PERDOCEO EDUCATION CORPORATION 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 endedDecember 31, 2021 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:
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declines in enrollment or interest in our programs;
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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 theU.S. Department of Education (the "Department")), as well as applicable accreditation standards and state regulatory requirements;
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the impact of various versions of "borrower defense to repayment" regulations;
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rulemaking by the Department or any state or accreditor and increased focus byCongress and governmental agencies on, or increased negative publicity about, for-profit education institutions;
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the success of our initiatives to improve student experiences, retention and academic outcomes;
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our continued eligibility to participate in educational assistance programs for veterans and other military personnel;
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increased competition;
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the impact of management changes; and
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changes in the overall
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:
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Overview
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Consolidated Results of Operations
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Segment Results of Operations
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Summary of Critical Accounting Policies and Estimates
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Liquidity, Financial Position and Capital Resources
OVERVIEW
Our academic institutions offer a quality postsecondary education primarily online to a diverse student population, along with campus-based and blended learning programs. Our accredited institutions -Colorado Technical University ("CTU") and the AmericanInterContinental University System ("AIUS" or "AIU System") - provide degree programs from associate through doctoral level as well as non-degree professional development and continuing education offerings. Our universities 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 support students and enhance learning. 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.
On
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the areas of behavioral sciences and business management programs. CalSouthern's
operations were brought within the AIUS segment, preserving the 'California
Southern University' name and programs as part of AIUS' operations. Results of
operations related to the CalSouthern acquisition are not material to our
consolidated results of operations and are included in the unaudited condensed
consolidated financial statements from the date of acquisition.
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, theCFPB , theFTC , state attorneys general and the media have scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry and reports were issued that are highly critical of for-profit colleges and universities. A group of influentialU.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged the Departments of Education, Defense andVeterans Affairs to take action to limit or terminate the participation of for-profit educational institutions, including Perdoceo, 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 currentPresidential and Department administrations, as well asCongress , 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 2022 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. 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. 2022 Third Quarter Overview During the quarter endedSeptember 30, 2022 ("current quarter"), revenue decreased 3.2% to$168.4 million and operating income decreased 22.5% to$29.3 million as compared to the prior year quarter. We continued to invest in technology upgrades and maintain appropriate levels of academic and student support services that we believe are positively impacting academic outcomes and student experiences. Our current quarter operating results were supported by better than expected improvements in student engagement and student retention, as the overall macroeconomic and governmental responses generally wind down from the pandemic. 19 -------------------------------------------------------------------------------- Total student enrollments decreased 2.1% atSeptember 30, 2022 as compared toSeptember 30, 2021 , with CTU's increase of 2.7% more than offset with a decrease of 9.5% at AIUS. CTU's increase in total student enrollments was driven by improved student engagement and retention, which we believe is a result of the adjustments we made to our marketing processes in the third quarter of 2021. These marketing changes were made to refine the process to identify prospective students who are more likely to succeed at one of our academic institutions. AIUS' rate of decline in total student enrollments continued to moderate during the current quarter as the overall pandemic winds down and we continue to see improvements in student engagement and retention. We believe investments in technology positively impact student experiences and academic outcomes. We are making necessary investments to upgrade our student-serving systems and continue to leverage data analytics and machine learning to enable timely and relevant engagement with our students. We launched a new student relationship system that provides assistance and insights in the advising process, enabling us to effectively engage with students with the appropriate support at the right time. We also continue to make meaningful updates to our mobile applications for both students and faculty. We have upgraded our mobile technology framework allowing for better performance and increased stability. These upgrades also provide more flexibility with third party plugins enabling consistency amongst newer devices. Overall app usage is high at both institutions with an approximate 90% adoption rate. Lastly, after being successfully launched at AIUS, we have also completed the chat bot integration with messenger at CTU, allowing students to receive real-time support. We continued to focus on and invest in our corporate partnership program at both institutions and our teams are successfully engaging with employers who provide tuition assistance programs which allows for a debt-free education to their employees. 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. While we experienced better than expected improvements in student engagement and student retention during the current quarter, we expect AIUS' total student enrollments to decline atDecember 31, 2022 versus the prior year end and expect CTU's total student enrollments to increase atDecember 31, 2022 versus the prior year end. Typically, changes in total student enrollments have a lag in the impact on revenue, and, as a result, we still expect revenue and operating income for 2022 to be lower as compared to 2021, excluding any positive impacts from acquisitions or the academic calendar redesign. We will continue our efforts to adjust our operating processes and expenses to align with overall revenue and enrollment trends, although we do not expect these adjustments to fully offset the expected revenue decline.
Financial Highlights
Revenue for the quarter endedSeptember 30, 2022 decreased by 3.2% or$5.6 million as compared to the prior year quarter, resulting from a decrease in revenue for CTU of 6.9% or$7.2 million partially offset with an increase for AIUS of 2.4% or$1.6 million . The decrease in revenue for the current quarter at CTU was driven primarily by the lag impact on revenue of lower total student enrollments over the past several quarters and the increase in the number of student enrollments related to corporate partnerships. While student enrollments related to corporate partnerships have a lower revenue per student, we believe these students have higher retention over the course of their program. The increase in revenue at AIUS for the current quarter was driven by the acquisition completed during the current quarter. Excluding the current quarter acquisition, revenue would have declined at AIUS for the current quarter as compared to the prior year quarter driven by the decrease in total student enrollments. Operating income in the current quarter decreased to$29.3 million as compared to operating income of$37.9 million in the prior year quarter. The decrease in operating income for the current quarter was primarily due to the decrease in revenue. 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$38.7 million for the current quarter as compared to$46.3 million for the prior year quarter.
