10-Q 1 ceco-10q_20180930.htm 10-Q ceco-10q_20180930.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 SEPTEMBER 30, 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 every Interactive Data File required to be submitted 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 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

 

 

 

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 October 26, 2018: 69,760,992

 

 


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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

Item 4.

Controls and Procedures

36

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 6.

Exhibits

37

 

 

SIGNATURES

39

 

 

 


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

(unaudited)

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents, unrestricted

 

$

32,029

 

 

$

18,110

 

Restricted cash

 

 

337

 

 

 

789

 

Restricted short-term investments

 

 

4,320

 

 

 

5,070

 

Short-term investments

 

 

156,336

 

 

 

156,178

 

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

 

 

193,022

 

 

 

180,147

 

Student receivables, net of allowance for doubtful accounts of $21,571 and $20,533

   as of September 30, 2018 and December 31, 2017, respectively

 

 

34,043

 

 

 

18,875

 

Receivables, other, net

 

 

2,445

 

 

 

1,163

 

Prepaid expenses

 

 

8,515

 

 

 

7,722

 

Inventories

 

 

894

 

 

 

1,112

 

Other current assets

 

 

1,122

 

 

 

1,319

 

Assets of discontinued operations

 

 

66

 

 

 

382

 

Total current assets

 

 

240,107

 

 

 

210,720

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $195,650 and $213,825

   as of September 30, 2018 and December 31, 2017, respectively

 

 

29,977

 

 

 

33,230

 

Goodwill

 

 

87,356

 

 

 

87,356

 

Intangible assets, net of amortization of $1,400 as of both September 30, 2018 and December 31, 2017

 

 

7,900

 

 

 

7,900

 

Student receivables, net of allowance for doubtful accounts of $1,980

   and $2,001 as of September 30, 2018 and December 31, 2017, respectively

 

 

2,230

 

 

 

2,548

 

Deferred income tax assets, net

 

 

86,910

 

 

 

98,084

 

Other assets

 

 

5,277

 

 

 

5,673

 

Assets of discontinued operations

 

 

1,596

 

 

 

1,585

 

TOTAL ASSETS

 

$

461,353

 

 

$

447,096

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,646

 

 

$

8,515

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related benefits

 

 

23,953

 

 

 

32,910

 

Advertising and marketing costs

 

 

11,733

 

 

 

9,245

 

Income taxes

 

 

2,062

 

 

 

2,185

 

Other

 

 

16,222

 

 

 

31,233

 

Deferred revenue

 

 

22,988

 

 

 

22,897

 

Liabilities of discontinued operations

 

 

2,013

 

 

 

5,701

 

Total current liabilities

 

 

91,617

 

 

 

112,686

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Deferred rent obligations

 

 

14,205

 

 

 

15,277

 

Other liabilities

 

 

15,884

 

 

 

22,143

 

Liabilities of discontinued operations

 

 

-

 

 

 

785

 

Total non-current liabilities

 

 

30,089

 

 

 

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; 85,159,221

   and 84,279,533 shares issued, 69,760,992 and 69,117,803 shares

   outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

852

 

 

 

843

 

Additional paid-in capital

 

 

626,751

 

 

 

621,008

 

Accumulated other comprehensive loss

 

 

(271

)

 

 

(164

)

Accumulated deficit

 

 

(67,017

)

 

 

(108,127

)

Treasury stock, at cost; 15,398,229 and 15,161,730 shares as of September 30, 2018

   and December 31, 2017, respectively

 

 

(220,668

)

 

 

(217,355

)

Total stockholders' equity

 

 

339,647

 

 

 

296,205

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

461,353

 

 

$

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 September 30,

 

 

For the Year to Date Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tuition and fees

 

$

144,882

 

 

$

144,408

 

 

$

433,736

 

 

$

451,292

 

Other

 

 

808

 

 

 

578

 

 

 

2,055

 

 

 

2,025

 

Total revenue

 

 

145,690

 

 

 

144,986

 

 

 

435,791

 

 

 

453,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Educational services and facilities

 

 

27,201

 

 

 

37,788

 

 

 

84,437

 

 

 

114,367

 

General and administrative

 

 

96,842

 

 

 

99,077

 

 

 

293,190

 

 

 

304,158

 

Depreciation and amortization

 

 

2,364

 

 

 

3,582

 

 

 

7,049

 

 

 

11,368

 

Total operating expenses

 

 

126,407

 

 

 

140,447

 

 

 

384,676

 

 

 

429,893

 

Operating income

 

 

19,283

 

 

 

4,539

 

 

 

51,115

 

 

 

23,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

950

 

 

 

474

 

 

 

2,326

 

 

 

1,328

 

Interest expense

 

 

(108

)

 

 

(114

)

 

 

(323

)

 

 

(340

)

Miscellaneous income

 

