What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-05 · 109 added, 193 removed, 191 unchanged (61% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is a supplement to and should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2021.

Cautionary Notice Regarding Forward-Looking Statements

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The assumptions, risks and uncertainties include the pace of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as other federal laws and regulations, institutional accreditation standards and state regulatory requirements, rulemaking by the Department and increased focus by the U.S.

Congress on for-profit education institutions, competitive factors, risks associated with the further spread of COVID-19, including the ultimate impact of COVID-19 on people and economies, the impact of regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions including the Company's acquisition of Torrens University and associated assets in Australia and New Zealand, the risk that the benefits of the acquisition may not be fully realized or may take longer to realize than expected, and the risk that the acquisition may not advance the Company’s business strategy and growth strategy, risks relating to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the combined company may experience difficulty integrating employees or operations, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions.

Congress on for-profit education institutions, competitive factors, risks associated with the further spread of COVID-19, including the ultimate impact of COVID-19 on people and economies, the impact of regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions including our acquisition of Torrens University and associated assets in Australia and New Zealand, the risk that the benefits of our acquisition of Torrens University and associated assets in Australia and New Zealand may not be fully realized or may take longer to realize than expected, the risk that our acquisition of Torrens University and associated assets in Australia and New Zealand may not advance our business strategy and growth strategy, risks related to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the combined company may experience difficulty integrating employees or operations, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions.

You should not put undue reliance on any forward-looking statements.

Further information about these and other relevant risks and uncertainties may be found in Part II, “Item 1A.

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(“SEI,” “we”, “us” or “our”) is an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets.

We operate primarily through our wholly-owned subsidiaries Strayer University and Capella University, both accredited post-secondary institutions of higher education located in the United States, as well as Torrens University, an accredited post-secondary institution of higher education located in Australia.

Our operations emphasize relationships through our Alternative Learning segment with large employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs, and also include certain non-degree programs, mainly focused on software and application development, and other vocational and training programs in a variety of fields.

We operate primarily through our wholly-owned subsidiaries Strayer University and Capella University, both accredited post-secondary institutions of higher education located in the United States, and Torrens University, an accredited post-secondary institution of higher education located in Australia.

Our operations emphasize relationships through our Education Technology Services segment with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs.

Company Response to COVID-19

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SEI took early action to protect the health and well-being of our students and employees in accordance with government mandates and informed by guidance from the Centers for Disease Control and Prevention.

Specifically, we instituted a work-from-home policy for the vast majority of our workforce, closed physical campus locations, moved our on-ground courses

at Strayer University online, postponed large events such as graduation ceremonies, and prohibited non-essential employee travel.

As guidance has evolved, we have begun to reopen some campus and office locations and permit business travel.

Specifically, we instituted a work-from-home policy for the vast majority of our workforce, closed physical campus locations, moved our on-ground courses at Strayer University online, postponed large events such as graduation ceremonies, and prohibited non-essential employee travel.

As guidance has evolved, we have begun to reopen campus and office locations and permit business travel, after instituting a mandatory vaccination policy for all employees who may be required to be on-site at a Company facility or at a Company-sponsored event, subject to medical and religious accommodations (any employee receiving an accommodation is required to test at least weekly before being on-site).

We have taken measures to provide financial relief to our students and employer partners negatively affected by the COVID-19 crisis, including payment flexibility, scholarship opportunities, and other pricing relief.

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In the third quarter of 2020, we began implementing a restructuring plan that included both voluntary and involuntary employee terminations in an effort to reduce ongoing operating costs to align with changes in enrollment.

These headcount reductions resulted in a 5% decrease to SEI's total workforce.

During 2021, our restructuring efforts have included the closure of underutilized campus and corporate office space in response to changes in enrollment trends and as a result of our work-from-home policies.

Of the campus closures, the majority have an alternative location within relative proximity to support students as campus interactions are needed.

Our restructuring efforts have also included the consolidation of underutilized facilities in response to changes in enrollment trends and as a result of our work-from-home policies.

As the pandemic has continued, we have seen sustained weakness in demand, especially in the United States, where total enrollment in our U.S.

Higher Education segment decreased 7%, 10%, and 13% in the first, second, and third quarters of 2021, respectively, compared to the same periods in 2020.

Higher Education segment declined 13% in the first quarter of 2022, compared to the same period in 2021.

Enrollment in ANZ also has been impacted by the pandemic and the related closure of international borders in Australia and New Zealand.

We believe our current financial position and expected operating results, and ability to further control costs, are sufficient to support the ongoing operation of SEI in a manner that protects the health and well-being of our employees, students, and partners.

Acquisition of Torrens University and associated assets in Australia and New Zealand

On November 3, 2020, we completed the acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”), pursuant to the sale and purchase agreement dated July 29, 2020 (the “Purchase Agreement”).

ANZ includes Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across five industry verticals, including business, hospitality, health, education, creative technology and design.

We believe ANZ represents an attractive portfolio of institutions with a similar focus on innovation, academic outcomes, improved affordability and career advancement as us.

We also believe that ANZ provides an attractive platform for future growth, driven by Australia’s status as an attractive destination for international students, as well as the potential to use ANZ as a platform for expansion across the ASEAN region.

Pursuant to the Purchase Agreement, the aggregate consideration paid was approximately $658.4 million in cash, which reflected the original agreed upon purchase price of $642.7 million, plus a $15.7 million adjustment reflecting $11.0 million of net cash at close, and $4.7 million related to higher net working capital.

