What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-07-27 · 104 added, 104 removed, 259 unchanged (45% of the section changed)

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Certain of the statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act”).

Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” “may,” “will,” “forecast,” “outlook,” “plan,” “project,” “potential” or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses, capital expenditures and the ultimate effect of the COVID-19 pandemic on the Company’s business and results.

These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties.

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Segments Overview

As of June 30, 2023, we had the following reportable segments:

Higher Education Segment

As of September 30, 2023, we had the following reportable segments:

Higher Education (“USHE”) Segment

• The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University.

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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 2023, USHE enrollment increased 4.7% to 80,353 compared to 76,728 for the same period in 2022.

• Trailing 4-quarter student persistence within USHE was 87.4% in the first quarter of 2023 compared to 87.1% for the same period in 2022.

• In the third quarter of 2023, USHE enrollment increased 9.9% to 82,548 compared to 75,144 for the same period in 2022.

• Trailing 4-quarter student persistence within USHE was 87.3% in the second quarter of 2023 compared to 87.3% for the same period in 2022.

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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86.9 % 86.8 % 87.1 % 87.3 % 87.7 % 87.4 % 87.4 % 87.3 %

• Trailing 4-quarter government provided grants and loans per credit earned within USHE decreased 7.2% as of the end of the first quarter of 2023.

• Trailing 4-quarter government provided grants and loans per credit earned within USHE decreased 7.4% as of the end of the second quarter of 2023.

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 second quarter of 2023, employer affiliated enrollment as a percentage of USHE enrollment was 27.1% compared to 24.6% for the same period in 2022.

• In the third quarter of 2023, employer affiliated enrollment as a percentage of USHE enrollment was 27.8% compared to 25.3% 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 second quarter of 2023, Australia/New Zealand enrollment decreased 4.6% to 17,966 compared to 18,834 for the same period in 2022.

• In the third quarter of 2023, Australia/New Zealand enrollment decreased 1.2% to 18,279 compared to 18,493 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 six months ended June 30, 2023 consisted of tuition revenue.

Approximately 96% of our revenues during the nine months ended September 30, 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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Estimated redemption rates of eligible students vary based on their term of enrollment.

As of June 30, 2023, we had deferred $45.3 million for estimated

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

As of September 30, 2023, we had deferred $44.5 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.

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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 second quarter of 2023, our bad debt expense was 4.4% of revenue, compared to 3.2% for the same period in 2022.

A change in our allowance for credit losses of 1% of gross tuition receivable as of June 30, 2023 would have changed our income from operations by approximately $1.3 million.

For the third quarter of 2023, our bad debt expense was 5.2% of revenue, compared to 4.5% for the same period in 2022.

A change in our allowance for credit losses of 1% of gross tuition receivable as of September 30, 2023 would have changed our income from operations by approximately $1.5 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, 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 and six month periods ended June 30, 2023.

No events or circumstances occurred in the three and nine months ended September 30, 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 and nine month periods ended September 30, 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 six month periods ended June 30, 2023.

No impairment charges related to finite-lived intangible assets were recorded during the three and nine month periods ended September 30, 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 second quarter of 2023, we generated $287.7 million in revenue compared to $273.6 million in 2022.

Our income from operations was $16.8 million for the second quarter of 2023 compared to $21.9 million in 2022, principally due to lower earnings in the USHE segment, higher restructuring costs, and unfavorable foreign currency exchange impacts, partially offset by higher earnings in the ANZ segment.

Net income in the second quarter of 2023 was $14.2 million compared to $15.2 million for the same period in 2022.

Diluted earnings per share was $0.59 compared to $0.63 for the same period in 2022.

For the six months ended June 30, 2023, we generated $544.3 million in revenue, compared to $532.4 million for the same period in 2022.

Our income from operations was $15.5 million for the six months ended June 30, 2023 compared to $35.3 million for the same period in 2022, principally due to lower earnings in the USHE and ANZ segments, higher restructuring costs, and unfavorable foreign currency exchange impacts.

Net income was $12.2 million for the six months ended June 30, 2023 compared to $22.2 million for the same period in 2022, and diluted earnings per share was $0.51 in the six months ended June 30, 2023 compared to $0.92 for the same period in 2022.

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Consolidated revenue increased to $287.7 million in the second quarter of 2023, compared to $273.6 million in the same period in the prior year, primarily due to an increase in USHE enrollment and revenue per student and growth in Sophia Learning subscriptions, partially offset by unfavorable foreign currency exchange impacts.

In the USHE segment for the three

months ended June 30, 2023, total enrollment increased 4.7% to 80,353 from 76,728 for the same period in 2022.

USHE segment revenue increased 6.7% to $202.7 million compared to $190.0 million in 2022 primarily due to the increase in enrollment and higher revenue per student.

In the Australia/New Zealand segment for the three months ended June 30, 2023, total enrollment decreased 4.6% to 17,966, compared to 18,834 for the same period in 2022.

Australia/New Zealand segment revenue decreased 3.1% to $65.5 million compared to $67.5 million in 2022, primarily due to unfavorable foreign currency exchange impacts.

