What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-07-27 · 108 added, 102 removed, 250 unchanged (46% of the section changed)

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In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause the actual results to differ materially from those expressed in or implied by such statements.

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 and other action by the Department, including without limitation action related to borrower defense to repayment applications, and increased focus by the U.S.

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 and other action by the Department or other governmental entities, including without limitation action related to borrower defense to repayment applications, 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 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.

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Company Overview

As of June 30, 2022, we had the following reportable segments:

As of September 30, 2022, we had the following reportable segments:

Higher Education Segment

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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.

• In the second quarter of 2022, USHE enrollment decreased 9% to 76,728 compared to 83,923 for the same period in 2021.

• Trailing 4-quarter student persistence within USHE was 87.1% in the first quarter of 2022 compared to 86.5% for the same period in 2021.

• In the third quarter of 2022, USHE enrollment decreased 3% to 75,144 compared to 77,574 for the same period in 2021.

• Trailing 4-quarter student persistence within USHE was 87.3% in the second quarter of 2022 compared to 87.0% for the same period in 2021.

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.

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86.8 % 86.7 % 86.5 % 87.0 % 86.9 % 86.8 % 87.1 % 87.3 %

• Trailing 4-quarter government provided grants and loans per credit earned within USHE decreased 6.4% as of the end of the second quarter of 2022.

Government provided grants and loans per credit earned includes all Federal loans and grants for students (Title IV hereafter) in our USHE institutions, and is calculated on a trailing 4-quarter basis and reported one quarter in arrears.

Title IV per credit earned has been declining as employer-affiliated enrollment has grown, and as more students earn credit through Sophia Learning and other affordable alternative pathways.

The table below summarizes the percentage change in USHE trailing 4-quarter Title IV per credit earned for the past 8 quarters.

Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022

(5.8) % (10.3) % (15.1) % (17.2) % (15.1) % (11.3) % (8.1) % (6.4) %

Education Technology Services Segment

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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 second quarter of 2022, employer affiliated enrollment as a percentage of USHE enrollment was 24.6% compared to 20.5% for the same period in 2021.

• In the third quarter of 2022, employer affiliated enrollment as a percentage of USHE enrollment was 25.3% compared to 21.1% 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 education benefits programs through the use of low-cost online general education-level courses recommended by the American Council on Education for credit at other colleges and universities.

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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.

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.

• Think Education is a vocational registered training organization and accredited higher education provider in Australia.

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• Media Design School is a private tertiary institution for creative and technology qualifications in New Zealand.

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 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, the organization responsible for the quality assurance of non-university tertiary training providers.

• In the second quarter of 2022, Australia/New Zealand enrollment was 18,834 compared to 18,800 for the same period in 2021.

• In the third quarter of 2022, Australia/New Zealand enrollment was 18,493 compared to 18,188 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.

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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 six months ended June 30, 2022 consisted of tuition revenue.

Approximately 96% of our revenues during the nine months ended September 30, 2022 consisted of tuition revenue.

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

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

As of June 30, 2022, we had deferred $50.1 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.

As of September 30, 2022, we had deferred $48.4 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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We periodically assess our methodologies for estimating credit losses in consideration of actual experience.

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 second quarter of 2022, our bad debt expense was 3.2% of revenue, compared to 3.3% for the same period in 2021.

A change in our allowance for credit losses of 1% of gross tuition receivable as of June 30, 2022 would have changed our income from operations by approximately $1.2 million.

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 2022, our bad debt expense was 4.5% of revenue, compared to 3.8% for the same period in 2021.

A change in our allowance for credit losses of 1% of gross tuition receivable as of September 30, 2022 would have changed our income from operations by approximately $1.3 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 six months ended June 30, 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 and six month periods ended June 30, 2022.

No events or circumstances occurred in the three and nine months ended September 30, 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 and nine month periods ended September 30, 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 six month periods ended June 30, 2022.

No impairment charges related to finite-lived intangible assets were recorded during the three and nine month periods ended September 30, 2022.