 

32

 

 

 

196

 

 

 

225

 

 

 

489

 

Total other income

 

 

874

 

 

 

556

 

 

 

2,228

 

 

 

1,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRETAX INCOME

 

 

20,157

 

 

 

5,095

 

 

 

53,343

 

 

 

24,901

 

Provision for income taxes

 

 

5,089

 

 

 

1,597

 

 

 

11,527

 

 

 

11,143

 

INCOME FROM CONTINUING OPERATIONS

 

 

15,068

 

 

 

3,498

 

 

 

41,816

 

 

 

13,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, net of tax

 

 

(211

)

 

 

(476

)

 

 

(706

)

 

 

(1,273

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

14,857

 

 

 

3,022

 

 

 

41,110

 

 

 

12,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(21

)

 

 

105

 

 

 

(103

)

 

 

368

 

Unrealized gain (loss) on investments

 

 

106

 

 

 

-

 

 

 

(4

)

 

 

34

 

     Total other comprehensive income (loss)

 

 

85

 

 

 

105

 

 

 

(107

)

 

 

402

 

COMPREHENSIVE INCOME

 

$

14,942

 

 

$

3,127

 

 

$

41,003

 

 

$

12,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - BASIC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.21

 

 

$

0.05

 

 

$

0.60

 

 

$

0.20

 

Loss from discontinued operations

 

 

-

 

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.02

)

Net income per share

 

$

0.21

 

 

$

0.04

 

 

$

0.59

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - DILUTED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.21

 

 

$

0.05

 

 

$

0.59

 

 

$

0.20

 

Loss from discontinued operations

 

 

-

 

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.02

)

Net income per share

 

$

0.21

 

 

$

0.04

 

 

$

0.58

 

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,737

 

 

 

69,082

 

 

 

69,542

 

 

 

68,897

 

Diluted

 

 

71,790

 

 

 

70,865

 

 

 

71,425

 

 

 

70,660

 

 

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 Year to Date Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

41,110

 

 

$

12,485

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

 

 

cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

7,049

 

 

 

11,368

 

Bad debt expense

 

 

21,579

 

 

 

21,516

 

Compensation expense related to share-based awards

 

 

4,143

 

 

 

3,616

 

Deferred income taxes

 

 

11,174

 

 

 

10,282

 

Changes in operating assets and liabilities

 

 

(66,760

)

 

 

(88,374

)

Net cash provided by (used in) operating activities

 

 

18,295

 

 

 

(29,107

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(190,726

)

 

 

(202,050

)

Sales of available-for-sale investments

 

 

191,555

 

 

 

199,340

 

Purchases of property and equipment

 

 

(3,952

)

 

 

(3,426

)

Net cash used in investing activities

 

 

(3,123

)

 

 

(6,136

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

1,608

 

 

 

2,548

 

Payments of employee tax associated with stock compensation

 

 

(3,313

)

 

 

(1,170

)

Net cash (used in) provided by financing activities

 

 

(1,705

)

 

 

1,378

 

 

 

 

 

 

 

 

 

 

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE

   CHANGES ON CASH AND CASH EQUIVALENTS:

 

 

-

 

 

 

48

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

13,467

 

 

 

(33,817

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

 

18,899

 

 

 

50,882

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

32,366

 

 

$

17,065

 

 

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 and year to date ended September 30, 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 third quarter of 2018, the Company completed the teach-out of Harrington College of Design, which continues to be reported within the All Other Campuses segment as of September 30, 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.

3. RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance adopted in 2018

4


In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting. The amendments in this ASU expanded the accounting scope to include share-based payments issued to non-employees for goods or services to substantially align with share-based payments issued to employees. For public entities, ASU 2018-07 is effective for annual reporting periods and interim periods beginning after December 15, 2018; early adoption is permitted. We have evaluated and early adopted this guidance effective 2018. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments in this ASU allow public companies to record provisional amounts in their annual and interim financial statements using an approach similar to the “measurement period” that US GAAP permits in connection with the accounting for a recently acquired business. During the measurement period, management records provisional amounts for the effects of the tax law changes that can be reasonably estimated. If the finalization of the effect results in a different number, the adjustment to the provisional amount that was initially recorded does not represent the correction of an error. Instead, the adjustment is recorded to income tax expense in the period it is identified. For all entities, ASU 2018-05 is effective for annual periods and interim periods upon discovery. 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 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 beginning 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 more information.

