10-Q 1 a2180653z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)  

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

OR

o
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

LOGO

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.)

2895 Greenspoint Parkway, Suite 600,
Hoffman Estates, Illinois
(Address of principal executive offices)
 
 
 60169
(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 ý No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

  Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o

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

        Number of shares of registrant's common stock, par value $0.01, outstanding as of October 31, 2007: 91,072,533

CAREER EDUCATION CORPORATION
INDEX

 
    
   Page

 
 
PART I—FINANCIAL INFORMATION
 
 

Item 1.
 
Financial Statements
 
3

 
 
Unaudited Condensed Consolidated Balance Sheets
 
3

 
 
Unaudited Condensed Consolidated Statements of Income
 
4

 
 
Unaudited Condensed Consolidated Statement of Stockholders' Equity
 
5

 
 
Unaudited Condensed Consolidated Statements of Cash Flows
 
6

 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
7

Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
45

Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
72

Item 4.
 
Controls and Procedures
 
73

 
 
PART II—OTHER INFORMATION
 
 

Item 1.
 
Legal Proceedings
 
74

Item 1A.
 
Risk Factors
 
74

Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
74

Item 5.
 
Other Information
 
75

Item 6.
 
Exhibits
 
75

SIGNATURES
 
76

2


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 
   September 30,
2007
   December 31,
2006
  
ASSETS              
CURRENT ASSETS:              
  Cash and cash equivalents   $ 199,631   $ 187,853  
  Investments     243,136     259,766  
   
 
 
  Total cash and cash equivalents and investments     442,767     447,619  
  Receivables:              
    Students, net of allowance for doubtful accounts of $30,495 and $28,709 as of September 30, 2007, and December 31, 2006, respectively     58,414     48,564  
    Other, net     7,028     8,094  
  Prepaid expenses     35,755     29,621  
  Inventories     16,409     16,853  
  Deferred income tax assets     7,159     11,357  
  Assets held for sale     59,887     63,156  
  Other current assets     12,995     32,064  
   
 
 
      Total current assets     640,414     657,328  
   
 
 
PROPERTY AND EQUIPMENT, net     339,275     352,270  
GOODWILL     382,914     349,760  
INTANGIBLE ASSETS, net     45,792     33,984  
OTHER ASSETS     21,799     32,321  
   
 
 
TOTAL ASSETS   $ 1,430,194   $ 1,425,663  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
CURRENT LIABILITIES:              
  Current maturities of long-term debt   $ 11,596   $ 12,098  
  Accounts payable     33,606     30,095  
  Accrued expenses:              
    Payroll and related benefits     28,576     27,012  
    Income taxes     5,344     —  
    Other     85,887     78,885  
  Deferred tuition revenue     179,303     132,186  
  Liabilities held for sale     30,806     31,879  
   
 
 
      Total current liabilities     375,118     312,155  
   
 
 
LONG-TERM LIABILITIES:              
  Long-term debt, net of current maturities     3,484     2,763  
  Deferred rent obligations     92,143     90,360  
  Deferred income tax liabilities     16,607     16,527  
  Other     7,093     7,980  
   
 
 
      Total long-term liabilities     119,327     117,630  
   
 
 
SHARE-BASED AWARDS SUBJECT TO REDEMPTION     13,949     13,477  

STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
 
  Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding     —     —  
  Common stock, $0.01 par value; 300,000,000 shares authorized; 107,724,610 and 106,923,310 shares issued, 92,084,073 and 96,148,825 shares outstanding as of September 30, 2007, and December 31, 2006, respectively     1,077     1,069  
  Additional paid-in capital     696,070     666,780  
  Accumulated other comprehensive income     14,773     5,683  
  Retained earnings     725,440     675,188  
  Cost of 15,640,537 and 10,774,485 shares in treasury as of September 30, 2007, and December 31, 2006, respectively     (515,560 )   (366,319 )
   
 
 
      Total stockholders' equity     921,800     982,401  
   
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 1,430,194   $ 1,425,663  
   
 
 

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

3


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

 
   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
  
 
   2007
   2006
   2007
   2006
  
REVENUE:                          
  Tuition and registration fees   $ 380,523   $ 405,866   $ 1,178,054   $ 1,310,988  
  Other     23,882     22,698     59,671     60,149  
   
 
 
 
 
      Total revenue     404,405     428,564     1,237,725     1,371,137  
   
 
 
 
 

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Educational services and facilities     149,514     139,811     437,777     418,273  
  General and administrative     211,642     230,180     660,182     695,634  
  Depreciation and amortization     19,301     19,382     57,744     57,142  
  Goodwill impairment charge     —     785     —     85,760  
   
 
 
 
 
      Total operating expenses     380,457     390,158     1,155,703     1,256,809  
   
 
 
 
 
Income from operations     23,948     38,406     82,022     114,328  
   
 
 
 
 

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest income     4,269     4,475     13,105     13,448  
  Interest expense     (336 )   (322 )   (899 )   (1,007 )
  Share of affiliate earnings     209     510     2,870     2,109  
  Miscellaneous income     56     120     772     25  
   
 
 
 
 
      Total other income     4,198     4,783     15,848     14,575  
   
 
 
 
 
Income before provision for income taxes     28,146     43,189     97,870     128,903  
PROVISION FOR INCOME TAXES     8,316     16,153     33,765     77,548  
   
 
 
 
 