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

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Results of Operations

In the second quarter of 2022, we generated $273.6 million in revenue compared to $299.2 million in 2021.

Our income from operations was $21.9 million for the second quarter of 2022 compared to $26.7 million in 2021, principally due to lower earnings in the USHE segment, partially offset by lower amortization expense of intangible assets and merger and integration costs.

Net income in the second quarter of 2022 was $15.2 million compared to $20.0 million for the same period in 2021.

In the third quarter of 2022, we generated $263.1 million in revenue compared to $270.1 million in 2021.

Our income from operations was $7.8 million for the third quarter of 2022 compared to $7.3 million in 2021, principally due to lower amortization expense of intangible assets, restructuring costs, and merger and integration costs, partially offset by lower earnings in the USHE segment.

Net income in the third quarter of 2022 was $6.1 million compared to $3.9 million for the same period in 2021.

Diluted earnings per share was $0.25 compared to $0.16 for the same period in 2021.

For the six months ended June 30, 2022, we generated $532.4 million in revenue, compared to $589.5 million for the same period in 2021.

Our income from operations was $35.3 million for the six months ended June 30, 2022 compared to $38.7 million for the same period in 2021, principally due to lower earnings in the USHE segment, partially offset by lower restructuring costs and amortization expense of intangible assets.

Net income was $22.2 million for the six months ended June 30, 2022 compared to $29.6 million for the same period in 2021, and diluted earnings per share was $0.92 in the six months ended June 30, 2022 compared to $1.22 for the same period in 2021.

For the nine months ended September 30, 2022, we generated $795.5 million in revenue, compared to $859.6 million for the same period in 2021.

Our income from operations was $43.1 million for the nine months ended September 30, 2022 compared to $46.0 million for the same period in 2021, principally due to lower earnings in the USHE segment, partially offset by lower amortization expense of intangible assets, restructuring costs, and merger and integration costs.

Net income was $28.3 million for the nine months ended September 30, 2022 compared to $33.4 million for the same period in 2021, and diluted earnings per share was $1.18 in the nine months ended September 30, 2022 compared to $1.38 for the same period in 2021.

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”).

These measures, which are considered “non-GAAP financial measures” under SEC rules, are defined by us to exclude the following:

• purchase accounting adjustments to record acquired contract liabilities at fair value as a result of our acquisition of Torrens University and associated assets in Australia and New Zealand and to record amortization and depreciation expense related to intangible assets and software assets acquired through our merger with Capella Education Company and our acquisition of Torrens University and associated assets in Australia and New Zealand;

expense related to intangible assets and software assets acquired through our merger with Capella Education Company and our acquisition of Torrens University and associated assets in Australia and New Zealand;

• integration expenses associated with our merger with Capella Education Company and our acquisition of Torrens University and associated assets in Australia and New Zealand;

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

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 and six months ended June 30, 2022 are also presented on a constant currency basis.

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 and nine months ended September 30, 2022 are also presented on a constant currency basis.

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 results for 2021 exclude an adjustment for foreign currency exchange impacts and are therefore not directly comparable to adjusted results previously reported for the three and six months ended June 30, 2021.

Adjusted income from operations was $29.5 million in the second quarter of 2022 compared to $54.3 million in 2021.

Adjusted net income was $20.5 million in the second quarter of 2022 compared to $37.8 million in 2021, and adjusted diluted earnings per share was $0.85 in the second quarter of 2022 compared to $1.57 in 2021.

Adjusted income from operations was $48.9 million for the six months ended June 30, 2022 compared to $107.2 million for the same period in 2021.

Adjusted net income was $33.5 million for the six months ended June 30, 2022 compared to $74.8 million for the same period in 2021, and adjusted diluted earnings per share was $1.39 for the six months ended June 30, 2022 compared to $3.10 for the same period in 2021.

Adjusted income from operations was $12.2 million in the third quarter of 2022 compared to $20.7 million in 2021.

