What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-11-03 · 101 added, 163 removed, 195 unchanged (58% of the section changed)

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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 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.

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, 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.

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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 Overview

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

Segments Overview

As of March 31, 2023, 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 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.

• In the first quarter of 2023, USHE enrollment increased 2.3% to 79,935 compared to 78,172 for the same period in 2022.

• Trailing 4-quarter student persistence within USHE was 87.4% in the fourth quarter of 2022 compared to 86.8% 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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86.5 % 87.0 % 86.9 % 86.8 % 87.1 % 87.3 % 87.7 % 87.4 %

• 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.

• Trailing 4-quarter government provided grants and loans per credit earned within USHE decreased 6.2% as of the end of the fourth 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.

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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 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.

• In the first quarter of 2023, employer affiliated enrollment as a percentage of USHE enrollment was 26.3% compared to 23.0% for the same period in 2022.

• 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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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 third quarter of 2022, Australia/New Zealand enrollment was 18,493 compared to 18,188 for the same period in 2021.

• In the first quarter of 2023, Australia/New Zealand enrollment decreased 6.3% to 19,269 compared to 20,575 for the same period in 2022.

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 nine months ended September 30, 2022 consisted of tuition revenue.

Approximately 96% of our revenues during the three months ended March 31, 2023 consisted of tuition revenue.

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

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Those students who are veterans or active duty military personnel have access to various additional government-funded educational benefit programs.

In Australia, domestic students attending an ANZ institution finance their education themselves or by taking a loan through the government’s Higher Education Loan Program or Vocational Student Loan Program.

In Australia, domestic students attending an ANZ institution finance their education themselves or by taking a loan through the national Higher Education Loan Program provided by the Australian government to support higher education.

In New Zealand, domestic students may utilize government loans to fund tuition and may be eligible for a period of “fees free” study funded by the government.

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

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.

As of March 31, 2023, we had

deferred $45.9 million for estimated redemptions earned under the Graduation Fund, as compared to $46.8 million at December 31, 2022.

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 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.

For the first quarter of 2023, our bad debt expense was 3.8% of revenue, compared to 2.8% for the same period in 2022.

A change in our allowance for credit losses of 1% of gross tuition receivable as of March 31, 2023 would have changed our income (loss) from operations by approximately $1.2 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, 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.

No events or circumstances occurred in the three months ended March 31, 2023 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 periods ended March 31, 2023.

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, 2022.

No impairment charges related to finite-lived intangible assets were recorded during the three month periods ended March 31, 2023.

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 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 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”).

In the first quarter of 2023, we generated $256.6 million in revenue compared to $258.9 million in 2022.

Our loss from operations was $1.3 million for the first quarter of 2023 compared to income from operations of $13.4 million in 2022, principally due to lower earnings in the USHE segment, higher losses in the ANZ segment, and higher restructuring costs.

Net loss in the first quarter of 2023 was $2.0 million compared to net income of $7.0 million for the same period in 2022.

Diluted loss per share was $0.09 compared to diluted earnings per share of $0.29 for the same period in 2022.

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Consolidated revenue decreased to $256.6 million in the first quarter of 2023, compared to $258.9 million in the same period in the prior year, primarily due to timing of ANZ academic term start dates and unfavorable foreign currency exchange impacts, partially offset by an increase in USHE enrollment.

In the USHE segment for the three months ended March 31, 2023, total enrollment increased 2.3% to 79,935 from 78,172 for the same period in 2022.

USHE segment revenue increased 0.6% to $196.9 million compared to $195.8 million in 2022 primarily due to the increase in enrollment, partially offset by lower revenue per student.

In the Australia/New Zealand segment for the three months ended March 31, 2023, total enrollment decreased 6.3% to 19,269, compared to 20,575 for the same period in 2022.

Australia/New Zealand segment revenue decreased 14.4% to $41.5 million compared to $48.5 million in 2022, primarily driven by the timing of the first academic term of the year and unfavorable foreign currency exchange impacts.

