10-Q 1 ceco-10q_20180331.htm 10-Q ceco-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO             

Commission File Number: 0-23245

 

CAREER EDUCATION CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-3932190

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

231 N. Martingale Road

Schaumburg, Illinois

60173

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (847) 781-3600

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

Emerging growth company

 

  

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.    Yes      No  

Number of shares of registrant’s common stock, par value $0.01, outstanding as of April 27, 2018: 69,611,001

 

 


CAREER EDUCATION CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets

1

 

 

 

 

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income

2

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

3

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 6.

Exhibits

34

 

 

SIGNATURES

36

 

 

 


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

(unaudited)

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents, unrestricted

 

$

24,198

 

 

$

18,110

 

Restricted cash

 

 

789

 

 

 

789

 

Restricted short-term investments

 

 

4,570

 

 

 

5,070

 

Short-term investments

 

 

158,038

 

 

 

156,178

 

Total cash and cash equivalents, restricted cash and short-term investments

 

 

187,595

 

 

 

180,147

 

Student receivables, net of allowance for doubtful accounts of $19,986 and $20,533

   as of March 31, 2018 and December 31, 2017, respectively

 

 

23,915

 

 

 

18,875

 

Receivables, other, net

 

 

1,335

 

 

 

1,163

 

Prepaid expenses

 

 

10,182

 

 

 

7,722

 

Inventories

 

 

1,013

 

 

 

1,112

 

Other current assets

 

 

833

 

 

 

1,319

 

Assets of discontinued operations

 

 

513

 

 

 

382

 

Total current assets

 

 

225,386

 

 

 

210,720

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $213,056 and $213,825

   as of March 31, 2018 and December 31, 2017, respectively

 

 

32,027

 

 

 

33,230

 

Goodwill

 

 

87,356

 

 

 

87,356

 

Intangible assets, net of amortization of $1,400 and $1,400

   as of March 31, 2018 and December 31, 2017, respectively

 

 

7,900

 

 

 

7,900

 

Student receivables, net of allowance for doubtful accounts of $2,565

   and $2,001 as of March 31, 2018 and December 31, 2017, respectively

 

 

2,784

 

 

 

2,548

 

Deferred income tax assets, net

 

 

94,380

 

 

 

98,084

 

Other assets

 

 

5,918

 

 

 

5,673

 

Assets of discontinued operations

 

 

1,585

 

 

 

1,585

 

TOTAL ASSETS

 

$

457,336

 

 

$

447,096

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,694

 

 

$

8,515

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related benefits

 

 

20,345

 

 

 

32,910

 

Advertising and marketing costs

 

 

13,069

 

 

 

9,245

 

Income taxes

 

 

1,730

 

 

 

2,185

 

Other

 

 

32,671

 

 

 

31,233

 

Deferred revenue

 

 

30,278

 

 

 

22,897

 

Liabilities of discontinued operations

 

 

4,301

 

 

 

5,701

 

Total current liabilities

 

 

114,088

 

 

 

112,686

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Deferred rent obligations

 

 

14,522

 

 

 

15,277

 

Other liabilities

 

 

15,755

 

 

 

22,143

 

Liabilities of discontinued operations

 

 

-

 

 

 

785

 

Total non-current liabilities

 

 

30,277

 

 

 

38,205

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding

 

 

-

 

 

 

-

 

Common stock, $0.01 par value; 300,000,000 shares authorized; 84,987,946

   and 84,279,533 shares issued, 69,611,001 and 69,117,803 shares

   outstanding as of March 31, 2018 and December 31, 2017, respectively

 

 

850

 

 

 

843

 

Additional paid-in capital

 

 

623,378

 

 

 

621,008

 

Accumulated other comprehensive loss

 

 

(296

)

 

 

(164

)

Accumulated deficit

 

 

(90,625

)

 

 

(108,127

)

Treasury stock, at cost; 15,376,945 and 15,161,730 shares as of March 31, 2018

   and December 31, 2017, respectively

 

 

(220,336

)

 

 

(217,355

)

Total stockholders' equity

 

 

312,971

 

 

 

296,205

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

457,336

 

 

$

447,096

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME           (In thousands, except per share amounts)

 

 

 

For the Quarter Ended March 31,

 

 

 

2018

 

 

2017

 

REVENUE:

 

 

 

 

 

 

 

 

Tuition and fees

 

$

147,510

 

 

$

161,377

 

Other

 

 

555

 

 

 

732

 

Total revenue

 

 

148,065

 