 

 

5


Recent accounting guidance not yet adopted

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU provide clarifications which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software or software licenses. The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. For public entities, ASU 2018-15 is effective annual periods and interim periods beginning after December 15, 2019; early adoption is permitted. We are currently evaluating this guidance and the impact on the presentation of our financial condition, results of operations and disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU carried removals, modifications and additions of the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The guidance removed the requirements of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. The modifications include requirements to disclose timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse if the investee has communicated the timing to the entity or announced the timing publicly for those investments in entities which calculate net asset value and provide clarity to communicate information about the uncertainty in measurement as of the reporting date. Furthermore, this ASU added additional requirements which include changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For all entities, ASU 2018-13 is effective for annual periods and interim periods beginning after December 15, 2019; 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 disclosures.     

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 provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period when 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 disclosures.

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.

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. Subsequently, the FASB issued two additional Updates to the guidance as follows: In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, together providing additional clarity on certain narrow aspects of the guidance and providing an additional optional transition method to adopt the new leases standard. 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. Additionally, we expect an immaterial impact to the consolidated statement of income and comprehensive income prospectively. Based on ASU 2018-11, we will recognize and measure leases at the beginning of the adoption date which will be January 1, 2019 for CEC. Any cumulative effect adjustments will be recorded as an adjustment to the opening balance of retained earnings in the period of adoption. 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.

6


4. FINANCIAL INSTRUMENTS

Investments consist of the following as of September 30, 2018 and December 31, 2017 (dollars in thousands):

 

 

 

September 30, 2018

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

$

139,700

 

 

$

17

 

 

$

(241

)

 

$

139,476

 

Treasury and federal agencies

 

 

16,987

 

 

 

-

 

 

 

(127

)

 

 

16,860

 

Total short-term investments

 

 

156,687

 

 

 

17

 

 

 

(368

)

 

 

156,336

 

Restricted short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

 

4,320

 

 

 

-

 

 

 

-

 

 

 

4,320

 

Total investments (available for sale)

 

$

161,007

 

 

$

17

 

 

$

(368

)

 

$

160,656

 

 

 

 

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 September 30, 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.

As of September 30, 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.

7


Investments measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC Topic 820 – Fair Value Measurements at September 30, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

 

 

As of  September 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Non-governmental debt securities

 

$

15,000

 

 

$

128,796

 

 

$

-

 

 

$

143,796

 

Treasury and federal agencies

 

 

-

 

 

 

16,860

 

 

 

-

 

 

 

16,860

 

Totals

 

$

15,000

 

 

$

145,656

 

 

$

-

 

 

$

160,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2018, our investment in an equity affiliate equated to a 30.7%, or $3.0 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 September 30, 2018 and 2017, we recorded less than $0.1 million of gain and $0.1 million of loss, respectively, and during the years to date ended September 30, 2018 and September 30, 2017, we recorded $0.1 million 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 and years to date ended September 30, 2018 and 2017 were as follows (dollars in thousands):

 

Maintenance Fee Payments

 

For the quarter ended September 30, 2018

$

355

 

For the quarter ended September 30, 2017

$

356

 

For the year to date ended September 30, 2018

$

1,108

 

For the year to date ended September 30, 2017

$

1,013

 

 

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 September 30, 2018 and December 31, 2017, there were no outstanding borrowings under the revolving credit facility.

 

5. REVENUE RECOGNITION

 

Disaggregation of Revenue

The following tables disaggregate our revenue by major source (dollars in thousands):

 

8


 

 

For the Quarter Ended September 30, 2018

 

 

For the Year to Date Ended September 30, 2018

 

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

Tuition

 

$

89,121

 

 

$

50,349

 

 

$

64

 

 

$

139,534

 

 

$

269,146

 

 

$

148,134

 

 

$

555

 

 

$

417,835

 

Technology fees

 

 

2,823

 

 

 

1,953

 

 

 

-

 

 

 

4,776

 

 

 

8,554

 

 

 

5,577

 

 

 

-

 

 

 

14,131

 

Other miscellaneous fees(1)

 

 

426

 

 

 

145

 

 

 

1

 

 

 

572

 

 

 

1,415

 

 

 

335

 

 

 

20

 

 

 

1,770

 

      Total tuition and fees

 

 

92,370

 

 

 

52,447

 

 

 

65

 

 

 

144,882

 

 

 

279,115

 

 

 

154,046

 

 

 

575

 

 

 

433,736

 

Other revenue(2)

 

 

745

 

 

 

57

 

 

 

6

 

 

 

808

 

 

 

1,873

 

 

 

158

 

 

 

24

 

 

 

2,055

 

Total revenue

 

$

93,115

 

 

$

52,504

 

 

$

71

 

 

$

145,690

 

 

$

280,988

 

 

$

154,204

 

 

$

599

 

 

$

435,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended September 30, 2017

 

 

For the Year to Date Ended September 30, 2017

 

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

 

CTU

 

 

AIU

 

 

All Other Campuses

 

 

Total

 

Tuition

 

$

87,603

 

 

$

48,287

 

 

$

3,501

 

 

$

139,391

 

 

$

265,163

 

 

$

144,942