Adjusted net income was $8.0 million in the third quarter of 2022 compared to $14.1 million in 2021, and adjusted diluted earnings per share was $0.33 in the third quarter of 2022 compared to $0.59 in 2021.

Adjusted income from operations was $61.1 million for the nine months ended September 30, 2022 compared to $127.9 million for the same period in 2021.

Adjusted net income was $41.5 million for the nine months ended September 30, 2022 compared to $89.0 million for the same period in 2021, and adjusted diluted earnings per share was $1.73 for the nine months ended September 30, 2022 compared to $3.69 for the same period 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 June 30, 2022

Reconciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2022

Non-GAAP Adjustments

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Weighted average diluted shares outstanding 23,902 23,902

Re c onciliation of Reported to Adjusted Results of Operations for the three months ended June 30, 2021

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

Non-GAAP Adjustments

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Restructuring costs (3)

Income from other investments (4)

Loss from other investments (4)

adjustments (5)

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Weighted average diluted shares outstanding 24,113 24,113

Reconciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2022

Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2022

Non-GAAP Adjustments

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Weighted average diluted shares outstanding 24,026 24,026

Re c onciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2021

Re c onciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2021

Non-GAAP Adjustments

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(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% for the three and six months ended June 30, 2022, and an adjusted effective tax rate of 29.5% and 29.3% for the three and six months ended June 30, 2021, respectively.

The table below presents our adjusted results of operations on a constant currency basis for the three and six months ended June 30, 2022 (amounts in thousands, except per share data):

For the three months ended June 30, 2022 For the six months ended June 30, 2022

(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 33.0% and 30.6% for the three and nine months ended September 30, 2022, respectively, and an adjusted effective tax rate of 29.7% and 29.4% for the three and nine months ended September 30, 2021, respectively.

The table below presents our adjusted results of operations on a constant currency basis for the three and nine months ended September 30, 2022 (amounts in thousands, except per share data):

For the three months ended September 30, 2022 For the nine months ended September 30, 2022

(Non-GAAP) Constant currency adjustment (1)

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__________________________________________________________________________________________

(1) Reflects an adjustment to translate foreign currency results for the three and six months ended June 30, 2022 at a constant exchange rate of 0.77 Australian Dollars to U.S.

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

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

Consolidated revenue decreased to $273.6 million in the second quarter of 2022, compared to $299.2 million in the same period in the prior year, primarily due to declines in enrollment.

In the USHE segment for the three months ended June 30, 2022, total enrollment decreased 9% to 76,728 from 83,923 for the same period in 2021.

(1) Reflects an adjustment to translate foreign currency results for the three and nine months ended September 30, 2022 at a constant exchange rate of 0.73 and 0.76 Australian Dollars to U.S.

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

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Consolidated revenue decreased to $263.1 million in the third quarter of 2022, compared to $270.1 million in the same period in the prior year, primarily due to declines in USHE enrollment.

In the USHE segment for the three months ended September 30, 2022, total enrollment decreased 3% to 75,144 from 77,574 for the same period in 2021.

USHE segment revenue decreased 3.3% to $185.5 million compared to $191.9 million in 2021 primarily as a result of declines in enrollment.

In the Australia/New Zealand segment for the three months ended June 30, 2022, total enrollment was 18,834, compared to 18,800 for the same period in 2021.

Australia/New Zealand segment revenue decreased 8.8% to $67.5 million compared to $74.1 million in 2021, primarily due to foreign exchange impacts and lower revenue-per-student.

In the Education Technology Services segment, revenue for the three months ended June 30, 2022 increased 23.9% to $16.0 million compared to $12.9 million in 2021 as a result of growth in Sophia Learning and higher employer affiliated enrollment.

In the Australia/New Zealand segment for the three months ended September 30, 2022, total enrollment increased 1.7% to 18,493, compared to 18,188 for the same period in 2021.

Australia/New Zealand segment revenue decreased 6.2% to $61.2 million compared to $65.2 million in 2021, primarily due to unfavorable foreign exchange impacts and lower revenue-per-student.

