previously recorded tax reserves, the net effect of which increased the effective tax rate by 0.5%. For the full year 2023, we expect our effective tax rate to be between 26.0% and 27.0%.
20
SEGMENT RESULTS OF OPERATIONS
The following tables present unaudited segment results for the reported periods (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
REVENUE |
|
|
OPERATING INCOME (LOSS) |
|
|
OPERATING MARGIN |
|
|
|
2023 |
|
|
2022 |
|
|
% Change |
|
|
2023 |
|
|
2022 |
|
|
% Change |
|
|
2023 |
|
|
2022 |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU (1) |
|
$ |
124,492 |
|
|
$ |
113,148 |
|
|
|
10.0 |
% |
|
$ |
43,690 |
|
|
$ |
43,026 |
|
|
|
1.5 |
% |
|
|
35.1 |
% |
|
|
38.0 |
% |
AIUS (2) |
|
|
70,840 |
|
|
|
69,532 |
|
|
|
1.9 |
% |
|
|
12,003 |
|
|
|
9,523 |
|
|
|
26.0 |
% |
|
|
16.9 |
% |
|
|
13.7 |
% |
Corporate and other |
|
|
266 |
|
|
|
279 |
|
|
|
-4.7 |
% |
|
|
(12,357 |
) |
|
|
(8,856 |
) |
|
|
39.5 |
% |
|
NM |
|
|
NM |
|
Total |
|
$ |
195,598 |
|
|
$ |
182,959 |
|
|
|
6.9 |
% |
|
$ |
43,336 |
|
|
$ |
43,693 |
|
|
|
-0.8 |
% |
|
|
22.2 |
% |
|
|
23.9 |
% |
_________________
(1)CTU’s results of operations include the Coding Dojo acquisition commencing on the December 1, 2022 date of acquisition.
(2)AIUS’ results of operations include the CalSouthern acquisition commencing on the July 1, 2022 date of acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STUDENT ENROLLMENTS |
|
|
|
As of March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
% Change |
|
CTU |
|
|
23,500 |
|
|
|
23,500 |
|
|
|
0.0 |
% |
AIUS |
|
|
14,400 |
|
|
|
14,100 |
|
|
|
2.1 |
% |
Total |
|
|
37,900 |
|
|
|
37,600 |
|
|
|
0.8 |
% |
Total student enrollments represent all students who are active as of the last day of the reporting period. Active students are defined as those students who are considered in attendance by participating in class related activities during the previous two weeks. Total student enrollments do not include learners participating in: a) non-degree seeking and professional development programs, and b) degree seeking, non-Title IV, self-paced programs at our universities.
CTU. Current quarter revenue increased by 10.0% or $11.3 million as compared to the prior year quarter primarily driven by the 2022 acquisition which was not part of the comparative prior year period as well as underlying organic growth. Total student enrollments remained relatively flat as compared to the prior year quarter. Excluding the timing impact of the academic calendar, we believe total student enrollments would have increased as compared to the prior year quarter end.
Current quarter operating income for CTU increased by 1.5% or $0.7 million as compared to the prior year quarter driven by the increase in revenue discussed above as well as decreased occupancy expense, which were partially offset with increased academics, administration and admissions expenses for the current quarter as compared to the prior year quarter.
AIUS. Current quarter revenue increased by 1.9% or $1.3 million primarily driven by the 2022 acquisition which was not part of the comparative prior year period. Total student enrollment grew by 2.1% as of the end of the quarter as compared to the prior year quarter end. The increase in total student enrollments was positively impacted by the timing of the academic calendar during the current quarter as compared to the prior year quarter.
Current quarter operating income for AIUS increased by 26.0% or $2.5 million as compared to the prior year quarter driven by the increase in revenue discussed above. The current quarter improvement also benefitted from lower bad debt and marketing expenses.
Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company. Total Corporate and Other operating loss for the current quarter increased by 39.5% or $3.5 million as compared to the prior year quarter, primarily as a result of increased legal fee expense, including legal fees associated with the borrower defense to repayment applications from former students.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of operations that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption “Summary of Critical Accounting Policies and Estimates” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022. Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022 also includes a discussion of these and other significant accounting policies.
21
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
As of March 31, 2023, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $520.3 million. Restricted cash as of March 31, 2023 was $9.5 million and relates to amounts held in escrow accounts to secure post-closing indemnification obligations of the sellers pursuant to recent acquisitions. Our cash flows from operating activities have historically been adequate to fulfill our liquidity requirements. We have historically financed our operating activities, organic growth and acquisitions primarily through cash generated from operations and existing cash balances. We expect to continue to generate cash during the remainder of 2023. We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures, lease commitments and acquisitions through at least the next 12 months primarily with cash generated by operations and existing cash balances.
We maintain a balanced capital allocation strategy that focuses on maintaining a strong balance sheet and adequate liquidity, while (i) investing in organic projects at our universities, in particular technology-related initiatives which are designed to benefit our students, and (ii) evaluating diverse strategies to enhance stockholder value, including acquisitions that further extend the depth and breadth of our educational offerings and share repurchases. Ultimately, our goal is to deploy resources in a way that drives long term stockholder value while supporting and enhancing the academic value of our institutions.
