Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the "Selected Financial Data" and the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.
General Overview
We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average full-time enrollment and graduates. We also provide programs for welders and CNC machining technicians. We offer certificate, diploma or degree programs at 12 campuses across the United States, excluding the Norwood, Massachusetts campus which was closed on July 31, 2020. Additionally, we offer MSAT programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers. Founded in 1965, we have provided technical education for more than 55 years and have graduated more than 220,000 technicians.
Our revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who wi t hdraw from our programs prior to specified dates. Tuition and fee revenue is recognized ratably over the term of the course or program offered. Approximately 99%, 99% and 98% of our revenues for each of the years ended September 30, 2020, 2019 and 2018, respectively, consisted of gross tuition. We supplement our tuition and fee revenues with additional revenues from sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs. Through our proprietary loan program, we, in substance, provide the students who participate in this program with extended payment terms for a portion of their tuition. Under ASC 606, the portion of tuition revenue related to the proprietary loan program is considered a form of variable consideration. We estimate the amount we ultimately expect to collect from the portion of tuition that is funded by the proprietary loan program, resulting in a note receivable. Estimating the collection rate requires significant management judgment. The estimated amount is determined at the inception of the contract and we recognize the related revenue as the student progresses through school. Each reporting period, we update our assessment of the variable consideration associated with the proprietary loan program. Accordingly, we recognize tuition and loan origination fees financed by the loan and any related interest revenue under the effective interest method required under the loan based on this collection rate. Tuition revenue and fees generally vary based on the average number of students enrolled and average tuition charged per program. We also provide dealer technician training or instructor staffing services to manufacturers, and we recognize revenue as the transfer of services occurs.
Average full-time enrollments vary depending on, among other factors, the number of continuing students at the beginning of a period, new student enrollments during the period, students who have previously withdrawn but decide to re-enroll during the period, graduations and withdrawals during the period. Our average full-time enrollments are influenced by the:
• Attractiveness of our program offerings to high school graduates and potential adult students;
• Effectiveness of our marketing efforts;
• Depth of our industry relationships;
• Strength of employment markets and long-term career prospects;
• Quality of our instructors and student services professionals;
• Persistence of our students; the length of our education programs;
• Availability of federal and alternative funding for our programs; and
• Number of graduates of our programs who elect to attend the advanced training programs we offer and general economic conditions.
Our introduction of additional program offerings at existing campuses and opening additional campuses is expected to influence our average full-time enrollment. We currently offer start dates at our campuses that range from every three to six weeks throughout the year in our core programs. The number of start dates of advanced training programs varies by the
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duration of those programs and the needs of the manufacturers which sponsor them.
Our tuition charges vary by type and length of our programs and the program level, such as core or advanced training. We implemented tuition rate increases of up to 3.5%, 3.0% and 2.5% for each of the years ended September 30, 2020, 2019 and 2018, respectively. We regularly evaluate our tuition pricing based on individual campus markets, the competitive environment and ED regulations.
Most students at our campuses rely on funds received under various government-sponsored student financial aid programs, predominantly Title IV Programs and various veterans' benefits programs, to pay a substantial portion of their tuition and other education-related expenses. Approximately 66% of our revenues, on a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2020 as calculated under the 90/10 rule. Additionally, approximately 17% of our revenues, on a cash basis, were collected from funds distributed under various veterans' benefits programs for the year ended September 30, 2020.
We extend credit for tuition and fees, for a limited period of time, to the majority of our students. Our credit risk is mitigated through the students’ participation in federally funded financial aid and veterans' benefit programs unless students withdraw prior to the receipt by us of Title IV or veterans' benefit funds for those students. The financial aid and veterans' benefits programs are subject to political and budgetary considerations. There is no assurance that such funding will be maintained at current levels. Extensive and complex regulations govern the financial assistance programs in which our students participate. Our administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potential adverse actions, including a suspension, limitation, placement on reimbursement status or termination proceeding, which could have a material adverse effect on our business.
If any of our institutions were to lose its eligibility to participate in federal student financial aid or veterans' benefit programs, the students at that institution, and other locations of that institution, would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. The receipt of financial aid and veterans benefit funds reduces the students’ amounts due to us and has no impact on revenue recognition, as the transfer relates to the source of funding for the costs of education which may occur through Title IV, veterans benefit or other funds and resources available to the student. Additionally, we bear all credit and collection risk for the portion of our student tuition that is funded through our proprietary loan program.
We categorize our operating expenses as (i) educational services and facilities and (ii) selling, general and administrative.
Major components of educational services and facilities expenses include faculty and other campus administration employees compensation and benefits, facility rent, maintenance, utilities, depreciation and amortization of property and equipment used in the provision of educational services, tools, training aids, royalties under our licensing arrangements and other costs directly associated with teaching our programs and providing educational services to our students.
Selling, general and administrative expenses include compensation and benefits of employees who are not directly associated with the provision of educational services, such as: executive management; finance and central accounting; information technology; legal; human resources; marketing and student enrollment expenses, including compensation and benefits of personnel employed in marketing and student admissions; costs of professional services; bad debt expense; costs associated with the implementation and operation of our student management and reporting system; rent for our corporate office headquarters; depreciation and amortization of property and equipment that is not used in the provision of educational services, and other costs that are incidental to our operations. All marketing and student enrollment expenses are recognized in the period incurred. Costs related to the opening of new facilities, excluding related capital expenditures, are expensed in the period incurred or when services are provided.
2020 Overview
Impact of COVID-19
On March 19, 2020, we suspended all in-person classes at all of our campuses for the safety and protection of our students and staff, to help slow the spread of COVID-19 and to comply with state and local orders and restrictions. Upon the suspension of all in-person classes, we provided all students with the opportunity to take a leave of absence or to continue their education via an online curriculum. On March 25, 2020, we began offering the classroom portion of our training online so that the more than 8,000 students who elected to remain active in the program could continue their education remotely. As
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our training is a combination of classroom lectures and hands-on labs, there is a portion of most classes that cannot be delivered online and needs to be completed in-person at the campus labs.
