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, 2019

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

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A

Securities registered pursuant to Section 12(b) of the Act:

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

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, a 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 November 1, 2019: 70,377,310

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 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	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	38
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
SIGNATURES		42

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2019			2018
ASSETS	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents, unrestricted	$	47,411		$	32,394
Restricted cash		30,000			337
Short-term investments		234,415			196,428
Total cash and cash equivalents, restricted cash and short-term investments		311,826			229,159
Student receivables, net of allowance for doubtful accounts of $27,075 and $23,307    as of September 30, 2019 and December 31, 2018, respectively		29,913			28,751
Receivables, other, net		1,336			2,567
Prepaid expenses		7,645			7,771
Inventories		665			763
Other current assets		1,640			437
Total current assets		353,025			269,448
NON-CURRENT ASSETS:
Property and equipment, net of accumulated depreciation of $197,070 and $198,052    as of September 30, 2019 and December 31, 2018, respectively		26,698			30,048
Right of use asset		52,016			-
Goodwill		87,356			87,356
Intangible assets, net of amortization of $1,400 as of both September 30, 2019 and December 31, 2018		7,900			7,900
Student receivables, net of allowance for doubtful accounts of $1,922    and $1,529 as of September 30, 2019 and December 31, 2018, respectively		1,131			942
Deferred income tax assets, net		65,363			81,628
Other assets		5,140			4,993
Assets of discontinued operations		178			178
TOTAL ASSETS	$	598,807		$	482,493
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lease liability-operating	$	12,109		$	-
Accounts payable		11,044			9,195
Accrued expenses:
Payroll and related benefits		25,019			24,530
Advertising and marketing costs		11,896			9,300
Income taxes		1,675			1,472
Other		46,610			19,668
Deferred revenue		23,784			32,351
Liabilities of discontinued operations		3			536
Total current liabilities		132,140			97,052
NON-CURRENT LIABILITIES:
Lease liability-operating		54,904			-
Deferred rent obligations		-			12,745
Other liabilities		9,819			17,493
Total non-current liabilities		64,723			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; 85,876,510    and 85,173,686 shares issued, 70,312,424 and 69,772,910 shares    outstanding as of September 30, 2019 and December 31, 2018, respectively		859			852
Additional paid-in capital		633,536			628,295
Accumulated other comprehensive gain (loss)		386			(298	)
Accumulated deficit		(9,445	)		(52,946	)
Treasury stock, at cost; 15,564,086 and 15,400,776 shares as of September 30, 2019    and December 31, 2018, respectively		(223,392	)		(220,700	)
Total stockholders' equity		401,944			355,203
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	598,807		$	482,493

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,
	2019			2018			2019			2018
REVENUE:
Tuition and fees	$	154,291		$	144,882		$	467,298		$	433,736
Other		668			808			1,955			2,055
Total revenue		154,959			145,690			469,253			435,791
OPERATING EXPENSES:
Educational services and facilities		25,318			27,201			76,995			84,437
General and administrative		103,063			96,842			331,057			293,190
Depreciation and amortization		2,284			2,364			6,752			7,049
Total operating expenses		130,665			126,407			414,804			384,676
Operating income		24,294			19,283			54,449			51,115
OTHER INCOME:
Interest income		1,698			950			4,730			2,326
Interest expense		(43	)		(108	)		(125	)		(323	)
Miscellaneous income		97			32			368			225
Total other income		1,752			874			4,973			2,228
PRETAX INCOME		26,046			20,157			59,422			53,343
Provision for income taxes		7,653			5,089			16,362			11,527
INCOME FROM CONTINUING OPERATIONS		18,393			15,068			43,060			41,816
LOSS FROM DISCONTINUED OPERATIONS, net of tax		(159	)		(211	)		(594	)		(706	)
NET INCOME		18,234			14,857			42,466			41,110
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax:
Foreign currency translation adjustments		(113	)		(21	)		(130	)		(103	)
Unrealized gain (loss) on investments		44			106			814			(4	)
Total other comprehensive (loss) income		(69	)		85			684			(107	)
COMPREHENSIVE INCOME	$	18,165		$	14,942		$	43,150		$	41,003
NET INCOME (LOSS) PER SHARE - BASIC:
Income from continuing operations	$	0.26		$	0.21		$	0.62		$	0.60
Loss from discontinued operations		-			-			(0.01	)		(0.01	)
Net income per share	$	0.26		$	0.21		$	0.61		$	0.59
NET INCOME (LOSS) PER SHARE - DILUTED:
Income from continuing operations	$	0.25		$	0.21		$	0.60		$	0.59
Loss from discontinued operations		-			-			(0.01	)		(0.01	)
Net income per share	$	0.25		$	0.21		$	0.59		$	0.58
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		70,142			69,737			70,029			69,542
Diluted		72,142			71,790			71,901			71,425

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 STOCKHOLDERS’ EQUITY

(In thousands)

	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, July 1, 2019		85,668	$	857		(15,558	)	$	(223,263	)	$	630,878	$	455		$	(27,679	)	$	381,248
Net income		-		-		-			-			-		-			18,234			18,234
Foreign currency translation		-		-		-			-			-		(113	)		-			(113	)
Unrealized gain on investments		-		-		-			-			-		44			-			44
Share-based compensation expense		-		-		-			-			1,516		-			-			1,516
Common stock issued		209		2		(6	)		(129	)		1,142		-			-			1,015
BALANCE, September 30, 2019		85,877	$	859		(15,564	)	$	(223,392	)	$	633,536	$	386		$	(9,445	)	$	401,944
	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, July 1, 2018		85,115	$	851		(15,392	)	$	(220,573	)	$	624,869	$	(356	)	$	(81,874	)	$	322,917
Net income		-		-		-			-			-		-			14,857			14,857
Foreign currency translation		-		-		-			-			-		(21	)		-			(21	)
Unrealized gain on investments		-		-		-			-			-		106			-			106
Share-based compensation expense		-		-		-			-			1,445		-			-			1,445
Common stock issued		44		1		(6	)		(95	)		437		-			-			343
BALANCE, September 30, 2018		85,159	$	852		(15,398	)	$	(220,668	)	$	626,751	$	(271	)	$	(67,017	)	$	339,647
	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		-		-		-			-			-		-			42,466			42,466
Foreign currency translation		-		-		-			-			-		(130	)		-			(130	)
Unrealized gain on investments		-		-		-			-			-		814			-			814
Adjustment for change in accounting method		-		-		-			-			-		-			1,035			1,035
Share-based compensation expense		-		-		-			-			3,922		-			-			3,922
Common stock issued		703		7		(163	)		(2,692	)		1,319		-			-			(1,366	)
BALANCE, September 30, 2019		85,877	$	859		(15,564	)	$	(223,392	)	$	633,536	$	386		$	(9,445	)	$	401,944
	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, 2018		84,280	$	843		(15,162	)	$	(217,355	)	$	621,008	$	(164	)	$	(108,127	)	$	296,205
Net income		-		-		-			-			-		-			41,110			41,110
Foreign currency translation		-		-		-			-			-		(103	)		-			(103	)
Unrealized loss on investments		-		-		-			-			-		(4	)		-			(4	)
Share-based compensation expense		-		-		-			-			4,144		-			-			4,144
Common stock issued		879		9		(236	)		(3,313	)		1,599		-			-			(1,705	)
BALANCE, September 30, 2018		85,159	$	852		(15,398	)	$	(220,668	)	$	626,751	$	(271	)	$	(67,017	)	$	339,647

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

3

CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Year to Date Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	42,466		$	41,110
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense		6,752			7,049
Bad debt expense		32,028			21,579
Compensation expense related to share-based awards		3,922			4,143
Deferred income taxes		16,265			11,174
Changes in operating assets and liabilities		(16,042	)		(66,760	)
Net cash provided by operating activities		85,391			18,295
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments		(418,156	)		(190,726	)
Sales of available-for-sale investments		382,022			191,555
Purchases of property and equipment		(3,220	)		(3,952	)
Other		9			-
Net cash used in  investing activities		(39,345	)		(3,123	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock		1,326			1,608
Payments of employee tax associated with stock compensation		(2,692	)		(3,313	)
Net cash used in financing activities		(1,366	)		(1,705	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		44,680			13,467
CASH AND CASH EQUIVALENTS, beginning of the period		32,731			18,899
CASH AND CASH EQUIVALENTS, end of the period	$	77,411		$	32,366

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

4

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 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.

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, 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, 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 further information.

3. RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance adopted in 2019

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 beginning 2019. The adoption did 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. 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.

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 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. In April 2019, the FASB issued ASU 2019-04, Codification improvements to Topic 326, introducing the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. Additionally, in May 2019, the FASB issued ASU No. 2019-05, providing targeted transition relief to provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments – Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. 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.

6

4. FINANCIAL INSTRUMENTS

Investments consist of the following as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019
			Gross Unrealized
	Cost		Gain		(Loss)			Fair Value
Short-term investments (available for sale):
Municipal bonds	$	1,078	$	3	$	-		$	1,081
Non-governmental debt securities		212,120		490		(54	)		212,556
Treasury and federal agencies		20,788		4		(14	)		20,778
Total short-term investments (available for sale)		233,986		497		(68	)		234,415

	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

In the table above, unrealized holding gains (losses) 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.  

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, 2019, we held investments that are required to be measured at fair value on a recurring basis. These investments (available-for-sale) consist of municipal bonds, 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 September 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	As of  September 30, 2019
	Level 1		Level 2		Level 3		Total
Municipal bonds	$	-	$	1,081	$	-	$	1,081
Non-governmental debt securities		15,000		197,556		-		212,556
Treasury and federal agencies		-		20,778		-		20,778
Totals	$	15,000	$	219,415	$	-	$	234,415
	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

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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, 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.

During each of the quarters ended September 30, 2019 and 2018, we recorded less than $0.1 million of gain and during the years to date ended September 30, 2019 and September 30, 2018, we recorded less than $0.1 million of gain and $0.1 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, 2019 and 2018 were as follows (dollars in thousands):

	Maintenance Fee Payments
For the quarter ended September 30, 2019	$	338
For the quarter ended September 30, 2018	$	355
For the year to date ended September 30, 2019	$	1,045
For the year to date ended September 30, 2018	$	1,108

Credit Agreement

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 September 30, 2019 and December 31, 2018, 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):

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	For the Quarter Ended September 30, 2019								For the Quarter Ended September 30, 2018
	CTU		AIU		Corporate and Other(3)		Total		CTU		AIU		Corporate and Other(3)		Total
Tuition	$	90,256	$	56,383	$	-	$	146,639	$	89,121	$	50,349	$	64	$	139,534
Technology fees		4,789		2,360		-		7,149		2,823		1,953		-		4,776
Other miscellaneous fees(1)		384		119		-		503		426		145		1		572
Total tuition and fees		95,429		58,862		-		154,291		92,370		52,447		65		144,882
Other revenue(2)		609		45		14		668		745		57		6		808
Total revenue	$	96,038	$	58,907	$	14	$	154,959	$	93,115	$	52,504	$	71	$	145,690
	For the Year to Date Ended September 30, 2019								For the Year to Date Ended September 30, 2018
	CTU		AIU		Corporate and Other(3)		Total		CTU		AIU		Corporate and Other(3)		Total
Tuition	$	273,777	$	171,954	$	-	$	445,731	$	269,146	$	148,134	$	555	$	417,835
Technology fees		12,828		7,129		-		19,957		8,554		5,577		-		14,131
Other miscellaneous fees(1)		1,271		339		-		1,610		1,415		335		20		1,770
Total tuition and fees		287,876		179,422		-		467,298		279,115		154,046		575		433,736
Other revenue(2)		1,774		137		44		1,955		1,873		158		24		2,055
Total revenue	$	289,650	$	179,559	$	44	$	469,253	$	280,988	$	154,204	$	599	$	435,791

__________________

(1) Other miscellaneous fees include graduation fees and activity fees.

(2) Other revenue primarily includes contract training revenue and bookstore and laptop sales.

(3) Revenue recorded within Corporate and Other relates to closed campuses which are now reported within this category.

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 and graduation 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. Academic terms 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

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.