The aggregate consideration paid in the transaction was funded using cash on hand and borrowings under our revolving credit facility.

Our financial results for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and are therefore not directly comparable.

Company Overview

In the first quarter of 2021, we changed the way management reports financial information relied on by the Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate the resources of the Company.

Our revised organizational structure includes the following three operating and reportable segments:

Higher Education (“USHE”), which is primarily comprised of SEI's previous Strayer University and Capella University segments and is focused on providing flexible and affordable certificate and degree programs to working adults;

(2) Alternative Learning, a new segment that is primarily focused on developing and maintaining relationships with large employers to build employee education benefits programs;

and (3) Australia/New Zealand, which provides certificate and degree programs in Australia and New Zealand.

The Australia/New Zealand segment was not changed as a result of the reorganization.

We began reporting under the new segment structure in the first quarter of 2021, and we have restated the results for the prior period to conform to the current period presentation.

As of March 31, 2022, we had the following reportable segments:

Higher Education Segment

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USHE also operates non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University.

• Strayer University is accredited by the Middle States Commission on Higher Education and Capella University is accredited by the Higher Learning Commission, both institutional accrediting agencies recognized by the Department of

• Strayer University is accredited by the Middle States Commission on Higher Education and Capella University is accredited by the Higher Learning Commission, both higher education institutional accrediting agencies recognized by the Department of Education.

The USHE segment provides academic offerings both online and in physical classrooms, helping working adult students develop specific competencies they can apply in their workplace.

• The Jack Welch Management Institute (“JWMI”) offers an executive MBA online and is a Top 25 Princeton Review ranked online MBA program.

• Devmountain is a software development program offering affordable, high-quality, leading-edge software coding education at multiple campus locations and online.

• Hackbright Academy is a software engineering school for women.

Its primary offering is an intensive 12-week accelerated software development program, together with placement services and coaching.

• In the third quarter, USHE enrollment decreased 13% to 77,574 compared to 89,042 for the same period in 2020.

Alternative Learning Segment

• The Alternative Learning segment is primarily focused on developing and maintaining relationships with large employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs.

The employer relationships developed by the Alternative Learning division are an important source of student enrollment for Capella University and Strayer University, and the majority of the revenue attributed to the Alternative Learning division is driven by the volume of enrollment derived from these employer relationships.

Enrollments attributed to the Alternative Learning segment are determined based on a student’s employment status and the existence of a corporate partnership arrangement with SEI.

All enrollments attributed to the Alternative Learning division continue to be attributed to the division until the student graduates or withdraws, even if his or her employment status changes or if the partnership contract expires.

• In the third quarter, employer affiliated enrollment as a percentage of USHE enrollment was 21.1% compared to 18.3% for the same period in 2020.

• Sophia Learning provides low-cost online general education courses recommended by the American Council on Education for credit to other colleges and universities.

• Workforce Edge is a platform which provides employers a full-service education benefits administration solution.

• Digital Enablement Partnerships provide online course delivery and support capabilities related to online course delivery to other higher education institutions.

• In the first quarter of 2022, USHE enrollment decreased 13% to 78,172 compared to 89,482 for the same period in 2021.

• Trailing 4-quarter student persistence within USHE was 86.8% in the fourth quarter of 2021 compared to 86.7% for the same period in 2020.

Student persistence is calculated as the rate of students continuing from one quarter to the next, adjusted for graduates, on a trailing 4-quarter basis.

Student persistence is reported one quarter in arrears.

The table below summarizes USHE trailing 4-quarter student persistence for the past 8 quarters.

Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021

87.2 % 86.6 % 86.8 % 86.7 % 86.5 % 87.0 % 86.9 % 86.8 %

Education Technology Services Segment

• Our Education Technology Services segment is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs.

The employer relationships developed by the Education Technology Services division are an important source of student enrollment for Strayer University and Capella University, and the majority of the revenue attributed to the Education Technology Services division is driven by the volume of enrollment

derived from these employer relationships.

Enrollments attributed to the Education Technology Services segment are determined based on a student’s employment status and the existence of a corporate partnership arrangement with SEI.

All enrollments attributed to the Education Technology Services division continue to be attributed to the division until the student graduates or withdraws, even if his or her employment status changes or if the partnership contract expires.

• In the first quarter of 2022, employer affiliated enrollment as a percentage of USHE enrollment was 23.0% compared to 20.7% for the same period in 2021.

• Education Technology Services also supports employer partners through Workforce Edge, a platform which provides employers a full-service education benefits administration solution, and Sophia Learning, which enables lower cost education benefits programs through the use of low-cost online general education courses recommended by the American Council on Education for credit at other colleges and universities.

Australia/New Zealand Segment

• Torrens University is the only investor-funded university in Australia.

Torrens University offers undergraduate and graduate courses primarily in five fields of study:

Torrens University offers undergraduate, graduate, higher degree by research, and specialized degree courses primarily in five fields of study:

business, design and creative technology, health, hospitality, and education.

Courses are offered both online and on physical campuses.

Courses are offered both online and at physical campuses.

Torrens University is registered with the Tertiary Education Quality and Standards Agency (“TEQSA”), the regulator for higher education providers and universities throughout Australia, as an Australian University that is authorized to self-accredit its courses.

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Media Design School offers industry-endorsed courses in 3D animation and visual effects, game art, game programming, graphic and motion design, digital media artificial intelligence, and creative advertising.