We transitioned our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs. On-campus labs have been redesigned to meet the health, safety and social distancing guidelines imposed by the CDC and state and local jurisdictions, while still meeting our accreditation and curriculum requirements. Both the ED and the ACCSC granted institutions temporary approval to offer distance learning through December 31, 2020. To afford us additional flexibility beyond the current temporary approval period(s), we have initiated the approval process with the ACCSC and the appropriate state agencies to be able to offer distance education and a blended learning format for all of our programs on a more permanent basis. In May 2020, we resumed in-person labs at eight of our campus locations. Four of our campuses resumed in-person labs in June 2020, and our final campus in Bloomfield, New Jersey resumed in-person labs on July 1, 2020. As previously planned, we completed the teach-out of our Norwood, Massachusetts campus and it closed on July 31, 2020.
Once a student returns to campus for in-person labs, under the new guidelines it takes on average approximately six to nine weeks for that student to catch-up on the lab work that he was unable to complete during the campus closure and prior to his return. Additionally, as of September 30, 2020, approximately 5% of students had not returned to campus to complete the in-person labs and remain only in the online portion of the curriculum, essentially only completing half of each course, while approximately 28% of students were completing catch up labs, but over an extended period of time. We continue to recognize revenue ratably over the term of the course or program offered, taking into consideration those only completing the online curriculum, and the catch up period for active students and the impact it has on expected graduation dates. As a result, as of September 30, 2020, we had deferred revenue of $6.1 million.
While we have reopened all of our campus locations, some students have delayed returning to campus for in-person labs even with the new social distancing protocols in place and remain on leave of absence or continue only with the online instruction portion of the curriculum. If students continue to remain on a leave of absence, withdraw, or do not make up the required in person labs on a timely basis, our revenues could continue to be impacted in fiscal 2021.
Student Metrics
End of period undergraduate full-time student enrollment as of September 30, 2020 and 2019 was 12,524 and 12,363, respectively, representing growth of 1.3% despite the impacts of the COVID-19 pandemic.
We experienced a 2.0% decline in our average full-time enrollment to 10,462 students for the year ended September 30, 2020 as compared to the prior year period. Excluding the Norwood, Massachusetts campus, we started 11,283 students during the year ended September 30, 2020, which represents a decrease of 2.4% from the same period during fiscal 2019. The decrease in full-time enrollment and starts was primarily the result of the COVID-19 pandemic.
Our ability to start new students continues to be influenced by various factors including: unemployment rates; competition; adverse media coverage, legislative hearings, regulatory actions and investigations by attorneys general and various agencies related to allegations of wrongdoing on the part of other companies within the education and training services industry, which have cast the industry in a negative light; and the state of the general macro-economic environment and its impact on price sensitivity and the ability and willingness of students and their families to incur debt. For more information, see Item 1A. “Risk Factors.”
Operations
Our revenues for the year ended September 30, 2020 were $300.8 million, a decrease of $30.7 million, or 9.3%, from the prior year. The decrease in revenue was primarily due to the COVID-19 pandemic as more students were on leave of absence during the year and our campuses suspended operations for a period of time. While we have transitioned to a blended learning model, the COVID-19 pandemic has impacted the pace in which students are progressing through their programs. As a result, our total graduates in fiscal 2020 decreased by 19% as compared to the prior year. Additionally, our revenue was impacted by our exit of the Norwood, Massachusetts campus in July 2020. We had $1.4 million of revenue from Norwood in fiscal 2020, compared to $8.5 million in the prior year. Revenues were favorably impacted in fiscal 2020 from the opening of our Bloomfield, New Jersey campus in fiscal 2018. We had $14.6 million in revenue from Bloomfield in fiscal 2020, as compared to $10.9 million in fiscal 2019 when the campus was still ramping up.
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In fiscal 2020, we had an operating loss of $3.9 million, as compared to an operating loss of $7.8 million for the same period in the prior year. Our operating expenses for fiscal 2020 decreased 10.2% as compared to the prior year primarily due to cost management initiatives, as well as decreases in compensation and benefit costs, depreciation expense, and contract and professional services expenses. Productivity improvements and proactive cost actions have been a key part of our operating model for the past several years, and we continue to identify and execute on efficiency opportunities throughout our cost structure, while improving and investing in the overall student experience. Net income for the year ended September 30, 2020 was $8.0 million, compared to a net loss of $7.9 million in the prior year, and includes a $10.7 million tax benefit resulting from the application of revised net operating loss carryback regulations from the CARES Act.
During fiscal 2020, we were granted approximately $33.0 million in HEERF funds under the CARES Act, with $16.5 million exclusively for emergency financial aid grants to students impacted by COVID-19 and $16.5 million to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus. As of September 30, 2020, we have awarded all $16.5 million designated for student grants. During the year ended September 30, 2020, we drew down $13.9 million of the institutional funds into our operating cash account as partial reimbursement for the $15.7 million of eligible costs incurred during fiscal 2020.
We continue to focus on the following key strategies as we identify opportunities for growth:
• Expanding into new geographic markets either organically or through strategic acquisitions;
• Offering new programs, such as expanding our welding program to additional campus locations, and offering associate level degree programs at additional campus locations;
• Maintaining and expanding our manufacturer brand partners and other employers to provide career opportunities and tuition reimbursement for our graduates;
• Identifying and executing on a variety of affordability initiatives for our students, including employer financial support and institutional scholarships and grants; and
• Shifting perceptions and building advocacy with key policy makers and influencers.
Results of Operations
The following table sets forth selected statements of operations data as a percentage of revenues for each of the periods indicated.