In the Education Technology Services segment, revenue for the three months ended June 30, 2023 increased 22.1% to $19.5 million compared to $16.0 million in 2022, primarily as a result of growth in Sophia Learning subscriptions and higher employer affiliated enrollment.

In the third quarter of 2023, we generated $285.9 million in revenue compared to $263.1 million for the same period in 2022.

Our income from operations was $25.6 million in the third quarter of 2023 compared to $7.8 million for the same period in 2022, principally due to higher revenue driven by enrollment growth in the USHE segment and growth in Sophia Learning subscriptions in the Education Technology Services segment, partially offset by higher restructuring costs.

Net income in the third quarter of 2023 was $18.5 million compared to $6.1 million for the same period in 2022, and diluted earnings per share was $0.77 in the third quarter of 2023 compared to $0.25 for the same period in 2022.

For the nine months ended September 30, 2023, we generated $830.2 million in revenue compared to $795.5 million for the same period in 2022.

Our income from operations was $41.1 million for the nine months ended September 30, 2023 compared to $43.1 million for the same period in 2022, principally due to higher restructuring costs and unfavorable foreign currency exchange impacts, partially offset by higher earnings in the Education Technology Services and USHE segments as a result of revenue growth.

Net income was $30.7 million for the nine months ended September 30, 2023 compared to $28.3 million for the same period in 2022, and diluted earnings per share was $1.28 in the nine months ended September 30, 2023 compared to $1.18 for the same period in 2022.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Consolidated revenue increased to $285.9 million in the third quarter of 2023 compared to $263.1 million in the third quarter of 2022, primarily due to an increase in USHE enrollment and growth in Sophia Learning subscriptions, partially offset by

unfavorable foreign currency exchange impacts.

In the USHE segment for the three months ended September 30, 2023, total enrollment increased 9.9% to 82,548 from 75,144 for the same period in 2022.

USHE segment revenue increased 8.8% to $201.8 million in the third quarter of 2023 compared to $185.5 million in the third quarter of 2022, primarily due to an increase in enrollment.

In the Australia/New Zealand segment for the three months ended September 30, 2023, total enrollment decreased 1.2% to 18,279 from 18,493 for the same period in 2022.

Australia/New Zealand segment revenue increased 3.4% to $63.3 million in the third quarter of 2023 compared to $61.2 million in the third quarter of 2022, primarily due to higher revenue per student as a result of students taking higher course loads, partially offset by unfavorable foreign currency exchange impacts.

Education Technology Services segment revenue increased 26.7% to $20.8 million in the third quarter of 2023 compared to $16.4 million in the third quarter of 2022, primarily as a result of growth in Sophia Learning subscriptions and higher employer affiliated enrollment.

Instructional and support costs.

Consolidated instructional and support costs increased to $161.5 million, compared to $147.4 million in the same period in the prior year, principally due to increases in bad debt expense 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 56.1% in the second quarter of 2023 from 53.9% in the second quarter of 2022.

Consolidated instructional and support costs increased to $155.7 million in the third quarter of 2023 compared to $153.2 million in the third quarter of 2022, principally due to increases in bad debt expense, personnel-related costs, student material costs, and technology-related expenses, partially offset by lower stock-based compensation expense and facility costs, and favorable foreign currency exchange impacts.

Consolidated instructional and support costs as a percentage of revenues decreased to 54.5% in the third quarter of 2023 from 58.2% in the third quarter of 2022.

General and administration expenses .

Consolidated general and administration expenses increased to $99.0 million in the second quarter of 2023 compared to $96.7 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 decreased to 34.4% in the second quarter of 2023 from 35.4% in the second quarter of 2022.

Consolidated general and administration expenses decreased to $97.6 million in the third quarter of 2023 compared to $97.8 million in the third quarter of 2022, principally due to lower personnel-related costs and stock-based compensation expense, and favorable foreign currency exchange impacts, partially offset by increased investments in branding initiatives and partnerships with brand ambassadors.

Consolidated general and administration expenses as a percentage of revenues decreased to 34.1% in the third quarter of 2023 from 37.2% in the third quarter of 2022.

Amortization of intangible assets .

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

Amortization of intangible assets decreased to $3.4 million in the third quarter of 2023 compared to $3.5 million in the third quarter of 2022, due to favorable foreign currency exchange impacts.

Merger and integration costs.

Merger and integration costs were $0.6 million in the second quarter of 2023 compared to $0.3 million in 2022, and are primarily related to integration expenses associated with the Company’s acquisition of ANZ.

Merger and integration costs were $0.3 million in the third quarter of 2023 and 2022, primarily due to integration expenses associated with the Company’s acquisition of ANZ.

Restructuring costs .

Restructuring costs increased to $6.4 million in the second quarter of 2023 compared to $3.7 million in 2022, primarily due to higher severance and other personnel-related expenses from employee terminations, partially offset by a $2.1 million gain from the sale of property and equipment of an owned campus and lower right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the second quarter of 2023.