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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; we receive funds to apply against the contract asset balance; 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 September 30, 2019 and December 31, 2018 were as follows (dollars in thousands):

	As of
	September 30, 2019			December 31, 2018
Gross deferred revenue	$	35,611		$	51,694
Gross contract assets		(11,827	)		(19,343	)
Deferred revenue, net	$	23,784		$	32,351

Deferred Revenue

Changes in our deferred revenue balances for the quarters and years to date ended September 30, 2019 and 2018 were as follows (dollars in thousands):

	For the Quarter Ended September 30, 2019											For the Quarter Ended September 30, 2018
	CTU			AIU			Corporate and Other(2)		Total			CTU			AIU			Corporate and Other(2)			Total
Gross deferred revenue, July 1,	$	25,825		$	19,976		$	-	$	45,801		$	23,754		$	13,436		$	70		$	37,260
Revenue earned from balances existing as of July 1,		(23,375	)		(16,970	)		-		(40,345	)		(21,533	)		(11,341	)		(47	)		(32,921	)
Billings during period(1)		96,863			47,310			-		144,173			93,277			73,852			63			167,192
Revenue earned for new billings during the period		(72,054	)		(41,892	)		-		(113,946	)		(70,837	)		(41,106	)		(18	)		(111,961	)
Other adjustments		(146	)		74			-		(72	)		(266	)		(500	)		(25	)		(791	)
Gross deferred revenue, September 30,	$	27,113		$	8,498		$	-	$	35,611		$	24,395		$	34,341		$	43		$	58,779
	For the Year to Date Ended September 30, 2019											For the Year to Date Ended September 30, 2018
	CTU			AIU			Corporate and Other(2)		Total			CTU			AIU			Corporate and Other(2)			Total
Gross deferred revenue, January 1,	$	24,250		$	27,444		$	-	$	51,694		$	23,933		$	15,507		$	104		$	39,544
Revenue earned from balances existing as of January 1,		(22,289	)		(21,779	)		-		(44,068	)		(22,192	)		(14,310	)		(104	)		(36,606	)
Billings during period(1)		289,803			159,711			-		449,514			279,374			173,244			558			453,176
Revenue earned for new billings during the period		(265,587	)		(157,643	)		-		(423,230	)		(256,923	)		(139,736	)		(471	)		(397,130	)
Other adjustments		936			765			-		1,701			203			(364	)		(44	)		(205	)
Gross deferred revenue, September 30,	$	27,113		$	8,498		$	-	$	35,611		$	24,395		$	34,341		$	43		$	58,779

______________

(1) Billings during period includes adjustments for prior billings.

(2) Revenue recorded within Corporate and Other relates to closed campuses which are now reported within this category.

Cash Receipts

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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.

If a student withdraws from one of our institutions prior to the completion of the academic term, 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 $1.1 million and $0.9 million as of September 30, 2019 and December 31, 2018, respectively. 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 of revenue for each of the quarters ended September 30, 2019 and 2018, and $0.9 million and $1.1 million for the years to date ended September 30, 2019 and 2018, 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 monitor that the collectability threshold is met.

For the quarters and years to date ended September 30, 2019 and 2018, 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 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

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regulatory environments and the ability to complete the federal financial aid process with the students. 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

As of September 30, 2019 and December 31, 2018, the amount of non-current student receivables under payment plans that are longer than 12 months in duration, net of allowance for doubtful accounts, was $1.1 million and $0.9 million, respectively.

Student Receivables Valuation Allowance

Changes in our current and non-current receivables allowance for the quarters and years to date ended September 30, 2019 and 2018 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 September 30, 2019	$	30,730	$	8,888	$	(10,621	)	$	28,997
For the quarter ended September 30, 2018	$	24,268	$	7,932	$	(8,649	)	$	23,551
For the year to date ended September 30, 2019	$	24,836	$	32,042	$	(27,881	)	$	28,997
For the year to date ended September 30, 2018	$	22,534	$	21,675	$	(20,658	)	$	23,551

(1) Charges to expense include an offset for recoveries of amounts previously written off of $0.6 million and $1.8 million for the quarters ended September 30, 2019 and 2018, respectively, and $2.0 million and $4.3 million for the years to date ended September 30, 2019 and 2018, 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. LEASES

We lease most of our administrative and educational facilities under non-cancelable operating leases expiring at various dates through 2028. Lease terms generally range from five to ten years with one to four renewal options for extended terms. In most cases, we are required to make additional payments under facility operating leases for taxes, insurance and other operating expenses incurred during the operating lease period, which are typically variable in nature.

We determine if a contract contains a lease when the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Upon identification and commencement of a lease, we establish a right of use (“ROU”) asset and a lease liability.

Contract components

A lease component is defined as an asset within the lease contract that a lessee can benefit from the use of and is not highly dependent or interrelated with other assets in the arrangement. A lease contract may contain multiple lease components. A non-lease component is defined as a component of the lease that transfers a good or service for the underlying asset, such as maintenance services. We have determined that all of our leases contain one lease component related to the building and land. We have determined that treating the land together with the building as one lease component would not result in a significant difference from accounting for them as separate lease components. Additionally, we have elected the practical expedient to include both the lease component and the non-lease component as a single component when accounting for each lease and calculating the resulting lease liability and ROU asset. Any remaining contract consideration, such as property taxes and insurance, that does not meet the definition of a lease component or non-lease component would be allocated to the single lease component based on our election.

Lease liability and ROU asset

The lease liability represents future lease payments for lease and non-lease components discounted for present value. Lease payments that may be included in the lease liability include fixed payments, variable lease payments that are based on an index or rate and payments for penalties for terminating the lease if the lessee is reasonably certain to utilize a termination option, among others. Certain of our leases contain rent escalation clauses that are specifically stated in the lease and these are included in the calculation of the lease liability. Variable lease payments for lease and non-lease components which are not based on an index or rate are excluded

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from the calculation of the lease liability and are recognized in the statement of income and comprehensive income during the period incurred.

The ROU asset consists of the amount of the initial measurement of the lease liability and adjusted for any lease incentives, including rent abatements and tenant improvement allowances, and any initial direct costs incurred by the lessee. The ROU asset is amortized over the remaining lease term on a straight-line basis and recorded within educational services and facilities on our unaudited condensed consolidated statements of income and comprehensive income.

Lease term

The lease term is determined by taking into account the initial period as stated in the lease contract and adjusted for any renewal options that the company is reasonably certain to exercise as well as any period of time that the lessee has control of the space before the stated initial term of the lease. If we determine that we are reasonably certain to exercise a termination option, the lease term is then adjusted to account for the expected termination date.

Quantitative lease information

Quantitative information related to leases is presented in the following table (dollars in thousands):

	For the Quarter Ended September 30, 2019			For the Year to Date Ended September 30, 2019
Lease expenses (1)
Fixed lease expenses - operating (1)	$	3,046		$	9,751
Variable lease expenses - operating (1)		2,196			6,830
Sublease income (1)		(1,075	)		(3,332	)
Total lease expenses (1)		4,167			13,249
Other information
Gross operating cash flows for operating leases (2)	$	(7,400	)	$	(25,503	)
Operating cash flows from subleases (2)		1,112			3,417
				As of September 30, 2019
Weighted average remaining lease term (in months) – operating leases					79
Weighted average discount rate – operating leases					5.2	%

__________________

(1) Lease expense and sublease income represent the amount recorded within our unaudited condensed consolidated statement of income and comprehensive income. Variable lease amounts represent expenses recognized as incurred which are not included in the lease liability. Fixed lease expenses and sublease income are recorded on a straight-line basis over the lease term and therefore are not necessarily representative of cash payments during the same period.

(2) Cash flows are presented on a consolidated basis, including continuing and discontinued operations, and represent cash payments for fixed and variable lease costs.

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Gross Lease Obligations

As of September 30, 2019, future minimum lease payments under operating leases which are included in lease liabilities on our condensed consolidated balance sheet for continuing operations are as follows (dollars in thousands):

	Operating Leases Total
2019 (1)	$	2,451
2020		17,390
2021		13,505
2022		11,331
2023 and thereafter		35,821
Total	$	80,498
Less: imputed interest		13,485
Present value of future minimum lease payments		67,013
Less: current lease liabilities		12,109
Non-current lease liabilities	$	54,904

__________________

  (1)  Amounts provided are for liabilities remaining as of September 30, 2019.

As of December 31, 2018, future minimum lease payments under operating leases for continuing and discontinued operations were as follows (dollars in thousands):

	Operating Leases
	Continuing Operations		Discontinued Operations		Total
2019 (1)	$	21,076	$	808	$	21,884
2020		17,728		-		17,728
2021		12,070		-		12,070
2022		8,638		-		8,638
2023 and thereafter		22,298		-		22,298
Total	$	81,810	$	808	$	82,618

__________________

(1) Amounts include payments due associated with executed early terminations of real estate leases and represent payments for the full year 2019.

Subleases

For certain of our leased locations, primarily those related to our closed campuses, we have vacated the facility and have fully or partially subleased the space. For each sublease that has been entered into, we remain the guarantor under the lease and therefore become the intermediate lessor. We have 12 subleases within eight leased facilities with terms ranging from two to four years. We have recognized sublease income of $1.1 million and $3.3 million for the quarter and year to date ended September 30, 2019, respectively, as on offset to lease expense on our unaudited condensed consolidated statement of income and comprehensive income.

As of September 30, 2019, future minimum sublease rental income under operating leases, which will decrease our future minimum lease payments presented above, is as follows (dollars in thousands):

	Operating Subleases Total
2019 (1)	$	649
2020		2,765
2021		1,081
2022		777
2023 and thereafter		330
Total	$	5,602

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_____________________

(1) Sublease receivables remaining as of September 30, 2019.

Significant Judgments and Assumptions

We utilize discount rates to determine the net present value of our gross lease obligations when calculating the lease liability and related ROU asset. In cases in which the rate implicit in the lease is readily determinable, we utilize that discount rate for purposes of the net present value calculation. In most cases, our lease agreements do not have a discount rate that is readily determinable and therefore we utilize an estimate of our incremental borrowing rate. Our incremental borrowing rate is determined at lease commencement or lease modification and represents the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  

Of our nine leases related to our ongoing operations which consist of administrative offices and university locations, we are not reasonably certain that we will extend or terminate any of those leases. For the eight remaining leases that have been vacated related to our closed campuses, we are not reasonably certain to exercise any options to extend or terminate any leases.

Transition to ASC 842

Upon transition to ASC 842 as of January 1, 2019, the following beginning balances were restated within our condensed consolidated balance sheet (dollars in thousands):

	December 31, 2018			Impact of Modified Retrospective Adoption of ASC 842			January 1, 2019 Post ASC 842 Adoption
Prepaid expenses (1)	$	7,771		$	(1,502	)	$	6,269
Right of use asset		-			45,963			45,963
Deferred income tax assets, net		81,628			(325	)		81,303
Assets of discontinued operations, non-current		178			57			235
Lease liability - operating, current		-			18,656			18,656
Other accrued expenses, current (1)		19,668			(5,950	)		13,718
Liabilities of discontinued operations, current		536			57			593
Lease liability - operating, non-current		-			48,238			48,238
Deferred rent obligations (1)		12,745			(12,745	)		-
Other liabilities, non-current (1)		17,493			(5,098	)		12,395
Accumulated deficit (2)		(52,946	)		1,035			(51,911	)

__________________

(1) Balances as of December 31, 2018 that related to prepaid rent, remaining lease obligations for vacated spaces and deferred rent obligations were offset with the ROU asset as of January 1, 2019.

(2) Certain leases resulted in a negative ROU asset upon transition to ASC 842 related to vacated spaces that had liabilities previously established. Those leases that resulted in a negative ROU asset were recorded as an adjustment, net of tax, to accumulated deficit within stockholders equity on our condensed consolidated balance sheet as of January 1, 2019.

We elected to adopt the relief provisions under ASC 842. ASC 842 offers relief from implementing the transition provisions by permitting an entity to elect not to reassess:

• whether any expired or existing contract is a lease or contains a lease,

• the lease classification of any expired or existing leases, and

• initial direct costs for any existing leases.

8. CONTINGENCIES

An accrual for estimated legal fees and settlements of $37.5 million and $6.1 million at September 30, 2019 and December 31, 2018, respectively, is presented within current liabilities – other accrued expenses 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

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outcome of pending appeals, motions, or settlements; (4) if there are significant factual issues to be determined or resolved; and (5) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.