Year Ended September 30,
2020 2019 2018
Revenues 100.0 % 100.0 % 100.0 %
Operating expenses:
Educational services and facilities 51.9 % 53.8 % 57.6 %
Selling, general and administrative 49.4 % 48.6 % 53.5 %
Total operating expenses 101.3 % 102.4 % 111.1 %
Loss from operations (1.3) % (2.4) % (11.1) %
Interest income (expense), net 0.4 % (0.5) % (0.6) %
Other income — % 0.6 % 0.4 %
Total other income (expense), net 0.4 % 0.1 % (0.2) %
Loss before income taxes (0.9) % (2.3) % (11.3) %
Income tax benefit (expense) 3.5 % (0.1) % 1.0 %
Net income (loss) 2.6 % (2.4) % (10.3) %
Preferred stock dividends 1.8 % 1.6 % 1.7 %
Income (loss) available for distribution 0.8 % (4.0) % (12.0) %
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Year Ended September 30, 2020 Compared to Year Ended September 30, 2019
Revenues
Our revenues for the year ended September 30, 2020 were $300.8 million, a decrease of $30.7 million, or 9.3%, as compared to revenues of $331.5 million for the year ended September 30, 2019. Our average full-time student enrollment decreased by 2.0% primarily due to a higher number of students who went on a leave of absence during the three months ended June 30, 2020 due to the COVID-19 pandemic. Additionally, timing of revenue recognition for active students has been impacted by additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed and by students retaking courses that were previously completed. As a result of the catch up labs not yet completed, as of September 30, 2020, we have deferred revenue of $6.1 million.
We recognized $5.1 million on an accrual basis related to revenues and interest under our proprietary loan program for the year ended September 30, 2020, as compared to $6.8 million recognized for the year ended September 30, 2019. The decrease in overall fiscal year 2020 revenues was also partially attributable to a $1.5 million decrease in revenues from student-paid MSATs for the year ended September 30, 2020 as compared to the prior year period.
Educational services and facilities expenses
Our educational services and facilities expenses for the year ended September 30, 2020 were $155.9 million, representing a decrease of $22.4 million, or 12.6%, as compared to $178.3 million for the year ended September 30, 2019.
The following table sets forth the significant components of our educational services and facilities expenses (in thousands):
Year Ended September 30,
2020 2019
Salaries expense $ 71,516 $ 78,195
Employee benefits and tax 11,911 15,972
Bonus expense 1,023 550
Stock-based compensation 64 —
Compensation and related costs 84,514 94,717
Depreciation and amortization expense 12,187 15,811
Occupancy costs 37,742 35,783
Other educational services and facilities expenses (2,099) 11,560
Supplies and maintenance expense 15,282 10,840
Contract services expense 2,801 3,501
Taxes and licensing expense 2,319 3,479
Student expense $ 3,186 $ 2,626
Total educational services and facilities expense 155,932 178,317
Compensation and related costs decreased $10.2 million for the year ended September 30, 2020, as compared to the prior year:
• Salaries expense decreased $6.7 million primarily due to an approximate 6% decrease in full-time employee headcount. The decrease in headcount was primarily due to attrition and productivity improvements. Furloughs enacted to offset revenue decreases from the COVID-19 pandemic also reduced salaries expense.
• Employee benefits and tax decreased $4.1 million also primarily due to lower headcount and lower cost per employee from implementing new benefit plans at the beginning of fiscal 2020.
Depreciation and amortization expense decreased $3.6 million during the year ended September 30, 2020 primarily due to the adoption of ASC 842 as of October 1, 2019, whereby the assets that were previously financed by finance obligations were converted to operating leases. Subsequent to the adoption of ASC 842, the assets relating to the operating leases were
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classified as “Right-of-use assets for operating leases” on the consolidated balance sheet and the related operating lease expense was rolled into “Occupancy costs” in the table above.
Occupancy costs increased $2.0 million during the year ended September 30, 2020. The increase was primarily attributed to the adoption of ASC 842 as of October 1, 2019 as described above partially offset by cost reductions from closing our Norwood, Massachusetts campus, relocating and downsizing our headquarters facility, and downsizing our Exton, Pennsylvania campus.
Other educational services and facilities expense decreased by $13.7 million, which includes a $13.3 million credit for the year ended September 30, 2020 from the institutional HEERF funds for the reimbursement of allowable costs related to the changes in the delivery of instruction due to the coronavirus. The allowable costs were included in the relevant line items above. See Note 21 in the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further information on the HEERF funds.
Supplies and maintenance expense increased by $4.4 million primarily due to $5.7 million in laptops purchased for our students to support their transition to the new blended on-line learning model. The laptops were one of the allowable costs qualifying for reimbursement from the institutional HEERF funds received.
Contract services expense decreased $0.7 million during the year ended September 30, 2020 primarily due to phasing out contracts with third parties and absorbing these responsibilities internally.
Taxes and licensing expenses decreased by $1.2 million, primarily due to a $0.7 million decrease in taxes and licensing fees for properties in use and a $0.4 million decrease in sales and use taxes.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the year ended September 30, 2020 were $148.7 million, representing a decrease of $12.3 million, or 7.6%, as compared to $161.0 million for the year ended September 30, 2019.
The following table sets forth the significant components of our selling, general and administrative expenses (in thousands):
Year Ended September 30,
2020 2019
Salaries expense $ 57,266 $ 57,827
Employee benefits and tax 11,539 14,130
Bonus expense 11,116 10,718
Stock-based compensation 2,013 1,440
Compensation and related costs 81,934 84,115
Advertising expense 39,707 41,163
Other selling, general and administrative expenses 17,961 21,140
Contract services expense 4,307 8,401
Professional services expense 3,828 4,690
Depreciation and amortization expense 963 1,480
Total selling, general and administrative expenses $ 148,700 $ 160,989
Compensation and related costs decreased by $2.2 million for the year ended September 30, 2020, as compared to the prior year:
• Salaries expense decreased by $0.6 million, primarily due to lower headcount compared to the prior year, partially offset by costs related to the retirement of Kimberly J. McWaters, our former President and Chief Executive Officer, in October 2019.
• Employee benefits and tax decreased by $2.6 million, primarily due to lower headcount and lower cost per employee from implementing new benefit plans at the beginning of fiscal 2020.
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• Stock-based compensation expense increased by $0.6 million, due to new awards granted during fiscal 2020. There were no stock-based compensation awards granted during fiscal 2019.
Advertising expense decreased by $1.5 million for the year ended September 30, 2020, as compared to the prior year. The decrease was attributable to targeted cost-efficient marketing efforts, with a shift away from television advertising toward digital media. Advertising expense as a percentage of revenues remained relatively consistent at approximately 13.2% for the year ended September 30, 2020 as compared to 12.4% in the prior year.
