ceco-10q_20190331.htm

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.

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 May 3, 2019: 70,102,909

	March 31,			December 31,
	2019			2018
ASSETS	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents, unrestricted	$	38,799		$	32,394
Restricted cash		337			337
Short-term investments		200,768			196,428
Total cash and cash equivalents, restricted cash and short-term investments		239,904			229,159
Student receivables, net of allowance for doubtful accounts of $26,331 and $23,307 as of March 31, 2019 and December 31, 2018, respectively		29,840			28,751
Receivables, other, net		2,581			2,567
Prepaid expenses		8,381			7,771
Inventories		727			763
Other current assets		628			437
Assets of discontinued operations		120			-
Total current assets		282,181			269,448

NON-CURRENT ASSETS:
Property and equipment, net of accumulated depreciation of $192,613 and $198,052 as of March 31, 2019 and December 31, 2018, respectively		28,397			30,048
Right of use asset		43,389			-
Goodwill		87,356			87,356
Intangible assets, net of amortization of $1,400 as of both March 31, 2019 and December 31, 2018		7,900			7,900
Student receivables, net of allowance for doubtful accounts of $1,598 and $1,529 as of March 31, 2019 and December 31, 2018, respectively		975			942
Deferred income tax assets, net		74,850			81,628
Other assets		4,930			4,993
Assets of discontinued operations		178			178
TOTAL ASSETS	$	530,156		$	482,493
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lease liability-operating	$	14,595		$	-
Accounts payable		13,072			9,195
Accrued expenses:
Payroll and related benefits		17,449			24,530
Advertising and marketing costs		11,633			9,300
Income taxes		1,298			1,472
Other		10,277			19,668
Deferred revenue		24,289			32,351
Liabilities of discontinued operations		8			536
Total current liabilities		92,621			97,052

NON-CURRENT LIABILITIES:
Lease liability-operating		47,328			-
Deferred rent obligations		-			12,745
Other liabilities		9,885			17,493
Total non-current liabilities		57,213			30,238

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; 85,658,822 and 85,173,686 shares issued, 70,102,909 and 69,772,910 shares outstanding as of March 31, 2019 and December 31, 2018, respectively		857			852
Additional paid-in capital		629,768			628,295
Accumulated other comprehensive gain (loss)		49			(298	)
Accumulated deficit		(27,120	)		(52,946	)
Treasury stock, at cost; 15,555,913 and 15,400,776 shares as of March 31, 2019 and December 31, 2018, respectively		(223,232	)		(220,700	)
Total stockholders' equity		380,322			355,203
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	530,156		$	482,493

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

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

	For the Quarter Ended March 31,
	2019			2018
REVENUE:
Tuition and fees	$	157,228		$	147,510
Other		625			555
Total revenue		157,853			148,065

OPERATING EXPENSES:
Educational services and facilities		26,327			26,946
General and administrative		99,322			98,008
Depreciation and amortization		2,233			2,582
Total operating expenses		127,882			127,536
Operating income		29,971			20,529

OTHER INCOME:
Interest income		1,440			634
Interest expense		(42	)		(109	)
Miscellaneous income		226			328
Total other income		1,624			853

PRETAX INCOME		31,595			21,382
Provision for income taxes		6,407			3,498
INCOME FROM CONTINUING OPERATIONS		25,188			17,884

LOSS FROM DISCONTINUED OPERATIONS, net of tax		(397	)		(382	)

NET INCOME		24,791			17,502

OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustments		(52	)		86
Unrealized gain (loss) on investments		399			(218	)
Total other comprehensive income (loss)		347			(132	)
COMPREHENSIVE INCOME	$	25,138		$	17,370

NET INCOME (LOSS) PER SHARE - BASIC:
Income from continuing operations	$	0.36		$	0.26
Loss from discontinued operations		(0.01	)		(0.01	)
Net income per share	$	0.35		$	0.25

NET INCOME (LOSS) PER SHARE - DILUTED:
Income from continuing operations	$	0.35		$	0.25
Loss from discontinued operations		-			-
Net income per share	$	0.35		$	0.25

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		69,837			69,216
Diluted		71,492			71,119