Media Design School is accredited in New Zealand by the New Zealand Qualifications Authority, responsible for the quality assurance of non-university tertiary training providers.

• In the third quarter, Australia/New Zealand enrollment decreased 4% to 18,188 compared to 18,985 for the same period in 2020.

Media Design School is accredited in New Zealand by the New Zealand Qualifications Authority, the organization responsible for the quality assurance of non-university tertiary training providers.

• In the first quarter of 2022, Australia/New Zealand enrollment decreased 4% to 20,575 compared to 21,469 for the same period in 2021.

We believe we have the right operating strategies in place to provide the most direct path between learning and employment for our students.

We are constantly innovating to differentiate ourselves in our markets and drive growth by supporting student

success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our students’ professional needs, and establishing new growth platforms.

We are constantly innovating to differentiate ourselves in our markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our students’ professional needs, and establishing new growth platforms.

The talent of our faculty and employees, supported by market leading technology, enable these strategies.

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Torrens University offers the majority of its education programs on a trimester system having three primary academic terms, which all occur within the calendar year.

Approximately 96% of our revenues during the nine months ended September 30, 2021 consisted of tuition revenue.

Approximately 96% of our revenues during the three months ended March 31, 2022 consisted of tuition revenue.

Capella University offers monthly start options for new students, who then transition to a quarterly schedule.

Capella University also offers its FlexPath program, which allows students to determine their 12-week billing session schedule after they complete their first course.

Tuition revenue for all students is recognized ratably over the course of instruction as the universities and the schools offering non-degree programs provide academic services, whether delivered in person at a physical campus or online.

Tuition revenue for all students is recognized ratably over the course of instruction as the universities provide academic services, whether delivered in person at a physical campus or online.

Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts.

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Any cash received prior to the start of an academic term or program is recorded as a contract liability.

Students at Strayer University and Capella University finance their education in a variety of ways, and historically about three quarters of our students have participated in one or more financial aid program provided through Title IV of the Higher Education Act.

Students at Strayer University and Capella University finance their education in a variety of ways, and historically about 75% of our students have participated in one or more financial aid program provided through Title IV of the Higher Education Act.

In addition, many of our working adult students finance their own education or receive full or partial tuition reimbursement from their employers.

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The portion of tuition revenue refundable to students may vary based on the student’s state of residence.

For students who withdraw from all their courses during the period of instruction, we reassess collectibility of tuition and fees for revenue recognition purposes.

In addition, we cease revenue recognition when a student fully withdraws from all of his or her courses in the academic term.

Tuition charges billed in accordance with our billing schedule may be greater than the pro rata revenue amount, but the additional amounts are not recognized as revenue unless they are collected in cash and the term is complete.

students who receive funding under Title IV and withdraw, funds are subject to return provisions as defined by the Department of Education.

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Loss of financial aid eligibility during an academic term is rare and would normally coincide with the student’s withdrawal from the institution.

When a student withdraws from all of his or her courses, we consider it to be a contract modification and reassess collectibility at that time.

As a result of this reassessment, we cease revenue recognition as our historical experience has shown that amounts outstanding for this group of students are not collectible.

In Australia and New Zealand, government funding for eligible students is provided directly to the institution on an estimated basis annually.

The amount of government funding provided is based on a course-by-course forecast of enrollments that the institution submits for the upcoming calendar year.

amount of government funding provided is based on a course-by-course forecast of enrollments that the institution submits for the upcoming calendar year.

Using the enrollment forecast provided as well as the requesting institution's historical enrollment trends, the government approves a fixed amount, which is then funded to the institution evenly on a monthly basis.

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Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by Strayer University in the future.

In response to the COVID-19 pandemic, Strayer University is temporarily allowing students to miss two consecutive terms without losing their Graduation Fund credits.

In response to the COVID-19 pandemic, Strayer University temporarily allowed students to miss three consecutive terms without losing their Graduation Fund credits.

In their final academic year, qualifying students will receive one free course for every three courses that the student successfully completed in prior years.

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Estimated redemption rates of eligible students vary based on their term of enrollment.

As of September 30, 2021, we had deferred $51.6 million for estimated redemptions earned under the Graduation Fund, as compared to $53.3 million at December 31, 2020.

Each quarter, we assess our methodologies and assumptions underlying our estimates for persistence and estimated redemptions based on actual experience.

As of March 31, 2022, we had deferred $51.2 million for estimated redemptions earned under the Graduation Fund, as compared to $52.0 million at December 31, 2021.

Each quarter, we assess our assumptions underlying our estimates for persistence and estimated redemptions based on actual experience.

To date, any adjustments to our estimates have not been material.

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If the financial condition of our students were to deteriorate based on current or expected future events resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required.

For the third quarter of 2021, our bad debt expense was 3.8% of revenue, compared to 4.7% for the same period in 2020.

A change in our allowance for credit losses of 1% of gross tuition receivable as of September 30, 2021 would have changed our income from operations by approximately $1.4 million.

Business combinations — We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, the purchase price be allocated to all tangible assets and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.

Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill.

The determination of the fair value of assets acquired and liabilities assumed requires many estimates and assumption with respect to the timing and amounts of cash flow projections, revenue growth rates, earnings before interest and taxes margins, student attrition rates, royalty rates, discount rates, and useful lives.

These estimates are based on assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party valuation firms.

During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with corresponding offsets to goodwill.