Other selling, general and administrative decreased by $3.2 million. Other selling, general and administrative expenses includes a $1.8 million credit for year ended September 30, 2020 from the institutional HEERF funds for the reimbursement of allowable costs related to the changes in the delivery of instruction due to the coronavirus. The allowable costs were included in the relevant line items above. See Note 21 of the notes to our Condensed Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further information on the HEERF funds. Also contributing to the favorable cost trend were decreases in travel and entertainment of $1.5 million.
Contract services expense decreased $4.1 million for the year ended September 30, 2020. The decrease was attributable to a one-time, non-recurring $4.0 million consultant termination fee recognized during the year ended September 30, 2019.
Professional services expense decreased by $0.9 million primarily attributable to a decreases in legal fees of $0.5 million and broad decreases related to external professional services due to cost control measures.
Other income (expense)
Other income for the year ended September 30, 2020 was $1.3 million, an increase of $1.1 million as compared to other expense of $0.1 million for the year ended September 30, 2019. The $1.3 million of other income in fiscal 2020 was comprised primarily of interest income from our held-to-maturity investments. The adoption of ASC 842 as of October 1, 2019 resulted in the de-recognition of the assets associated with our financing obligations, which were previously included in property and equipment during the year ended September 30, 2019 and contributed $3.2 million of interest expense during that period. This was partially offset by tenant rent income in the prior period of $1.5 million which was not present during the year ended September 30, 2020 also due to the impacts of the ASC 842 adoption.
Income taxes
Our income tax benefit for the year ended September 30, 2020 was $10.6 million, or (408.7%) of pre-tax loss, compared to income tax expense of $0.2 million, or 2.6% of pre-tax loss, for the year ended September 30, 2019. The effective income tax rate in each period differed from the federal statutory tax rate of 21% primarily as a result of changes in the valuation allowance and state taxes. Our income tax benefit or expense was impacted by a decrease of $6.1 million and an increase of $1.5 million in the valuation allowance during the years ended September 30, 2020 and 2019, respectively. The significant decrease in the valuation allowance for the year ended September 30, 2020, and the related income tax benefit, was primarily attributable to the carryback of NOLs under the provisions of the CARES Act and the adoption of ASC 842 as of October 1, 2019. The income tax expense for the year September 30, 2019 was related to certain state taxes. We will maintain a valuation allowance on our deferred tax assets until sufficient positive evidence exists to support its reversal. See Note 13 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Preferred stock dividends
On June 24, 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash, less $1.2 million in issuance costs. Pursuant to this sale, we paid preferred stock cash dividends totaling $5.3 million during the years ended September 30, 2020 and 2019, respectively. See Note 15 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the preferred stock transaction.
Income (loss) available for distribution
Income (loss) available for distribution refers to net income (loss) reduced by dividends on our Series A Preferred Stock. As a result of the foregoing, we reported income available for distribution for the year ended September 30, 2020 of $2.7 million, as compared to a loss available for distribution of $13.1 million for the year ended September 30, 2019.
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For a discussion of the financial results of operations for the year ended September 30, 2019 compared to the year ended September 30 2018, refer to Part I, Item 7 of our 201 9 Form 10-K filed with the SEC on December 6, 2019 which discussion is incorporated herein by reference and which is available free of charge on the SEC’s website at www.sec.gov.
Non-GAAP Financial Measures
Our earnings before interest, tax, depreciation and amortization (“EBITDA”) for the years ended September 30, 2020, 2019 and 2018 were $9.4 million, $11.4 million and $(16.7) million, respectively. We define EBITDA as net income (loss) for the year, before interest (income) expense, income tax (benefit) expense, and depreciation and amortization.
EBITDA is a non-GAAP financial measure which is provided to supplement, but not substitute for, the most directly comparable GAAP measure. We choose to disclose this non-GAAP financial measure because it provides an additional analytical tool to clarify our results from operations and helps to identify underlying trends. Additionally, this measure helps compare our performance on a consistent basis across time periods. Management also utilizes EBITDA as an internal performance measure. To obtain a complete understanding of our performance, this measure should be examined in connection with net income (loss) determined in accordance with GAAP. Since the items excluded from this measure are significant components in understanding and assessing financial performance under GAAP, this measure should not be considered to be an alternative to net income (loss) or any other measures derived in accordance with GAAP as a measure of our operating performance or profitability. Exclusion of items in our non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring. Other companies, including other companies in the education industry, may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure across companies. Investors are encouraged to use GAAP measures when evaluating our financial performance.
EBITDA reconciles to net income (loss) as follows (in thousands):
Year Ended September 30,
2020 2019 2018
Net income (loss) $ 8,008 $ (7,868) $ (32,682)
Interest (income) expense, net (1,142) 1,729 1,885
Income tax (benefit) expense (10,602) 203 (3,015)
Depreciation and amortization (1)
13,150 17,291 17,074
EBITDA $ 9,414 $ 11,355 $ (16,738)
(1) Includes depreciation of training equipment obtained in exchange for services of $1.3 million, $1.4 million and $1.4 million for the years ended September 30, 2020, 2019 and 2018, respectively.
Liquidity and Capital Resources
Based on past performance and current expectations, we believe that our cash flows from operations, cash on hand and short-term investments will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our existing operations, as well as the expansion of programs at existing campuses through the next 12 months. Our cash position is available to fund strategic long-term growth initiatives, including opening additional metro campuses in new markets and the creation of new programs, such as welding, in existing markets with under-utilized campus facilities. We had no line of credit or other long-term debt as of September 30, 2020.
Our aggregate cash and cash equivalents were $76.8 million as of September 30, 2020, an increase of $11.4 million from September 30, 2019. Additionally, we had short-term held-to-maturity investments of $38.1 million as of September 30, 2020. There were no held-to-maturity investments as of September 30, 2019.
