Career Education Corporation Reports Results for Fourth Quarter and Full Year 2016

Career Education Corporation (NASDAQ: CECO) today reported operating and financial results for the fourth quarter and year ended December 31, 2016.

University Group Full Year Highlights:

• Total student enrollment growth of 5.3 percent as compared to the prior year
• Revenue increase of 2.3 percent for 2016 as compared to the prior year
• Student retention continues to improve as investments in various student-serving functions help enhance overall student retention and outcomes

Fourth Quarter Consolidated Results:

• Revenue of $155.3 million for the quarter as compared to $199.9 million in the prior year quarter, with the decline primarily driven by teach-out campuses
• Operating loss of $55.9 million compared to prior year quarter operating loss of $3.9 million; fourth quarter 2016 includes charges recorded for:
  • $18.4 million related to remaining lease obligations for vacated space at teach-out campuses
  • $10.0 million legal settlement
  • $22.0 million of third party legal fees

Full Year Consolidated Results:

• Revenue of $704.4 million for 2016 as compared to $847.3 million in the prior year, with the decline primarily driven by teach-out campuses
• Operating expenses decreased by $202.7 million as compared to the prior year driven by continued execution on strategic initiatives
• As of December 31, 2016, cash, cash equivalents, restricted cash and available-for-sale short-term investments was $207.2 million, with cash flow provided by operations of $5.9 million compared to cash usage in the prior year of $21.7 million

“I am pleased with our 2016 results and with the progress our teams have made against our strategic initiatives,” said Todd Nelson, President and Chief Executive Officer. “Our commitment to improving student retention and outcomes while investing in technology and resources resulted in total enrollment growth at our University Group, with year-end total enrollments at the highest level since 2012. The results of our teach-out operations were ahead of our expectations, and our overall operating costs decreased by more than $200 million compared to last year, resulting in a year end cash balance that was higher than our outlook. For 2017, we will continue to invest in technology and resources which we believe will further enhance student retention and outcomes and pursue sustainable and responsible growth opportunities within our University Group.”

REVENUE

For the quarter and year ended December 31, 2016, total revenue was $155.3 million and $704.4 million, respectively, representing a decrease of 22.4 percent and 16.9 percent, respectively, compared to total revenue of $199.9 million and $847.3 million for the quarter and year ended December 31, 2015, respectively. The decrease was driven by declining revenues within the teach-out segments. Total revenue for the University Group was $135.6 million and $562.4 million for the quarter and year ended December 31, 2016, respectively, representing a decrease of 1.3 percent and an increase of 2.3 percent, respectively.

TOTAL AND NEW STUDENT ENROLLMENTS

As of the end of 2016, total student enrollments for the University Group were 33,600, compared to 31,900 as of the prior year, primarily driven by improved student retention at CTU and new enrollment growth at AIU. New student enrollments for the University Group were 9,280 and 35,120 for the quarter and year ended December 31, 2016, respectively, compared to new student enrollments of 8,760 and 35,290 for the quarter and year ended December 31, 2015, respectively.

OPERATING INCOME (LOSS)

For the quarter and year ended December 31, 2016, the Company recorded an operating loss of $55.9 million and $32.3 million, respectively, compared to operating losses of $3.9 million and $92.2 million for the quarter and year ended December 31, 2015, respectively. Total University Group operating loss of $9.9 million and operating income of $69.8 million for the quarter and year ended December 31, 2016, respectively, included charges of $32.0 million recorded for a legal settlement and associated third party legal fees within AIU as well as increased compensation expenses for the current year related to performance-driven metrics.

The fourth quarter operating loss for the teach-out segments included $18.4 million of unused space charges as compared to $2.5 million in the prior year quarter. Additionally, asset impairment charges for the teach-out segments of $0.9 million were recorded in the current year as compared to $60.0 million recorded in the prior year with $0.9 million and $9.2 million recorded in the current year quarter and prior year quarter, respectively.

NET INCOME (LOSS)

Net loss of $32.9 million was recorded for the quarter ended December 31, 2016 as compared to net income of $142.7 million in the prior year quarter. For the year ended December 31, 2016, net loss was $18.7 million as compared to net income of $51.9 million for the prior year. The prior year quarter and year ended included a tax benefit of $146.5 million and $147.5 million, respectively, driven by the partial reversal of tax valuation allowances.

ADJUSTED EBITDA

The Company believes it is useful to present non-GAAP financial measures, which exclude certain significant items, as a means to understand the performance of its operations. (See tables below and the GAAP to non-GAAP reconciliation attached to this press release for further details.)

As shown in the table below, adjusted EBITDA for the University Group and Corporate was $17.9 million and $91.7 million for the quarter and year ended December 31, 2016, respectively, representing a decrease of 39.4 percent and an increase of 9.6 percent, respectively, as compared to the prior year periods. The current quarter variance is driven by increased compensation expenses related to performance-driven metrics recorded in the current quarter. Adjusted EBITDA for the Transitional Group, Culinary Arts and discontinued operations improved to negative $19.6 million and a negative $49.8 million for the quarter and year ended December 31, 2016, respectively, representing improvement of 5.1 percent and 43.5 percent, respectively, as compared to the prior year periods.

BALANCE SHEET AND CASH FLOW

Net cash used in operating activities was negative $9.8 million and net cash flows provided by operating activities was $5.9 million for the quarter and year ended December 31, 2016, respectively, as compared to net cash used in operating activities of $0.7 million and $21.7 million for the prior year periods, respectively. The cash usage in the fourth quarter of 2016 includes increased payments related to exiting and reducing long-term lease obligations as compared to the prior year. The Company’s continued focus on improving marketing efficiencies within the University Group and the reduction in operating losses related to our teach-outs contributed to the improvement in cash flow from operations for the full year.