In the Education Technology Services segment, revenue for the three months ended September 30, 2022 increased 26.9% to $16.4 million compared to $13.0 million in 2021, primarily as a result of growth in Sophia Learning and higher employer affiliated enrollment.

Instructional and support costs.

Consolidated instructional and support costs decreased to $147.4 million, compared to $152.9 million in the same period in the prior year, principally due to lower facility costs.

Consolidated instructional and support costs as a percentage of revenues increased to 53.9% in the second quarter of 2022 from 51.1% in the second quarter of 2021.

Consolidated instructional and support costs decreased to $153.2 million, compared to $153.7 million in the same period in the prior year, principally due to lower facility costs, partially offset by higher bad debt expense.

Consolidated instructional and support costs as a percentage of revenues increased to 58.2% in the third quarter of 2022 from 56.9% in the third quarter of 2021.

General and administration expenses .

Consolidated general and administration expenses increased to $96.7 million in the second quarter of 2022 compared to $93.4 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 35.4% in the second quarter of 2022 from 31.2% in the second quarter of 2021.

Consolidated general and administration expenses increased to $97.8 million in the third quarter of 2022 compared to $95.7 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 37.2% in the third quarter of 2022 from 35.4% in the third quarter of 2021.

Amortization of intangible assets .

Amortization of intangible assets decreased to $3.7 million in the second 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.

Amortization of intangible assets decreased to $3.5 million in the third quarter of 2022 compared to $8.9 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 $0.3 million in the second quarter of 2022 compared to $1.9 million for the same period in 2021, as a result of lower integration expenses associated with the acquisition of ANZ.

Merger and integration costs decreased to $0.3 million in the third quarter of 2022 compared to $1.1 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 $3.7 million in the second quarter of 2022 compared to $4.8 million in 2021, primarily due to lower severance and other personnel-related expenses from employee terminations in connection with the Company's restructuring plan, offset by higher right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the second quarter of 2022.

Restructuring costs decreased to $0.6 million in the third quarter of 2022 compared to $3.3 million in 2021, primarily due to lower right-of-use lease asset and fixed asset impairment charges associated with vacating leased space and lower severance and other personnel-related expenses from employee terminations in connection with the Company's restructuring plan.

Income from operations .

Consolidated income from operations decreased to $21.9 million in the second quarter of 2022 compared to $26.7 million in the second quarter of 2021, principally due to lower earnings in the USHE segment, partially offset by lower amortization expense of intangible assets and merger and integration costs.

USHE segment income from operations decreased 63.0% to $11.9 million in the second quarter of 2022, compared to $32.1 million in the second quarter of 2021, primarily due to lower enrollments and increased investments in marketing initiatives.

In the Australia/New Zealand segment, income from

operations was $12.3 million in the second quarter of 2022, compared to $15.6 million in the second quarter of 2021, primarily driven by lower revenue.

In the Education Technology Services segment, income from operations for the three months ended June 30, 2022 increased 2.4% to $5.3 million compared to $5.2 million in 2021 as a result of growth in Sophia Learning and an increase in employer affiliated enrollment, partially offset by increased investment in outreach to corporate partners.

Other income .

Other income decreased to $0.3 million in the second quarter of 2022 compared to $0.8 million in the second quarter of 2021, as a result of a decrease in investment income from our limited partnership investments and an increase in interest expense.

We incurred $1.1 million of interest expense in the three months ended June 30, 2022 compared to $0.9 million in the three months ended June 30, 2021.

Consolidated income from operations increased to $7.8 million in the third quarter of 2022 compared to $7.3 million in the third quarter of 2021, principally due to lower amortization expense of intangible assets, restructuring costs, and merger and integration costs, partially offset by lower earnings in the USHE segment.

In the USHE segment, loss from operations was $1.9 million in the third quarter of 2022, compared to $5.2 million of income from operations in the third quarter of 2021, primarily due to lower enrollments and increased investments in marketing initiatives.