We believe that additional strategic use of our cash resources may include funding new campuses or new programs in our existing campuses, purchase of real estate assets, consideration of strategic acquisitions, the repurchase of common stock, subsidizing funding alternatives for our students, and other potential uses of cash. To the extent that potential acquisitions are large enough to require financing beyond cash from operations, cash and cash equivalents, and short-term investments, or we need capital to fund operations, new campus openings or expansion of programs at existing campuses, we may enter into a credit facility, issue debt or issue additional equity.
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On February 20, 2020, we entered into an Underwriting Agreement with B. Riley FBR, Inc., as representative of the several underwriters named therein, to issue and sell an aggregate of 6,782,610 shares of our common stock, par value $0.0001 per share, in a public offering, at a price to the public of $7.75 per share, pursuant to a registration statement on Form S-3 (Registration No. 333-236146) and the accompanying prospectus , including the related prospectus supplement , filed with the SEC (the “Offering”). The Offering closed on February 25, 2020. The net proceeds from the Offering were approximately $49.2 million, after deducting underwriting discounts and offering expenses. We invested a portion of the net proceeds from the Offering in held-to-maturity securities, which primarily consist of corporate bonds from large cap industrial and selected financial companies with a minimum credit rating of A. We intend to use the proceeds for working capital, capital expenditures, and other general corporate purposes, which may include the addition of new campuses, the expansion of existing programs and the development of new programs, and the purchase of real property and campus infrastructure. We may also use a portion of the net proceeds to fund potential strategic acquisitions of complementary businesses, assets, services or technologies. See Note 15 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K for further discussion of the Offering.
On June 9, 2016, our board of directors voted to eliminate the quarterly cash dividend on our common stock. On June 24, 2016, we issued 700,000 shares of Series A Preferred Stock for a total purchase price of $70.0 million. The proceeds from the offering were used to fund strategic initiatives to drive growth including the transformation plan, expansion to new markets with metro campuses and the creation of new programs in existing markets with under-utilized campus facilities. We paid preferred stock cash dividends of $5.3 million during the years ended September 30, 2020, 2019, and 2018, respectively.
Our principal source of liquidity is operating cash flows and existing cash and cash equivalents. A majority of our revenues are derived from Title IV Programs and various veterans benefits programs. Federal regulations dictate the timing of disbursements of funds under Title IV Programs. Students must apply for new funding for each academic year consisting of thirty-week periods. Loan funds are generally provided in two disbursements for each academic year. The first disbursement for first-time borrowers is usually received 30 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student’s academic year. Under our proprietary loan program, we bear all credit and collection risk and students are not required to begin repayment until six months after the student completes or withdraws from his or her program. These factors, together with the timing of when our students begin their programs, affect our operating cash flow.
As discussed in more detail in Note 21 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K, during fiscal 2020 we were granted approximately $33.0 million in HEERF funds under the CARES Act, with $16.5 million exclusively for emergency financial aid grants to students impacted by COVID-19 and $16.5 million to cover institutional costs associated with significant changes to the delivery of instruction due to coronavirus. As of September 30, 2020, we have awarded all $16.5 million designated for student grants. During the year ended September 30, 2020, we drew down $13.9 million of the institutional funds into our operating cash account as partial reimbursement for the $15.7 million of eligible costs incurred during fiscal 2020. As of September 30, 2020, $2.7 million remained in our G5 account with the ED and is not included in our “Cash and cash equivalents” on our consolidated balance sheet. We drew down the remaining $1.8 million for the eligible costs incurred during the year ended September 30, 2020 in October 2020.
Operating Activities
Our net cash provided by operating activities was $11.0 million and $21.7 million for the years ended September 30, 2020 and 2019, respectively. Our net cash used in operating activities was $13.4 million for the year ended September 30, 2018.
Net income, after adjustments for non-cash items, for the year ended September 30, 2020 provided cash of $48.8 million. The non-cash items included $24.3 million for amortization of right-of-use assets for operating leases, $11.8 million for depreciation and amortization expense, $2.1 million for stock based compensation expense and $1.8 million for bad debt expense.
Changes in operating assets and liabilities for the year ended September 30, 2020 used cash of $37.7 million primarily due to the following:
• Changes in our operating lease liability as a result of rent payments used cash of $25.6 million.
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• The increase in receivables used cash of $13.7 million and was primarily due to the timing of Title IV disbursements and other cash receipts on behalf of our students. Due to the COVID-19 pandemic, more students took a leave of absence in fiscal 2020 and our campuses suspended operations for a period of time during the second quarter. While we have transitioned to a blended learning model, the COVID-19 pandemic has impacted the pace in which students are progressing through their programs.
• The increase in the income taxes receivable used cash of $7.0 million and was primarily attributable to the CARES Act, which allowed us to carryback NOLs from fiscal 2019 and fiscal 2018.
• The decrease in deferred revenue used cash of $2.2 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relations to completion of their program at September 30, 2020 as compared to September 30, 2019. We had deferred revenue of $6.1 million during fiscal 2020 due to students retaking courses that were previously completed and the additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed due to the COVID-19 pandemic.
• The increase in accounts payable and accrued expenses provided cash of $7.0 million primarily related to the timing of payments to vendors and bonus accruals.
Net loss, after adjustments for non-cash items, for the year ended September 30, 2019 provided cash of $11.1 million. The non-cash items included $13.2 million for depreciation and amortization expense, $2.7 million for amortization of assets subject to financing obligations, $1.4 million for stock-based compensation expense, and $1.2 million for bad debt expense.
Changes in operating assets and liabilities for the year ended September 30, 2019 provided cash of $10.7 million primarily due to the following:
• The increase in deferred revenue provided cash of $4.7 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2019 as compared to September 30, 2018.
• The decrease in prepaid expenses and other current assets provided cash of $3.2 million primarily due to a decrease in prepaid rent.
• The increase in accounts payable and accrued expenses provided cash of $2.9 million primarily related to the timing of payments to vendors.
• The increase in receivables used cash of $1.5 million and was primarily attributable to the timing of Title IV disbursements and other cash receipts on behalf of our students.