We applied the acquisition method of accounting to our acquisition of ANZ in 2020.

Refer to Note 3, Acquisition of Torrens University and Associated Assets in Australia and New Zealand, within the footnotes to the condensed consolidated financial statements for additional information.

For the first quarter of 2022, our bad debt expense was 2.8% of revenue, compared to 3.7% for the same period in 2021.

A change in our allowance for credit losses of 1% of gross tuition receivable as of March 31, 2022 would have changed our income from operations by approximately $1.1 million.

Goodwill and intangible assets — Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed.

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Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment.

No events or circumstances occurred in the three and nine months ended September 30, 2021 to indicate an impairment to goodwill or indefinite-lived intangible assets.

Accordingly, no impairment charges related to goodwill or indefinite-lived intangible assets were recorded during the three and nine month periods ended September 30, 2021.

No events or circumstances occurred in the three months ended March 31, 2022 to indicate an impairment to goodwill or indefinite-lived intangible assets.

Accordingly, no impairment charges related to goodwill or indefinite-lived intangible assets were recorded during the three month period ended March 31, 2022.

Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset.

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If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets.

No impairment charges related to finite-lived intangible assets were recorded during the three and nine month periods ended September 30, 2021.

No impairment charges related to finite-lived intangible assets were recorded during the three month period ended March 31, 2022.

Other estimates — We record estimates for certain of our accrued expenses and for income tax liabilities.

We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary.

We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to

achieve performance targets for stock-based awards and adjust them as necessary.

Should actual results differ from our estimates, revisions to our accrued expenses, carrying amount of goodwill and intangible assets, stock-based compensation expense, and income tax liabilities may be required.

Results of Operations

As discussed above, we completed our acquisition of ANZ on November 3, 2020.

Our results of operations for the three and nine months ended September 30, 2021 include the results of ANZ, but the results of operations for the three and nine months ended September 30, 2020 do not include the financial results of ANZ.

Accordingly, the financial results of each period presented are not directly comparable.

In the third quarter of 2021, we generated $270.1 million in revenue compared to $239.0 million in 2020.

Our income from operations was $7.3 million for the third quarter of 2021 compared to $15.4 million in 2020, primarily due to lower earnings in the USHE segment, partially offset by the inclusion of ANZ's income from operations and lower amortization expense of intangible assets.

Net income in the third quarter of 2021 was $3.9 million compared to $11.0 million for the same period in 2020.

In the first quarter of 2022, we generated $258.9 million in revenue compared to $290.3 million in 2021.

Our income from operations was $13.4 million for the first quarter of 2022 compared to $12.0 million in 2021, primarily due to lower restructuring costs and amortization expense of intangible assets, partially offset by lower earnings in the USHE segment.

Net income in the first quarter of 2022 was $7.0 million compared to $9.6 million for the same period in 2021.

Diluted earnings per share was $0.29 compared to $0.40 for the same period in 2021.

For the nine months ended September 30, 2021, we generated $859.6 million in revenue, compared to $760.2 million for the same period in 2020.

Our income from operations was $46.0 million for the nine months ended September 30, 2021 compared to $105.8 million for the same period in 2020, primarily due to lower earnings in the USHE segment and higher restructuring costs incurred in the first nine months of 2021, partially offset by the inclusion of ANZ's income from operations.

Net income was $33.4 million for the nine months ended September 30, 2021 compared to $80.4 million for the same period in 2020, and diluted earnings per share was $1.38 in the nine months ended September 30, 2021 compared to $3.58 for the same period in 2020.

In the accompanying analysis of financial information for 2022 and 2021, we use certain financial measures including Adjusted Revenue, Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings per Share that are not required by or prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

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• discrete tax adjustments related to stock-based compensation and other adjustments;

• foreign currency exchange impact related to translating foreign currency results at a constant exchange rate.

To illustrate currency impacts to operating results, Adjusted Revenue, Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings per Share for the three months ended March 31, 2022 are also presented on a constant currency basis utilizing an exchange rate of 0.7728 Australian Dollars to U.S.

Dollars, which was the average exchange rate for the same period in 2021.

When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying trends associated with our ongoing operations.

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A reconciliation of these measures to the most directly comparable GAAP measures is provided below.

Adjusted income from operations was $20.8 million in the third quarter of 2021 compared to $37.8 million in 2020.

Adjusted net income was $14.2 million in the third quarter of 2021 compared to $27.4 million in 2020, and adjusted diluted earnings per share was $0.59 in the third quarter of 2021 compared to $1.18 in 2020.

Adjusted income from operations was $127.4 million for the nine months ended September 30, 2021 compared to $163.9 million for the same period in 2020.

Adjusted net income was $88.7 million for the nine months ended September 30, 2021 compared to $119.3 million for the same period in 2020, and adjusted diluted earnings per share was $3.67 for the nine months ended September 30, 2021 compared to $5.32 for the same period in 2020.

Adjusted results for 2021 exclude foreign currency exchange impacts and are therefore not directly comparable to adjusted results previously reported for the three months ended March 31, 2021.

Adjusted income from operations was $19.4 million in the first quarter of 2022 compared to $52.9 million in 2021.

Adjusted net income was $13.1 million in the first quarter of 2022 compared to $37.0 million in 2021, and adjusted diluted earnings per share was $0.54 in the first quarter of 2022 compared to $1.53 in 2021.