In the Education Technology Services segment, revenue for the three months ended

March 31, 2023 increased 24.9% to $18.2 million compared to $14.6 million in 2022, primarily as a result of growth in Sophia Learning and higher employer affiliated enrollment.

Instructional and support costs.

Consolidated instructional and support costs increased to $152.9 million, compared to $144.6 million in the same period in the prior year, principally due to increases in bad debt expense, student material costs, and technology-related costs, partially offset by lower facility costs and favorable foreign currency exchange impacts.

Consolidated instructional and support costs as a percentage of revenues increased to 59.6% in the first quarter of 2023 from 55.9% in the first quarter of 2022.

General and administration expenses .

Consolidated general and administration expenses increased to $95.5 million in the first quarter of 2023 compared to $94.8 million in the prior year, principally due to increased investments in branding initiatives and partnerships with brand ambassadors, partially offset by favorable foreign currency exchange impacts.

Consolidated general and administration expenses as a percentage of revenues increased to 37.2% in the first quarter of 2023 from 36.6% in the first quarter of 2022.

Amortization of intangible assets .

Amortization of intangible assets decreased to $3.5 million in the first quarter of 2023 compared to $3.7 million in 2022, due to foreign currency exchange impacts.

Merger and integration costs.

Merger and integration costs were $0.4 million in the first quarter of 2023 and 2022, and are primarily related to integration expenses associated with the Company's acquisition of ANZ.

Restructuring costs .

Restructuring costs increased to $5.6 million in the first quarter of 2023 compared to $1.9 million in 2022, primarily due to a $3.6 million right-of-use lease asset impairment charge associated with vacating leased space in the first quarter of 2023 and higher severance and other personnel-related expenses from involuntary employee terminations.

Income (loss) from operations .

Consolidated income (loss) from operations decreased to a loss from operations of $1.3 million in the first quarter of 2023 compared to income from operations of $13.4 million in the first quarter of 2022, principally due to lower earnings in the USHE segment, higher losses in the ANZ segment, and higher restructuring costs.

In the USHE segment, income from operations was $9.6 million in the first quarter of 2023, compared to $15.5 million in the first quarter of 2022, primarily due to increased investments in marketing initiatives, partially offset by higher revenue due to an increase in enrollments.

In the Australia/New Zealand segment, loss from operations was $7.2 million in the first quarter of 2023, compared to $0.7 million in the first quarter of 2022, primarily driven by lower revenue due to the timing of the first academic term of the year, increased investments in marketing initiatives, and unfavorable foreign currency impacts.

In the Education Technology Services segment, income from operations increased 23.0% to $5.8 million in the first quarter of 2023, compared to $4.7 million in 2022 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 (expense).

Other income (expense) was $0.4 million of income in the first quarter of 2023 compared to $1.2 million of expense in the first quarter of 2022, 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 $1.8 million of interest expense in the three months ended March 31, 2023 compared to $0.9 million in the three months ended March 31, 2022.

Provision for income taxes.

Income tax expense was $1.1 million in the first quarter of 2023, compared to $5.2 million in the first quarter of 2022.

Income tax expense for the three months ended March 31, 2023 and 2022 include shortfall tax impacts of approximately $1.4 million and $1.3 million, respectively, related to share-based payment arrangements.

Net income (loss) .

Net income (loss) decreased to $2.0 million of net loss in the first quarter of 2023 compared to $7.0 million of net income in the first quarter of 2022 due to the factors discussed above.

Non-GAAP Financial Measures

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;

• amortization and depreciation expense related to intangible assets and software assets acquired through 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 nine months ended September 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 months ended March 31, 2023 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 nine months ended September 30, 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.

Adjusted income from operations was $8.2 million in the first quarter of 2023 compared to $19.4 million in 2022.

Adjusted net income was $5.8 million in the first quarter of 2023 compared to $13.1 million in 2022, and adjusted diluted earnings per share was $0.24 in the first quarter of 2023 compared to $0.54 in 2022.