 

 

162,109

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Educational services and facilities

 

 

26,946

 

 

 

40,173

 

General and administrative

 

 

98,008

 

 

 

108,245

 

Depreciation and amortization

 

 

2,582

 

 

 

3,910

 

Total operating expenses

 

 

127,536

 

 

 

152,328

 

Operating income

 

 

20,529

 

 

 

9,781

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

Interest income

 

 

634

 

 

 

390

 

Interest expense

 

 

(109

)

 

 

(113

)

Miscellaneous income

 

 

328

 

 

 

40

 

Total other income

 

 

853

 

 

 

317

 

 

 

 

 

 

 

 

 

 

PRETAX INCOME

 

 

21,382

 

 

 

10,098

 

Provision for income taxes

 

 

3,498

 

 

 

4,501

 

INCOME FROM CONTINUING OPERATIONS

 

 

17,884

 

 

 

5,597

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, net of tax

 

 

(382

)

 

 

(420

)

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

17,502

 

 

 

5,177

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

86

 

 

 

41

 

Unrealized (loss) gain on investments

 

 

(218

)

 

 

23

 

     Total other comprehensive (loss) income

 

 

(132

)

 

 

64

 

COMPREHENSIVE INCOME

 

$

17,370

 

 

$

5,241

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - BASIC:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.26

 

 

$

0.08

 

Loss from discontinued operations

 

 

(0.01

)

 

 

-

 

Net income per share

 

$

0.25

 

 

$

0.08

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - DILUTED:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.25

 

 

$

0.08

 

Loss from discontinued operations

 

 

-

 

 

 

(0.01

)

Net income per share

 

$

0.25

 

 

$

0.07

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic

 

 

69,216

 

 

 

68,578

 

Diluted

 

 

71,119

 

 

 

70,319

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

For the Quarter Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

17,502

 

 

$

5,177

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

 

 

cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,582

 

 

 

3,910

 

Bad debt expense

 

 

6,982

 

 

 

8,224

 

Compensation expense related to share-based awards

 

 

1,501

 

 

 

1,111

 

Deferred income taxes

 

 

3,704

 

 

 

3,792

 

Changes in operating assets and liabilities

 

 

(21,175

)

 

 

(61,267

)

Net cash provided by (used in) operating activities

 

 

11,096

 

 

 

(39,053

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(50,799

)

 

 

(39,992

)

Sales of available-for-sale investments

 

 

49,257

 

 

 

44,316

 

Purchases of property and equipment

 

 

(1,360

)

 

 

(735

)

Net cash (used in) provided by investing activities

 

 

(2,902

)

 

 

3,589

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

875

 

 

 

138

 

Payments of employee tax associated with stock compensation

 

 

(2,981

)

 

 

(928

)

Net cash used in financing activities

 

 

(2,106

)

 

 

(790

)

 

 

 

 

 

 

 

 

 

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE

   CHANGES ON CASH AND CASH EQUIVALENTS:

 

 

-

 

 

 

15

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

6,088

 

 

 

(36,239

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

 

18,899

 

 

 

50,882

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

24,987

 

 

$

14,643

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. DESCRIPTION OF THE COMPANY

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. Our 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® 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.

Additionally, CEC is in the process of teaching out campuses within our All Other Campuses segment. Students enrolled at these campuses have been afforded the reasonable opportunity to complete their program of study prior to the final teach-out date.

A listing of our University Group locations and web links to these institutions can be found at www.careered.com.

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “the Company” and “CEC” refer to Career Education Corporation and our wholly-owned subsidiaries. The terms “college,” “institution” and “university” refer to an individual, branded, for-profit educational institution, owned by us and includes its campus locations. The term “campus” refers to an individual main or branch campus operated by one of our colleges, institutions or universities.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.

The unaudited condensed consolidated financial statements presented herein include the accounts of Career Education Corporation and our wholly-owned subsidiaries (collectively “CEC”). All intercompany transactions and balances have been eliminated.

         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 group of postsecondary education providers that offer a variety of academic programs. We organize our business across three reporting segments: CTU, AIU (comprises University Group) and All Other Campuses (formerly separately reported as Culinary Arts and Transitional Group). Campuses included in our All Other Campuses segment are currently being taught out and no longer enroll new students or have completed their teach-out. These campuses employ a gradual teach-out process, enabling them to continue to operate while current students have a reasonable opportunity to complete their program of study.