We are, or were, a party to the following legal proceedings that we consider to be outside the scope of ordinary routine litigation incidental to our business.

Oregon Arbitrations. There were approximately 310 remaining active individual arbitration claims which were filed against Western Culinary Institute, Ltd. (“WCI”) from March through July 2018, all of which are being administered by the American Arbitration Association. These individual arbitrations involve students who attended WCI from approximately 2008 to 2010. Each arbitration seeks monetary damages and alleges that WCI made a variety of misrepresentations to the individual student filing the arbitration, relating generally to WCI’s placement statistics, students’ employment prospects upon graduation from WCI, the value and quality of an education at WCI, and the amount of tuition students could expect to pay as compared to salaries they could expect to earn after graduation. The institution is no longer in operation and closed in 2017.

The Company entered into a letter of intent as of September 26, 2019 to settle these approximately 310 remaining individual arbitration claims. The settlement, which will be in the form of a class settlement, is for a total amount of $7.1 million which includes all attorneys’ fees and costs. On October 9, 2019, a motion to certify the settlement class was filed in circuit court in Oregon. The Company makes no admission of liability pursuant to the terms of the settlement. The settlement is subject to final court approval. Payment of the $7.1 million will be made after final court approval, which the Company currently expects to occur in the first quarter of 2020. Unless they opt out, all claims against the Company alleged in the cases by settlement class members will be dismissed with prejudice. The Company will have the option of withdrawing from the settlement if a specified number of individuals opt out of the settlement.

The Company’s financial statements for the quarter ended September 30, 2019 reflect a reserve of $7.1 million related to this matter. The one-time settlement expense is expected to result in substantial net savings for the Company compared to the significant long-term cost of participating in multiple individual arbitrations.  

FTC. As previously disclosed, on July 26, 2019, the Company and certain operating subsidiaries executed a settlement agreement (the “FTC Agreement”) with the U.S. Federal Trade Commission (“FTC”) to resolve the inquiry commenced by the FTC on August 20, 2015. The FTC Agreement which is in the form of a Stipulation as to Entry of an Order for Permanent Injunction and Monetary Judgment became effective upon its entry as an Order in the United States District Court of the Northern District of Illinois on October 9, 2019. As of September 30, 2019, the Company’s condensed consolidated balance sheet reflects restricted cash of approximately $30.0 million held in an escrow account and a reserve of $30.0 million related to this matter. The escrow account funds were distributed to the FTC after entry of the district court’s Order.

Other. In addition to the legal proceedings and other matters described above, we receive informal requests from state attorneys general and other government agencies relating to specific complaints they have received from students or former students which seek information about the student, our programs, and other matters relating to our activities in the relevant state. These requests can be broad and time consuming to respond to, and there is a risk that they could expand and/or lead to a formal inquiry or investigation into our practices in a particular state. We are also subject to a variety of other claims, lawsuits, arbitrations and investigations that arise from time to time out of the conduct of our business, including, but not limited to, matters involving prospective students, students or graduates, alleged violations of the Telephone Consumer Protection Act, both individually and on behalf of a putative class, and employment matters. While we currently believe that these additional matters, individually or in aggregate, will not have a material adverse impact on our financial position, cash flows or results of operations, these additional matters are subject to inherent uncertainties, and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur in any one or more of these matters, there exists the possibility of a material adverse impact on our business, reputation, financial position and cash flows.

9. INCOME TAXES

The determination of the annual effective tax is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which we operate and the ongoing development of tax planning strategies during the year. In addition, our provision for income taxes can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

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The following is a summary of our provision for income taxes and effective tax rate from continuing operations (dollars in thousands):

	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
	2019			2018			2019			2018
Pretax income	$	26,046		$	20,157		$	59,422		$	53,343
Provision for income taxes	$	7,653		$	5,089		$	16,362		$	11,527
Effective rate		29.4	%		25.2	%		27.5	%		21.6	%

As of December 31, 2018, a valuation allowance of $48.0 million was maintained with respect to our foreign tax credits, state net operating losses and Illinois edge credits. During the quarter ended June 30, 2019, the valuation allowance was reduced by $0.8 million to reflect the results of a Florida income tax audit and the realizability of that state’s net operating loss carryforward. After considering both positive and negative evidence related to the realization of the deferred tax assets, we have determined that it is necessary to continue to maintain a $47.2 million valuation allowance against our foreign tax credits, state net operating losses and Illinois edge credits as of September 30, 2019.

The effective tax rate for the quarter and year to date ended September 30, 2019 reflects the tax effect of the partial non-deductibility of the FTC settlement, which increased the effective tax rate for the quarter and year to date by 5.7% and 6.5%, respectively. The effective tax rate for the quarter and year to date ended September 30, 2019 was impacted by the tax effect of stock-based compensation and net adjustments that increased the state deferred tax asset. The year to date effective tax rate also includes the release of previously recorded tax reserves. The effect of these discrete items decreased the current effective tax rate for the quarter and year to date by 2.4% and 4.8%, respectively. For the quarter and year to date ended September 30, 2018, the effective tax rate reflects the tax effect of expenses that are not deductible for tax purposes and other adjustments which on a relative basis are a higher percentage of projected full-year earnings. The effective rate for the quarter and year to date ended September 30, 2018 includes the impact of tax reserves, the tax effect of stock-based compensation and adjustments to increase the state deferred tax asset. The effect of these discrete items decreased the effective tax rate for the quarter and year to date by 2.7% and 5.2%, respectively.

We estimate that it is reasonably possible that the gross liability for unrecognized tax benefits for a variety of uncertain tax positions will decrease by up to $1.6 million in the next twelve months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. The income tax rate for the quarter and year to date ended September 30, 2019 does not take into account the possible reduction of the liability for unrecognized tax benefits. The impact of a reduction to the liability will be treated as a discrete item in the period the reduction occurs. We recognize interest and penalties related to unrecognized tax benefits in tax expense. As of September 30, 2019, we had accrued $1.8 million as an estimate for reasonably possible interest and accrued penalties.

Our tax returns are routinely examined by federal, state and local tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service has completed its examination of our U.S. income tax returns through our tax year ended December 31, 2014.

Accumulated Other Comprehensive Income

Effective January 1, 2019, the Company adopted ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). This new guidance provides the option to reclassify stranded tax effects within 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 Cut and Jobs Act is recorded. The Company evaluated and concluded the stranded tax effects were immaterial and elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings.  

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10. SHARE-BASED COMPENSATION

Overview of Share-Based Compensation Plans

The Career Education Corporation 2016 Incentive Compensation Plan (the “2016 Plan”) authorizes awards of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock, performance units, annual incentive awards, and substitute awards, which generally may be settled in cash or shares of our common stock. Any shares of our common stock that are subject to awards of stock options or stock appreciation rights payable in shares will be counted as 1.0 share for each share issued for purposes of the aggregate share limit and any shares of our common stock that are subject to any other form of award payable in shares will be counted as 1.35 shares for each share issued for purposes of the aggregate share limit. As of September 30, 2019, there were approximately 1.8 million shares of common stock available for future share-based awards under the 2016 Plan, which is net of (i) 0.8 million shares issuable upon exercise of outstanding options and (ii) 2.5 million shares underlying restricted stock units, which will be settled in shares of our common stock if the vesting conditions are met and thus reduce the common stock available for future share-based awards under the 2016 Plan by the amount vested. These shares have been multiplied by the applicable factor under the 2016 Plan to determine the remaining shares available as of September 30, 2019. Additionally, as of September 30, 2019 under the previous Career Education Corporation 2008 Incentive Compensation Plan, there were approximately 1.7 million shares issuable upon exercise of outstanding options and 0.2 million shares underlying outstanding restricted and deferred stock units, which will be settled in shares of our common stock if the vesting conditions are met. This plan was replaced by the 2016 Plan effective May 24, 2016. The vesting of all types of equity awards (stock options, stock appreciation rights, restricted stock awards, restricted stock units and deferred stock units) is subject to possible acceleration in certain circumstances. Generally, if a plan participant terminates employment for any reason other than by death or disability during the vesting period, the right to unvested equity awards is forfeited.

As of September 30, 2019, we estimate that compensation expense of approximately $16.0 million will be recognized over the next four years for all unvested share-based awards that have been granted to participants, including stock options and restricted stock units to be settled in shares of stock but excluding restricted stock units to be settled in cash and cash-based performance unit awards and excludes any estimates of forfeitures. This amount generally does not include expense associated with performance-based restricted stock unit awards granted in the fourth quarter of 2018 as the Company does not currently believe it is probable that it will meet the performance goals.

Stock Options. The exercise price of stock options granted under each of the plans is equal to the fair market value of our common stock on the date of grant. Employee stock options generally become exercisable 25% per year over a four-year service period beginning on the date of grant and expire ten years from the date of grant. Non-employee directors’ stock options expire ten years from the date of grant and generally become 100% exercisable after the first anniversary of the grant date. Grants of stock options are generally only subject to the service conditions discussed previously.

Stock option activity during the year to date ended September 30, 2019 under all of our plans was as follows (options in thousands):

	Options			Weighted Average Exercise Price
Outstanding as of December 31, 2018		2,818		$	9.59
Granted		42			21.29
Exercised		(194	)		5.73
Cancelled		(164	)		22.62
Outstanding as of September 30, 2019		2,502		$	9.23
Exercisable as of September 30, 2019		1,947		$	9.01

Restricted Stock Units to be Settled in Stock. Restricted stock units to be settled in shares of stock which are not “performance-based” generally vest 25% per year over a four-year service period. Restricted stock units which are “performance-based” are subject to performance or market conditions that, even if the requisite service period is met, may reduce the number of units of restricted stock that vest at the end of the requisite service period or result in all units being forfeited. The performance-based restricted stock units generally vest three years after the grant date.

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The following table summarizes information with respect to all outstanding restricted stock units to be settled in shares of stock under our plans during the year to date ended September 30, 2019 (units in thousands):

	Restricted Stock Units to be Settled in Shares of Stock
	Units			Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of December 31, 2018 (1)		2,017		$	12.70
Granted		428			21.31
Vested		(493	)		6.11
Forfeited		(23	)		11.42
Outstanding as of  September 30, 2019		1,929		$	16.31

__________________

(1) The weighted average grant-date fair value per unit as of December 31, 2018 reflects an adjusted fair value per unit from $10.59 to $12.70 due to the modification of grants approved by the Board of Directors during the current quarter for our performance-based grants granted on December 14, 2018.

          Deferred Stock Units to be Settled in Stock. We granted deferred stock units to our non-employee directors. The deferred stock units are to be settled in shares of stock. Settlement of the deferred stock units and delivery of the underlying shares of stock to the plan participants does not occur until he or she ceases to provide services to the Company in the capacity of a director, employee or consultant.

The following table summarizes information with respect to all deferred stock units during the year to date ended September 30, 2019 (units in thousands):

	Deferred Stock Units to be Settled in Shares			Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of  December 31, 2018 (1)		76		$	4.44
Granted		-			-
Vested (2)		(3	)		5.56
Forfeited		-			-
Outstanding as of September 30, 2019 (1)		73		$	4.39

(1) Includes vested but unreleased awards. These awards are included in total outstanding awards until they are released under the terms of the agreement.

(2) Includes previously vested awards which were released during the current period.  

Restricted Stock Units to be Settled in Cash. Restricted stock units to be settled in cash generally vest 25% per year over a four-year service period beginning on the date of grant. Cash-settled restricted stock units are recorded as liabilities as the expense is recognized and the fair value for these awards is determined at each period end date with changes in fair value recorded in our unaudited condensed consolidated statements of income and comprehensive income in the current period. Cash-settled restricted stock units are settled with a cash payment for each unit vested equal to the closing price on the vesting date. Cash-settled restricted stock units are not included in common shares reserved for issuance or available for issuance under the 2016 Plan.