The tables below reconcile our reported results of operations to adjusted results (amounts in thousands, except per share data):

Reconciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2021

Non-GAAP Adjustments

(GAAP) Purchase accounting adjustments (1)

Merger and integration costs (2)

Restructuring costs (3)

Loss from other investments (4)

adjustments (5)

Foreign exchange adjustments (6)

Revenues $ 270,078 $ — $ — $ — $ — $ — $ 646 $ 270,724

Total costs and expenses $ 262,730 $ (8,932) $ (1,111) $ (3,322) $ — $ — $ 580 $ 249,945

Income from operations $ 7,348 $ 8,932 $ 1,111 $ 3,322 $ — $ — $ 66 $ 20,779

Operating margin 2.7% 7.7%

Income before income taxes $ 5,500 $ 8,932 $ 1,111 $ 3,322 $ 1,211 $ — $ 66 $ 20,142

Net income $ 3,854 $ 8,932 $ 1,111 $ 3,322 $ 1,211 $ (4,331) $ 66 $ 14,165

Diluted earnings per share $ 0.16 $ 0.59

Weighted average diluted shares outstanding 24,113 24,113

Rec onciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2020

Re c onciliation of Reported to Adjusted Results of Operations for the three months ended March 31, 2021

Non-GAAP Adjustments

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adjustments (5)

Foreign exchange adjustments (6)

Revenues $ 290,336 $ 2,223 $ — $ — $ — $ — $ 292,559

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Weighted average diluted shares outstanding 24,153 24,153

Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2021

Reconciliation of Reported to Adjusted Results of Operations for the three months ended March 31, 2022

Non-GAAP Adjustments

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Restructuring costs (3)

Income from other investments (4)

Loss from other investments (4)

adjustments (5)

Foreign exchange adjustments (6)

Revenues $ 258,855 $ — $ — $ — $ — $ — $ 258,855

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Weighted average diluted shares outstanding 24,114 24,114

Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2020

Non-GAAP Adjustments

(GAAP) Purchase accounting adjustments (1)

Merger and integration costs (2)

Restructuring costs (3)

Income from other investments (4)

adjustments (5)

Foreign exchange adjustments (6)

__________________________________________________________________________________________

(1) Reflects a purchase accounting adjustment to record acquired contract liabilities at fair value as a result of the Company's acquisition of Torrens University and associated assets in Australia and New Zealand, and amortization and depreciation expense of intangible assets and software assets acquired through the Company’s merger with Capella Education Company and the Company's acquisition of Torrens University and associated assets in Australia and New Zealand.

(2) Reflects transaction and integration expenses associated with the Company's merger with Capella Education Company, including premerger litigation settlement, and the Company's acquisition of Torrens University and associated assets in Australia and New Zealand.

(3) Reflects severance costs and right-of-use lease asset impairment charges associated with the Company's restructuring.

(4) Reflects income/loss recognized from the Company's investments in partnership interests and other investments.

(5) Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 30.0% and 29.2% for the three months ended March 31, 2022 and 2021, respectively.

The table below presents our adjusted results of operations on a constant currency basis for the three months ended March 31, 2022 (amounts in thousands, except per share data):

(Non-GAAP) Constant currency adjustment (1)

As Adjusted with Constant Currency

Revenues $ 258,855 $ 2,886 $ 261,741

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__________________________________________________________________________________________

(2) Reflects transaction and integration expenses associated with the Company's merger with Capella Education Company and the Company's acquisition of Torrens University and associated assets in Australia and New Zealand.

(3) Reflects severance costs and right-of-use lease asset impairment charges associated with the Company's restructuring.

(4) Reflects income/loss recognized from the Company's investments in partnership interests and other investments.

(5) Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 28.5% for the three and nine months ended September 30, 2020 and an adjusted effective tax rate of 29.7% and 29.4% for the three and nine months ended September 30, 2021, respectively.

(6) Reflects foreign currency exchange impact related to translating foreign currency results at a constant exchange rate of 0.743 Australian Dollars to U.S.

Dollars, which is the 2021 budget rate.

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

Consolidated revenue increased to $270.1 million, compared to $239.0 million in the same period in the prior year, primarily due to the inclusion of ANZ.

In the USHE segment for the three months ended September 30, 2021, total enrollment decreased 13% to 77,574 from 89,042 for the same period in 2020.

USHE segment revenue decreased 16.7% to $191.9 million compared to $230.3 million in 2020 as a result of declines in enrollment and revenue-per-student due to higher scholarships and discounts.

Near term revenue in the USHE segment is expected to continue to be impacted negatively by the ongoing COVID-19 pandemic with weaker demand for enrollments and higher scholarships and discounts.

In the Alternative Learning segment, revenue for the three months ended September 30, 2021 increased 48.7% to $13.0 million compared to $8.7 million in 2020 as a result of rapid growth in Sophia Learning and higher employer affiliated enrollment.

Revenues for the Australia/New Zealand segment were $65.2 million.

(1) Reflects an adjustment to translate foreign currency results for the three months ended March 31, 2022 at a constant exchange rate of 0.7728 Australian Dollars to U.S.

Dollars, which was the average exchange rate for the same period in 2021.

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Consolidated revenue decreased to $258.9 million, compared to $290.3 million in the same period in the prior year, primarily due to declines in enrollment.

In the USHE segment for the three months ended March 31, 2022, total enrollment decreased 13% to 78,172 from 89,482 for the same period in 2021.

USHE segment revenue decreased 13.6% to $195.8 million compared to $226.5 million in 2021 primarily as a result of declines in enrollment.