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, 2022

Reconciliation of Reported to Adjusted Results of Operations for the three months ended March 31, 2023

Non-GAAP Adjustments

(GAAP) Purchase accounting adjustments (1)

(GAAP) Amortization of intangible assets (1)

Merger and integration costs (2)

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Total costs and expenses $ 257,955 $ (3,532) $ (425) $ (5,595) $ — $ — $ 248,403

Income from operations $ 7,807 $ 3,522 $ 269 $ 610 $ — $ — $ 12,208

Income (loss) from operations $ (1,349) $ 3,532 $ 425 $ 5,595 $ — $ — $ 8,203

Operating margin -0.5% 3.2%

Income before income taxes $ 7,545 $ 3,522 $ 269 $ 610 $ (39) $ — $ 11,907

Net income $ 6,092 $ 3,522 $ 269 $ 610 $ (39) $ (2,478) $ 7,976

Diluted earnings per share $ 0.25 $ 0.33

Income (loss) before income taxes $ (951) $ 3,532 $ 425 $ 5,595 $ (325) $ — $ 8,276

Net income (loss) $ (2,028) $ 3,532 $ 425 $ 5,595 $ (325) $ (1,406) $ 5,793

Diluted earnings (loss) per share $ (0.09) $ 0.24

Weighted average diluted shares outstanding (6)

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

23,430 24,023

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

Non-GAAP Adjustments

(GAAP) Purchase accounting adjustments (1)

(GAAP) Amortization of intangible assets (1)

Merger and integration costs (2)

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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, 2022

Non-GAAP Adjustments

(GAAP) Purchase accounting adjustments (1)

Merger and integration costs (2)

Restructuring costs (3)

Income from other investments (4)

adjustments (5)

Revenues $ 795,542 $ — $ — $ — $ — $ — $ 795,542

Total costs and expenses $ 752,429 $ (10,954) $ (933) $ (6,129) $ — $ — $ 734,413

Income from operations $ 43,113 $ 10,954 $ 933 $ 6,129 $ — $ — $ 61,129

Operating margin 5.4% 7.7%

Income before income taxes $ 41,980 $ 10,954 $ 933 $ 6,129 $ (178) $ — $ 59,818

Net income $ 28,341 $ 10,954 $ 933 $ 6,129 $ (178) $ (4,666) $ 41,513

Diluted earnings per share $ 1.18 $ 1.73

Weighted average diluted shares outstanding 24,026 24,026

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

Non-GAAP Adjustments

(GAAP) Purchase accounting adjustments (1)

Merger and integration costs (2)

Restructuring costs (3)

Income from other investments (4)

adjustments (5)

Revenues $ 859,587 $ 3,646 $ — $ — $ — $ — $ 863,233

Total costs and expenses $ 813,539 $ (47,731) $ (4,060) $ (26,400) $ — $ — $ 735,348

Income from operations $ 46,048 $ 51,377 $ 4,060 $ 26,400 $ — $ — $ 127,885

Operating margin 5.4% 14.8%

Income before income taxes $ 47,124 $ 51,377 $ 4,060 $ 26,400 $ (2,970) $ — $ 125,991

Net income $ 33,407 $ 51,377 $ 4,060 $ 26,400 $ (2,970) $ (23,312) $ 88,962

Diluted earnings per share $ 1.38 $ 3.69

Weighted average diluted shares outstanding 24,131 24,131

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(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 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.

(1) Reflects amortization and depreciation expense of intangible assets and software assets acquired through the Company’s acquisition of Torrens University and associated assets in Australia and New Zealand.

(2) Reflects 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 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)

As Adjusted with Constant Currency

(Non-GAAP) As Adjusted

(6) For the three months ended March 31, 2023, 593 shares issuable in connection with stock options, restricted stock and restricted stock units were excluded from the diluted loss per share calculation because the effect would have been anti-dilutive due to the Company's net loss during the period.