In the Australia/New Zealand segment, income from operations decreased 13.8% to $8.9 million in the third quarter of 2022, compared to $10.4 million in the third quarter of 2021, primarily driven by lower revenue, higher bad debt expense, and unfavorable foreign currency impacts.

In the Education Technology Services segment, income from operations was $5.2 million in the third quarter of 2022 and 2021.

As discussed above, revenue in the Education Technology Services segment increased in the third quarter of 2022 compared to the third quarter of 2021 as a result of growth in Sophia Learning and an increase in employer affiliated enrollment;

however, income from operations remained consistent due to increased investment in outreach to corporate partners in the third quarter of 2022.

Other expense.

Other expense was $0.3 million in the third quarter of 2022 compared to $1.8 million in the third quarter of 2021, as a result of an increase in investment income from our limited partnership investments and an increase in interest income, partially offset by an increase in interest expense due to higher interest rates.

We incurred $1.6 million of interest expense in the three months ended September 30, 2022 compared to $0.9 million in the three months ended September 30, 2021.

Provision for income taxes.

Income tax expense was $6.9 million in the second quarter of 2022, compared to $7.5 million in the second quarter of 2021.

Income tax expense was $1.5 million in the third quarter of 2022, compared to $1.6 million in the third quarter of 2021.

Our effective tax rate for the quarter was 19.3%, compared to 29.9% for the same period in 2021.

Net income decreased to $15.2 million in the second quarter of 2022 compared to $20.0 million in the second quarter of 2021 due to the factors discussed above.

Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

Consolidated revenue decreased to $532.4 million in the six months ended June 30, 2022, compared to $589.5 million in the same period in the prior year, primarily due to declines in enrollment.

Net income increased to $6.1 million in the third quarter of 2022 compared to $3.9 million in the third quarter of 2021 due to the factors discussed above.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

Consolidated revenue decreased to $795.5 million in the nine months ended September 30, 2022, compared to $859.6 million in the same period in the prior year, primarily due to declines in enrollment.

USHE segment revenue decreased 9.4% to $571.3 million compared to $630.6 million in 2021 primarily as a result of declines in enrollment.

Australia/New Zealand segment revenue decreased 7.4% to $116.1 million compared to $125.3 million in 2021 as a result of foreign exchange impacts and declines in enrollment.

In the Education Technology Services segment, revenue for the six months ended June 30, 2022 increased 20.2% to $30.6 million compared to $25.4 million in 2021 as a result of growth in Sophia Learning and higher employer affiliated enrollment.

Australia/New Zealand segment revenue decreased 7.0% to $177.2 million compared to $190.5 million in 2021 as a result of unfavorable foreign exchange impacts, declines in enrollment, and lower revenue-per-student.

In the Education Technology Services segment, revenue for the nine months ended September 30, 2022 increased 22.5% to $47.0 million compared to $38.4 million in 2021, primarily as a result of growth in Sophia Learning and higher employer affiliated enrollment.

Instructional and support costs.

Consolidated instructional and support costs decreased to $292.0 million in the six months ended June 30, 2022 from $305.7 million in the six months ended June 30, 2021, principally due to lower facility costs and bad debt expense.

Consolidated instructional and support costs as a percentage of revenues increased to 54.8% in the six months ended June 30, 2022 from 51.9% in the six months ended June 30, 2021.

Consolidated instructional and support costs decreased to $445.2 million in the nine months ended September 30, 2022 from $459.4 million in the nine months ended September 30, 2021, principally due to lower facility costs and bad debt expense.

Consolidated instructional and support costs as a percentage of revenues increased to 56.0% in the nine months ended September 30, 2022 from 53.4% in the nine months ended September 30, 2021.

General and administration expenses .

Consolidated general and administration expenses increased to $191.5 million in the six months ended June 30, 2022 from $180.2 million in the six months ended June 30, 2021, 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 36.0% in the six months ended June 30, 2022 from 30.6% in the six months ended June 30, 2021.

