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Corinthian Colleges Reports Second Quarter 2013 Results

Comparing the second quarter of fiscal 2013 with the same quarter of the prior year (Note: results for continuing operations only):

  • Net revenue was $409.7 million versus $392.1 million, an increase of 4.5%.
  • Total student population at December 31, 2012 was 88,688 versus 90,910 at December 31, 2011, a decrease of 2.4%.
  • New student enrollments totaled 23,703 versus 24,790, a decrease of 4.4%.
  • Non-ATB new student enrollments totaled 23,269 versus 23,232.
  • Operating income was $14.1 million, compared with operating income of $13.4 million, which excludes $2.7 million in impairment and severance charges in Q2 12.
  • Income from continuing operations (after tax) was $4.3 million, compared with $5.5 million, excluding impairment and severance charges in Q2 12.
  • Diluted earnings per share from continuing operations were $0.05, versus diluted earnings per share of $0.06, excluding impairment and severance charges in Q2 12.

Financial Review

Educational services expenses were 61.4% of revenue in Q2 13 versus 60.3% in Q2 12. The increase is primarily the result of an increase in bad debt. Bad debt increased to 4.3% of revenue in Q2 13 versus 3.4% of revenue in Q2 12. The increase in bad debt expense is primarily the result of delays in student financial aid processing.

Marketing and admissions expenses were 24.9% of revenue in Q2 13 versus 24.6% in Q2 12. The increase is primarily the result of higher advertising and lead generation expenses.

General and administrative expenses were 10.3% of revenue in Q2 13 versus 11.7% in Q2 12. The decrease is primarily due to cost reduction initiatives.

The operating margin was 3.5% in Q2 13 versus 3.4% in Q2 12, excluding impairment and severance charges in Q2 12.

Cash and cash equivalents totaled $43.6 million at December 31, 2012, compared with $72.5 million at June 30, 2012. The decrease in cash is primarily due to the net repayment of borrowings under our credit facility during the first half of this fiscal year, partially offset by the timing of cash receipts and payments.

Debt and capital leases (including current portion) totaled $47.1 million at December 31, 2012, compared with $149.0 million at June 30, 2012.

Cash flow from operations was $102.1 million in the first six months of FY 13, versus $137.2 million in the same period of the prior year. The decrease is primarily due to the timing of cash payments and receipts related to working capital.

Capital expenditures were $18.1 million for the first six months of fiscal 2013, versus $20.1 million in the same period last year. The decrease is primarily the result of opening fewer new campuses.

Regulatory Update

On November 5, 2012, we filed an 8-K regarding a letter from the Department of Education (ED) about its determination of our financial responsibility composite score for fiscal 2011. The score is calculated annually by ED as a test of whether an institution meets ED's standards of financial responsibility. ED has calculated the company's fiscal 2011 composite score to be .9, while we have calculated our fiscal 2011 score to be 2.1. The main source of the difference between the two calculations is ED's interpretation of how goodwill impairment charges should be treated in the formula. A composite score below 1.0 subjects the company to additional monitoring and reporting by ED, and requires the posting of a letter of credit. (For more detail on this issue, see the 8-K referenced above: .)

We met with ED officials and have requested reconsideration of the letter of credit requirement. In December 2012, we filed our fiscal 2012 financials and audits with ED, and re-filed our fiscal 2011 financials to reflect the reclassification of certain schools into discontinued operations. Based upon our re-filed fiscal 2011 financials and our fiscal 2012 financials, even using ED's method for the treatment of goodwill impairment charges, we calculate our composite score to be 1.0 for fiscal 2011 and 1.5 for fiscal 2012. Either result could serve as a basis for ED not to impose the letter of credit requirement. This matter is pending at ED and no assurances can be made with respect to its final determination. As a contingency, we are pursuing alternative sources of financing to be able to post a letter of credit if one is required. In addition, while this matter is pending at ED, we have agreed with our banks that we will not draw additional amounts on our credit facility and that we will provide additional financial reporting.

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