          During the first quarter of 2018, the Company completed the teach-out of one campus, Sanford-Brown San Antonio, which continues to be reported within the All Other Campuses segment as of March 31, 2018 in accordance with ASC Topic 360 – Property, Plant and Equipment, which limits discontinued operations reporting.

          Effective January 1, 2018, we have implemented FASB ASC Topic 606 – Revenue from Contracts with Customers. This guidance supersedes all previously issued revenue recognition guidance. As a result of this change in accounting guidance, we have updated our revenue recognition policies and disclosures. The guidance under Topic 606 did not impact the amount of revenue we recognized in previous periods, and also does not impact the amount of revenue recognized prospectively as our revenue recognition methodology remained relatively the same under the new guidance. The guidance under Topic 606 did impact our presentation of financial condition and disclosures. Previously, a student’s entire accounts receivable balance along with their deferred revenue balance was evaluated to determine the net position of the two and the proper reporting of that balance within student receivables, net, or within deferred revenue, net, on our condensed consolidated balance sheets. Under Topic 606, we now separate the contract asset balance from the student receivable balance to determine the amount reported as deferred revenue on the condensed consolidated balance sheets for each student. See Note 5 “Revenue Recognition” for more information.

4


3. RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance adopted in 2018

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments in this ASU clarify and provide guidance for partial sales of nonfinancial assets and recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. For all public entities, ASU 2017-05 is effective for annual reporting periods and interim periods beginning after December 15, 2017. We have evaluated and adopted this guidance effective January 1, 2018. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by reducing complexity in accounting standards. The amendments eliminate the exception prohibiting the recognition of current and deferred income taxes for an intra-entity transfer of an asset other than inventory until the asset has been sold to an outside party. For all public entities, ASU 2016-16 is effective for annual periods and interim periods beginning after December 15, 2017. We have evaluated and adopted this guidance beginning 2018. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU address eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The eight topics include debt prepayment or extinguishments costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, proceeds from settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. For all public business entities, ASU 2016-15 is effective for annual periods and interim periods beginning after December 15, 2017. We have evaluated and adopted this guidance beginning 2018. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new accounting standard intended to improve and converge the financial reporting requirements between U.S. GAAP and International Financial Reporting Standards, which supersedes virtually all existing revenue recognition guidance under GAAP. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five step approach for the recognition of revenue. For all public business entities, ASU No. 2014-09 is effective for annual periods and interim periods beginning after December 15, 2017. We completed the assessment of our evaluation of the new standard on our accounting policies, processes and system requirements and adopted this guidance beginning 2018. We have adopted this guidance using the modified retrospective approach which applies to contracts that have remaining obligations as of January 1, 2018 and new contracts entered into subsequent to January 1, 2018. Under the modified retrospective approach, we do not restate comparative periods on our condensed consolidated financial statements. The adoption impacted the presentation of our financial condition and disclosures but did not impact our results of operations. See Note 5 “Revenue Recognition” for further information.

Recent accounting guidance not yet adopted

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. For all entities, ASU 2018-02 is effective for annual periods and interim periods beginning after December 15, 2018; early adoption is permitted. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosure.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected and credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. For all public business entities, ASU 2016-13 is effective for annual periods and interim periods beginning after December 15, 2019; early adoption is permitted for all organizations for annual periods and interim periods beginning after December 15, 2018. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

5


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The objective of Topic 842 is to establish transparency and comparability that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that lessees should recognize the assets and liabilities that arise from leases. All leases create an asset and liability for the lessee in accordance with FASB Concept Statements No. 6 Elements of Financial Statements, and, therefore, recognition of those lease assets and liabilities represents an improvement over previous GAAP. The accounting applied for lessors largely remained unchanged. The amendment in this ASU requires recognition of a lease liability and a right of use asset at the lease inception date. For all public business entities, ASU 2016-02 is effective for annual periods and interim periods beginning after December 15, 2018; early adoption is permitted. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact primarily relates to our accounting for real estate leases and real estate subleases. We expect to have a material amount now reported as a right of use asset and lease liability related to these leases as well as expect to separate lease components from the non-lease components for recognition. Based on the current ASU, we will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach beginning with January 1, 2017. We are currently evaluating this guidance and believe the adoption will significantly impact the presentation of our financial condition and disclosures, but will not significantly impact our results of operations.