Near term revenue in the USHE segment is expected to continue to be impacted negatively by the ongoing COVID-19 pandemic with weaker demand for enrollments.

In the Australia/New Zealand segment for the three months ended March 31, 2022, total enrollment decreased 4% to 20,575 from 21,469 for the same period in 2021.

Australia/New Zealand segment revenue decreased 5.4% to $48.5 million compared to $51.3 million in 2021 as a result of declines in enrollment and revenue-per-student.

In the Education Technology Services segment, revenue for the three months ended March 31, 2022 increased 16.4% to $14.6 million compared to $12.5 million in 2021 as a result of growth in Sophia Learning and higher employer affiliated enrollment.

Instructional and support costs.

Consolidated instructional and support costs increased to $153.7 million, compared to $127.2 million in the same period in the prior year, principally due to the inclusion of $33.7 million of instructional and support costs related to ANZ, partially offset by lower expenses associated with facility costs as well as savings from the employee restructuring plan implemented in the third quarter of 2020.

Consolidated instructional and support costs as a percentage of revenues increased to 56.9% in the third quarter of 2021 from 53.2% in the third quarter of 2020.

Consolidated instructional and support costs decreased to $144.6 million, compared to $152.8 million in the same period in the prior year, principally due to lower facility costs and bad debt expense.

Consolidated instructional and support costs as a percentage of revenues increased to 55.9% in the first quarter of 2022 from 52.6% in the first quarter of 2021.

General and administration expenses .

Consolidated general and administration expenses increased to $95.7 million in the third quarter of 2021 compared to $74.1 million in the prior year, principally due to the inclusion of $21.2 million of general and administration expenses related to ANZ, as well as increased investments in branding initiatives and partnerships with brand ambassadors.

Consolidated general and administration expenses as a percentage of revenues increased to 35.4% in the third quarter of 2021 from 31.0% in the third quarter of 2020.

Consolidated general and administration expenses increased to $94.8 million in the first quarter of 2022 compared to $86.8 million in the prior year, principally due to increased investments in branding initiatives and partnerships with brand ambassadors.

Consolidated general and administration expenses as a percentage of revenues increased to 36.6% in the first quarter of 2022 from 29.9% in the first quarter of 2021.

Amortization of intangible assets .

Amortization of intangible assets decreased to $8.9 million in the third quarter of 2021 compared to $15.4 million in 2020, due to lower amortization expense associated with intangible assets acquired through the merger with Capella Education Company, offset by additional amortization expense of intangible assets acquired in the acquisition of ANZ in November 2020.

Amortization of intangible assets decreased to $3.7 million in the first quarter of 2022 compared to $19.4 million in 2021, due to the finite-lived intangible assets acquired through the merger with Capella Education Company being fully amortized as of the third quarter of 2021.

Merger and integration costs.

Merger and integration costs decreased to $1.1 million in the third quarter of 2021 compared to $2.9 million for the same period in 2020, as a result of lower transaction and integration expenses associated with the acquisition of ANZ.

Merger and integration costs decreased to $0.4 million in the first quarter of 2022 compared to $1.0 million for the same period in 2021, as a result of lower integration expenses associated with the acquisition of ANZ.

Restructuring costs .

Restructuring costs decreased to $3.3 million in the third quarter of 2021 compared to $4.0 million in 2020, primarily due to lower severance and other personnel-related expenses from employee terminations in connection with the restructuring plan implemented in the third quarter of 2020, partially offset by impairments of right-of-use lease assets associated with vacating leased space in the third quarter of 2021.

Restructuring costs decreased to $1.9 million in the first quarter of 2022 compared to $18.3 million in 2021, primarily due to $16.4 million of right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the first quarter of 2021.

Income from operations .

Consolidated income from operations decreased to $7.3 million in the third quarter of 2021 compared to $15.4 million in the third quarter of 2020, principally due to lower earnings in the USHE segment, partially offset by the inclusion of ANZ's income from operations and lower amortization expense of intangible assets.

USHE segment income from operations decreased 84.7% to $5.2 million in the third quarter of 2021, compared to $33.7 million in the third quarter of 2020, primarily due to lower enrollments, higher scholarship and discount offerings, and increased investments in marketing initiatives.

In the Alternative Learning segment, income from operations for the three months ended September 30, 2021 increased 26.0% to $5.2 million compared to $4.1 million in 2020 as a result of rapid growth in Sophia Learning and an increase in employer affiliated enrollment, partially offset by increased investment in outreach to corporate partners.

Income from operations for the Australia/New Zealand segment was $10.4 million.

Consolidated income from operations increased to $13.4 million in the first quarter of 2022 compared to $12.0 million in the first quarter of 2021, principally due to lower restructuring costs and amortization expense of intangible assets, partially offset by lower earnings in the USHE segment.

USHE segment income from operations decreased 67.6% to $15.5 million in the first quarter of 2022, compared to $47.8 million in the first quarter of 2021, primarily due to lower enrollments and increased investments in marketing initiatives.

In the Australia/New Zealand segment, loss from operations was $0.7 million in the first quarter of 2022, compared to a $2.9 million loss in the first quarter of 2021, primarily driven by a $2.2 million purchase

accounting reduction in 2021 related to contract liabilities acquired in the acquisition.