The following table summarizes information with respect to all cash-settled restricted stock units during the year to date ended September 30, 2019 (units in thousands):

	Restricted Stock Units to be Settled in Cash
Outstanding as of December 31, 2018		213
Granted		-
Vested		(125	)
Forfeited		(2	)
Outstanding as of  September 30, 2019		86

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          Upon vesting, based on the conditions set forth in the award agreements, these units will be settled in cash. We valued these units in accordance with the guidance set forth by FASB ASC Topic 718 – Compensation-Stock Compensation and recognized $1.8 million and $2.0 million of expense for the years to date ended September 30, 2019 and September 30, 2018, respectively, for all cash-settled restricted stock units, of which $0.3 million and $0.4 million was recorded during the quarters to date ended September 30, 2019 and September 30, 2018, respectively.

Stock-Based Compensation Expense. Total stock-based compensation expense for the quarters and years to date ended September 30, 2019 and 2018 for all types of awards was as follows (dollars in thousands):

	For the Quarter Ended September 30,				For the Year to Date Ended September 30,
Award Type	2019		2018		2019		2018
Stock options	$	400	$	516	$	1,260	$	1,423
Restricted stock units settled in stock		1,113		924		2,651		2,707
Restricted stock units settled in cash		340		435		1,777		1,997
Total stock-based compensation expense	$	1,853	$	1,875	$	5,688	$	6,127

Performance Unit Awards. Performance unit awards granted during 2017 are long-term incentive, cash-based awards. Payment of these awards is based upon a calculation of Total Shareholder Return (“TSR”) of CEC as compared to TSR across a specified peer group of our competitors over a three-year performance period ending on December 31, 2019. These awards are recorded as liabilities as the expense is recognized and the fair value for these awards is determined at each period end date with changes in fair value recorded in our unaudited condensed consolidated statements of income and comprehensive income in the current period. We recorded $2.9 million and $2.5 million of expense related to these awards for the years to date September 30, 2019 and September 30, 2018, respectively, with $0.8 million and $0.9 million of expense for the quarters ended September 30, 2019 and September 30, 2018, respectively.

11. WEIGHTED AVERAGE COMMON SHARES

Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock units were settled for common shares during the period.

The weighted average number of common shares used to compute basic and diluted net income per share for the quarters and years to date ended September 30, 2019 and 2018 were as follows:

	For the Quarter Ended September 30,				For the Year to Date Ended September 30,
	2019		2018		2019		2018
Basic common shares outstanding		70,142		69,737		70,029		69,542
Common stock equivalents		2,000		2,053		1,872		1,883
Diluted common shares outstanding		72,142		71,790		71,901		71,425

For the quarters and years to date ended September 30, 2019 and 2018, certain unexercised stock option awards are excluded from our computations of diluted earnings per share, as these shares were out-of-the-money and their effect would have been anti-dilutive. The anti-dilutive options that were excluded from our computations of diluted earnings per share were 0.3 million and 0.8 million shares for the quarters ended September 30, 2019 and 2018, respectively, and 0.7 million and 0.8 million shares for the years to date ended September 30, 2019 and 2018, respectively.

12. SEGMENT REPORTING

Our segments are determined in accordance with FASB 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. These segments are organized by key market segments and to enhance brand focus within each segment to more effectively execute our strategic plan. As of September 30, 2019, our two segments are:

♦ Colorado Technical University (CTU) places a strong focus on providing industry-relevant degree programs to meet the needs of our non-traditional students for career advancement and of employers for a well-educated workforce and offers academic programs in the career-oriented disciplines of business studies, nursing, computer science, engineering, information systems and technology, cybersecurity, criminal justice and healthcare management. Students pursue their

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degrees through fully-online programs, local campuses and blended formats which combine campus-based and online education. As of September 30, 2019, students enrolled at CTU represented approximately 62% of our total enrollments. Approximately 94% of CTU’s enrollments are fully online.

♦ American InterContinental University (AIU) focuses on helping non-traditional students get the degree they need to move forward in their career as efficiently as possible and offers academic programs in the career-oriented disciplines of business studies, information technologies, education and criminal justice. Students pursue their degrees through fully-online programs, local campuses and blended formats which combine campus-based and online education. As of September 30, 2019, students enrolled at AIU represented approximately 38% of our total enrollments. Approximately 94% of AIU’s enrollments are fully online.

Summary financial information by reporting segment is as follows (dollars in thousands):

	For the Quarter Ended September 30,
	Revenue										Operating Income (Loss)
	2019		% of Total			2018		% of Total			2019			2018
CTU	$	96,038		62.0	%	$	93,115		63.9	%	$	29,926		$	26,261
AIU		58,907		38.0	%		52,504		36.0	%		7,341			1,070
Total University Group		154,945		100.0	%		145,619		100.0	%		37,267			27,331
Corporate and Other (1)		14	NM				71		0.0	%		(12,973	)		(8,048	)
Total	$	154,959		100.0	%	$	145,690		100.0	%	$	24,294		$	19,283

	For the Year to Date Ended September 30,
	Revenue										Operating Income (Loss)
	2019		% of Total			2018		% of Total			2019			2018
CTU (2)	$	289,650		61.7	%	$	280,988		64.5	%	$	71,730		$	80,562
AIU (3)		179,559		38.3	%		154,204		35.4	%		11,436			3,621
Total University Group		469,209		100.0	%		435,192		99.9	%		83,166			84,183
Corporate and Other (1)		44	NM				599		0.1	%		(28,717	)		(33,068	)
Total	$	469,253		100.0	%	$	435,791		100.0	%	$	54,449		$	51,115

	Total Assets as of  (4)
	September 30, 2019		December 31, 2018
CTU	$	100,527	$	76,713
AIU		79,039		59,133
Total University Group		179,566		135,846
Corporate and Other (1)		419,063		346,469
Discontinued Operations		178		178
Total	$	598,807	$	482,493

(1) Corporate and Other includes results of operations for closed campuses. A reserve of $7.1 million was recorded during the current quarter within Corporate and Other for the Oregon arbitration matter related to previously closed campuses.

(2) A reserve of $18.6 million was recorded within CTU related to the FTC settlement during the year to date ended September 30, 2019.

(3) A reserve of $11.4 million was recorded within AIU related to the FTC settlement during the year to date ended September 30, 2019.

(4) Total assets do not include intercompany receivable or payable activity between institutions and corporate and investments in subsidiaries.

13. DISCONTINUED OPERATIONS

As of September 30, 2019, the results of operations for campuses that have ceased operations prior to 2015 are presented within discontinued operations. Prior to January 1, 2015, our teach-out campuses met the criteria for discontinued operations upon completion of their teach-out as defined under FASB ASC Topic 205 – Presentation of Financial Statements. Commencing January 1, 2015, in accordance with the new guidance under ASC Topic 360, only campuses that meet the criteria of a strategic shift upon

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disposal are classified within discontinued operations, among other criteria. Since the January 2015 effective date of the updated guidance within ASC Topic 360, we have not had any campuses that met the criteria to be considered a discontinued operation.  

Results of Discontinued Operations

The summary of unaudited results of operations for our discontinued operations for the quarters and years to date ended September 30, 2019 and 2018 were as follows (dollars in thousands):

	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
	2019			2018			2019			2018
Total operating expenses	$	208		$	277		$	775		$	922
Loss before income tax	$	(208	)	$	(277	)	$	(775	)	$	(922	)
Benefit from income tax		(49	)		(66	)		(181	)		(216	)
Loss from discontinued operations, net of tax	$	(159	)	$	(211	)	$	(594	)	$	(706	)

Assets and Liabilities of Discontinued Operations

Assets and liabilities of discontinued operations on our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 include the following (dollars in thousands):

	September 30,		December 31,
	2019		2018
Assets:
Non-current assets:
Deferred income tax assets, net		178		178
Total assets of discontinued operations	$	178	$	178
Liabilities:
Current liabilities:
Accounts payable and accrued expenses	$	3	$	51
Remaining lease obligations		-		485
Total current liabilities		3		536
Total liabilities of discontinued operations	$	3	$	536

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion below and other items in this Quarterly Report on Form 10-Q contain “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “plan,” “seek,” “should,” “will,” “continue to,” “outlook,” “focused on” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018 that could cause our actual growth, results of operations, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. Among the factors that could cause actual results to differ materially from those expressed in, or implied by, our forward-looking statements are the following:

• declines in enrollment or interest in our programs;

• our continued compliance with and eligibility to participate in Title IV Programs under the Higher Education Act of 1965, as amended, and the regulations thereunder (including 90-10, financial responsibility and administrative capability standards prescribed by the U.S. Department of Education (“ED”)), as well as applicable accreditation standards and state regulatory requirements;

• the impact of recently effective and recently adopted “borrower defense to repayment” regulations;

• rulemaking by ED or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions (in particular as these risks and uncertainties may be exacerbated leading up to and following the 2020 presidential election);

• the operating impact of the settlements with the U.S. Federal Trade Commission and state attorneys general;

• the success of our initiatives to improve student experiences, retention and academic outcomes;

• the ability of our student admissions and advising centers to achieve anticipated operating performance;

• increased competition;

• delays in receiving necessary regulatory approvals relating to the pending acquisition of Trident University International and difficulties with post-closing business integration;

• the impact of management changes; and

• changes in the overall U.S. economy.

Readers are also directed to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and its subsequent filings with the Securities and Exchange Commission for information about other risks and uncertainties, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Form 10-K.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help investors understand the results of operations, financial condition and present business environment. The MD&A is organized as follows:

• Overview

• Consolidated Results of Operations

• Segment Results of Operations

• Summary of Critical Accounting Policies and Estimates

• Liquidity, Financial Position and Capital Resources

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OVERVIEW

Our academic institutions offer a quality education to a diverse student population in a variety of disciplines through online, campus-based and blended learning programs which combine campus-based and online education. 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^® adaptive learning platform. Career Education is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

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. These segments are organized by key market segments and to enhance brand focus within each segment to more effectively execute our strategic plan.

Beginning 2019, the Company no longer reports results for closed campuses separately as these campuses no longer meet the definition of an operating segment under ASC Topic 280. Any remaining results of operations, which primarily consists of occupancy expenses for remaining properties and legal fees, is reported within Corporate and Other. Prior period segment amounts have been recast to reflect our reporting segments on a comparable basis.

Regulatory Environment

We operate in a highly regulated industry, which has significant impacts on our business and creates risks and uncertainties. In recent years, Congress, ED, states, accrediting agencies, the CFPB, the FTC, state attorneys general and the media have scrutinized the for-profit, postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry and reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged the Departments of Education, Defense and Veterans Affairs to take action to limit or terminate the participation of for-profit educational institutions, including Career Education Corporation, in existing tuition assistance programs.

We encourage you to review Item 1, “Business,” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K to learn more about our highly regulated industry and related risks and uncertainties, in addition to the MD&A in our 2019 Quarterly Reports on Form 10-Q.

Note Regarding Non-GAAP measures

We believe it is useful to present non-GAAP financial measures which exclude certain significant and non-cash items as a means to understand the performance of our core business. As a general matter, we use non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of our core business, assist with preparing the annual operating plan, and measure performance for some forms of compensation. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance.

We believe certain non-GAAP measures allow us to compare our current operating results with respective historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance, such as restructuring charges and significant legal reserves. In evaluating the use of non-GAAP measures, investors should be aware that in the future we may incur expenses similar to the adjustments presented below. Our presentation of non-GAAP measures should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. A non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income (loss), operating income (loss), earnings per diluted share, or any other performance measure derived in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our liquidity.

Non-GAAP financial measures, when viewed in a reconciliation to respective GAAP financial measures, provide an additional way of viewing the Company's results of operations and the factors and trends affecting the Company's business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

2019 Third Quarter Overview

Third quarter 2019 (“current quarter”) results were supported by positive operating trends across both of our universities. We continue to make further investments in student-serving processes, technology and data analytics with the goal of improving student

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experiences, retention and academic outcomes while also benefitting our operating processes and financial results. Additionally, we continue to see consistent levels of prospective student interest that are being well served by our admissions and advising support centers. Although these investments have mostly annualized, we are increasingly using technology and data analytics to optimize our student enrollment, onboarding and learning processes.