4. FINANCIAL INSTRUMENTS

Investments consist of the following as of March 31, 2018 and December 31, 2017 (dollars in thousands):

 

 

 

March 31, 2018

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

$

128,641

 

 

$

6

 

 

$

(415

)

 

$

128,232

 

Treasury and federal agencies

 

 

29,964

 

 

 

-

 

 

 

(158

)

 

 

29,806

 

Total short-term investments

 

 

158,605

 

 

 

6

 

 

 

(573

)

 

 

158,038

 

Restricted short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

 

4,570

 

 

 

-

 

 

 

-

 

 

 

4,570

 

Total investments (available for sale)

 

$

163,175

 

 

$

6

 

 

$

(573

)

 

$

162,608

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

830

 

 

$

-

 

 

$

-

 

 

$

830

 

Non-governmental debt securities

 

 

125,485

 

 

 

7

 

 

 

(222

)

 

 

125,270

 

Treasury and federal agencies

 

 

30,211

 

 

 

-

 

 

 

(133

)

 

 

30,078

 

Total short-term investments

 

 

156,526

 

 

 

7

 

 

 

(355

)

 

 

156,178

 

Restricted short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

 

5,070

 

 

 

-

 

 

 

-

 

 

 

5,070

 

Total investments (available for sale)

 

$

161,596

 

 

$

7

 

 

$

(355

)

 

$

161,248

 

 

In the table above, unrealized holding gains (losses) as of March 31, 2018 relate to short-term investments that have been in a continuous unrealized gain (loss) position for less than one year.

Our unrestricted non-governmental debt securities primarily consist of commercial paper and certificates of deposit. Our treasury and federal agencies primarily consist of U.S. Treasury bills and federal home loan debt securities. We do not intend to sell our investments in these securities prior to maturity and it is not likely that we will be required to sell these investments before recovery of the amortized cost basis. Our restricted short-term investments are comprised entirely of certificates of deposit, which secure our letters of credit.

Fair Value Measurements

FASB ASC Topic 820 – Fair Value Measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

6


As of March 31, 2018, we held investments that are required to be measured at fair value on a recurring basis. These investments (available-for-sale) consist of non-governmental debt securities, and treasury and federal agencies securities. Available for sale securities included in Level 1 are valued at quoted prices in active markets for identical assets and liabilities. Available for sale securities included in Level 2 are estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in inactive markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Investments measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC Topic 820 – Fair Value Measurements at March 31, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

 

 

As of  March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Non-governmental debt securities

 

$

31,500

 

 

$

101,302

 

 

$

-

 

 

$

132,802

 

Treasury and federal agencies

 

 

-

 

 

 

29,806

 

 

 

-

 

 

 

29,806

 

Totals

 

$

31,500

 

 

$

131,108

 

 

$

-

 

 

$

162,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Municipal bonds

 

$

-

 

 

$

830

 

 

$

-

 

 

$

830

 

Non-governmental debt securities

 

 

31,500

 

 

 

98,840

 

 

 

-

 

 

 

130,340

 

Treasury and federal agencies

 

 

-

 

 

 

30,078

 

 

 

-

 

 

 

30,078

 

Totals

 

$

31,500

 

 

$

129,748

 

 

$

-

 

 

$

161,248

 

 

 

Equity Method Investment

Our investment in an equity affiliate, which is recorded within other noncurrent assets on our condensed consolidated balance sheets, represents an international investment in a private company. As of March 31, 2018, our investment in an equity affiliate equated to a 30.7%, or $3.4 million, non-controlling interest in CCKF, a Dublin-based educational technology company providing intelligent systems to power the delivery of individualized and personalized learning.

During the quarters ended March 31, 2018 and 2017, we recorded approximately $0.1 million of gain and $0.2 million of loss, respectively, related to our proportionate investment in CCKF within miscellaneous income on our unaudited condensed consolidated statements of income and comprehensive income.

We make periodic operating maintenance payments related to proprietary rights that we use in our intellipath® personalized learning technology. The total fees paid to CCKF for the quarters ended March 31, 2018 and 2017 were as follows (dollars in thousands):

 

Maintenance Fee Payments

 

For the quarter ended March 31, 2018

$

376

 

For the quarter ended March 31, 2017

$

325

 

 

Credit Agreement

During the fourth quarter of 2015, the Company; its wholly-owned subsidiary, CEC Educational Services, LLC (“CEC-ES”); and the subsidiary guarantors thereunder entered into a Fourth Amendment to its Amended and Restated Credit Agreement dated as of December 30, 2013 (as amended, the “Credit Agreement”) with BMO Harris Bank N.A., in its capacities as the initial lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the Credit Agreement, to among other things, decrease the revolving credit facility to $95.0 million and require pre-approval by the lenders for each credit extension (other than letter of credit extensions) occurring after December 31, 2015. The revolving credit facility under the Credit Agreement is scheduled to mature on December 31, 2018. The loans and letter of credit obligations under the Credit Agreement are required to be secured by 100% cash collateral. As of March 31, 2018 and December 31, 2017, there were no outstanding borrowings under the revolving credit facility.