In the Education Technology Services segment, income from operations for the three months ended March 31, 2022 decreased 19.9% to $4.7 million compared to $5.9 million in 2021 as a result of increased investment in outreach to corporate partners, partially offset by growth in Sophia Learning and an increase in employer affiliated enrollment.

Other income (expense) .

Other income (expense) decreased to $1.8 million of expense in the third quarter of 2021 compared to $0.9 million of income in the third quarter of 2020, as a result of an $0.8 million loss on the sale of marketable securities, a $0.6 million loss from limited partnership investments, as well as an increase in interest expense due to the $141.6 million balance outstanding on our revolving credit facility which was used to partially fund the ANZ acquisition in November 2020.

We incurred $0.9 million of interest expense in the three months ended September 30, 2021 compared to $0.2 million in 2020.

Other income (expense) decreased to $1.2 million of expense in the first quarter of 2022 compared to $2.2 million of income in the first quarter of 2021, as a result of a decrease in investment income from our limited partnership investments.

We incurred $0.9 million of interest expense in the three months ended March 31, 2022 and 2021.

Provision for income taxes.

Income tax expense was $1.6 million in the third quarter of 2021, compared to $5.4 million in the third quarter of 2020.

Income tax expense was $5.2 million in the first quarter of 2022, compared to $4.6 million in the first quarter of 2021.

Our effective tax rate for the quarter was 42.7%, compared to 32.4% for the same period in 2021.

increase in the effective tax rate in 2020 was primarily due to non-deductible transaction expenses incurred in that period.

Net income decreased to $3.9 million in the third quarter of 2021 compared to $11.0 million in the third quarter of 2020 due to the factors discussed above.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

Consolidated revenue increased to $859.6 million, compared to $760.2 million in the same period in the prior year, primarily due to the inclusion of ANZ.

USHE segment revenue decreased 14.0% to $630.6 million compared to $733.2 million in 2020 as a result of declines in enrollment and revenue-per-student due to higher scholarships and discounts we offered in response to the COVID-19 pandemic.

Near term revenue in the USHE segment is expected to continue to be impacted negatively by the ongoing COVID-19 pandemic with weaker demand for enrollments and higher scholarships and discounts.

In the Alternative Learning segment, revenue for the nine months ended September 30, 2021 increased 42.3% to $38.4 million compared to $27.0 million in 2020 as a result of rapid growth in Sophia Learning, and higher employer affiliated enrollment.

Revenues for the Australia/New Zealand segment were $190.5 million and included a $3.6 million purchase accounting reduction related to contract liabilities acquired in the acquisition.

Instructional and support costs.

Consolidated instructional and support costs increased to $459.4 million in the nine months ended September 30, 2021 from $385.7 million in the nine months ended September 30, 2020, principally due to the inclusion of $101.7 million of instructional and support costs related to ANZ, partially offset by cost savings implemented as a result of the impact of the COVID-19 pandemic, which included lower expenses associated with travel and facilities costs, as well as savings from the employee restructuring plan implemented in the third quarter of 2020.

Consolidated instructional and support costs as a percentage of revenues increased to 53.4% in the nine months ended September 30, 2021 from 50.7% in the nine months ended September 30, 2020.

General and administration expenses .

Consolidated general and administration expenses increased to $276.0 million in the nine months ended September 30, 2021 from $210.6 million in the nine months ended September 30, 2020, principally due to the inclusion of $65.9 million of general and administration expenses related to ANZ.

Consolidated general and administration expenses as a percentage of revenues increased to 32.1% in the nine months ended September 30, 2021 from 27.7% in the nine months ended September 30, 2020.

Amortization of intangible assets .

Amortization of intangible assets increased to $47.7 million in the nine months ended September 30, 2021 from $46.3 million in the nine months ended September 30, 2020, due to additional amortization expense of intangible assets acquired in the acquisition of ANZ in November 2020, partially offset by lower amortization expense associated with intangible assets acquired through the merger with Capella Education Company.

Merger and integration costs.

Merger and integration costs decreased to $4.1 million in the nine months ended September 30, 2021 from $7.9 million in the nine months ended September 30, 2020, as a result of lower expenses for integration support services and severance costs related to the merger with Capella Education Company, partially offset by integration expenses associated with the acquisition of ANZ.

Restructuring costs .

Restructuring costs increased to $26.4 million in the nine months ended September 30, 2021 from $4.0 million in the nine months ended September 30, 2020, as a result of right-of-use lease assets and fixed assets impairments associated with vacating leased space based on an assessment of our real estate portfolio.

Income from operations .

Consolidated income from operations decreased to $46.0 million in the nine months ended September 30, 2021 from $105.8 million in the nine months ended September 30, 2020, principally due to lower earnings in the USHE segment and restructuring costs incurred in 2021, partially offset by the inclusion of ANZ's income from operations.

USHE segment income from operations decreased 43.0% to $85.0 million in the nine months ended September 30, 2021 from $149.2 million in the nine months ended September 30, 2020, primarily due to lower enrollments and increased scholarship offerings during the COVID-19 pandemic.

Alternative Learning segment income from operations increased 10.3% to $16.2 million in the nine months ended September 30, 2021 from $14.7 million in the nine months ended September 30, 2020 as a result of rapid growth in Sophia Learning, partially offset by increased investment in outreach to corporate partners.

Income from operations for the Australia/New Zealand segment was $23.0 million, which included a $3.6 million purchase accounting reduction related to contract liabilities acquired in the acquisition.

Other income (expense) .