For the third quarter of 2019, new student enrollments within the University Group increased 4.7% as compared to the prior year quarter and increased 16.2% for the current year to date as compared to the prior year to date. The increases in new student enrollments drove an increase in total enrollments of 6.1% as of the end of the third quarter as compared to the prior year. The timing of the academic calendar redesign at AIU had positively impacted the first half of 2019 student enrollments but the number of enrollment days were relatively comparable for the third quarter of 2019 as compared to the prior year quarter. Enrollment days attributable to any given quarter are the available days in the quarter during which a prospective student may apply to start school during that quarter. The number of enrollment days within the quarter impacts the new student enrollments for the quarter. We have been working on optimizing the academic calendar so that the magnitude and frequency of the calendar driven variability within AIU should be less in future quarters. Lastly, we experienced improved student retention during the current quarter driven by our student-serving initiatives and investments, which has contributed to the increase in total student enrollments.

Some additional factors which have contributed to the increase in total student enrollments as of September 30, 2019 include: consistent levels of prospective student interest; improved productivity and service levels within our admissions and advising student support centers as a result of increased tenure and training and development of our employees; improved student retention and engagement; and ongoing optimization of course pairing and sequencing that has resulted in greater learning and student engagement. Corporate partnerships also continue to be a meaningful contributor of the growth in total student enrollment and improvement in student retention trends.

Additionally, we are increasingly using technology and data analytics to optimize our student enrollment, onboarding and learning processes. One example is our two-way messenger application between advising, faculty and students which provides more real time support and feedback to students. We are also utilizing machine learning and automation technologies to enhance the functionality and sophistication of our online outreach to identify prospective students and a chatbot which has streamlined the process for prospective students with the ability to answer questions with over 90% accuracy while continuing to learn from its interactions. We have fully rolled out an updated version of our mobile application for both students and faculty and we have also continued to refine technology within the student admissions process that customizes our outreach to prospective students based on their prior student experience and program of interest, which has increased the operating efficiency of our student enrollment process.

Supported by the positive enrollment trends through the first three quarters of 2019 coupled with the operating improvements and initiatives discussed above, we expect new student enrollment growth of 12.0% to 13.0% for the University Group for the full year 2019 with both AIU and CTU experiencing new and total student enrollment growth during the fourth quarter.

New student enrollments within CTU remained relatively flat for the current quarter and increased 6.4% for the current year to date as compared to the respective prior year periods, contributing to total student enrollment growth of 3.2% as of September 30, 2019. New student enrollments for the quarter were expected to be relatively flat, due to the strong prior year comparative performance period. We believe the year to date new student enrollment and total student enrollment growth is attributable to our operational focus and priorities discussed above.

Total student enrollments for AIU increased by 11.3% as of September 30, 2019 as compared to the prior year supported by the current quarter and year to date new student enrollment growth of 10.0% and 30.5%, respectively, as compared to the prior year periods. The current quarter enrollment days were relatively comparable to the prior year period while the year to date new student enrollments benefitted by approximately 10.5% more enrollment days as compared to the prior year to date. The current quarter improvement in student enrollments was positively impacted by the operational initiatives discussed above as well as ongoing refinement and optimization of the graduate team model that AIU has implemented.

Financial Highlights

Revenue for the third quarter increased $9.3 million or 6.4% as compared to the prior year quarter, driven by revenue growth at both universities as a result of the positive enrollment trends discussed above. Operating income for the current quarter was $24.3 million as compared to operating income of $19.3 million for the prior year quarter, an increase of $5.0 million or 26.0%. Included in the current quarter was a legal settlement reserve of $7.1 million related to the Oregon arbitration matter (see Note 8 “Contingencies” for more information). Lastly, we reported cash provided by operations for the current year to date of $85.4 million as compared to cash provided by operations of $18.3 million in the prior year to date.

Revenue within our CTU segment increased $2.9 million or 3.1% for the third quarter as compared to the prior year quarter supported by the increase in total student enrollments. Operating income for CTU increased $3.7 million or 14.0% for the third quarter as compared to the prior year quarter, driven by the increase in revenue and reduced severance expense as compared to the prior year with efficiencies across student processes offsetting incremental investments in marketing.

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Revenue within our AIU segment increased $6.4 million or 12.2% for the third quarter as compared to the prior year quarter supported by the increase in new and total student enrollments. Operating income for AIU increased $6.3 million or 586.1% for the third quarter as compared to the prior year quarter, driven by the increase in revenue and reduced severance expense as compared to the prior year, partially offset with increased bad debt and marketing expenses.

Within our Corporate and Other category, operating loss was $13.0 million for the third quarter of 2019 as compared to an operating loss of $8.0 million for the prior year quarter. The increased operating loss for the current quarter was driven by the legal settlement reserve of $7.1 million recorded related to our closed campuses. Excluding the legal settlement reserve, operating losses would have improved driven by the completion of our teach-out strategy in the prior year. With the closure of all of our teach-out campuses in the prior year, we began reporting the losses associated with the closed campuses within Corporate and Other in 2019. All prior period results have been recast to be comparable. Residual losses for future quarters associated with our closed campuses will primarily consist of residual occupancy expenses associated with remaining leases along with fees for legal and professional services.

The Company believes it is useful to present non-GAAP financial measures, which exclude certain significant and non-cash items, as a means to understand the performance of its operations. (See tables below for a GAAP to non-GAAP reconciliation.) Adjusted operating income for the total company was $34.0 million for the third quarter as compared to $25.8 million in the prior year quarter with the improvement primarily driven by revenue growth at both universities and reduced operating losses within our closed campuses, partially offset with costs associated with ongoing investments in technology and increased marketing and bad debt expenses.

Adjusted operating income and adjusted earnings per diluted share for the quarters and years to date ended September 30, 2019 and 2018 is presented below (dollars in thousands, unless otherwise noted):

	ACTUAL						ACTUAL
	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
Adjusted Operating Income	2019			2018			2019			2018
Total Company
Operating income	$	24,294		$	19,283		$	54,449		$	51,115
Depreciation and amortization		2,284			2,364			6,752			7,049
Lease expenses for vacated space (1)		295			2,114			1,453			5,774
Severance and related costs, net of cancellations (2)		-			1,898			-			1,898
Significant legal settlements (3)		7,100			134			37,100			9,595
Adjusted Operating Income -- Total Company	$	33,973		$	25,793		$	99,754		$	75,431
	ACTUAL						ACTUAL
	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
Adjusted Earnings Per Diluted Share	2019			2018			2019			2018
Total Company
Reported Earnings Per Diluted Share	$	0.25		$	0.21		$	0.59		$	0.58
Pre-tax adjustments included in operating expenses:
Lease expenses for vacated space (1)		-			0.03			0.02			0.08
Severance and related costs, net of cancellations (2)		-			0.03			-			0.03
Significant legal settlements (3)		0.10			-			0.52			0.13
Total pre-tax adjustments	$	0.10		$	0.06		$	0.54		$	0.24
Tax effect of adjustments (4)		(0.02	)		(0.02	)		(0.06	)		(0.06	)
Total adjustments after tax		0.08			0.04			0.48			0.18
Adjusted Earnings Per Diluted Share -- Total Company	$	0.33		$	0.25		$	1.07		$	0.76

_________________

(1) Lease expenses for vacated space include both fixed and variable lease costs offset with sublease income.

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(2) Severance and related costs, net of cancellations, include charges related to significant restructuring actions which were primarily recorded within the University Group. These restructuring charges do not regularly occur and are not consideration part of ongoing operating results.

(3) Significant legal settlements relate to the FTC and Oregon arbitration matters recorded during 2019 and the Surrett matter which was recorded during 2018.

(4) The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate reflects federal and state taxable jurisdictions as well as the nature of the adjustments. The non-deductible amount of $23.3 million for the FTC settlement recorded during the year to date ended September 30, 2019 does not include a tax effect.

We continue to focus on building a strong balance sheet, while prudently investing in organic growth projects and also have committed capital to inorganic growth strategies, with the pending acquisition of Trident University International which was announced during the first quarter. Additionally, on November 4, 2019, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock through the end of 2021. Our goal remains to deploy resources in the most effective and efficient manner that we believe will lead to increased shareholder value while supporting and enhancing the academic quality of our institutions.

The year to date 2019 operating performance was positively impacted by investments in our admissions and advising centers, consistent levels of prospective student interest, investments in technology and 5.6% more revenue-earning days at AIU. We are on track to enter 2020 on a strong note. We continue to focus on student retention and supporting our students’ continued persistence and learning as they progress through their field of study. We are executing well against our overall strategy of sustainable and responsible growth which is driven by our focus on student experiences, retention and academic outcomes. We believe we are well-positioned, both from a competitive and operating standpoint, to serve and educate current and prospective students and to build a leadership position in the postsecondary education industry.

2019 Outlook

We currently expect the following updated outlook, subject to the key assumptions identified below (see the GAAP to non-GAAP reconciliation for adjusted operating income and adjusted earnings per diluted share below):

Financial Outlook:

• Full year 2019 – total company:

o Revenue growth of approximately 6.0% to 6.5%

o Operating income in the range of $81.9 million to $83.9 million

o Adjusted operating income in the range of $130.0 million to $132.0 million

o Earnings per diluted share in the range of $0.84 to $0.86

o Adjusted earnings per diluted share in the range of $1.32 to $1.34

• Fourth quarter 2019 – total company:

o Operating income in the range of $27.7 million to $29.7 million

o Adjusted operating income in the range of $30.2 million to $32.2 million

o Earnings per diluted share in the range of $0.26 to $0.28

o Adjusted earnings per diluted share in the range of $0.27 to $0.29

	OUTLOOK		ACTUAL			OUTLOOK		ACTUAL
	For the Quarter Ending December 31,					For the Year Ending December 31,
	2019		2018			2019		2018
Total Company:
Operating income	$27.7M - $29.7M		$	20,183		$81.9M - $83.9M		$	71,298
Depreciation and amortization	~2.0			2,345		~9.0			9,394
Lease expenses for vacated space (1)	~0.5			2,642		~2.0			8,416
Severance and related costs, net of cancellations (2)		-		(443	)		-		1,455
Significant legal settlements (3)		-		5,000			37.1		14,595
Adjusted Operating Income	$30.2M - $32.2M		$	29,727		$130M - $132M		$	105,158

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	OUTLOOK		ACTUAL			OUTLOOK			ACTUAL
	For the Quarter Ending December 31,					For the Year Ending December 31,
	2019		2018			2019			2018
Total Company:
Reported Earnings Per Diluted Share	$0.26 - $0.28		$	0.20		$0.84 - $0.86			$	0.77
Pre-tax adjustments included in operating expenses:
Lease expenses for vacated space (1)	~0.01			0.04		~0.03				0.12
Severance and related costs, net of cancellations (2)		-		-			-			0.02
Significant legal settlements (3)		-		0.07		~0.52				0.21
Total pre-tax adjustments	~0.01			0.11		~0.55				0.35
Tax effect of adjustments (4)		-		(0.01	)		(0.07	)		(0.07	)
Total adjustments after tax	~0.01			0.10		~0.48				0.28
Adjusted Earnings Per Diluted Share	$0.27 - $0.29		$	0.30		$1.32 - $1.34			$	1.05

_______________________

(1) Lease expenses for vacated space include both fixed and variable lease costs offset with sublease income.

(2) Severance and related costs, net of cancellations, include charges related to significant restructuring actions which were primarily recorded within the University Group. These restructuring charges do not regularly occur and are not considered part of ongoing operating results.

(3) Significant legal settlements relate to the FTC and Oregon arbitration matters recorded during 2019 and the Surrett and multi-state AG matters recorded during 2018.

(4) The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate reflects federal and state taxable jurisdictions as well as the nature of the adjustments. The non-deductible amounts of $23.3 million for the FTC settlement recorded during 2019 and $5.0 million for the multi-state AG settlement recorded during the year ended December 31, 2018, do not include a tax effect.

University Group Outlook:

• CTU:

o New and total student enrollments for the fourth quarter and full year are expected to grow as compared to the respective prior year periods.

• AIU:

o New and total student enrollments for the fourth quarter and full year are expected to grow as compared to the respective prior year periods, with the number of enrollment days in the fourth quarter relatively comparable to the prior year quarter and approximately 8.2% higher for the full year as compared to the prior year pursuant to the academic calendar.

• University Group:

o New student enrollments are expected to increase approximately 12.0% to 13.0% for the full year 2019 as compared to the prior year.