Net loss, after adjustments for non-cash items, for the year ended September 30, 2018 used cash of $15.5 million. The non-cash items included $13.0 million for depreciation and amortization expense, $2.7 million for amortization of assets subject to financing obligations, $1.8 million for stock-based compensation expense, $1.5 million for bad debt expense, and $1.2 million for goodwill impairment expense.
Changes in operating assets and liabilities for the year ended September 30, 2018 provided cash of $2.2 million primarily due to the following:
• The increase in deferred rent liability provided cash of $5.1 million and was primarily relating to the Bloomfield, New Jersey campus, partially offset by amortization of the deferred rent balance associated with our home office lease.
• The increase in accounts payable and accrued expenses provided cash of $3.9 million primarily related to changes in our graduate-based incentive compensation program for our admissions representatives.
• The change in notes receivable provided cash of $3.4 million and was due to payments received on loans exceeding new loan originations.
• The decrease in deferred revenue used cash of $5.7 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at September 30, 2018 compared to September 30, 2017.
• The increase in receivables used cash of $2.7 million and was primarily attributable to the timing of Title IV disbursements and other cash receipts on behalf of our students.
• The increase in prepaid expenses and other current assets used cash of $1.6 million primarily related to the timing of the payment made for general invoices compared to the prior year.
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Investing Activities
For the year ended September 30, 2020, net cash used in investing activities was $45.8 million. The cash outflow was primarily related to the net purchase of $38.4 million in held-to-maturity investments with a portion of the proceeds received from the Offering. Net cash used in investing activities was also impacted by purchases of property and equipment of $9.3 million which includes capital expenditures for the Houston, Texas and Long Beach, California welding program expansions.
For the year ended September 30, 2019, net cash used in investing activities was $6.2 million, primarily related to the purchase of property and equipment, primarily for our Dallas/Ft. Worth, Texas campus for welding program expansion, and new and replacement training equipment for ongoing operations and consolidation efforts at our Houston, Texas campus.
For the year ended September 30, 2018, cash provided by investing activities was $27.1 million. We had cash inflows of $40.9 million from proceeds received from sales of trading securities and $7.7 million from proceeds received upon the maturity of our investments. We had cash outflows of $20.6 million related to the purchases of new training equipment for our Bloomfield, New Jersey campus and replacement training equipment for our ongoing operations.
Financing Activities
For the year ended September 30, 2020, net cash provided by financing activities was $43.1 million and related primarily to the net proceeds received from the Offering of $49.2 million, partially offset by our semi-annual payments of preferred stock dividends of $5.3 million.
For the year ended September 30, 2019, net cash used in financing activities was $7.2 million and related primarily to the semi-annual payments of preferred stock dividends of $5.3 million and payments of financing obligations of $1.3 million.
For the year ended September 30, 2018, net cash used in financing activities was $6.6 million and related primarily to the semi-annual payments of preferred stock dividends of $5.3 million and payments of financing obligations of $1.1 million.
Share Repurchase Program
On December 20, 2011, our board of directors authorized the repurchase of up to $25.0 million of our common stock in the open market or through privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements, and prevailing market conditions. We may terminate or limit the share repurchase program at any time without prior notice. The last stock repurchase under this stock repurchase program was during fiscal 2015. As of September 30, 2020, we have repurchased 1,677,570 shares at an average price per share of $9.09 and a total cost of approximately $15.3 million under this program. Under the terms of the Certificate of Designations, stock purchases under this program require the approval of a majority of the voting power of the Series A Preferred Stock.
Contractual Obligations
The following table sets forth in thousands, as of September 30, 2020, the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms that will require cash outlays in the future.
Payments Due by Period
Less than 1-3 3-5 More than
Total 1 year years years 5 years
Operating leases, net of sublease income (1)
$ 192,815 $ 28,212 $ 46,012 $ 32,457 $ 86,134
Finance leases 268 135 133 — —
Purchase obligations (2)
8,582 1,399 2,515 2,813 1,855
Total contractual commitments $ 201,665 $ 29,746 $ 48,660 $ 35,270 $ 87,989
(1) Minimum rental commitments. These amounts do not include property taxes, insurance or ordinary course recurring repairs and maintenance.
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(2) Includes all agreements to purchase goods or services of either a fixed or minimum quantity that are enforceable and legally binding. Employment contracts, minimum payments under licensing and royalty agreements and purchase orders outstanding as of September 30, 2020 are included. In the ordinary course of business, we enter into forward purchase commitments for service agreements for general operations and advertising.
Off-Balance Sheet Arrangements
Each of our campuses must be authorized by the applicable state education agency in which the campus is located to operate and to grant certificates, diplomas or degrees to its students. Our campuses are subject to extensive, ongoing regulation by each of these states. Additionally, our campuses are required to be authorized by the applicable state education agencies of certain other states in which our campuses recruit students. Our insurers issue surety bonds for us on behalf of our campuses and admissions representatives with multiple states to maintain authorization to conduct our business. We are obligated to reimburse our insurers for any surety bonds that are paid by the insurers. As of September 30, 2020, the total face amount of these surety bonds was approximately $16.8 million.
Related Party Transactions
Information concerning certain related party transactions is included in Note 10 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K.
For a description of additional information regarding related party transactions, see the information included in our proxy statement for the 2021 Annual Meeting of Stockholders under the heading “Certain Relationships and Related Transactions.”
Seasonality
Our operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population and costs associated with opening or expanding our campuses. Our student population varies as a result of new student enrollments, graduations and student attrition. Historically, we have had lower student populations in our third quarter than in the remainder of our year because fewer students are enrolled during the summer months. Additionally, we have had higher student populations in our fourth quarter than in the remainder of the year because more students enroll during this period. Our expenses, however, do not vary significantly with changes in student population and revenues and, as a result, such expenses do not fluctuate significantly on a quarterly basis. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of new school openings, new program introductions, increased enrollments of adult students or acquisitions. Furthermore, our revenues for the first quarter ending December 31 are impacted by the closure of our campuses for a week in December for a holiday break and during which we do not earn revenue.