The table below presents our adjusted results of operations on a constant currency basis for the three months ended March 31, 2023 (amounts in thousands, except per share data):

For the three months ended March 31, 2023

(Non-GAAP) Constant currency adjustment (1)

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(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 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 $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 $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 $3.5 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 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 $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 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 $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 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 7.0% 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 $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 $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 $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 $0.9 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 $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 $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 $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 $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 $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.

(1) Reflects an adjustment to translate foreign currency results for the three months ended March 31, 2023 at a constant exchange rate of 0.72 Australian Dollars to U.S.

Dollars, respectively, which was the average exchange rate for the same period in 2022.

Liquidity and Capital Resources

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.

At March 31, 2023, we had cash, cash equivalents, and marketable securities of $240.0 million compared to $235.9 million at December 31, 2022 and $321.5 million at March 31, 2022.

We maintain our cash and cash equivalents primarily in demand deposit bank accounts and money market funds at high credit quality financial institutions, which are included in cash and cash equivalents at March 31, 2023 and 2022.

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

During the three months ended March 31, 2023 and 2022, we earned interest income of $1.8 million and $0.2 million, respectively.

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.

The Amended Credit Facility provides us with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the Revolving Credit Facility or establish one or more incremental term loans (each, an “Incremental Facility”) in an amount up to the sum of (x) the greater of (A) $300 million and (B) 100% of the Company’s consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company's leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00.

The Amended Credit Facility provides us

with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the Revolving Credit Facility or establish one or more incremental term loans (each, an “Incremental Facility”) in an amount up to the sum of (x) the greater of (A) $300 million and (B) 100% of the Company’s consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00.

In addition, the Amended Credit Facility provides for a subfacility for borrowings in certain foreign currencies in an amount equal to the U.S.

2 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, 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 $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 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.

We were in compliance with all applicable covenants related to the Amended Credit Facility as of March 31, 2023.

As of March 31, 2023 and 2022, we had $101.3 million and $141.7 million, respectively, outstanding under our Revolving Credit Facility.

During the three months ended March 31, 2023 and 2022, we paid $2.4 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 three months ended March 31, 2023 decreased to $35.2 million, compared to $56.6 million for the same period in 2022.

The decrease in net cash from operating activities was primarily driven by lower earnings, an increase in cash used for working capital, and higher tax payments.

Our net cash used in investing activities for the three months ended March 31, 2023 increased to $23.3 million, compared to $8.8 million for the same period in 2022.

The increase in net cash used in investing activities was primarily driven by $17.1 million in purchases of marketable securities, partially offset by a decrease in capital expenditures and higher cash proceeds from marketable securities and other investments.

Capital expenditures decreased to $8.3 million for the three months ended March 31, 2023, compared to $9.7 million for the same period in 2022, primarily due to the timing of capital projects.

Our net cash used in financing activities for the three months ended March 31, 2023 decreased to $19.7 million, compared to $21.8 million for the same period in 2022.

The decrease in net cash used in financing activities was primarily driven by a $4.0 million decrease in repurchases of common stock, partially offset by an increase in net payments for employee stock awards.

The Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock in the first quarter of 2023.

During the three months ended March 31, 2023, we paid a total of $14.8 million in cash dividends on our common stock, compared to $15.0 million for the same period in 2022.

During the three months ended March 31, 2023, we did not repurchase any shares of common stock in the open market under our repurchase program.

As of March 31, 2023, we had $246.8 million of share repurchase authorization remaining to use through December 31, 2023.

For the first quarter of 2023 and 2022, bad debt expense as a percentage of revenue was 3.8% and 2.8%, respectively.

Our recurring cash requirements consist primarily of general operating expenses, capital expenditures, discretionary dividend payments, and contractual obligations related to our lease agreements, limited partnership investments, and Revolving Credit Facility.

We believe that the combination of our existing cash, cash equivalents, and marketable securities, cash generated from operating activities, and if necessary, cash available under our Amended Credit Facility will be sufficient to meet our cash requirements for the next 12 months and beyond.

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