Adjusted operating income and adjusted earnings per diluted share for the
quarters and years to date ended
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For the Quarter Ended September For the Year to Date Ended
30, September 30,
Adjusted Operating Income 2022 2021 2022 2021
Operating income $ 29,324 $ 37,861 $ 106,963 $ 114,440
Depreciation and amortization (1) 5,065 3,887 14,856 11,802
Legal fee expense related to
certain matters (2) 4,294 4,583 9,728 7,241
Adjusted Operating Income $ 38,683 $ 46,331 $ 131,547 $ 133,483
For the Quarter Ended September For the Year to Date Ended
30, September 30,
Adjusted Earnings Per Diluted Share 2022 2021 2022 2021
Reported Earnings Per Diluted Share
1.16 $ 1.19
Pre-tax adjustments included in
operating expenses:
Amortization for acquired
intangible assets (1) 0.03 0.01 0.08 0.03
Legal fee expense related to
certain matters (2) 0.06 0.06 0.14 0.10
Total pre-tax adjustments $ 0.09 $ 0.07 $ 0.22 $ 0.13
Tax effect of adjustments (3) (0.02 ) (0.01 ) (0.06 ) (0.03 )
Total adjustments after tax 0.07 0.06 0.16 0.10
Adjusted Earnings Per Diluted Share
1.32 $ 1.29
(1)Amortization for acquired intangible assets relate to definite-lived intangible assets associated with acquisitions.
(2)
Legal fee expense associated with (i) responses to 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.
Regulatory Updates Student Loan Forgiveness OnAugust 24, 2022 ,President Biden and the Department announced a plan to provide broad student loan forgiveness to borrowers with certain federal student loans. The plan provides$20,000 in debt relief to Pell Grant recipients with loans held by the Department and up to$10,000 in debt relief to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than$125,000 or$250,000 for households. This plan includes our current and former students that had loan balances as ofJune 30, 2022 . TheCongressional Budget Office ("CBO") estimated that 42.4 million individuals will be eligible for debt relief at a total cost of$430 billion . The plan was described as a form of COVID pandemic related financial support that relies upon Congressional authorization given to the Department for loan modifications for individuals impacted by national emergencies. The plan is currently subject to a number of legal challenges in Federal courts and the Department is currently enjoined by anEighth Circuit Federal Court of Appeals from proceeding with the loan forgiveness while the court considers the pending challenge. The loan relief will benefit our eligible current and former students, however, we are unable to determine what impact it will have on our schools, if any, or on any pending borrower defense to repayment or closed school discharge claims. See Item 1A, "Risk Factors - Risks Related to the Highly Regulated Field in Which We Operate - 'Borrower defense to repayment' regulations, including closed school discharges, may subject us to significant repayment liability to the Department for discharged federal student loans and posting of substantial letters of credit that may limit our ability to make investments in our business which could negatively impact our future growth," in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for more information about risks associated with the borrower defense to repayment regulations.
2021-22 Negotiated Rulemakings
InDecember 2021 , the Department concluded negotiated rulemaking on a number of topics related to affordability and student loans. The topics discussed during these negotiations generally related to different Title IV regulations that impact the Department's ability to discharge student loans. During the process, the Department expressed a goal of making it easier for students to have their loans discharged or forgiven and providing more favorable loan repayment terms. The Department also intends to make it easier to seek recovery of discharged loan funds from institutions through leveraging existing processes and modifications to current procedures. OnJuly 13, 2022 , the Department published in theFederal Register a set of proposed regulations for public comment 21 -------------------------------------------------------------------------------- covering most of the topics that were part of the affordability and student loan negotiations. The public comment period was set at 30 days and concluded onAugust 12, 2022 . The Department published final regulations onNovember 1, 2022 in theFederal Register , which means these regulations will become effectiveJuly 1, 2023 .
These new regulations from the
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Discharges for borrowers with a total and permanent disability;
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Eliminating certain interest capitalization events not required by statute;
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Discharges for when a school falsely certifies a student was eligible for Title IV Program financial aid;
• Closed school discharges;
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Expanding and simplifying public service loan forgiveness;
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Modifying the bases for borrower defense to repayment ("BDR") claims as well as the adjudication processes for student claims;
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Modifying the procedures for recovering funds from schools for loans discharged pursuant to the borrower defense to repayment process; and
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Prohibiting schools from adopting or enforcing pre-dispute arbitration agreements and waivers of class action lawsuits.