Revenues
(Dollars shown in thousands) Year Ended September 30,
2020 2019 2018
Three Month Period Ending: Amount Percent Amount Percent Amount Percent
December 31 $ 87,234 29.0 % $ 83,050 25.1 % $ 81,156 25.6 %
March 31 82,717 27.5 % 81,746 24.7 % 80,663 25.5 %
June 30 54,483 18.1 % 79,042 23.8 % 74,890 23.6 %
September 30 76,327 25.4 % 87,666 26.4 % 80,256 25.3 %
Fiscal year $ 300,761 100.0 % $ 331,504 100.0 % $ 316,965 100.0 %
The decline in revenues from December 31, 2019 to June 30, 2020 was primarily due to the impact of the COVID-19 pandemic as a higher number of students went on leave of absence. Additionally, timing of revenue recognition for active students was impacted by additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed and by students retaking courses that were previously completed. The increase in revenue for the three months ended September 30, 2020 was primarily due to our successful transition of our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations
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with hands-on labs. During the year ended September 30, 2020, the COVID-19 pandemic impacted our financials throughout each of the three months ended March 31, 2020, June 30, 2020, and September 30, 2020, and therefore are not comparative for seasonality effects.
The increase in revenues for each of the three months ended December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019, as compared to the same periods in fiscal 2018, was primarily due to an increase in our student population during fiscal 2019.
Income (Loss) from Operations
(Dollars shown in thousands) Year Ended September 30,
2020 2019 2018
Three Month Period Ending: Amount Percent Amount Percent Amount Percent
December 31 $ 4,254 (109.9) % $ (7,205) 92.4 % $ (3,604) 10.2 %
March 31 (499) 12.9 % (5,580) 71.5 % (8,820) 25.0 %
June 30 (13,779) 356.0 % (455) 5.8 % (11,800) 33.5 %
September 30 6,153 (159.0) % 5,438 (69.7) % (11,051) 31.3 %
Fiscal year $ (3,871) 100.0 % $ (7,802) 100.0 % $ (35,275) 100.0 %
During the year ended September 30, 2020, the COVID-19 pandemic impacted our financials throughout each of the three months ended March 31, 2020, June 30, 2020 and September 30, 2020, and therefore, are not comparative for seasonality effects. Management's continued cost control efforts contributed to the improvement in income (loss) from operations for the each of the three months ended March 31, 2019, June 30, 2019 and September 30, 2019, as compared to the same periods in fiscal 2018.
Effect of Inflation
To date, inflation has not had a significant effect on our operations.
Critical Accounting Estimates
Our discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, our proprietary loan program, allowance for uncollectible accounts, goodwill recoverability, self-insurance claim liabilities, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.
Our significant accounting policies are discussed in Note 2 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties.
Revenue recognition
Revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who withdraw from our programs prior to specified dates. We apply the five-step model outlined in Accounting Standards Codification Topic 606, Revenue from Contracts from Customers (“ASC 606”). Tuition and fee revenue is recognized ratably over the term of the course or program offered. Approximately 99%, 99% and 98% of our revenues for each of the years ended September 30, 2020, 2019 and 2018,
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respectively, consisted of gross tuition. The majority of our core programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration. We supplement our revenues with sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs. Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in our consolidated balance sheets because it is expected to be earned within the next 12 months.
During the year ended September 30, 2020, due to the COVID-19 pandemic, we transitioned our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs. We continue to recognize revenue ratably over the term of the course or program offered. However, revenue recognition for active students during the year ended September 30, 2020 was impacted by students retaking courses that were previously completed and the additional time needed to complete in-person catch-up labs that were unable to be completed during the time the campuses were closed due to COVID-19. As of September 30, 2020 we had deferred revenue of $6.1 million related to students who were only attending courses online or with catch-up labs still outstanding. We do not recognize revenue while a student is on a leave of absence.
Through our proprietary loan program, we, in substance, provide the students who participate in this program with extended payment terms for a portion of their tuition. Based on historical collection rates, we can demonstrate that a portion of these loans are collectible, which results in a change in accounting due to our adoption of ASC 606 on October 1, 2017. Accordingly, we recognize tuition and loan origination fees financed by the loan and any related interest revenue under the effective interest method required under the loan based on this collection rate.
Other
We provide dealer technician training or instructor staffing services to manufacturers. Revenues are recognized as transfer of the services occurs.
Proprietary Loan Program
In order to provide funding for students who are not able to fully finance the cost of their education under traditional governmental financial aid programs, commercial loan programs or other alternative sources, we established a private loan program with a bank.
Under the terms of the proprietary loan program, the bank originates loans for our students who meet our specific credit criteria with the related proceeds used exclusively to fund a portion of their tuition. We then purchase all such loans from the bank at least monthly and assume all of the related credit risk. The loans bear interest at market rates ranging from approximately 7% to 10%; however, principal and interest payments are not required until six months after the student completes or withdraws from his or her program. After the deferral period, monthly principal and interest payments are required over the related term of the loan. The repayment term is up to 10 years.
Under ASC 606, the portion of tuition revenue related to the proprietary loan program is considered a form of variable consideration. We estimate the amount we ultimately expect to collect from the portion of tuition that is funded by the proprietary loan program, resulting in a note receivable. Estimating the collection rate requires significant management judgment. The estimated amount is determined at the inception of the contract and we recognize the related revenue as the student progresses through school. Each reporting period, we update our assessment of the variable consideration associated with the proprietary loan program.
Allowance for uncollectible accounts
We maintain an allowance for uncollectible accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments. We offer a variety of payment plans to help students pay that portion of their education expenses not covered by financial aid programs or alternate fund sources, which are unsecured and not guaranteed.
We use estimates that are subjective and require judgment in determining the allowance for doubtful accounts, which are principally based on accounts receivable, historical percentages of uncollectible accounts, customer credit worthiness and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts. We also monitor and consider external factors such as changes in the economic and regulatory environment. We use an internal group of
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collectors, augmented by third party collectors as deemed appropriate, in our collection efforts. When a student with Title IV loans withdraws, Title IV rules determine if we are required to return a portion of Title IV funds to the lender. We are then entitled to collect these funds from the students, but collection rates for these types of receivables is significantly lower than our collection rates for receivables for students who remain in our programs.
