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COCO > SEC Filings for COCO > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for CORINTHIAN COLLEGES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CORINTHIAN COLLEGES INC


6-Nov-2013

Quarterly Report


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

This Quarterly Report on Form 10-Q contains statements that may constitute "forward-looking statements" as defined by the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "estimates," "anticipates," "continues," "contemplates," "expects," "may," "will," "could," "should" or "would," or the negatives thereof. Those statements are based on the intent, belief or expectation of the Company as of the date of this Quarterly Report. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties that are outside the control of the Company. Results may differ materially from the forward-looking statements contained herein as a result of many factors, including the following: risks associated with variability in the expense and effectiveness of the Company's advertising and promotional efforts; unfavorable changes in the cost or availability of alternative loans for our students; the uncertain future impact of the new student information system; increased competition; the Company's effectiveness in its regulatory compliance efforts; the outcome of pending litigation against the Company; the outcome of ongoing reviews and inquiries by accrediting, state and federal agencies; general labor market conditions; general credit market conditions and lenders' willingness or potential unwillingness to make loans to our students; and other factors, including those discussed under the headings entitled "Governmental Regulation and Financial Aid" and "Risk Factors" in the Company's Annual Report on Form 10-K, the section titled "Risk Factors" in this Report on Form 10-Q, and other documents periodically filed with the Securities and Exchange Commission. The Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The following discussion of the Company's results of operations and financial condition should be read in conjunction with the interim unaudited condensed financial statements of the Company and the notes thereto included herein and in conjunction with the information contained in the Annual Report on Form 10-K. You should keep in mind the following points as you read this Report on Form 10-Q: (i) the terms "we," "us," "our" and the "Company" refer to Corinthian Colleges, Inc. and its subsidiaries; (ii) the terms "school," "college," "campus," or "university" refer to a single location of any school; and
(iii) the term "institution" means a main campus and its additional locations, as such are defined under the regulations of the U.S. Department of Education, which we sometimes refer to herein as the "ED".

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts on those financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to our allowance for doubtful accounts, intangible assets, deferred taxes, contingencies and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which 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 conditions or if our assumptions change.

Our critical accounting estimates are those which we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates is as follows:

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments. We determine the adequacy of this allowance by regularly reviewing the accounts and notes receivable agings and applying various expected loss percentages to student accounts and notes receivable categories based upon historical bad debt experience and consideration of the current economic environment. We generally write off accounts receivable balances deemed uncollectible as they are sent to collection agencies. We offer a variety of payment plans to help students pay that portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed. We believe our reserves are adequate; however, losses related to unpaid student balances could exceed the amounts we have reserved for bad debts. The effect of an increase in our accounts receivable allowance of 3% of our outstanding receivables from 18.6% to 21.6% or $21.8 million to $25.3 million would result in a increase in pre-tax loss of $3.5 million for the quarter ended September 30, 2013. The effect of an increase in our student notes receivable allowance of 3% of our outstanding earned notes receivable from 19.7% to 22.7% or $22.2 million to $25.6 million would result in a increase in pre-tax of $3.4 million for the quarter ended September 30, 2013.

Many of our students in the U.S. participate in federally guaranteed student loan programs. The federally guaranteed student loans are authorized by the Higher Education Act ("HEA") of 1965 and are guaranteed by an agency of the federal government. The guaranteed loans are not guaranteed by us, and the guaranteed student loans cannot become an obligation of ours. Accordingly, we do not record an obligation to repay any of the guaranteed loans that are not repaid by our former students and we do not record either a contingent obligation or an allowance for future obligations as a result of student defaults of federally guaranteed student loans.


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However, if an institution's former students' default rate on guaranteed loans (the "Cohort Default Rate") equals or exceeds applicable thresholds for three consecutive years, the institution may lose participation eligibility in the guaranteed loan program and its students would be denied access to the guaranteed loan program. Our institutions' Cohort Default Rates act as a gatekeeper to their eligibility to participate in the federal student financial aid programs. We have no obligation to repay any of the federally guaranteed loans that our former students default upon, even if the Cohort Default Rates of our students exceed permitted levels.

Insurance/Self-Insurance. We use a combination of insurance and self-insurance for a number of risks including claims related to employee health care, workers' compensation, general liability, and business interruption. Liabilities associated with these risks are estimated based on, among other things, historical claims experience, severity factors and other actuarial assumptions. The Company's loss exposure related to self-insurance is limited by stop loss coverage. Our expected loss accruals are based on estimates, and while we believe the amounts accrued are adequate, the ultimate loss may differ from the amounts provided.

Goodwill and Intangible Assets. We have significant goodwill and other intangible assets. Goodwill represents the excess of the cost over the fair market value of net assets acquired, including identified intangible assets. We consider a number of factors, including valuations and appraisals from independent valuation firms, in determining the amounts that are assignable to other intangible assets, such as curriculum, accreditation, and trade names. We, however, are ultimately responsible for the valuations. The fair value of identified intangible assets is derived using accepted valuation methodologies, including cost, market, and income approaches, as appropriate, following consultations with valuation firms and the requirements set forth by the Uniform Standards of Professional Appraisal Practice.

We do not amortize goodwill, accreditation, or trade names as these assets meet the indefinite life criteria within the accounting standards. Curricula are amortized over their useful lives ranging generally from five to fifteen years and the amortization is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Goodwill is tested annually for impairment during the fourth quarter or earlier in the year upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not to be impaired. The testing of goodwill for impairment is required to be performed at the level referred to as the reporting unit. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component." We perform the goodwill impairment test one level below the operating segment level.

We determine the fair value of our reporting units using an equal weighting of an income approach, based on discounted cash flow ("DCF"), and a market-based approach. The DCF incorporates our cash flow projections and a terminal value. This amount is then discounted using a weighted average cost of capital (WACC) which considered our costs of debt and equity. We then reconcile the calculated fair value of our reporting units to our market capitalization, including a reasonable premium, as another consideration in assessing fair value.

In establishing the WACC, consideration is given to specific regulatory risks related to each reporting unit, including the impact of our decision with respect to enrolling "ability to benefit" students. Our cash flow projections incorporate our best estimate of potential future changes related to gainful employment. However, further negative developments in the regulatory environment could impact future assessments and result in impairments of goodwill and other indefinite lived intangible assets. In addition, impairment assessments involve significant judgments related to future revenues and earnings. Although we believe we have made reasonable and supportable estimates in connection with our impairment analyses, changes in strategy or market conditions could significantly impact these judgments and result in future impairments.

Indefinite-lived intangible assets are tested annually or more frequently if circumstances indicate potential impairment, by comparing their fair values to their carrying amounts. To the extent the fair value of an intangible asset is less than its carrying amount, an impairment charge is recorded in the consolidated statements of operations. When testing for impairment, management calculates the present value of its estimates of the future cash flows expected to be received from the assets tested and compares this result to the carrying value of the assets tested. If the resulting amount was below the carrying value of the related assets, we would consider the assets to be impaired and take a charge to write down those assets to fair value.

At September 30, 2013, we considered if there were indicators of impairment that would require an interim impairment test for goodwill and other non-amortizable intangible assets at the date and concluded that no such test was necessary. We will perform our required annual impairment test for goodwill and other non-amortizable intangible assets as of June 30, 2014.

At September 30, 2013, goodwill of $197.9 million relates to the Heald reporting unit, which was acquired in January 2010. Additionally, during the first quarter of 2013 we acquired QuickStart which resulted in $7.7 million of goodwill. Since the acquisition, of Heald it has continued to meet or exceed all operating projections, including but not limited to revenues and cash flow targets. The annual impairment test of Heald's goodwill as of June 30, 2013 did not result in an impairment charge. However, impairment


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assessments involve significant judgments related to future revenues and earnings. For Heald, at June 30, 2013 we assumed a WACC of 12.1%, revenue growth rates ranging from (3.0%) to 3.4% for fiscal 2014 to 2016 and a terminal growth rate of 4%, which resulted in fair value exceeding carrying value by approximately 12.3%. These assumptions reflect the lower risk of Heald relative to the Everest schools resulting from less exposure to ATB students and to regulatory uncertainty. Although we believe the estimates made are reasonable and supportable in connection with the impairment analyses, changes in strategy or market conditions could significantly impact these judgments and result in future impairments.

Accreditation is required for an institution to be eligible to participate in the federal student financial aid programs. The process of obtaining accreditation and access to Title IV funds is a barrier to entry for the industry. The process of applying for accreditation is a time intensive and expensive process, whereby an institution is required to operate without eligibility to Title IV funds for several years.

We used the With and Without Method in valuing accreditation both upon acquisition and in the performance of our impairment analysis, which estimates the fair value of an asset as the present value of differential cash flows between two scenarios. As it was applied to the fair valuation of accreditation, the "with" component reflects the present value of the "as is" cash flows, while the "without" component of the analysis assumes the initial grant of accreditation, and the hypothetical scaling of operations to the "as is" state.

For accreditation, at June 30, 2013, the current "as is" scenario derives value from cash flows projected from fiscal 2014 to fiscal 2019, with compound annual growth rates ranging from 2.4% to 6.0% with discount rates ranging from 14.3% to 34.3%. After the estimated future cash flows for the "as is" and "without" scenarios were determined, management calculated their respective present values and then subtracted the present value of the "without" scenario from the present value of the "as is" scenario to obtain the estimated fair value of accreditation. The significant assumptions for the "without" scenario include estimated compound annual growth rates ranging from 55.1% to 83.6% with discount rates ranging from 14.3% to 34.3%. Using this analysis, at June 30, 2013 the fair value of accreditation exceeded book value by a range of 37.2% to 4,122%.

We used the relief from royalty method to estimate the fair value of trade names. Under the relief from royalty method, estimated royalty rates were selected and applied to the revenue stream generated by trade names in order to estimate the potential value of the asset, assuming that trade names would be licensed to a third-party. For Heald, at June 30, 2013, we assume a royalty rate of 3.0% based upon profit split analysis and comparable licensing transactions, a discount rate of 14.3%, a tax rate of 39%, and a terminal growth rate value of 4.0%. For WyoTech, we assume a royalty rate of 2.0% based upon comparable licensing transactions, a discount rate of 21.8%, a tax rate of 39% and a terminal growth rate value of 1.5%.

The determination of whether or not intangible assets are impaired involves significant judgment. This judgment includes estimates of student population, program mix, and pricing changes which could be affected by future regulations, or compliance with regulatory and accreditation standards. Although we believe our goodwill and intangible assets are fairly stated, changes in strategy or market conditions could significantly impact these judgments and result in future impairments. Should our stock price remain depressed or decline further, we could incur additional impairment charges to write-down all or a portion of its goodwill and other intangible assets. Additionally, the fair value measure of accounting for financial instruments established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The implied fair value of goodwill was determined using Level 3 inputs included in our discounted cash flow valuation method.

Deferred Taxes. We currently have deferred income tax assets which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of our deferred income tax assets is principally dependent upon achievement of projected future taxable income offset by deferred income tax liabilities. We evaluate the realizability of our deferred income tax assets annually. In addition, we review our income tax filing positions quarterly and update our tax contingency reserves as necessary.

Assets and liabilities held for sale. We estimate the fair value of certain assets and liabilities associated with schools that are held for sale. The valuation of these assets and liabilities involves subjective judgment by management on the timing and amount of proceeds or payments. These estimates had an effect on the amount of impairment losses recognized. We develop these assumptions based on past experience and by evaluating the circumstances surrounding each situation and location. These estimates are subject to change and thus any variation to the estimates could influence the total loss on the sale of schools.

Contingencies. In the ordinary conduct of the business, we are subject to occasional lawsuits, investigations and claims, including, but not limited to, claims involving students and graduates, routine employment matters and investigations by regulatory authorities. 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


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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. 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.

Stock-based compensation. Stock-based compensation cost for our equity instruments exchanged for employee and director services is measured at the date of grant, based on the calculated fair value of the grant and is recognized as an expense on a straight-line basis over the period of time that the grantee must provide services to us before the stock-based compensation is fully vested. The vesting period is generally the period set forth in the agreement granting the stock-based compensation.

Results of Operations

Comparisons of results of operations between the three months ended September 30, 2013 and September 30, 2012.

The following table summarizes our operating results as a percentage of net revenue for the periods indicated.

                                                            Three Months
                                                               Ended
                                                           September 30,
                                                       2013             2012
Statement of Operations Data:
Net revenues                                               100.0 %          100.0 %
Operating expenses:
Educational services                                        62.3             60.5
General and administrative                                  11.6             10.7
Marketing and admissions                                    27.7             24.3
Impairment, facility closing, and severance
charges                                                      1.0              0.2
Total operating expenses                                   102.6             95.7
Income (loss) from operations                               (2.6 )            4.3
Interest income                                                -                -
Interest expense, net                                       (0.5 )           (0.3 )
Other expense, net                                          (1.6 )           (1.0 )
Income (loss) from continuing operations before
provision (benefit) for income taxes                        (4.7 )            3.0
Provision (benefit) for income taxes                        (1.9 )            1.1
Income (loss) from continuing operations                    (2.8 )            1.8
Loss from discontinued operations, net of tax               (1.3 )           (1.4 )
Net income (loss)                                           (4.1 )%           0.4 %


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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Net Revenues. Net revenues decreased $37.0 million, or 9.2%, from $402.0 million in the first quarter of fiscal 2013 to $365.0 million in the first quarter of fiscal 2014. The decrease was due to an approximate 10.9% decrease in average student population and a 1.6% increase in average revenue per student during the period. The decline in average student population was largely due to a reduction in ATB students and a decline in our exclusively online population. At September 30, 2013, student population was 80,032 compared with 90,469 at September 30, 2012, a decrease of 11.5%. Total student starts decreased 8.1% to 28,551 for the first quarter of fiscal 2014 when compared to the first quarter of last year.

Educational Services. Educational services expenses include direct operating expenses of the schools consisting primarily of payroll and payroll related expenses, rents, occupancy costs, supply expenses, bad debt expense and other educational related expenses. Educational services expenses decreased $16.3 million, or 6.7%, from $243.4 million in the first quarter of fiscal 2013 to $227.1 million in the first quarter of fiscal 2014. The decrease was primarily due to lower variable costs in consumables, supplies, compensation, and lower bad debt. As a percentage of net revenues, educational services expenses increased from 60.5% of revenues in the first quarter of fiscal 2013 to 62.3% of revenues in the first quarter of fiscal 2014. The increase in costs as a percentage of net revenues was a result of lower net revenues which resulted in a lower level of utilization of our facilities in the first quarter of fiscal 2014 when compared to the first quarter of last year. Bad debt expense amounted to $17.9 million or 4.9% of net revenues for the first quarter of fiscal 2014 compared to $19.2 million or 4.8% of net revenues for the first quarter of fiscal 2013.

General and Administrative. General and administrative expenses include corporate compensation expenses, headquarters office rents and occupancy expenses, professional fees and other support related expenses. General and administrative expenses decreased $0.6 million, or 1.4%, from $43.0 million in the first quarter of fiscal 2013 to $42.4 million in the first quarter of fiscal 2014. As a percentage of net revenues, general and administrative expenses increased from 10.7% of net revenues in the first quarter of fiscal 2013 to 11.6% in the first quarter of fiscal 2014.

Marketing and Admissions. Marketing and admissions expenses consist primarily of direct-response and other advertising expenses, payroll and payroll related expenses, promotional materials and other related marketing costs. Marketing and admissions expenses increased $3.5 million, or 3.6%, from $97.7 million in the first quarter of fiscal 2013 to $101.2 million in the first quarter of fiscal 2014. As a percentage of net revenues, marketing and admissions expenses increased from 24.3% of revenues in the first quarter of fiscal 2013 to 27.7% of revenues in the first quarter of fiscal 2014. The increase as a percentage of net revenue is primarily attributable to incremental costs associated with bringing lead management services in-house and lower conversion rates. The cost per start increased $399 or 12.7% from $3,146 in the first quarter of fiscal 2013 to $3,545 in the first quarter of fiscal 2014.

Impairment and Severance Charges. During the first quarter of 2014 and 2013 we incurred severance charges of $3.7 million and $0.8 million, respectively.

Provision (Benefit) for Income Taxes. The effective income tax rate in the first quarter of fiscal 2014 was a benefit of 40.9% as compared to a charge of 38.6% in the first quarter of fiscal 2013.

Seasonality and Other Factors Affecting Quarterly Results

Our net revenues normally fluctuate as a result of seasonal variations in our business. Student population varies as a result of new student enrollments, graduations, and student attrition. Historically, our schools have had lower revenues in the first fiscal quarter than in the remainder of the fiscal year. Our expenses, however, do not vary as significantly as student population and revenues. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. More importantly, quarterly results may be impacted based on the timing and extent of new acquisitions, new branch openings, relocations and remodels, new program adoptions and high school enrollments. The operating results for any quarter are not necessarily indicative of the results for any future period.

Liquidity and Capital Resources

On May 17, 2012, we entered into a Fourth Amended and Restated Credit Agreement (the "Credit Facility") with Bank of America, N.A., which replaces the credit facility that was set to expire in October 2012. The Credit Facility, which expires July 1, 2015, provides aggregate commitments including borrowings and letters of credit of up to $145 million, of which $135 million is a domestic facility, and $10 million is a Canadian facility. The Credit Facility has been established to provide available funds for acquisitions, to fund general corporate purposes, and to provide for letters of credit issuances of up to $50 million for domestic letters of credit and $7.5 million for Canadian letters of credit. The Credit Facility is secured by guaranties from the Company and each of its subsidiaries, as well as a first priority lien on substantially all of the tangible and intangible assets of the Company and its subsidiaries, including real property, and the stock of the Company's operating subsidiaries.


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The following table summarizes the terms of the Credit Facility and its status as of September 30, 2013:

Borrowing limit                           $145 million
Interest Rate                             At the Company's discretion, the base
. . .
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