These rules remove certain barriers and simplify the process for borrowers with a total and permanent disability and borrowers seeking public service loan forgiveness. The rules also expand closed school discharge provisions. The rules reduce the required supporting evidence and related obligations of students applying for BDR loan forgiveness, expand the categories students could raise in a BDR application, and provide the Department wide latitude to selectively adjudicate future BDR applications without affording institutions adequate opportunity to respond. The BDR rules remove any statute of limitations on student claims and create a rebuttable presumption in favor of full loan forgiveness as opposed to partial relief for most approved applications, eliminating the Department's approach under the current rules of assessing whether and to what extent a student had been financially harmed. The combination of the reduced requirements, increased categories, and presumptions will increase the likelihood of loan forgiveness and potentially create a significant financial incentive for existing and former students to apply for loan forgiveness regardless of a claim's merit. The proposed rules also increase the burden on institutions to maintain and provide documentation to refute student claims. As a result, an institution's failure to maintain and provide timely and responsive information that goes beyond the contents of a typical student's academic file in response to future BDR applications could form the basis for loan forgiveness. Under existing BDR rules, the standards applicable to BDR applications generally corresponds to the rules that were in effect when the loans were first disbursed to the student. The standards arising from existing and prior regulations are sometimes referred to as the pre-2016 BDR standards, the 2016 BDR standards, and the 2019 BDR standards to correlate to the BDR rules initially applicable when adopted in 1994, and later revised by the Department in 2016 and 2019. The Department seeks to eliminate the differing standards that have resulted from these prior rulemakings. Upon the effective date of these new regulations, the Department proposes to apply its new standards to all pending and future BDR applications regardless of prior rules or limitations applicable to such BDR applications and regardless of the student's loan disbursement date. As a separate process from the adjudication of a borrower's BDR application, the rules establish a new process for the Department to recoup funds from schools for any loans forgiven pursuant to a BDR application. The new rules require the Department to rely upon and adhere to existing or prior applicable BDR regulations for loans disbursed prior to the effective date of the regulations, but would significantly expand the basis for recovery for loans disbursed after the rules become effective. We continue to closely monitor the rulemaking process along with the Department's public statements, legal filings, and other communications, but are unable to determine the ultimate impact of any final regulations on our business at this time. See Item 1A, "Risk Factors - Risks Related to the Highly Regulated Field in Which We Operate - The extensive regulatory requirements applicable to our business may change, in particular as a result of the scrutiny of the for-profit postsecondary education sector and the results of the 2020 Presidential and Congressional elections, which could require us to make substantial changes to our business, reduce our profitability, and make compliance more difficult," for information about the potential impact of new regulations on our business. OnJuly 28, 2022 , the Department published in theFederal Register another set of proposed regulations for public comment covering a topic that was part of the 2021 affordability and student loan negotiations along with two topics that were part of the 2022 institutional and programmatic eligibility negotiations. The public comment period was set for 30 days and concluded onAugust 27, 2022 . The Department published final regulations onOctober 28, 2022 in theFederal Register , which means these regulations will become effectiveJuly 1, 2023 .
The new regulations from the
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Adopting new regulations to calculate the percentage of a for-profit school's revenue that is derived from federal education assistance, referred to as the "90-10 Rule";
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Placing additional requirements and limits on changes of ownership or control; and
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Pell Grant eligibility for prison education programs.
The American Rescue Plan Act of 2021 (H.R.1319), passed onMarch 11, 2021 , amended the Higher Education Act requirement of the 90-10 Rule that for-profit schools derive at least 10% of their tuition and fee revenue from Title IV funds aid to requires that the 90% revenue cap include all sources of federal funding, not just Title IV student aid funds. The regulation describing the new 90-10 Rule includes an expanded view of what federal aid is considered "federal educational assistance funds" under the rule, and is intended to include any identifiable revenue a school receives from tuition assistance programs offered by federal agencies, such as the Departments of Defense,Veterans Affairs , and Labor. The new rule also includes a number of technical changes, including a departure from the historical focus on cash basis revenue and existing Title IV Program cash management regulations. For example, institutions would be required to accelerate the receipt of, or would be deemed to have received, federal funds at the end of the annual measurement period. Although the Department published regulations in its Final Rule that are consistent with the consensus language reached during negotiated rulemaking, the Department included in the preamble to the regulation a number of interpretations that may potentially narrow and/or limit non-federal revenue that may be included by institutions in their annual calculations. These interpretations were offered with limited explanation and are expected to make future compliance with these regulations more difficult for for-profit institutions. We are continuing to evaluate these regulations along with the Department's interpretations, public statements, and other communications but are unable to determine the ultimate impact of these final regulations on our business at this time. See Item 1, "Business - Legislative Action and Recent Department Regulatory Initiatives" and "Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for an overview of the previously adopted and rescinded gainful employment regulation and the current rules relating to the 90-10 Rule, change of ownership or control, financial responsibility and administrative capability. See Item 1A, "Risk Factors - Risks Related to the Highly Regulated Field in Which We Operate - The extensive regulatory requirements applicable to our business may change, in particular as a result of the scrutiny of the for-profit postsecondary education sector and the results of the 2020 Presidential and Congressional elections, which could require us to make substantial changes to our business, reduce our profitability and make compliance more difficult," in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for information about the potential impact of new regulations on our business.
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