Consolidated general and administration expenses increased to $289.3 million in the nine months ended September 30, 2022 from $276.0 million in the nine months ended September 30, 2021, 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 36.4% in the nine months ended September 30, 2022 from 32.1% in the nine months ended September 30, 2021.

Amortization of intangible assets .

Amortization of intangible assets decreased to $7.4 million in the six months ended June 30, 2022 from $38.8 million in the six months ended June 30, 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.

Amortization of intangible assets decreased to $11.0 million in the nine months ended September 30, 2022 from $47.7 million in the nine months ended September 30, 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 $0.7 million in the six months ended June 30, 2022 from $2.9 million in the six months ended June 30, 2021, as a result of lower integration expenses associated with the acquisition of ANZ.

Merger and integration costs decreased to $0.9 million in the nine months ended September 30, 2022 from $4.1 million in the nine months ended September 30, 2021, as a result of lower integration expenses associated with the acquisition of ANZ.

Restructuring costs .

Restructuring costs decreased to $5.5 million in the six months ended June 30, 2022 from $23.1 million in the six months ended June 30, 2021, primarily due to $3.5 million of right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the first six months of 2022, compared to $19.0 million in the comparable period in 2021, as well as higher severance and other personnel-related expenses from employee terminations in the first six months of 2021.

Restructuring costs decreased to $6.1 million in the nine months ended September 30, 2022 from $26.4 million in the nine months ended September 30, 2021, primarily due to $3.7 million of right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the first nine months of 2022, compared to $21.5 million in the comparable period in 2021, as well as higher severance and other personnel-related expenses from employee terminations in the first nine months of 2021.

Income from operations .

Consolidated income from operations decreased to $35.3 million in the six months ended June 30, 2022 from $38.7 million in the six months ended June 30, 2021, principally due to lower earnings in the USHE segment, partially offset by lower restructuring costs and amortization expense of intangible assets.

USHE segment income from operations decreased 65.8% to $27.3 million in the six months ended June 30, 2022 from $79.8 million in the six months ended June 30, 2021, primarily due to lower enrollments and increased investments in marketing initiatives.

Australia/New Zealand segment income from operations was $11.6 million in the six months ended June 30, 2022, compared to $12.7 million of income from operations in the six months ended June 30, 2021, primarily due to lower revenue, partially offset by a $3.6 million purchase accounting reduction in 2021 related to contract liabilities acquired in the acquisition.

Education Technology Services segment income from operations decreased 9.5% to $10.0 million for the six months ended June 30, 2022 from $11.1 million in the six months ended

June 30, 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.

Consolidated income from operations decreased to $43.1 million in the nine months ended September 30, 2022 from $46.0 million in the nine months ended September 30, 2021, principally due to lower earnings in the USHE segment, partially offset by lower amortization expense of intangible assets, restructuring costs, and merger and integration costs.

USHE segment income from operations decreased 70.1% to $25.4 million in the nine months ended September 30, 2022 from $85.0 million in the nine months ended September 30, 2021, primarily due to lower enrollments, lower revenue-per-student, and increased investments in marketing initiatives.

Australia/New Zealand segment income from operations decreased 10.9% to $20.5 million in the nine months ended September 30, 2022, compared to $23.0 million of income from operations in the nine months ended September 30, 2021, primarily due to lower revenue and unfavorable foreign currency impacts.

Education Technology Services segment income from operations decreased 6.2% to $15.2 million for the nine months ended September 30, 2022 from $16.2 million in the nine months ended September 30, 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 $0.9 million of expense in the six months ended June 30, 2022 from $2.9 million of income in the six months ended June 30, 2021, primarily due to a decrease in investment income from our limited partnership investments and an increase in interest expense.

We incurred $2.0 million of interest expense in the six months ended June 30, 2022 compared to $1.8 million in six months ended June 30, 2021.

Other income (expense) decreased to $1.1 million of expense in the nine months ended September 30, 2022 from $1.1 million of income in the nine months ended September 30, 2021, primarily due to a decrease in investment income from our limited partnership investments and an increase in interest expense, partially offset by an increase in interest income due to higher interest rates.