Other income (expense) decreased to $1.1 million of income in the nine months ended September 30, 2021 from $4.7 million of income in the nine months ended September 30, 2020, as a result of an $0.8 million loss on the sale of marketable securities and an increase in interest expense due to the $141.6 million balance outstanding on our revolving credit facility which was used to partially fund the ANZ acquisition in November 2020.

We incurred $2.7 million of interest expense in the nine months ended September 30, 2021 compared to $0.7 million in the nine months ended September 30, 2020.

Provision for income taxes.

Income tax expense was $13.7 million in the nine months ended September 30, 2021, compared to $30.1 million in the nine months ended September 30, 2021.

Our effective tax rate for the nine months ended September 30, 2021

was 29.1%, compared to 27.3% for the nine months ended September 30, 2020.

The effective tax rate in 2020 included higher windfall tax benefits recognized through share-based payment arrangements.

Net income decreased to $33.4 million in the nine months ended September 30, 2021 compared to $80.4 million in the nine months ended September 30, 2021 due to the factors discussed above.

increase in the effective tax rate in 2022 was primarily due to a $1.3 million tax shortfall recognized through share-based payment arrangements.

Net income decreased to $7.0 million in the first quarter of 2022 compared to $9.6 million in the first quarter of 2021 due to the factors discussed above.

Liquidity and Capital Resources

At September 30, 2021, we had cash, cash equivalents, and marketable securities of $305.0 million compared to $225.3 million at December 31, 2020 and $768.9 million at September 30, 2020.

At September 30, 2021, most of our cash was held in demand deposit accounts at high credit quality financial institutions.

At March 31, 2022, we had cash, cash equivalents, and marketable securities of $321.5 million compared to $298.8 million at December 31, 2021 and $274.0 million at March 31, 2021.

At March 31, 2022, most of our cash was held in demand deposit accounts at high credit quality financial institutions.

We are party to a credit facility (the “Amended Credit Facility”), which provides for a senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $350 million.

4 unchanged sentences

An unused commitment fee ranging from 0.20% to 0.30% per annum, depending on our leverage ratio, accrues on unused amounts.

We were in compliance with all applicable covenants related to the Amended Credit Facility as of September 30, 2021.

At September 30, 2021, we had $141.6 million outstanding on our Revolving Credit Facility.

We had no borrowings outstanding as of September 30, 2020.

During the nine months ended September 30, 2021 and 2020, we paid $2.1 million and $0.4 million, respectively of interest and unused commitment fees related to our Revolving Credit Facility.

Our net cash provided by operating activities for the nine months ended September 30, 2021 was $161.2 million, compared to $158.8 million for the same period in 2020.

The increase in net cash from operating activities was driven by the inclusion of ANZ, offset by lower earnings in the USHE segment.

Capital expenditures decreased to $33.6 million for the nine months ended September 30, 2021, compared to $34.8 million for the same period in 2020, due to lower capital investments in new and closed campuses, partially offset by the inclusion of ANZ.

The Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock for each of the first three quarters of 2021.

During the nine months ended September 30, 2021, we paid a total of $44.3 million in cash dividends on our common stock.

During the nine months ended September 30, 2021, we paid $5.9 million to repurchase common shares in the open market under our repurchase program.

As of September 30, 2021, we had $244.1 million of share repurchase authorization remaining to use through December 31, 2021.

For the third quarter of 2021 and 2020, bad debt expense as a percentage of revenue was 3.8% and 4.7%, respectively.

We were in compliance with all applicable covenants related to the Amended Credit Facility as of March 31, 2022.

As of March 31, 2022 and 2021, we had $141.7 million and $141.8 million, respectively, outstanding under our Revolving Credit Facility.

During the three months ended March 31, 2022 and 2021, we paid $0.4 million and $0.7 million, respectively, of interest and unused commitment fees related to our Revolving Credit Facility.

Our net cash provided by operating activities for the three months ended March 31, 2022 was $56.6 million, compared to $78.8 million for the same period in 2021.

The decrease in net cash from operating activities was primarily driven by lower earnings in the USHE segment, partially offset by favorable timing of payments of working capital.

Capital expenditures decreased to $9.7 million for the three months ended March 31, 2022, compared to $12.7 million for the same period in 2021, due to the timing of capital projects.

The Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock in February 2022.

During the three months ended March 31, 2022, we paid a total of $15.0 million in cash dividends on our common stock.

During the three months ended March 31, 2022, we paid $4.0 million to repurchase common shares in the open market under our repurchase program.

As of March 31, 2022, we had $246.0 million of share repurchase authorization remaining to use through December 31, 2022.

For the first quarter of 2022 and 2021, bad debt expense as a percentage of revenue was 2.8% and 3.7%, respectively.

We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under our Amended Credit Facility will be sufficient to meet our requirements for at least the next 12 months.

Currently, we maintain our cash primarily in demand deposit bank accounts and money market funds, which are included in cash and cash equivalents at September 30, 2021 and 2020.

We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities.

During the nine months ended September 30, 2021 and 2020, we earned interest income of $0.9 million and $3.6 million, respectively.

Currently, we maintain our cash primarily in demand deposit bank accounts and money market funds, which are included in cash and cash equivalents at March 31, 2022 and 2021.

We also hold marketable securities, which primarily include tax-exempt municipal

securities and corporate debt securities.

During the three months ended March 31, 2022 and 2021, we earned interest income of $0.2 million and $0.3 million, respectively.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis