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Accounts Receivable and Credit Losses

6 Months Ended

Dec. 31, 2020

8. Accounts Receivable and Credit Losses

We categorize our accounts receivable balances as trade receivables or financing receivables. Our trade receivables relate to student or customer balances occurring in the normal course of business. Trade receivables have a term of less than one year and are included in accounts receivable, net on our Consolidated Balance Sheets. Our financing receivables relate to credit extension programs where the student is provided payment terms in excess of one year with their respective school and are included in accounts receivable, net and other assets, net on our Consolidated Balance Sheets.

The classification of our accounts receivable balances was as follows (in thousands):


	December 31, 2020
		Gross		Allowance		Net
Trade receivables, current	$	99,811	$	(11,298)	$	88,513
Financing receivables, current		6,830		(4,292)		2,538
Accounts receivable, current	$	106,641	$	(15,590)	$	91,051

Financing receivables, current	$	6,830	$	(4,292)	$	2,538
Financing receivables, noncurrent		41,165		(13,063)		28,102
Total financing receivables	$	47,995	$	(17,355)	$	30,640

Our financing receivables relate to credit extension programs available to students at Chamberlain, AUC, RUSM, and RUSVM. These credit extension programs are designed to assist students who are unable to completely cover educational

costs consisting of tuition, books, and fees, and are available only after all other student financial assistance has been applied toward those purposes. In addition, AUC, RUSM, and RUSVM allow students to finance their living expenses. Repayment plans for financing agreements are developed to address the financial circumstances of the particular student. Interest charges at rates from 3.0% to 12.0% per annum accrue each month on the unpaid balance. Most students are required to begin repaying their loans while they are still in school with a minimum payment level designed to demonstrate their capability to repay, which reduces the possibility of over borrowing, and minimizes interest being accrued on the loan balance. Payments may increase upon completing or departing school. After a student leaves school, the student typically will have a monthly installment repayment plan. In addition, Becker offered an 18-month credit extension program for its Becker CPA Exam Review Course which is considered a financing receivable. Becker is no longer offering credit extension under this program. Instead, Becker is offering flexible payment plans with terms of up to 12-months which is not considered a financing receivable.

Credit Quality

The primary credit quality indicator for our financing receivables is delinquency. Balances are considered delinquent when contractual payments on the loan become past due. We charge-off financing receivable balances after they have been sent to a third party collector, the timing of which varies by the institution granting the loan, but in most cases is when the financing agreement is at least 181 days past due. Payments are applied first to outstanding interest and then to the unpaid principal balance.

The credit quality analysis of financing receivables as of December 31, 2020 was as follows (in thousands):


	Amortized Cost Basis by Origination Year
	Prior		2017		2018		2019		2020		2021		Total
1-30 days past due	$	767	$	444	$	589	$	909	$	342	$	23	$	3,074
31-60 days past due		631		500		97		123		183		29		1,563
61-90 days past due		261		417		69		195		245		—		1,187
Greater than 90 days past due		7,635		2,367		2,200		1,027		506		—		13,735
Total past due		9,294		3,728		2,955		2,254		1,276		52		19,559
Current		11,824		5,389		3,891		4,205		2,271		856		28,436
Financing receivables, gross	$	21,118	$	9,117	$	6,846	$	6,459	$	3,547	$	908	$	47,995

The following table includes our financing receivables credit risk profile disclosures for prior periods before we adopted ASC 326 on July 1, 2020 (in thousands):


							Over						Total
	1-30 Days		31-60 Days		61-90 Days		90 Days		Total				Financing
	Past Due		Past Due		Past Due		Past Due		Past Due		Current		Receivables
Financing receivables:
June 30, 2020	$	7,192	$	1,755	$	1,547	$	13,782	$	24,276	$	25,749	$	50,025
December 31, 2019	$	3,226	$	1,601	$	566	$	13,407	$	18,800	$	31,415	$	50,215

Allowance for Credit Losses

The allowance for credit losses represents an estimate of the lifetime expected credit losses inherent in our accounts receivable balances as of each balance sheet date. In evaluating the collectability of all our accounts receivable balances, we utilize historical events, current conditions, and reasonable and supportable forecasts about the future.

For our trade receivables, we primarily use historical loss rates based on a student’s status to determine the allowance for credit losses. As these trade receivables are short-term in nature, management believes a student’s status provides the best credit loss estimate. Students still attending classes and recently graduated are more likely to pay than those who are inactive due to being on a leave of absence or withdrawing from school.

For our financing receivables, we primarily use historical loss rates based on an aging schedule specific to each school. As these financing receivables are based on long-term financing agreements offered by Adtalem, management believes

that delinquency provides the best credit loss estimate. As the financing receivable balances become further past due, it is less likely we will receive payment, causing our estimate of credit losses to increase.

The following tables provide a rollforward of the allowance for credit losses (in thousands):


	Three Months Ended December 31, 2020						Six Months Ended December 31, 2020
	Trade		Financing		Total		Trade		Financing		Total
Beginning balance	$	10,634	$	16,815	$	27,449	$	10,825	$	15,690	$	26,515
Write-offs		(1,143)		(1,597)		(2,740)		(1,902)		(1,853)		(3,755)
Recoveries		205		85		290		391		125		516
Provision for credit losses		1,602		2,052		3,654		1,984		3,393		5,377
Ending balance	$	11,298	$	17,355	$	28,653	$	11,298	$	17,355	$	28,653


	Three Months Ended December 31, 2019						Six Months Ended December 31, 2019
	Trade		Financing		Total		Trade		Financing		Total
Beginning balance	$	9,231	$	9,578	$	18,809	$	8,243	$	6,289	$	14,532
Write-offs		(1,306)		(45)		(1,351)		(2,904)		(71)		(2,975)
Recoveries		181		4		185		504		28		532
Provision for credit losses		1,546		4,336		5,882		3,809		7,627		11,436
Ending balance	$	9,652	$	13,873	$	23,525	$	9,652	$	13,873	$	23,525

Allowance for bad debts on short-term and long-term receivables as of December 31, 2020, June 30, 2020, and December 31, 2019 were $28.7 million, $26.5 million, and $23.5 million, respectively. The increase in the reserve from the year-ago period is driven by an increase in our overall historical loss rates, primarily related to the credit extension programs at the medical and veterinary schools.

Accounts receivable, net decreased with an offsetting increase in other assets, net on the Consolidated Balance Sheet as of December 31, 2020 compared to the prior periods presented primarily due to a correction in the methodology on how we classify financing receivable balances between current and noncurrent assets.

Other Financing Receivables

In connection with the sale of DeVry University, Adtalem loaned $10.0 million to DeVry University under the terms of the Note. The Note bears interest at a rate of 4% per annum, payable annually in arrears, and has a maturity date of January 1, 2022. The DeVry University loan receivable is included on the Consolidated Balance Sheet in other assets, net as of each of December 31, 2020, June 30, 2020, and December 31, 2019, respectively, except for $5.1 million within prepaid expenses and other current assets as of December 31, 2020, and is estimated by discounting the future cash flows using an average of current rates for similar arrangements, which is estimated at 4% per annum. Management has evaluated the collectability of this note and has determined no reserve is necessary.

On July 31, 2019, Adtalem sold its Chicago, Illinois, campus facility to DePaul College Prep Foundation (“DePaul College Prep”). In connection with the sale, Adtalem holds a mortgage from DePaul College Prep for $46.8 million. The mortgage is due on July 31, 2024 as a balloon payment and bears interest at a rate of 4% per annum, payable monthly. The carrying value of the DePaul College Prep loan receivable included in other assets, net on the Consolidated Balance Sheet as of December 31, 2020, June 30, 2020, and December 31, 2019 is $42.0 million, $41.4 million, and $40.8 million, respectively, and was originally determined by discounting the future cash flows using an average of current rates for similar arrangements, which is estimated at 7% per annum. Management has evaluated the collectability of this note and has determined no reserve is necessary.