We incurred $3.6 million of interest expense in the nine months ended September 30, 2022 compared to $2.7 million in nine months ended September 30, 2021.

Provision for income taxes.

Income tax expense was $12.2 million in the six months ended June 30, 2022, compared to $12.1 million in the six months ended June 30, 2021.

Our effective tax rate for the six months ended June 30, 2022 was 35.4%, compared to 29.0% for the six months ended June 30, 2021.

Income tax expense was $13.6 million in the nine months ended September 30, 2022, compared to $13.7 million in the nine months ended September 30, 2021.

Our effective tax rate for the nine months ended September 30, 2022 was 32.5%, compared to 29.1% for the nine months ended September 30, 2021.

The increase in the effective tax rate in 2022 was primarily due to a $1.4 million tax shortfall recognized through share-based payment arrangements.

Net income decreased to $22.2 million in the six months ended June 30, 2022 compared to $29.6 million in the six months ended June 30, 2021 due to the factors discussed above.

Net income decreased to $28.3 million in the nine months ended September 30, 2022 compared to $33.4 million in the nine months ended September 30, 2021 due to the factors discussed above.

Liquidity and Capital Resources

At June 30, 2022, we had cash, cash equivalents, and marketable securities of $289.7 million compared to $298.8 million at December 31, 2021 and $293.7 million at June 30, 2021.

At June 30, 2022, most of our cash was held in demand deposit accounts at high credit quality financial institutions.

At September 30, 2022, we had cash, cash equivalents, and marketable securities of $288.8 million compared to $298.8 million at December 31, 2021 and $305.0 million at September 30, 2021.

At September 30, 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.

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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 June 30, 2022.

As of June 30, 2022 and 2021, we had $141.4 million and $141.7 million, respectively, outstanding under our Revolving Credit Facility.

During the six months ended June 30, 2022 and 2021, we paid $1.2 million and $1.4 million, respectively, of interest and unused commitment fees related to our Revolving Credit Facility.

Our net cash provided by operating activities for the six months ended June 30, 2022 was $80.7 million, compared to $125.8 million for the same period in 2021.

We were in compliance with all applicable covenants related to the Amended Credit Facility as of September 30, 2022.

As of September 30, 2022 and 2021, we had $141.2 million and $141.6 million, respectively, outstanding under our Revolving Credit Facility.

During the nine months ended September 30, 2022 and 2021, we paid $3.0 million and $2.1 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, 2022 was $124.7 million, compared to $161.2 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 $22.7 million for the six months ended June 30, 2022, compared to $23.1 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 for each of the first two quarters of 2022.

During the six months ended June 30, 2022, we paid a total of $29.9 million in cash dividends on our common stock.

During the six months ended June 30, 2022, we paid $25.0 million to repurchase common shares in the open market under our repurchase program.

As of June 30, 2022, we had $225.0 million of share repurchase authorization remaining to use through December 31, 2022.

For the second quarter of 2022 and 2021, bad debt expense as a percentage of revenue was 3.2% and 3.3%, respectively.

Capital expenditures decreased to $32.5 million for the nine months ended September 30, 2022, compared to $33.6 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 for each of the first three quarters of 2022.

During the nine months ended September 30, 2022, we paid a total of $44.6 million in cash dividends on our common stock.

During the nine months ended September 30, 2022, we paid $36.9 million to repurchase common shares in the open market under our repurchase program.

As of September 30, 2022, we had $213.1 million of share repurchase authorization remaining to use through December 31, 2022.

For the third quarter of 2022 and 2021, bad debt expense as a percentage of revenue was 4.5% and 3.8%, 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 June 30, 2022 and 2021.

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

securities and corporate debt securities.

During the six months ended June 30, 2022 and 2021, we earned interest income of $0.8 million and $0.6 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 September 30, 2022 and 2021.

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

During the nine months ended September 30, 2022 and 2021, we earned interest income of $1.9 million and $0.9 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