On January 27, 2022, the Board of Directors of the Company approved a new stock repurchase program for up to $50.0 million which commenced March 1, 2022 and expires September 30, 2023. The timing of purchases and the number of shares repurchased under the program will be determined by the Company’s management and will depend on a variety of factors including stock price, trading volume and other general market and economic conditions, its assessment of alternative uses of capital, regulatory requirements and other factors. Share repurchases will remain a part of our capital allocation strategy. Since the March 1, 2022 inception date, the Company repurchased approximately 2.2 million shares for $23.9 million, of which approximately 0.1 million shares were repurchased for $0.8 million during the quarter ended March 31, 2023.
On September 8, 2021, the Company and the subsidiary guarantors thereunder entered into a credit agreement with Wintrust Bank N.A. (“Wintrust”), in its capacities as the sole lead arranger, sole bookrunner, administrative agent and letter of credit issuer for the lenders from time to time parties thereto. The credit agreement provides the Company with the benefit of a $125.0 million senior secured revolving credit facility. The $125.0 million revolving credit facility under the credit agreement is scheduled to mature on September 8, 2024. So long as no default has occurred and other conditions have been met, the Company may request an increase in the aggregate commitment in an amount not to exceed $50.0 million. The loans and letter of credit obligations under the credit agreement are secured by substantially all assets of the Company and the subsidiary guarantors.
The credit agreement and the ancillary documents executed in connection therewith contain customary affirmative, negative and financial maintenance covenants. The Company is required to maintain unrestricted cash, cash equivalents and short-term investments in domestic accounts in an amount at least equal to the aggregate loan commitments then in effect. Acquisitions to be undertaken by the Company must meet certain criteria, and the Company’s ability to make restricted payments, including payments in connection with a repurchase of shares of our common stock, is subject to an aggregate maximum of $100.0 million per fiscal year. Upon the occurrence of certain regulatory events or if the Company’s unrestricted cash, cash equivalents and short term investments are less than 125% of the aggregate amount of the loan commitments then in effect, the Company is required to maintain cash in a segregated, restricted account in an amount not less than the aggregate loan commitments then in effect. The credit agreement also contains customary representations and warranties, events of default, and rights and remedies upon the occurrence of any event of default thereunder, including rights to accelerate the loans, terminate the commitments and realize upon the collateral securing the obligations under the credit agreement. As of March 31, 2023, there were no amounts outstanding under the revolving credit facility.
The discussion above reflects management’s expectations regarding liquidity; however, as a result of the significance of the Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on timing or our ability to receive Title IV Program funds, or any requirement to post a significant letter of credit to the Department, may have a significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollments which could be impacted by external factors. See Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Sources and Uses of Cash
Operating Cash Flows
During the quarters ended March 31, 2023 and 2022, net cash flows provided by operating activities totaled $4.6 million and $22.2 million, respectively. The current quarter decrease in net cash flows provided by operating activities was driven by timing of certain working capital payments versus the prior year quarter.
Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the ability to pay tuition costs through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, institutional payment plans, private and institutional scholarships and cash payments.
22
For further discussion of Title IV Program funding and other funding sources for our students, see Item 1, “Business - Student Financial Aid and Related Federal Regulation,” in our Annual Report on Form 10-K for the year ended December 31, 2022.
Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other institution supplies, and to federal, state and local governments for income and other taxes.
Investing Cash Flows
During the quarters ended March 31, 2023 and 2022, net cash flows used in investing activities totaled $21.4 million and $146.9 million, respectively.
Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $19.4 million and $135.2 million for the quarters ended March 31, 2023 and 2022, respectively.
Capital Expenditures. Capital expenditures decreased to $1.9 million for the quarter ended March 31, 2023 as compared to $4.7 million for the quarter ended March 31, 2022. Capital expenditures represented approximately 1.0% and 2.6% of total revenue for the quarters ended March 31, 2023 and 2022, respectively. For the full year 2023, we expect capital expenditures to be between 1% to 2% of revenue.
Financing Cash Flows
During the quarters ended March 31, 2023 and 2022, net cash flows used in financing activities totaled $2.8 million and $8.8 million, respectively. Payments to repurchase shares of our common stock were $0.8 million for the quarter ended March 31, 2023 and $3.8 million for the quarter ended March 31, 2022. The prior year quarter included a $4.0 million payment to release the escrow associated with the Trident acquisition.
Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $2.2 million and $1.6 million for the quarters ended March 31, 2023 and 2022, respectively.
Changes in Financial Position
Selected condensed consolidated balance sheet account changes from December 31, 2022 to March 31, 2023 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
% Change |
|
ASSETS |
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
11,383 |
|
|
|
8,411 |
|
|
|
35 |
% |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
Payroll and related benefits |
|
|
22,448 |
|
|
|
40,306 |
|
|
|
-44 |
% |
Income taxes |
|
|
20,079 |
|
|
|
7,814 |
|
|
|
157 |
% |
Deferred revenue |
|
|
44,710 |
|
|
|
71,590 |
|
|
|
-38 |
% |
Prepaid expenses: The increase is driven by timing of prepayments for annual invoices, which are typically paid in the first quarter of the year and amortized by the end of a year.
Payroll and related benefits: The decrease is driven by annual incentive compensation payments made during the current quarter.
Income taxes: The increase primarily relates to amounts owed with respect to estimated payments of federal and state income tax for 2023.
Deferred revenue: The decrease is primarily related to the timing impact of the academic terms within CTU and AIUS.