7


 

5. REVENUE RECOGNITION

 

Disaggregation of Revenue

The following table disaggregates our revenue by major source (dollars in thousands):

 

 

 

For the Quarter Ended March 31, 2018

 

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

Tuition

 

$

90,734

 

 

$

51,131

 

 

$

331

 

 

$

142,196

 

Technology fees

 

 

2,874

 

 

 

1,840

 

 

 

-

 

 

 

4,714

 

Other miscellaneous fees(1)

 

 

500

 

 

 

100

 

 

 

-

 

 

 

600

 

      Total tuition and fees

 

 

94,108

 

 

 

53,071

 

 

 

331

 

 

 

147,510

 

Other revenue(2)

 

 

499

 

 

 

50

 

 

 

6

 

 

 

555

 

Total revenue

 

$

94,607

 

 

$

53,121

 

 

$

337

 

 

$

148,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2017

 

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

Tuition

 

$

90,205

 

 

$

52,219

 

 

$

13,709

 

 

$

156,133

 

Technology fees

 

 

2,793

 

 

 

1,858

 

 

 

-

 

 

 

4,651

 

Other miscellaneous fees(1)

 

 

496

 

 

 

88

 

 

 

9

 

 

 

593

 

      Total tuition and fees

 

 

93,494

 

 

 

54,165

 

 

 

13,718

 

 

 

161,377

 

Other revenue(2)

 

 

541

 

 

 

88

 

 

 

103

 

 

 

732

 

Total revenue

 

$

94,035

 

 

$

54,253

 

 

$

13,821

 

 

$

162,109

 

__________________

 

(1)

Other miscellaneous fees include graduation fees, laboratory fees and activity fees.

 

(2)

Other revenue primarily includes contract training revenue and bookstore and laptop sales.

 

Performance Obligations

Our revenue, which is derived primarily from academic programs taught to students who attend our institutions, is generally segregated into two categories: (1) tuition and fees and (2) other. Tuition and fees represent costs to our students for educational services provided by our institutions. Our institutions charge tuition and fees at varying amounts, depending on the institution, the type of program and specific curriculum. Our institutions bill students a single charge that covers tuition, fees and required program materials, such as textbooks and supplies, which we treat as a single performance obligation. Generally, we bill student tuition at the beginning of each academic term, and recognize the tuition as revenue on a straight-line basis over the academic term, which includes any applicable externship period. As part of a student’s course of instruction, certain fees, such as technology fees, graduation fees and laboratory fees, are billed to students. These fees are earned over the applicable term and are not considered separate performance obligations.

Other revenue, which consists primarily of contract training revenue and bookstore sales, is billed and recognized as goods are delivered or services are performed. Contract training revenue results from individual training courses that are stand-alone courses and not part of a degree or certificate program. Bookstore sales are primarily initiated by the student and are not included in the enrollment agreement at the onset of a student’s entrance to the institution. These types of sales constitute a separate performance obligation from classroom instruction.

Our institutions’ academic year is generally at least 30 weeks in length but varies both by institution and program of study and is divided by academic terms or payment periods. Academic terms or payment periods are determined by regulatory requirements mandated by the federal government and/or applicable accrediting body, which also vary by institution and program. Academic terms are determined by start dates, which vary by institution and program and are generally 10 – 11 weeks in length.

Contract Assets

Prior to the adoption of ASC Topic 606, we offset our student receivable balances with deferred revenue on a student by student basis. Deferred revenue was previously stated net of outstanding student receivables on a student-by-student basis as of the end of each reporting period. Upon adoption of ASC Topic 606, we determined that a portion of the student receivable balance which was previously offset with deferred revenue now meets the definition of student receivables and is not considered a contract asset and

8


therefore is no longer offset with deferred revenue. The previously reported balances along with the adjustment and beginning January 1, 2018 balances are provided below (dollars in thousands).

 

 

 

 

 

 

 

December 31, 2017

 

 

Impact of Modified Retrospective Adoption of ASC 606

 

 

January 1, 2018 Post ASC 606 Adoption

 

Student receivables, net of allowance for doubtful accounts, current

 

$

18,875

 

 

$

6,663

 

 

$

25,538

 

Deferred revenue

 

$

22,897

 

 

$

6,663

 

 

$

29,560

 

 

For each term, the portion of tuition and fee payments received from students but not yet earned is recorded as deferred revenue and reported as a current liability on our condensed consolidated balance sheets, as we expect to earn these revenues within the next year. A contract asset is recorded for each student for the current term for which they are enrolled for the amount charged for the current term that has not yet been received as payment and to which we do not have the unconditional right to receive payment because the student has not reached the point in the student’s current academic term at which the amount billed is no longer refundable to the student. On a student by student basis, the contract asset is offset against the deferred revenue balance for the current term and the net deferred revenue balance is reflected within current liabilities on our condensed consolidated balance sheets.

Due to the short-term nature of our academic terms, the contract asset balance which exists at the beginning of each quarter will no longer be a contract asset at the end of that quarter. The decrease in contract asset balances are a result of one of the following: it becomes a student receivable balance once a student reaches the point in a student’s academic term where the amount billed is no longer refundable to the student; a refund to withdrawn students for the portion entitled to be refunded under each institutions’ refund policy; or a student makes a change in the number of classes they are enrolled which may cause an adjustment to their previously billed amount. As of the end of each quarter, a new contract asset is determined on a student by student basis based on the most recently started term and a student’s progress within that term as compared to the date at which the student is no longer entitled to a refund under each institution’s refund policy.

The amount of contract assets which are being offset with deferred revenue balances as of January 1, 2018 and March 31, 2018 were as follows (dollars in thousands):

 

 

As of

 

 

 

January 1, 2018

 

 

March 31, 2018

 

Gross deferred revenue

 

$

39,544

 

 

$

45,582

 

Gross contract assets

 

 

(9,984

)

 

 

(15,304

)

Deferred revenue, net

 

$

29,560

 

 

$

30,278

 

Deferred Revenue

Changes in our deferred revenue balances for the quarter ended March 31, 2018 were as follows (dollars in thousands):

 

 

 

For the Quarter Ended March 31, 2018

 

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

Gross deferred revenue, January 1, 2018

 

$

23,933

 

 

$

15,507

 

 

$

104

 

 

$

39,544

 

Revenue earned from balances existing as of January 1, 2018

 

 

(20,623

)

 

 

(13,540

)

 

 

(38

)

 

 

(34,201

)

Billings during period

 

 

93,896

 

 

 

58,935

 

 

 

396

 

 

 

153,227

 

Revenue earned for new billings during the period

 

 

(73,485

)

 

 

(39,531

)

 

 

(293

)

 

 

(113,309

)

Other adjustments

 

 

304

 

 

 

44

 

 

 

(27

)

 

 

321

 

Gross deferred revenue, March 31, 2018

 

$

24,025

 

 

$

21,415

 

 

$

142

 

 

$

45,582

 

Cash Receipts

Our students finance costs through a variety of funding sources, including, among others, federal loan and grant programs, institutional payment plans, employer reimbursement, Veterans’ Administration and other military funding and grants, private and institutional scholarships and cash payments. Cash receipts from government related sources are typically received during the current academic term. We typically receive funds after the end of an academic term for students who receive employer reimbursements. Students who have not applied for any type of financial aid generally set up a payment plan with the institution and make payments on a monthly basis per the terms of the payment plan.

9


If a student withdraws from one of our institutions prior to the completion of the academic term or program period, we refund the portion of tuition and fees already paid that, pursuant to our refund policy and applicable federal and state law and accrediting agency standards, we are not entitled to retain. Generally, the amount to be refunded to a student is calculated based upon the percent of the term attended and the amount of tuition and fees paid by the student as of their withdrawal date. In certain circumstances, we have recognized revenue for students who have withdrawn that we are not entitled to retain. We have estimated a reserve for these limited circumstances based on historical evidence in the amount of $1.0 million as of March 31, 2018. Students are typically entitled to a partial refund through approximately halfway of their term. Pursuant to each institution’s policy, once a student reaches the point in the term where no refund is given, the student would not have a refund due if withdrawing from the institution subsequent to that date.

Management reassesses collectability when a student withdraws from the institution and has unpaid tuition charges for the current term which the institution is entitled to retain per the applicable refund policy. Such unpaid charges do not meet the threshold of reasonably collectible and are recognized as revenue in accordance with ASC Topic 606 when cash is received and the contract is terminated and neither party has further performance obligations. We have no remaining performance obligations for students who have withdrawn from our institutions, and once the refund calculation is performed and funds are returned to the student, if applicable under our refund policy, no further consideration is due back to the student. We recognized $0.4 million and $0.5 million of revenue for the quarters ended March 31, 2018 and March 31, 2017, respectively, for payments received from withdrawn students.

Significant Judgments

We analyze revenue recognition on a portfolio approach under ASC Topic 606. Significant judgment is utilized in determining the appropriate portfolios to assess for meeting the criteria to recognize revenue under ASC Topic 606. We have determined that all of our students can be grouped into one portfolio. Based on our past experience, students at different campuses, in different programs or with different funding all behave similarly. Enrollment agreements all contain similar terms, refund policies are similar across all institutions and all students work with the campus to obtain some type of funding, for example, Title IV Program funds, Veterans Administration funds, military funding, employer reimbursement or self-pay. We have significant historical data for our students which allows us to analyze collectability. We do not expect that revenue earned for the portfolio is significantly different as compared to revenue that would be earned if we were to assess each student contract separately.

Significant judgment is also required to assess collectability, particularly as it relates to students seeking funding under Title IV Programs. Because students are required to provide documentation, and in some cases extensive documentation, to the Department of Education to be eligible and approved for funding, the timeframe for this process can sometimes span between 90 to 120 days. We monitor the progress of students through the eligibility and approval process and assess collectability for the portfolio each reporting period to ensure that the collectability threshold is met.

For the quarters ended March 31, 2018 and 2017, we received a majority of our institutions’ cash receipts for tuition payments from various government agencies as well as our corporate partnerships which represents a substantial portion of our consolidated revenues and are all low risk of collectability.

6. STUDENT RECEIVABLES

Student receivables represent funds owed to us in exchange for the educational services provided to a student. Student receivables are reflected net of an allowance for doubtful accounts as determined on a student-by-student basis at the end of the reporting period. Student receivables, net are reflected on our condensed consolidated balance sheets as components of both current and non-current assets. We do not accrue interest on past due student receivables; interest is recorded only upon collection.

Generally, a student receivable balance is written off once it reaches greater than 90 days past due. Although we analyze past due receivables, it is not practical to provide an aging of our non-current student receivable balances as a result of the methodology utilized in determining our earned student receivable balances. Student receivables are recognized on our condensed consolidated balance sheets as they are deemed earned over the course of a student’s program and/or term, and therefore cash collections are not applied against specifically dated transactions.

Our standard student receivable allowance estimation methodology considers a number of factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for doubtful accounts. These factors include, but are not limited to: internal repayment history, repayment practices of previous extended payment programs, changes in the current economic, legislative or regulatory environments and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student receivables is validated by trending analysis and comparing estimated and actual performance. 

Student Receivables Under Extended Payment Plans and Recourse Loan Agreements

To assist students in completing their educational programs, we had previously provided extended payment plans to certain students and also had loan agreements with Sallie Mae and Stillwater National Bank and Trust Company (“Stillwater”) which required

10


us to repurchase loans originated by them to our students after a certain period of time. We discontinued providing extended payment plans to students during the first quarter of 2011 and the recourse loan agreements with Sallie Mae and Stillwater ended in March 2008 and April 2007, respectively.

As of March 31, 2018 and December 31, 2017, the amount of non-current student receivables under these programs along with payment plans that are longer than 12 months in duration, net of allowance for doubtful accounts, was $2.8 million and $2.5 million, respectively.

Student Receivables Valuation Allowance

Changes in our current and non-current receivables allowance for the quarters ended March 31, 2018 and 2017 were as follows (dollars in thousands):

 

 

 

Balance,

Beginning

of Period

 

 

Charges to

Expense (1)

 

 

Amounts

Written-off

 

 

Balance,

End

of Period

 

For the quarter ended March 31, 2018

 

$

22,534

 

 

$

7,013

 

 

$

(6,996

)

 

$

22,551

 

For the quarter ended March 31, 2017

 

$

23,142

 

 

$

8,292

 

 

$

(7,281

)

 

$

24,153

 

 

(1)

Charges to expense include an offset for recoveries of amounts previously written off of $1.3 million and $1.5 million for the quarters ended March 31, 2018 and 2017, respectively.

Fair Value Measurements

The carrying amount reported in our condensed consolidated balance sheets for the current portion of student receivables approximates fair value because of the nature of these financial instruments as they generally have short maturity periods. It is not practicable to estimate the fair value of the non-current portion of student receivables, since observable market data is not readily available, and no reasonable estimation methodology exists.

7. RESTRUCTURING CHARGES

During the past several years, we have carried out reductions in force related to the continued reorganization of our corporate and campus functions to better align with total enrollments and made decisions to teach out a number of campuses, meaning gradually close the campuses through an orderly process. As part of the process to wind down these teach-out campuses, the Company also announced that it will align its corporate overhead to support a more streamlined and focused operating entity. Most notably, we have recorded charges within our All Other Campuses segment and our corporate functions as we continue to align our overall management structure. Each of our teach-out campuses offer current students the reasonable opportunity to complete their course of study. The majority of these teach-out campuses have ceased operations as of March 31, 2018, with the remainder expected to cease operations by December 31, 2018.

The following table details the changes in our accrual for severance and related costs associated with all restructuring events for our continuing operations during the quarters ended March 31, 2018 and 2017 (dollars in thousands):

 

 

 

Balance,

Beginning of

Period

 

 

Severance &

Related

Charges

 

 

Payments

 

 

Non-cash

Adjustments (1)

 

 

Balance,

End of

Period

 

For the quarter ended March 31, 2018

 

$

2,170

 

 

$

-

 

 

$

(917

)

 

$

(79

)

 

$

1,174

 

For the quarter ended March 31, 2017

 

$

8,686

 

 

$

-

 

 

$

(1,889

)

 

$

(173

)

 

$

6,624

 

 

(1)

Includes cancellations due to employee departures prior to agreed upon end dates, employee transfers to open positions within the organization and subsequent adjustments to severance and related costs.

 

The current portion of the accrual for severance and related charges was $1.2 million and $2.1 million, respectively, as of March 31, 2018 and December 31, 2017, which is recorded within current accrued expenses – payroll and related benefits.

In addition, as of March 31, 2018, we have an accrual of approximately $0.4 million related to retention bonuses that have been offered to certain employees. These amounts are recorded ratably over the period the employees are retained.

Remaining Lease Obligations of Continuing Operations

We have recorded lease exit costs associated with the exit of real estate space for certain campuses related to our continuing operations, primarily associated with our teach-out campuses. These costs are recorded within educational services and facilities expense on our unaudited condensed consolidated statements of income and comprehensive income. The current portion of the

11


liability for these charges is reflected within other accrued expenses under current liabilities and the long-term portion of these charges are included in other liabilities under the non-current liabilities section of our condensed consolidated balance sheets. Changes in our future minimum lease obligations for vacated space related to our continuing operations for the quarters ended March 31, 2018 and 2017 were as follows (dollars in thousands):              

 

 

 

Balance,

Beginning

of Period

 

 

Charges

Incurred (1)

 

 

Net Cash

Payments

 

 

Other (2)

 

 

Balance,

End of

Period

 

For the quarter ended March 31, 2018

 

$

20,763

 

 

$

432

 

 

$

(5,352

)

 

$

-

 

 

$

15,843

 

For the quarter ended March 31, 2017

 

$

36,814

 

 

$

4,457

 

 

$

(5,999

)

 

$

(862

)

 

$

34,410

 

_____________

(1)Includes charges for newly vacated spaces and subsequent adjustments for accretion, revised estimates and variances between estimated and actual charges, net of any reversals for terminated lease obligations.

(2)Includes existing prepaid rent and deferred rent liability balances for newly vacated spaces that offset the losses incurred in the period recorded.

In addition to the severance charges detailed above, our six remaining teach-out campuses will have remaining lease obligations following the eventual campus closure. The total remaining estimated charge as of March 31, 2018, for all restructuring events reported within continuing operations related to the remaining lease obligation for these leases, once the campus completes the close process, and adjusted for possible lease buyouts and sublease assumptions is approximately $3 million. The amount related to each campus will be recorded at each campus closure date based on current estimates and assumptions related to the amount and timing of sublease income. This is in addition to approximately $68.2 million of charges related to remaining obligations for continuing operations which were recorded since 2015.

8. CONTINGENCIES

An accrual for estimated legal fees and settlements of $11.8 million and $8.7 million at March 31, 2018 and December 31, 2017, respectively, is presented within other current liabilities on our condensed consolidated balance sheets.

We record a liability when we believe that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. We evaluate, at least quarterly, developments in our legal matters that could affect the amount of liability that was previously accrued, and make adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. We may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (1) if the damages sought are indeterminate; (2) if the proceedings are in early stages; (3) if there is uncertainty as to the outcome o