Forward looking adjusted operating income and adjusted earnings per diluted share are presented in the reconciliation of GAAP to non-GAAP tables above. Operating income, which is the most directly comparable GAAP measure to adjusted operating income, and earnings per diluted share may not follow the same trends stated in the outlook above because of adjustments made for certain significant and non-cash items such as lease expenses for vacated space offset with any sublease income as well as depreciation, amortization, asset impairment charges, significant restructuring charges and significant legal settlements. The revenue, operating income, adjusted operating income, earnings per share, adjusted earnings per share and enrollment outlook provided above for 2019 are based on the following key assumptions and factors, among others: (i) prospective student interest in the Company’s programs remains consistent with recent experience, (ii) initiatives and investments in student-serving operations continue to positively impact enrollment trends within the University Group, (iii) no material changes in the current legal or regulatory environment, and excludes legal and regulatory liabilities and other related impacts which are not probable and estimable at this time, and any impact of new or proposed regulations, including the “borrower defense to repayment” regulations, (iv) no significant operating impacts from the settlements with the U.S. Federal Trade Commission and state attorneys general or other legal or regulatory matters, (v) no material changes in the estimated amount of compensation expense that could be impacted by changes in the Company’s stock price or the

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Company’s assessment of the probable outcome of performance conditions relating to performance-based compensation, (vi) earnings per diluted share outlook assumes an effective income tax rate of approximately 32.5% for the fourth quarter and 30% for the full year, (vii) any impact from the Company’s stock repurchase program is excluded, and (viii) any results of operations from Trident University are excluded. Although these estimates and assumptions are based upon management’s good faith beliefs regarding current and future circumstances and actions that may be undertaken, actual results could differ materially from these estimates. In addition, decisions we make in the future as we continue to evaluate diverse strategies to enhance shareholder value may impact the outlook provided above.

Regulatory Updates

Borrower Defense to Repayment. On October 28, 2016, ED adopted new regulations that cover multiple issues including the processes and standards for the discharge of federal student loans, which are commonly referred to as “borrower defense to repayment” regulations. ED initially delayed the effective date of these regulations; however, after a successful legal challenge against the delay, ED published guidance to institutions on March 15, 2019 regarding how to implement the 2016 regulations while noting that a new set of regulations was forthcoming. On September 23, 2019, ED published new final “borrower defense to repayment” regulations that become effective on July 1, 2020. Prior to July 1, 2020, institutions are required to follow the 2016 regulations, subject to ED’s ongoing guidance and direction. The new 2019 final borrower defense to repayment regulations will result in a distinct loan discharge process and standards applicable to federal student loans first disbursed after July 1, 2020. As a result, student loans disbursed before July 1, 2017 will follow ED’s original discharge standards and processes, loans disbursed between July 1, 2017 and July 1, 2020 will follow the processes outlined in the 2016 regulations and loans disbursed after July 1, 2020 will follow the new 2019 regulations. In addition to modifying the loan discharge standards and processes, the 2019 regulations maintain the concept from the 2016 regulations of triggering events that cause the recalculation of an institution’s financial responsibility, but generally narrow the triggering events to more measurable and certain events which potentially impact an institution’s financial status. See Item 1, “Business—Student Financial Aid and Related Federal Regulation—Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations - Borrower Defense to Repayment,” and Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which We Operate - Currently effective or modified ‘borrower defense to repayment’ regulations may subject us to significant repayment liability to ED for discharged federal student loans, posting of substantial letters of credit and other requirements that could have a material adverse effect on us,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for more information about the 2016 regulations and the risks associated with those regulations and modifications thereto. We continue to review the new 2019 final regulations and the impact on us as well as monitor for additional guidance and direction from ED regarding the interim implementation of the 2016 regulations.

Accreditation and Innovation Negotiated Rulemaking. On November 1, 2019, ED published final regulations that include updates on a wide range of topics designed to impact accreditation standards and innovation in higher education, including state authorization of distance learning. These published final regulations only cover part of the package of rules that were collectively negotiated as part of the rule-making process and ED has indicated that the remaining regulations will be published at a later date. The final regulations are substantially the same as the earlier proposal that was published for public comment in June 2019. Included in the final regulations are various updates to technical Title IV Program requirements that may provide additional flexibility for accreditors and institutions that should benefit students. Among the many topics addressed were rules concerning the state authorization of distance learning as a condition of Title IV Program eligibility and changes to required disclosures associated with state licensing and adverse state and accreditor actions. Although the new regulations will generally take effect on July 1, 2020, select provisions, including those related to required disclosures and state authorization, have been designated by the Secretary of Education as eligible for early adoption and institutions may elect to immediately adopt them as effective. AIU and CTU have elected to early adopt these rules. See Item 1, “Business—Accreditation and Jurisdictional Authorizations—State Authorization,” in our Annual Report on Form 10-K for the year ended December 31, 2018 for more information about state authorization.

Cohort Default Rates. In late September 2019, ED released the official three-year cohort default rates for the 2016 cohort. Both CTU and AIU had cohort default rates under the 30% threshold for the 2016 cohort, with the rates for both institutions showing improvement from the prior year cohort. See Item 1, “Business – Student Financial Aid and Related Federal Regulation – Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations – Student Loan Default Rates” in our Annual Report on Form 10-K for the year ended December 31, 2018 for more information about cohort default rates, our prior year rates and ED’s related standards.

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CONSOLIDATED RESULTS OF OPERATIONS

The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the quarters and years to date ended September 30, 2019 and 2018 (dollars in thousands):

	For the Quarter Ended September 30,												For the Year to Date Ended September 30,
		2019		% of Total Revenue				2018		% of Total Revenue				2019		% of Total Revenue				2018		% of Total Revenue
TOTAL REVENUE	$	154,959					$	145,690					$	469,253					$	435,791
OPERATING EXPENSES
Educational services and facilities (1)		25,318			16.3	%		27,201			18.7	%		76,995			16.4	%		84,437			19.4	%
General and administrative: (2)
Advertising		35,354			22.8	%		34,155			23.4	%		99,212			21.1	%		97,013			22.3	%
Admissions		23,435			15.1	%		23,764			16.3	%		69,713			14.9	%		70,918			16.3	%
Administrative		35,386			22.8	%		30,991			21.3	%		130,090			27.7	%		103,584			23.8	%
Bad debt		8,888			5.7	%		7,932			5.4	%		32,042			6.8	%		21,675			5.0	%
Total general and administrative expense		103,063			66.5	%		96,842			66.5	%		331,057			70.5	%		293,190			67.3	%
Depreciation and amortization		2,284			1.5	%		2,364			1.6	%		6,752			1.4	%		7,049			1.6	%
OPERATING INCOME		24,294			15.7	%		19,283			13.2	%		54,449			11.6	%		51,115			11.7	%
PRETAX INCOME		26,046			16.8	%		20,157			13.8	%		59,422			12.7	%		53,343			12.2	%
PROVISION FOR INCOME TAXES		7,653			4.9	%		5,089			3.5	%		16,362			3.5	%		11,527			2.6	%
Effective tax rate		29.4	%					25.2	%					27.5	%					21.6	%
INCOME FROM CONTINUING OPERATIONS		18,393			11.9	%		15,068			10.3	%		43,060			9.2	%		41,816			9.6	%
LOSS FROM DISCONTINUED OPERATIONS, net of tax		(159	)		-0.1	%		(211	)		-0.1	%		(594	)		-0.1	%		(706	)		-0.2	%
NET INCOME	$	18,234			11.8	%	$	14,857			10.2	%	$	42,466			9.0	%	$	41,110			9.4	%

(1) Educational services and facilities expense includes costs attributable to the educational activities of our institutions, including: salaries and benefits of faculty, academic administrators and student support personnel, and costs of educational supplies and facilities, such as rents on campus leases and certain costs of establishing and maintaining computer laboratories. Also included in educational services and facilities expense are costs of other goods and services provided by our campuses, including costs of textbooks and laptop computers.

(2) General and administrative expense includes salaries and benefits of personnel in corporate and campus administration, marketing, admissions, information technology, financial aid, accounting, human resources, legal and compliance. Other expenses within this expense category include costs of advertising and production of marketing materials, bad debt expense and for the quarter and year to date ended September 30, 2018, occupancy of the corporate offices. Beginning January 1, 2019 all occupancy expenses are recorded within educational services and facilities.

Revenue

Current quarter and year to date revenue increased by 6.4% or $9.3 million and 7.7% or $33.5 million, respectively, as compared to the prior year periods supported by a 6.1% increase in total student enrollments for the University Group. CTU’s and AIU’s new and total student enrollments are discussed in the segment results of operations section below. The year to date revenue was also benefitted by 5.6% more revenue-earning days within AIU.

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Educational Services and Facilities Expense (dollars in thousands)

	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
		2019	% of Total Revenue		2018	% of Total Revenue		2019	% of Total Revenue		2018	% of Total Revenue
Educational services and facilities:
Academics & student related	$	19,473	12.6%	$	20,974	14.4%	$	58,887	12.5%	$	64,913	14.9%
Occupancy		5,845	3.8%		6,227	4.3%		18,108	3.9%		19,524	4.5%
Total educational services and facilities	$	25,318	16.3%	$	27,201	18.7%	$	76,995	16.4%	$	84,437	19.4%

The educational services and facilities expense for the current quarter and year to date improved by 6.9% or $1.9 million and 8.8% or $7.4 million, respectively, as compared to the prior year periods. Academics and student related costs improved by 7.2% or $1.5 million and 9.3% or $6.0 million for the current quarter and year to date, respectively, driven by efficiencies attained through our restructuring and re-engineering actions implemented primarily within non student-facing operations during the third quarter of 2018. We have maintained the level of staffing through 2019 but as our total student enrollments increase, academics and student related costs as a percent of revenue should decrease. Occupancy expense for the current quarter and year to date improved by 6.1% or $0.4 million and 7.3% or $1.4 million, respectively, as compared to the prior year periods primarily driven by the termination of leases for our closed campuses. We have begun recording occupancy expenses for the corporate offices within educational services and facilities beginning in 2019. Previously, these expenses were recorded within administrative expenses. The amount of occupancy expenses for the corporate offices that was recorded within general and administrative expense during the prior year quarter and prior year to date was $1.6 million and $4.7 million, respectively. Educational services and facilities expense as a percent of revenue improved by 2.4% for the quarter and 3.0% for the year to date as compared to prior periods.

General and Administrative Expense (dollars in thousands)

	For the Quarter Ended September 30,						For the Year to Date Ended September 30,
		2019	% of Total Revenue		2018	% of Total Revenue		2019	% of Total Revenue		2018	% of Total Revenue
General and administrative:
Advertising	$	35,354	22.8%	$	34,155	23.4%	$	99,212	21.1%	$	97,013	22.3%
Admissions		23,435	15.1%		23,764	16.3%		69,713	14.9%		70,918	16.3%
Administrative		35,386	22.8%		30,991	21.3%		130,090	27.7%		103,584	23.8%
Bad debt		8,888	5.7%		7,932	5.4%		32,042	6.8%		21,675	5.0%
Total general and administrative expense	$	103,063	66.5%	$	96,842	66.5%	$	331,057	70.5%	$	293,190	67.3%

The general and administrative expense for the current quarter and year to date increased by 6.4% or $6.2 million and 12.9% or $37.9 million, respectively, as compared to the prior year periods. The quarter and year to date increases were primarily driven by increases in administrative, advertising and bad debt expenses. The increased administrative expense for the current quarter and year to date is primarily due to legal reserves recorded during the current year of $37.1 million, of which $7.1 million was recorded during the current quarter related to the Oregon arbitration matter (see Note 8 “Contingencies” to the Company’s unaudited condensed consolidated financial statements in this Form 10-Q for further information) as well as increased investments in technology. The prior year to date included legal settlement expense of $9.6 million related to the Surrett matter. The advertising expense for the current quarter and year to date increased by 3.5% or $1.2 million and 2.3% or $2.2 million, respectively, as compared to the prior year periods. This increase is aligned with our prospective student interest and supports positive total enrollment growth within both CTU and AIU. Admissions expense improved for the quarter and year to date by 1.4% or $0.3 million and 1.7% or $1.2 million, respectively, as compared to the respective prior periods. An improvement in CTU’s admissions expense for the year to date of 4.4% or $1.6 million as compared to the prior year period was partially offset by increases within AIU’s admissions expense of 1.0% or $0.3 million for the year to date as compared to prior periods.