Although we believe that our allowance is adequate, if we underestimate the allowances required, additional allowances may be necessary, which would result in increased selling, general and administrative expenses in the period such determination is made.
Leases
We lease the majority of our administrative and educational facilities. ASC 842, Leases , requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. We adopted ASC 842 as of October 1, 2019 under a modified retrospective method without the recasting of comparative periods’ financial information.
To determine if a contract is or contains a lease, we considered whether (1) explicitly or implicitly identified assets have been deployed in the contract and (2) we obtain substantially all of the economic benefits from the use of that underlying asset and direct how and for what purpose the asset is used during the term of the contract. If we determine a contract is, or contains, a lease, we assess whether the contract contains multiple lease components. We consider a lease component to be separate from other lease components in the contract if (a) we can benefit from the right of use either on its own or together with other resources that are readily available to us and (b) the right of use is neither highly dependent on nor highly interrelated with the other right(s) to use underlying assets in the contract. In contracts involving the use of real estate, we separate the right to use land from other underlying assets unless the effect of separating the land is insignificant to the resulting lease accounting. We have elected to account for the lease and non-lease components as a single lease component.
For all leases we are a party to, the discount rate implicit in the lease was not readily determinable. Therefore, we used our incremental borrowing rate for each lease to determine the present value of the lease. We determined the incremental borrowing rate applicable to each lease through a model that 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. The incremental borrowing rate was applied to each lease based on the remaining term of the lease.
The components of lease expense are included in “Educational services and facilities” and “Selling, general and administrative” on the consolidated statement of operations, with the exception of interest on lease liabilities, which is included in “Interest expense.”
Goodwill
Goodwill represents the excess of the cost of an acquired business over the estimated fair values of the assets acquired and liabilities assumed. Goodwill is reviewed at least annually for impairment, which might result from the deterioration in the operating performance of the acquired business, adverse market conditions, adverse changes in the applicable laws or regulations and a variety of other circumstances. Any resulting impairment charge would be recognized as an expense in the period in which impairment is identified.
We perform our annual goodwill impairment assessment during the fourth quarter of each fiscal year. In performing our impairment tests, we first consider the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or intangible, as applicable, is less than its carrying amount. If we conclude that it is more likely than not that the fair value is less than the carrying amount based on our qualitative assessment, or that a qualitative assessment should not be performed, we proceed with the quantitative impairment tests to compare the estimated fair value of the reporting unit to the carrying value of its net assets.
The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and requires significant judgment at many points during the analysis. If we elect to perform an optional qualitative analysis, we consider many factors including, but not limited to, general economic conditions, industry and market conditions, our market capitalization, financial performance and key business drivers, long-term operating plans and potential changes to significant assumptions used in the most recent fair value analysis for the reporting unit.
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When performing a quantitative goodwill impairment test, we generally determine the fair value of reporting units using an income-based approach consisting of a discounted cash flow valuation method. The fair value determination consists primarily of using unobservable inputs under the fair value measurement standards, and we believe our related assumptions are consistent with a reasonable market participant view while employing the concept of highest and best use of the asset.
We believe the most critical assumptions and estimates in determining the estimated fair value of our reporting units include, but are not limited to, future tuition revenues, operating costs, working capital changes, capital expenditures and a discount rate. The assumptions used in determining our expected future cash flows consider various factors such as historical operating trends particularly in student enrollment and pricing and long-term operating strategies and initiatives.
2020 Impairment Testing
Our total recorded goodwill was $8.2 million as of September 30, 2020 which resulted primarily from the acquisition of our motorcycle and marine education business in 1998 in Orlando, Florida. We completed our 2020 annual goodwill impairment tests and determined that it was more likely than not that the fair value of the reporting units exceeded the carrying value and concluded that goodwill was not impaired. As a result, we did not perform the quantitative goodwill impairment evaluation.
Self-Insurance
We are self-insured for a number of risks, including claims related to employee health care and dental care and workers’ compensation. The accounting for our self-insured plans involves estimates and judgments to determine our ultimate liability related to reported claims and claims incurred but not reported. We consider our historical experience, severity factors, actuarial analysis and existing stop loss insurance in estimating our ultimate insurance liability. If our insurance claim trends were to differ significantly from our historic claim experience, we would make a corresponding adjustment to our insurance reserves.
Income taxes
We are subject to the income tax laws of the United States, which are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. As a result, significant judgments and interpretations are required in determining our provision for income taxes.
Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets, which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. In assessing the need for a valuation allowance, we consider all available evidence, including our historical profitability and projections of future taxable income. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. Such valuation allowance is maintained on our deferred tax assets until sufficient positive evidence exists to support its reversal in future periods. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Significant judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. Changes in the valuation allowance are included in our statement of operations as a charge or credit to income tax benefit (expense).
As a result of our assessment, income tax benefit (expense) within our statements of operations was impacted by a decrease of $6.1 million and an increase of $1.5 million in the valuation allowance during the years ended September 30, 2020 and 2019, respectively. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future taxable income during the carryforward period are increased, if objective negative evidence in the form of cumulative losses is no longer present and if additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance in future periods for any change in circumstances that causes a change in judgment about the realizability of the deferred tax assets.
Although we believe that our estimates are reasonable, changes in tax laws or our interpretation of tax laws, and the outcome of future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Additionally, actual operating results and the underlying amount and category of income in future years could render our current assessment of recoverable deferred tax assets inaccurate.
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Contingencies
In the ordinary conduct of our business, we are subject to occasional lawsuits, investigations and claims, including, but not limited to, claims involving students and graduates and routine employment matters. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. Generally, we expense legal fees as incurred. There can be no assurance that the ultimate outcome of any of the lawsuits, investigations or claims pending against us will not have a material adverse effect on our financial condition or results of operations.
Recent Accounting Pronouncements
Information concerning recently issued accounting pronouncements which are not yet effective is included in Note 3 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Annual Report on Form 10-K. As indicated in Note 3, we are still evaluating the impact of the recently issued accounting pronouncements on our financial statements.