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

	Common Stock				Treasury Stock								Accumulated Other
	Issued Shares		$0.01 Par Value		Purchased Shares			Cost			Additional Paid-in Capital		Comprehensive Gain (Loss)			Accumulated Deficit			Total
BALANCE, January 1, 2019		85,174	$	852		(15,401	)	$	(220,700	)	$	628,295	$	(298	)	$	(52,946	)	$	355,203
Net income		-		-		-			-			-		-			24,791			24,791
Foreign currency translation		-		-		-			-			-		(52	)		-			(52	)
Unrealized gain on investments		-		-		-			-			-		399			-			399
Adjustment for change in accounting method		-		-		-			-			-		-			1,035			1,035
Share-based compensation expense		-		-		-			-			1,369		-			-			1,369
Common stock issued		485		5		(155	)		(2,532	)		104		-			-			(2,423	)
BALANCE, March 31, 2019		85,659	$	857		(15,556	)	$	(223,232	)	$	629,768	$	49		$	(27,120	)	$	380,322



	Common Stock				Treasury Stock								Accumulated Other
	Issued Shares		$0.01 Par Value		Purchased Shares			Cost			Additional Paid-in Capital		Comprehensive Loss			Accumulated Deficit			Total
BALANCE, January 1, 2018		84,280	$	843		(15,162	)	$	(217,355	)	$	621,008	$	(164	)	$	(108,127	)	$	296,205
Net income		-		-		-			-			-		-			17,502			17,502
Foreign currency translation		-		-		-			-			-		86			-			86
Unrealized loss on investments		-		-		-			-			-		(218	)		-			(218	)
Share-based compensation expense		-		-		-			-			1,501		-			-			1,501
Common stock issued		708		7		(215	)		(2,981	)		869		-			-			(2,105	)
BALANCE, March 31, 2018		84,988	$	850		(15,377	)	$	(220,336	)	$	623,378	$	(296	)	$	(90,625	)	$	312,971

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

	For the Quarter Ended March 31,
	2019			2018

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	24,791		$	17,502
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense		2,233			2,582
Bad debt expense		11,709			6,982
Compensation expense related to share-based awards		1,369			1,501
Deferred income taxes		6,778			3,704
Changes in operating assets and liabilities		(33,935	)		(21,175	)
Net cash provided by operating activities		12,945			11,096

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments		(138,700	)		(50,799	)
Sales of available-for-sale investments		135,062			49,257
Purchases of property and equipment		(479	)		(1,360	)
Net cash used in investing activities		(4,117	)		(2,902	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock		109			875
Payments of employee tax associated with stock compensation		(2,532	)		(2,981	)
Net cash used in financing activities		(2,423	)		(2,106	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		6,405			6,088
CASH AND CASH EQUIVALENTS, beginning of the period		32,731			18,899
CASH AND CASH EQUIVALENTS, end of the period	$	39,136		$	24,987

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

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 regionally accredited universities – Colorado Technical University (“CTU”) and American InterContinental University (“AIU”) – 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 needs of today’s busy adults. CTU and AIU 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.

A listing of our university 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 “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 institutions.

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, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.

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 is comprised of a postsecondary education institution that offers a variety of academic programs. We organize our business across two reporting segments: CTU and AIU (collectively referred to as the “University Group”).

As of January 1, 2019, campuses which were included in our former All Other Campuses segment have been fully taught out. As a result, during the first quarter of 2019, the Company combined the former All Other Campuses reporting segment with ‘Corporate and Other’ as part of continuing operations. Prior period segment amounts have been recast to reflect our reporting segments on a comparable basis.

Effective January 1, 2019, we have implemented FASB ASC Topic 842 – Leases. This guidance supersedes all previously issued lease guidance. As a result of this change in accounting guidance, we updated our lease policies and disclosures. The guidance under Topic 842 impacts accounting for leases with the most significant impact primarily related to our accounting for real estate leases and real estate subleases. The guidance under Topic 842 significantly impacts our presentation of financial condition and disclosures, but did not have significant impact to our results of operations. We now have a material amount reported as a right of use asset and lease liability related to these leases reported on our unaudited condensed consolidated balance sheet. Prior period amounts have not been restated in accordance with ASC 842’s modified retrospective approach. See Note 7 “Leases” for more information.