Bad debt expense incurred by each of our segments during the quarters and years to date ended September 30, 2019 and 2018 was as follows (dollars in thousands):

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	For the Quarter Ended September 30,												For the Year to Date Ended September 30,
		2019		% of Segment Revenue				2018		% of Segment Revenue				2019	% of Segment Revenue				2018		% of Segment Revenue
Bad debt expense:
CTU	$	4,973			5.2	%	$	5,089			5.5	%	$	16,602		5.7	%	$	13,837			4.9	%
AIU		3,951			6.7	%		3,259			6.2	%		15,425		8.6	%		8,658			5.6	%
Total University Group		8,924			5.8	%		8,348			5.7	%		32,027		6.8	%		22,495			5.2	%
Corporate and Other		(36	)	NM				(416	)	NM				15	NM				(820	)	NM
Total bad debt expense	$	8,888			5.7	%	$	7,932			5.4	%	$	32,042		6.8	%	$	21,675			5.0	%

          Bad debt expense increased by 12.1% or $1.0 million and 47.8% or $10.4 million for the current quarter and year to date, respectively, as compared to the prior year periods. The increased bad debt expense within both CTU and AIU for the year to date was primarily driven by an increase in reserve rates due to recent performance within each segment along with increases in accounts receivable write-offs as compared to the prior year periods within both CTU and AIU. CTU’s bad debt decreased by 2.3% or $0.1 million and increased by 20.0% or $2.8 million for the current quarter and year to date, respectively, as compared to the prior year periods. AIU’s bad debt increased by 21.2% or $0.7 million and 78.2% or $6.8 million for the current quarter and year to date, respectively, as compared to the prior year periods. The Company continues to focus on further improving student retention and completion of the financial aid process for students.

Operating Income

Operating income increased by 26.0% or $5.0 million and 6.5% or $3.3 million for the current quarter and year to date, respectively, as compared to the prior year periods. The increase was primarily due to increased revenue of 6.4% or $9.3 million and 7.7% or $33.5 million for the current quarter and year to date, respectively, as compared to the prior year periods, and reduced operating losses within Corporate and Other for the year to date, which more than offset the increases in legal settlement expenses related to the FTC and Oregon arbitration matters, increases in bad debt and marketing expenses and ongoing investments in technology. The increase in revenue was from overall growth in total student enrollments and an increase in revenue-earning days at AIU for the year to date as compared to the prior year periods.

Provision for Income Taxes

For the quarter and year to date ended September 30, 2019, we recorded a provision for income taxes of $7.7 million or 29.4% and $16.4 million or 27.5%, respectively, as compared to a provision for income taxes of $5.1 million or 25.2% and $11.5 million or 21.6% for the respective prior year periods. The effective tax rate for the quarter and year to date ended September 30, 2019 reflects the tax effect of the partial non-deductibility of the FTC settlement, which increased the effective tax rate for the quarter and year to date by 5.7% and 6.5%, respectively. The current quarter and year to date effective tax rate includes the impact of stock-based compensation and net adjustments which increased the state deferred tax asset. The year to date effective tax rate was also impacted by the release of previously recorded tax reserves. The effect of these discrete items decreased the current effective tax rate for the quarter and year to date by 2.4% and 4.8%, respectively. For the quarter and year to date ended September 30, 2018, the effective tax rate includes the impact of tax reserves, the tax effect of stock-based compensation and adjustments to increase the state deferred tax asset, which decreased the effective tax rate by 2.7% and 5.2%, respectively. For the full year 2019, we expect our effective tax rate to be between 29.0% and 30.5%. As of December 31, 2018, we had $193.6 million of federal net operating loss carry forwards which will be partially used in 2019 to offset federal taxable income.

SEGMENT RESULTS OF OPERATIONS

The following tables present unaudited segment results for the reported periods (dollars in thousands):

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	For the Quarter Ended September 30,
	REVENUE							OPERATING INCOME (LOSS)									OPERATING MARGIN
		2019		2018	% Change				2019			2018		% Change				2019			2018
REVENUE:
CTU	$	96,038	$	93,115		3.1	%	$	29,926		$	26,261			14.0	%		31.2	%		28.2	%
AIU		58,907		52,504		12.2	%		7,341			1,070			586.1	%		12.5	%		2.0	%
Total University Group		154,945		145,619		6.4	%		37,267			27,331			36.4	%		24.1	%		18.8	%
Corporate and other (1)		-		-	NM				(4,758	)		(4,362	)		-9.1	%	NM			NM
Closed campuses (2)		14		71	NM				(8,215	)		(3,686	)		-122.9	%	NM			NM
Total Corporate and Other (2)		14		71	NM				(12,973	)		(8,048	)		-61.2	%	NM			NM
Total	$	154,959	$	145,690		6.4	%	$	24,294		$	19,283			26.0	%		15.7	%		13.2	%

	For the Year to Date Ended September 30,
	REVENUE							OPERATING INCOME (LOSS)									OPERATING MARGIN
		2019		2018	% Change				2019			2018		% Change				2019			2018
REVENUE:
CTU (3)	$	289,650	$	280,988		3.1	%	$	71,730		$	80,562			-11.0	%		24.8	%		28.7	%
AIU (4)		179,559		154,204		16.4	%		11,436			3,621			215.8	%		6.4	%		2.3	%
Total University Group		469,209		435,192		7.8	%		83,166			84,183			-1.2	%		17.7	%		19.3	%
Corporate and other (1)		-		-	NM				(15,916	)		(10,904	)		-46.0	%	NM			NM
Closed campuses (2)		44		599	NM				(12,801	)		(22,164	)		42.2	%	NM			NM
Total Corporate and Other (2)		44		599	NM				(28,717	)		(33,068	)		13.2	%	NM			NM
Total	$	469,253	$	435,791		7.7	%	$	54,449		$	51,115			6.5	%		11.6	%		11.7	%

_____________________

(1) This category includes amounts that were historically reported within Corporate and Other prior to the segment change which occurred during the first quarter of 2019.

(2) A reserve of $7.1 million was recorded within Corporate and Other for our closed campuses related to the Oregon arbitration matter during the third quarter of 2019.

(3) A reserve of $18.6 million was recorded within CTU related to the FTC settlement during the year to date ended September 30, 2019.

(4) A reserve of $11.4 million was recorded within AIU related to the FTC settlement during the year to date ended September 30, 2019.

	NEW STUDENT ENROLLMENTS												TOTAL STUDENT ENROLLMENTS
	For the Quarter Ended September 30,						For the Year to Date Ended September 30,						As of  September 30,
		2019	2018	% Change				2019	2018	% Change				2019	2018	% Change
CTU		6,500	6,520		-0.3	%		18,350	17,240		6.4	%		22,900	22,200		3.2	%
AIU		6,710	6,100		10.0	%		15,330	11,750		30.5	%		13,800	12,400		11.3	%
Total University Group		13,210	12,620		4.7	%		33,680	28,990		16.2	%		36,700	34,600		6.1	%

CTU. Current quarter and year to date revenue increased by 3.1% or $2.9 million and 3.1% or $8.7 million, respectively, as compared to the prior year periods. CTU experienced positive new student enrollment growth for the year to date of 6.4% as compared to the prior year period, and increased total student enrollments by 3.2% as of the end of the quarter as compared to the prior year quarter. New student enrollments for the current quarter as compared to the prior year quarter remained relatively flat as a result of the strong prior year comparative performance period. CTU’s new and total student enrollments were positively impacted by initiatives and investments in student-serving functions and technology enhancements as well as improved student retention and supported by consistent levels of prospective student interest. Also contributing to the increase in student enrollments was the continued growth within the corporate partnership program.

Current quarter operating income for CTU increased by 14.0% or $3.7 million as compared to the prior year period and decreased by 11.0% or $8.8 million for the year to date as compared to the prior year periods. The current quarter increase was driven

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by the increase in revenue and reduced severance expense as compared to the prior year quarter with efficiencies across student processes offsetting incremental investments in marketing. The year to date decrease in operating income was primarily driven by a reserve recorded during the year of $18.6 million related to the FTC settlement as well as increased bad debt and marketing expenses, which was partially offset with the increase in revenue discussed above.

AIU. Current quarter and year to date revenue increased by 12.2% or $6.4 million and 16.4% or $25.4 million, respectively, as compared to the prior year periods. The revenue growth was supported by an increase of 11.3% in total student enrollments at the end of the quarter as compared to the prior year quarter. New student enrollments for the quarter and year to date improved by 10.0% and 30.5% as compared to the prior year periods. The year to date increase was benefitted by approximately 10.5% more enrollment days during the current year as compared to the prior year as a result of the academic calendar redesign. Enrollment days attributable to any given quarter are the available days during the quarter during which a prospective student may apply to start school during that quarter. AIU’s new and total student enrollments were also positively impacted by initiatives and investments in student-serving functions and technology enhancements as well as improved student retention and supported by consistent levels of prospective student interest. AIU also experienced approximately 5.6% more revenue-earning days for the year to date as compared to the prior year period.

Current quarter and year to date operating income for AIU increased by 586.1% or $6.3 and 215.8% or $7.8 million, respectively, as compared to the prior year periods. The improvement in operating income was primarily driven by improved revenue from new and total student enrollment growth and reduced severance expense, which more than offset the increases in legal reserve as well as increased bad debt and marketing expenses for the current year to date.

Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company and remaining expenses associated with closed campuses. Total Corporate and Other operating loss for the current quarter increased by 61.2% or $4.9 million as compared to the prior year period primarily due to a $7.1 million legal reserve recorded for the Oregon arbitration matter during the current quarter related to our closed campuses. Total Corporate and Other operating loss for the year to date improved by 13.2% or $4.4 million as compared to the prior year period primarily as a result of decreased expenses associated with our closed campuses partially offset with increased legal and other professional fees within Corporate.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of operations that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption “Summary of Critical Accounting Policies and Estimates” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018. Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 also includes a discussion of these and other significant accounting policies.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of September 30, 2019, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $311.8 million. Restricted cash as of September 30, 2019 was approximately $30.0 million and is related to amounts held in an escrow account for the FTC settlement. This amount was subsequently paid in October 2019. Our cash flows from operating activities have been adequate to fulfill our liquidity requirements. We have historically financed our operating activities, organic growth and acquisitions primarily through cash generated from operations and existing cash balances. We expect to continue to generate cash during 2019. The expectation is based upon, and subject to, the key assumptions and factors discussed above in the Management’s Discussion and Analysis under the heading “2019 Outlook.” We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures and lease commitments through at least the next 12 months primarily with cash generated by operations and existing cash balances.

Our credit agreement allows us to borrow up to a maximum amount of $50.0 million and is scheduled to mature on January 20, 2022. The credit agreement contains customary affirmative, negative and financial maintenance covenants, including a requirement to maintain a balance of cash, cash equivalents and marketable securities in our domestic accounts with the bank of at least $50.0 million at all times. Amounts borrowed under the credit agreement are required to be 100% secured with deposits of cash and marketable securities with the bank. Under the credit agreement, the Company may make restricted payments, including payments in connection with an acquisition or a repurchase of shares of CEC’s common stock, up to an aggregate maximum of $65.0 million through January 27, 2020 and up to an aggregate maximum of $100.0 million during the one year period ending January 27, 2021.

Our strategy has been focused on building a strong balance sheet while prudently investing in organic growth projects. As we further build our cash balances, we will continue to evaluate diverse strategies to enhance shareholder value, including acquisitions of high-quality educational institutions and programs and repurchases of company stock, while emphasizing organic student-serving investments at our universities and maintaining adequate liquidity.

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On November 4, 2019, the Board of Directors of the Company approved a new stock repurchase program which authorizes the Company to repurchase up to $50 million of our common stock from time to time depending on market conditions and other considerations.  The program expires on December 31, 2021. See Part II, Item 5, in this Quarterly Report on Form 10-Q for more information about this stock repurchase program.