As of December 31, 2016 and December 31, 2015, cash, cash equivalents, restricted cash and available-for-sale short-term and long-term investments, net of borrowings, totaled $207.2 million and $201.0 million, respectively.

OUTLOOK

With the substantial completion of the teach-outs occurring in 2017, Career Education Corporation will begin disclosing its outlook based on an operating income (loss) and adjusted operating income (loss) measure as well as providing an outlook for year-end cash, cash equivalents, restricted cash and short-term investments, net of borrowings. The Company believes that an adjusted operating income (loss) measure will better reflect the ongoing operations of the business now that the teach-outs will be substantially complete. The Company will no longer provide updates under the previous measure of adjusted EBITDA. The Company expects the following results, subject to the key assumptions identified below (see the GAAP to non-GAAP reconciliation for adjusted operating income (loss) attached to this press release for further details):

• University Group and Corporate operating income and adjusted operating income to grow in 2017 and 2018 as compared to each respective prior year period.
• Adjusted operating loss for our teach-out segments, comprised of the Transitional Group and Culinary Arts, to be in the range of $50 million to $60 million in 2017 and to improve to a range of $10 million to $20 million in 2018 as we wind-down the remainder of our teach-out campuses.
• End of year cash, cash equivalents, restricted cash and available-for-sale short-term investments, net of any borrowings, as reported on the consolidated balance sheets (i) of approximately $150 million to $160 million for the year ending December 31, 2017, which includes payments related to a legal settlement of $10.0 million and $22.0 million of associated third party legal fees (which amounts were recorded during the fourth quarter of 2016); and (ii) to grow in 2018 as compared to 2017.

Operating income (loss), which is the most directly comparable GAAP measure to adjusted operating income (loss), may not follow the same trends as discussed in our outlook above because of adjustments made for unused space charges that represent the present value of future remaining lease obligations for vacated space less an estimated amount for sublease income as well as depreciation, amortization, asset impairment charges and significant legal settlements. The operating income (loss) and adjusted operating income (loss) and cash outlook provided above for 2017 and 2018 are based on the following key assumptions and factors, among others: (i) modest total enrollment growth within the University Group while achieving the intended University Group efficiencies, (ii) teach-outs to progress as expected and performance consistent with current trends, (iii) achievement of recovery rates for the Company’s real estate obligations and timing of any associated lease termination payments consistent with the Company’s historical experiences, (iv) continued right-sizing of the Company’s corporate expense structure to serve primarily online institutions, (v) no material changes in the legal or regulatory environment and excludes legal and regulatory liabilities which are not probable and estimable at this time and any impact of new or proposed regulations, including the “borrower defense to repayment” regulations issued in November 2016 and the gainful employment regulation, and (vi) consistent working capital movements in line with historical operating trends and potential impacts of teach-out campuses on working capital in line with expectations. Although these estimates and assumptions are based upon management’s good faith beliefs regarding current events and actions that may be undertaken in the future, actual results could differ materially from these estimates.

CONFERENCE CALL INFORMATION

Career Education Corporation will host a conference call on Thursday, February 23, 2017 at 5:30 p.m. Eastern time to discuss its fourth quarter and full year 2016 results. Interested parties can access the live webcast of the conference call and the related presentation materials at www.careered.com in the Investor Relations section of the website. Participants can also listen to the conference call by dialing 844-378-6484 (domestic) or 412-542-4179 (international). Please log-in or dial-in at least 10 minutes prior to the start time to ensure a connection. An archived version of the webcast will be accessible for 90 days at www.careered.com in the Investor Relations section of the website.

ABOUT CAREER EDUCATION CORPORATION

Career Education’s academic institutions offer a quality education to a diverse student population in a variety of disciplines through online, campus-based and blended learning programs. The Company’s two universities – American InterContinental University (“AIU”) and Colorado Technical University (“CTU”) – provide degree programs through the master’s or doctoral level as well as associate and bachelor’s levels. Both universities predominantly serve students online with career-focused degree programs that are designed to meet the educational demands of today’s busy adults. AIU and CTU continue to show innovation in higher education, advancing new personalized learning technologies like their intellipath™ adaptive learning platform. Career Education is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

A listing of individual campus locations and web links to Career Education’s institutions can be found at www.careered.com.

Except for the historical and present factual information contained herein, the matters set forth in this release, including statements identified by words such as “believe,” “will,” “expect,” “estimate,” “continue,” “intend,” “trend” and similar expressions, are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on information currently available to us and are subject to various assumptions, risks, uncertainties and other factors that could cause our 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 or revise such factors or any of the forward-looking statements contained herein to reflect future events, developments or changed circumstances, or for any other reason. These risks and uncertainties, the outcomes of which could materially and adversely affect our financial condition and operations, include, but are not limited to, the following: declines in enrollment; 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 gainful employment, 90-10, financial responsibility and administrative capability standards prescribed by the U.S. Department of Education), as well as applicable accreditation standards and state regulatory requirements; the impact of recently issued “defense to repayment” regulations; rulemaking by the U.S. Department of Education or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions; our ability to successfully defend litigation and other claims brought against us; the success of our initiatives to improve student experiences, retention and outcomes; negative trends in the real estate market which could impact the costs related to teaching out campuses and the success of our initiatives to reduce our real estate obligations; our ability to achieve anticipated cost savings and business efficiencies; increased competition; the impact of management changes; and changes in the overall U.S. economy. Further information about these and other relevant risks and uncertainties may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and its subsequent filings with the Securities and Exchange Commission.

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