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. We have evaluated and adopted this guidance effective January 1, 2019. The adoption did 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. For all public business entities, ASU 2016-02 is effective for annual periods and interim periods beginning after December 15, 2018. We completed the assessment of our evaluation of the new standard on our accounting policies and processes and adopted this guidance beginning 2019 using a modified retrospective approach without restating prior comparative periods. The most significant impact primarily relates to our accounting for real estate leases and real estate subleases. The adoption of this guidance significantly impacts the presentation of our financial condition and disclosures, but didn’t materially impact our results of operations. See Note 7 “Leases” for further information.

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 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 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 include removals, modifications of and additions to the disclosure requirements on fair value measurements, 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 as well as provides clarity for disclosures surrounding uncertainties in measurement as of the reporting date. Furthermore, this ASU added additional requirements regarding 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 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.

Investments consist of the following as of March 31, 2019 and December 31, 2018 (dollars in thousands):

In the table above, unrealized holding gains (losses) as of March 31, 2019 relate to short-term investments that have been in a continuous unrealized gain (loss) position for less than one year.

Our 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.

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 March 31, 2019, 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, 2019 and December 31, 2018 were as follows (dollars in thousands):

	As of March 31, 2019
	Level 1		Level 2		Level 3		Total
Non-governmental debt securities	$	10,000	$	177,990	$	-	$	187,990
Treasury and federal agencies		-		12,778		-		12,778
Totals	$	10,000	$	190,768	$	-	$	200,768

	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Non-governmental debt securities	$	20,000	$	159,091	$	-	$	179,091
Treasury and federal agencies		-		17,337		-		17,337
Totals	$	20,000	$	176,428	$	-	$	196,428

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, 2019, our investment in an equity affiliate equated to a 30.7%, or $2.6 million, non-controlling interest in CCKF, a Dublin-based educational technology company providing intelligent systems to power the delivery of individualized and personalized learning.

We recorded less than $0.1 million of gain during each of the quarters ended March 31, 2019 and 2018 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, 2019 and 2018 were as follows (dollars in thousands):

On December 27, 2018, the Company; its wholly-owned subsidiary, CEC Educational Services, LLC; and the subsidiary guarantors thereunder, entered into a credit agreement with BMO Harris Bank N.A. (“BMO Harris”), in its capacities as the sole lender, the letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the credit agreement. The credit agreement provides the Company with the benefit of a $50.0 million revolving credit facility and is scheduled to mature on January 20, 2022. The loans and letter of credit obligations under the credit agreement are required to be 100% secured with cash and marketable securities deposited with the bank. As of March 31, 2019 and December 31, 2018, there were no outstanding borrowings under the revolving credit facility.

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

	For the Quarter Ended March 31, 2019
	CTU		AIU		Corporate and Other ⁽³⁾		Total
Tuition	$	92,618	$	58,230	$	-	$	150,848
Technology fees		3,449		2,378		-		5,827
Other miscellaneous fees⁽¹⁾		424		129		-		553
Total tuition and fees		96,491		60,737		-		157,228
Other revenue⁽²⁾		566		42		17		625
Total revenue	$	97,057	$	60,779	$	17	$	157,853


	For the Quarter Ended March 31, 2018
	CTU		AIU		Corporate and Other ⁽³⁾		Total
Tuition	$	90,734	$	51,131	$	331	$	142,196
Technology fees		2,874		1,840		-		4,714
Other miscellaneous fees⁽¹⁾		500		100		-

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)


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	CECO	Nasdaq Global Select Market



		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 Stockholders’ Equity	3

	Unaudited Condensed Consolidated Statements of Cash Flows	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

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

	Maintenance Fee Payments
For the quarter ended March 31, 2019	$	348
For the quarter ended March 31, 2018	$	376

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

	March 31, 2019
			Gross Unrealized
	Cost		Gain		(Loss)			Fair Value
Short-term investments (available for sale):
Non-governmental debt securities	$	187,935	$	150	$	(95	)	$	187,990
Treasury and federal agencies		12,816		4		(42	)		12,778
Total short-term investments (available for sale)	$	200,751	$	154	$	(137	)	$	200,768

	December 31, 2018
			Gross Unrealized
	Cost		Gain		(Loss)			Fair Value
Short-term investments (available for sale):
Non-governmental debt securities	$	179,393	$	35	$	(337	)	$	179,091
Treasury and federal agencies		17,417		5		(85	)		17,337
Total short-term investments (available for sale)	$	196,810	$	40	$	(422	)	$	196,428