In 2019, we entered into an agreement to acquire substantially all of the assets of Trident University International (“Trident”). Trident is a regionally accredited university offering online undergraduate, master’s and doctoral programs with a strong focus on graduate programs. Under the terms of the agreement, we have agreed to pay a cash purchase price in the range of $35 million to $44 million depending on Trident’s actual financial results measured in terms of its revenue and EBITDA during a 12-month period prior to closing. We will also reimburse the seller for certain employee related expenses, the amount of which will be finalized at closing. In addition, the parties have agreed to a working capital adjustment based on the final closing balance sheet and that $4.0 million of the purchase price will be set aside in an escrow account to secure indemnification obligations of the seller after closing. The purchase price is expected to be funded fully using the Company’s available cash balances. The acquisition of Trident is expected to be immediately accretive to the Company’s earnings after closing. The transaction is expected to close by the end of 2019 or in early 2020, subject to necessary regulatory approvals and customary representations, warranties, covenants and closing conditions.

The discussion above reflects management’s expectations regarding liquidity; however, as a result of the significance of the Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV Program funds that our students are eligible to receive or any impact on timing or our ability to receive Title IV Program funds, or any requirement to post a significant letter of credit to ED, may have a significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollment which could be impacted by external factors. See Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Sources and Uses of Cash

Operating Cash Flows

During the years to date ended September 30, 2019 and 2018, net cash flows provided by operating activities totaled $85.4 million and $18.3 million, respectively. The improvement in cash flow from operations as compared to the prior year is primarily driven by improved operating performance within CTU and AIU and reduction of losses at our teach-out campuses.

Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the ability to pay tuition costs through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, institutional payment plans, private and institutional scholarships and cash payments. For the years to date ended September 30, 2019 and 2018, approximately 80% and 78%, respectively, of our institutions’ cash receipts from tuition payments came from Title IV Program funding.

For further discussion of Title IV Program funding and alternative funding sources for our students, see Item 1, “Business - Student Financial Aid and Related Federal Regulation,” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other institution supplies, and to federal, state and local governments for income and other taxes.

Investing Cash Flows

During the years to date ended September 30, 2019 and 2018, net cash flows used in investing activities totaled $39.3 million and $3.1 million, respectively.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $36.1 million and a $0.8 million net cash inflow during the years to date ended September 30, 2019 and 2018, respectively.

Capital Expenditures. Capital expenditures decreased to $3.2 million for the year to date ended September 30, 2019 as compared to $4.0 million for year to date ended September 30, 2018. Capital expenditures represented less than 1.0% of total revenue for each of the years to date ended September 30, 2019 and 2018. For the full year 2019, we expect capital expenditures to be approximately 1% of revenue.

Financing Cash Flows

During the years to date ended September 30, 2019 and 2018, net cash flows used in financing activities totaled $1.4 million and $1.7 million, respectively.

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Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $2.7 million for the year to date ended September 30, 2019 and $3.3 million for the prior year to date.

Credit Agreement. On December 27, 2018, we entered into a $50.0 million credit agreement with BMO Harris Bank N.A., in its capacities as the sole 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. The revolving credit facility under the credit agreement is scheduled to mature on January 20, 2022. Amounts borrowed under the credit agreement are required to be 100% secured with cash and marketable securities with the bank. The credit agreement, which includes certain financial covenants, requires that interest is payable at the end of each respective interest period or monthly in arrears, fees are payable quarterly in arrears and principal is payable at maturity. As of September 30, 2019, we had no outstanding borrowings under the revolving credit facility and we remain in compliance with the covenants of the credit agreement.

Changes in Financial Position

          Selected condensed consolidated balance sheet account changes from December 31, 2018 to September 30, 2019 were as follows (dollars in thousands):

	September 30,		December 31,
	2019		2018		% Change
ASSETS
CURRENT ASSETS:
Total cash and cash equivalents, restricted cash and short-term investments	$	311,826	$	229,159		36	%
NON-CURRENT ASSETS:
Right of use asset		52,016		-	NM
Deferred income tax assets, net		65,363		81,628		-20	%
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lease liability-operating		12,109		-	NM
Accrued expenses - other		46,610		19,668		137	%
NON-CURRENT LIABILITIES:
Lease liability-operating		54,904		-	NM
Deferred rent obligations		-		12,745	NM
Other non-current liabilities		9,819		17,493		-44	%

           Total cash and cash equivalents, restricted cash and short-term investments: The increase is primarily driven by cash provided by operating activities as a result of the increase in total revenue within CTU and AIU during the current year partially offset with cash outflows related to legal settlement payments and annual long-term incentive compensation payments during the current year to date.

Right of use asset: The increase is due to a change in accounting for lease assets under ASC Topic 842 as of January 1, 2019.

Deferred income tax assets, net: The decrease is driven by the usage of deferred tax assets associated with the offset of income taxes payable.

Lease liability-operating, current: The increase is due to a change in accounting for lease liabilities under ASC Topic 842 as of January 1, 2019.

         Accrued expenses – other: The increase is driven by the recording of a $30.0 million reserve relating to the FTC settlement and a $7.1 million reserve for the Oregon arbitration matter during the current year to date.  

Lease liability-operating, non-current: The increase is due to a change in accounting for lease liabilities under ASC Topic 842 as of January 1, 2019.

Deferred rent: The decrease is driven by the offset of deferred rent liabilities against the right of use asset upon adoption of ASC Topic 842 as of January 1, 2019.

          Other non-current liabilities: The decrease is driven by $5.1 million of unused space charges offset against the right of use asset upon adoption of ASC Topic 842.

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Contractual Obligations

As of September 30, 2019, future minimum cash payments under contractual obligations for our non-cancelable operating lease arrangements were as follows (dollars in thousands):

	2019 (5)		2020		2021		2022		2023 & Thereafter		Total
Gross operating lease obligations (1)
Ongoing operations (2)	$	1,707	$	13,318	$	12,440	$	11,331	$	35,821	$	74,617
Closed campuses (3)		744		4,072		1,065		-		-		5,881
Total gross operating lease obligations	$	2,451	$	17,390	$	13,505	$	11,331	$	35,821	$	80,498
Sublease income (4)
Ongoing operations (2)	$	163	$	860	$	764	$	777	$	330	$	2,894
Closed campuses (3)		486		1,905		317		-		-		2,708
Total sublease income	$	649	$	2,765	$	1,081	$	777	$	330	$	5,602
Net operating lease obligations
Ongoing operations (2)	$	1,544	$	12,458	$	11,676	$	10,554	$	35,491	$	71,723
Closed campuses (3)		258		2,167		748		-		-		3,173
Total net contractual lease obligations	$	1,802	$	14,625	$	12,424	$	10,554	$	35,491	$	74,896

(1) Amounts exclude certain costs associated with real estate leases, such as expense for common area maintenance (i.e., “CAM”) and taxes, as these amounts are undeterminable at this time and may vary based on future circumstances.

(2) Amounts relate to ongoing operations which include CTU, AIU and Corporate.

(3) Amounts relate to closed campuses.

(4) Amounts provided are for executed sublease arrangements.

(5) Amounts provided are for liabilities as of September 30, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We use various techniques to manage our market risk. We had no derivative financial instruments or derivative commodity instruments, and believe the risk related to cash equivalents and available for sale investments is limited due to the adherence to our investment policy, which focuses on capital preservation and liquidity. In addition, we utilize asset managers who conduct initial and ongoing credit analysis on our investment portfolio and monitor that all investments are in compliance with our investment policy. Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments and may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline.

Interest Rate and Foreign Currency Exposure

We manage interest rate risk by investing excess funds in cash equivalents and available for sale investments bearing a combination of fixed and variable interest rates, which are tied to various market indices. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell investments that have declined in market value due to changes in interest rates. At September 30, 2019, a 10% increase or decrease in interest rates applicable to our investments or borrowings would not have a material impact on our future earnings, fair values or cash flows.

Any outstanding borrowings under our revolving credit facility bear annual interest at fluctuating rates under either the Base Rate Loan or as determined by the London Interbank Offered Rate (“LIBOR”) for the relevant currency, plus the applicable rate based on the type of loan. Under the credit agreement, if LIBOR cannot be determined or an announcement is made about a specific date after which LIBOR will no longer be used for determining interest rates for loans, an alternative to LIBOR or a mechanism to establish an alternate rate is specified. As of September 30, 2019, we had no outstanding borrowings under this facility.

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During 2019 we were subject to foreign currency exchange exposures arising from transactions denominated in currencies other than the U.S. dollar, and from the translation of foreign currency balance sheet accounts into U.S. dollar balance sheet accounts, primarily related to an equity investment. We are subject to risks associated with fluctuations in the value of the Euro versus the U.S. dollar.

Our financial instruments are recorded at their fair values as of September 30, 2019 and December 31, 2018. We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in interest rates applicable to our investments or borrowings or to foreign currency fluctuations is not significant.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We completed an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q (“Report”) under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized, and reported within the time periods specified in the rules and forms provided by the U.S. Securities and Exchange Commission (“SEC”) and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Note 8 “Contingencies” to our unaudited condensed consolidated financial statements is incorporated herein by reference.

Item 1A. Risk Factors

           In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, Item 1A “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on February 20, 2019.

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

The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis during the year to date ended September 30, 2019:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
December 31, 2018							$	183,296,772
January 1, 2019—January 31, 2019		-	$	-		-		183,296,772
February 1, 2019—February 28, 2019		-		-		-		183,296,772
March 1, 2019—March 31, 2019		155,137		16.32		-		183,296,772
April 1, 2019—April 30, 2019		-		-		-		183,296,772
May 1, 2019—May 31, 2019		-		-		-		183,296,772
June 1, 2019—June 30, 2019		1,580		19.58		-		183,296,772
July 1, 2019—July 31, 2019		-		-		-		183,296,772
August 1, 2019—August 31, 2019		-		-		-		183,296,772
September 1, 2019—September 30, 2019		6,593		19.57		-		183,296,772
Total		163,310				-

(1) Includes 126,359 and 36,951 shares delivered back to the Company for payment of withholding taxes from employees for vesting restricted stock units pursuant to the terms of the Career Education Corporation 2008 Incentive Compensation Plan and 2016 Incentive Compensation Plan, respectively.

(2) As of September 30, 2019, approximately $183.3 million was available under our previously authorized repurchase program. This repurchase program was terminated on November 4, 2019, and a new stock repurchase program was approved. See Item 5 below for information about the new stock repurchase program

Item 5. Other Information

On November 4, 2019, the Board of Directors of the Company approved a new stock repurchase program which authorizes the Company to repurchase up to $50 million of the Company’s outstanding common stock. The timing of purchases and the number of shares repurchased under the new program will be determined by the Company’s management and will depend on a variety of factors including stock price, trading volume and other general market and economic conditions, its assessment of alternative uses of capital, regulatory requirements and other factors.

Repurchases will be made in open market transactions, including block purchases, conducted in accordance with Rule 10b-18 under the Exchange Act. Repurchases may also be made pursuant to trading plans established under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws.

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The stock repurchase program does not obligate the Company to purchase shares and the Company may, in its discretion, begin, suspend or terminate repurchases at any time, without any prior notice. The program expires on December 31, 2021 and replaces all prior stock repurchase programs authorized by the Board of Directors.

Item 6. Exhibits

The exhibits required to be filed by Item 601 of Regulation S-K are listed in the “Exhibit Index,” which is attached hereto and incorporated by reference herein.

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	INDEX TO EXHIBITS
Exhibit Number	Exhibit	Incorporated by Reference to:
+10.1	Stipulated Order for Permanent Injunction and Monetary Judgment dated October 9, 2019 agreed to by the Federal Trade Commission and Career Education Corporation and certain of its subsidiaries
+31.1	Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
+31.2	Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
+32.1	Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
+32.2	Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
+101.INS	Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
+101.SCH	Inline XBRL Taxonomy Extension Schema Document
+101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
+101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
+101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
+101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
+104	The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL (included in Exhibit 101)
	____
	* Management contract or compensatory plan or arrangement required to be filed as an Exhibit on this Form 10-Q.
	+Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAREER EDUCATION CORPORATION
Date: November 6, 2019	By:	/s/ TODD S. NELSON
		Todd S. Nelson President and Chief Executive Officer (Principal Executive Officer)
Date: November 6, 2019	By:	/s/ ASHISH R. GHIA
		Ashish R. Ghia Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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