Income from continuing operations     19,830     27,036     64,105     51,355  

LOSS FROM DISCONTINUED OPERATIONS, net of tax
 
 
(4,269
)
 
(6,321
)
 
(13,381
)
 
(25,450
)
   
 
 
 
 

NET INCOME
 
$
15,561
 
$
20,715
 
$
50,724
 
$
25,905
 
   
 
 
 
 

NET INCOME PER SHARE—BASIC:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Income from continuing operations   $ 0.21   $ 0.29   $ 0.68   $ 0.53  
  Loss from discontinued operations     (0.04 )   (0.07 )   (0.14 )   (0.26 )
   
 
 
 
 
  Net income   $ 0.17   $ 0.22   $ 0.54   $ 0.27  
   
 
 
 
 

NET INCOME PER SHARE — DILUTED:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Income from continuing operations   $ 0.21   $ 0.28   $ 0.67   $ 0.52  
  Loss from discontinued operations     (0.04 )   (0.06 )   (0.14 )   (0.26 )
   
 
 
 
 
  Net income   $ 0.17   $ 0.22   $ 0.53   $ 0.26  
   
 
 
 
 

WEIGHTED AVERAGE SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic     92,806     94,721     94,329     96,605  
   
 
 
 
 
  Diluted     93,455     96,195     95,055     98,556  
   
 
 
 
 

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

4


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In thousands)

 
   Common Stock
   Treasury Stock
    
    
    
    
  
 
    
   Accumulated
Other
Comprehensive
Income
    
    
  
 
   Issued
Shares
   $0.01 Par
Value
   Purchased
Shares
   Cost
   Additional
Paid-in
Capital
   Retained
Earnings
   Total
  
BALANCE, December 31, 2006   106,923   $ 1,069   (10,774 ) $ (366,319 ) $ 666,780   $ 5,683   $ 675,188   $ 982,401  
 
Net income
 
—
 
 
—
 
—
 
 
—
 
 
—
 
 
—
 
 
50,724
 
 
50,724
 
  Foreign currency translation   —     —   —     —     —     9,020     —     9,020  
  Unrealized gain on investments   —     —   —     —     —     70     —     70  
                                         
 
    Total comprehensive income                                           59,814  
 
Treasury stock purchased
 
—
 
 
—
 
(4,867
)
 
(149,241
)
 
—
 
 
—
 
 
—
 
 
(149,241
)
  Share-based compensation expense   —     —   —     —     11,700     —     —     11,700  
  Common stock issued under:                                              
    Stock option plans   700     7   —     —     12,283     —     —     12,290  
    Employee stock purchase plan   102     1   —     —     2,439     —     —     2,440  
  Tax benefit of options exercised   —     —   —     —     2,868     —     —     2,868  
  Adjustment to share-based awards subject to redemption   —     —   —     —     —     —     (472 )   (472 )
   
 
 
 
 
 
 
 
 
BALANCE, September 30, 2007   107,725   $ 1,077   (15,641 ) $ (515,560 ) $ 696,070   $ 14,773   $ 725,440   $ 921,800  
   
 
 
 
 
 
 
 
 

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

5


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
  
 
   2007
   2006
   2007
   2006
  
CASH FLOWS FROM OPERATING ACTIVITIES:                          
  Net income   $ 15,561   $ 20,715   $ 50,724   $ 25,905  
  Adjustments to reconcile net income to net cash provided by operating activities:                          
    Goodwill impairment charge     —     785     —     96,149  
    Depreciation and amortization expense     19,301     21,886     57,744     64,837  
    Bad debt expense     11,093     18,196     32,055     50,459  
    Compensation expense related to share-based awards     3,475     6,163     11,700     14,649  
    Gain (loss) on disposition of property and equipment     (4 )   5     (220 )   260  
    Share of affiliate earnings, net of dividends received     (1,177 )   3,633     (927 )   2,034  
    Changes in operating assets and liabilities, net of acquisitions     56,732     11,843     42,164     (39,606 )
   
 
 
 
 
      Net cash provided by operating activities     104,981     83,226     193,240     214,687  
   
 
 
 
 

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Business acquisition, net of acquired cash     —     —     (30,324 )   —  
  Acquisition transaction costs     (121 )   —     (1,553 )   —  
  Purchases of property and equipment     (12,755 )   (16,870 )   (44,085 )   (60,021 )
  Purchases of available-for-sale investments     (215,496 )   (249,160 )   (504,180 )   (801,610 )
  Sales of available-for-sale investments     236,457     208,241     522,789     745,526  
  Other     (5 )   (254 )   (196 )   (364 )
   
 
 
 
 
      Net cash provided by (used in) investing activities     8,080     (58,043 )   (57,549 )   (116,469 )
   
 
 
 
 

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Purchase of treasury stock     (24,320 )   —     (149,241 )   (124,845 )
  Issuance of common stock     3,740     1,236     14,730     8,647  
  Tax benefit associated with stock option exercises     302     51     2,868     2,101  
  Payments of capital lease obligations and other long-term debt     (9 )   (3,556 )   (1,385 )   (3,740 )
   
 
 
 
 
      Net cash used in financing activities     (20,287 )   (2,269 )   (133,028 )   (117,837 )
   
 
 
 
 

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE
 
 
 
 
 
 
 
 
 
 
 
 
 
  CHANGES ON CASH AND CASH EQUIVALENTS:     6,081     2,654     7,993     3,468  
   
 
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