Restructuring costs increased to $3.3 million in the third quarter of 2023 compared to $0.6 million in the third quarter of 2022, primarily due to higher severance and other personnel-related expenses from employee terminations in the third quarter of 2023.

Income from operations .

Consolidated income from operations decreased to $16.8 million in the second quarter of 2023 compared to $21.9 million in the second quarter of 2022, principally due to lower earnings in the USHE segment, higher restructuring costs, and unfavorable foreign currency exchange impacts, partially offset by higher earnings in the ANZ segment.

In the USHE segment, income from operations decreased 43.1% to $6.7 million in the second quarter of 2023, compared to $11.9 million in the second quarter of 2022, primarily due to increased investments in marketing initiatives and higher bad debt expense, partially offset by higher revenue due to an increase in enrollment and revenue per student.

In the Australia/New Zealand segment, income from operations increased 16.0% to $14.3 million in the second quarter of 2023, compared to $12.3 million in the second quarter of 2022, primarily driven by personnel cost savings due to headcount reductions, partially offset by lower revenue due to unfavorable foreign currency exchange impacts.

In the Education Technology Services segment, income from operations increased 16.3% to $6.2 million in the second quarter of 2023, compared to $5.3 million in 2022 as a result of growth in Sophia Learning subscriptions and an increase in employer affiliated enrollment, partially offset by increased investment in outreach to corporate partners.

Other income.

Other income increased to $3.2 million in the second quarter of 2023 compared to $0.3 million in the second 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 $2.0 million of interest expense in the three months ended June 30, 2023 compared to $1.1 million in the three months ended June 30, 2022.

Consolidated income from operations increased to $25.6 million in the third quarter of 2023 compared to $7.8 million in the third quarter of 2022, principally due to higher revenue driven by enrollment growth in the USHE segment and growth in Sophia Learning subscriptions in the Education Technology Services segment, partially offset by higher restructuring costs.

In the USHE segment, income from operations was $10.4 million in the third quarter of 2023 compared to $1.9 million of loss from operations in the third quarter of 2022, primarily driven by higher revenue due to an increase in enrollment, partially offset by higher bad debt expense.

In the Australia/New Zealand segment, income from operations increased 55.3% to $13.9 million in the third quarter of 2023 compared to $8.9 million in the third quarter of 2022, primarily driven by higher revenue and personnel cost savings due to headcount reductions.

In the Education Technology Services segment, income from operations increased 59.2% to $8.3 million in the third quarter of 2023 compared to $5.2 million in the third quarter of 2022, primarily due to higher revenue as a result of growth in Sophia Learning subscriptions and an increase in employer affiliated enrollment.

Other income (expense).

Other income (expense) increased to $0.8 million of income in the third quarter of 2023 compared to $0.3 million of expense in the third quarter of 2022, as a result of an increase in interest income, partially offset by an increase in interest expense due to higher interest rates.

We incurred $2.0 million of interest expense in the three months ended September 30, 2023 compared to $1.6 million in the three months ended September 30, 2022.

Provision for income taxes.

Income tax expense was $5.8 million in the second quarter of 2023, compared to $6.9 million in the second quarter of 2022.

Income tax expense was $8.0 million in the third quarter of 2023, compared to $1.5 million in the third quarter of 2022.

Our effective tax rate for the quarter was 30.3%, compared to 19.3% for the same period in 2022.

Net income decreased to $14.2 million in the second quarter of 2023 compared to $15.2 million in the second quarter of 2022 due to the factors discussed above.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Consolidated revenue increased to $544.3 million in the six months ended June 30, 2023, compared to $532.4 million in the same period in the prior year, primarily due to an increase in USHE enrollment, partially offset by a decrease in ANZ revenue due to the timing of academic term start dates and unfavorable foreign currency exchange impacts.

revenue increased 3.6% to $399.6 million compared to $385.8 million in 2022 primarily due to the increase in enrollment.

Australia/New Zealand segment revenue decreased 7.8% to $107.0 million compared to $116.1 million in 2022, primarily due to the timing of the academic term start dates and unfavorable foreign currency exchange impacts.

In the Education Technology Services segment, revenue for the six months ended June 30, 2023 increased 23.4% to $37.7 million compared to $30.6 million in 2022, primarily as a result of growth in Sophia Learning and higher employer affiliated enrollment.

Net income increased to $18.5 million in the third quarter of 2023 compared to $6.1 million in the third quarter of 2022 due to the factors discussed above.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Consolidated revenue increased to $830.2 million in the nine months ended September 30, 2023 compared to $795.5 million in the same period in 2022, primarily due to an increase in USHE enrollment and growth in Sophia Learning subscriptions, partially offset by a decrease in Australia/New Zealand segment revenue due to the timing of academic term start dates and unfavorable foreign currency exchange impacts.

USHE segment revenue increased 5.3% to $601.4 million in the nine

months ended September 30, 2023 compared to $571.3 million in the same period in 2022, primarily due to an increase in enrollment.

Australia/New Zealand segment revenue decreased 3.9% to $170.2 million in the nine months ended September 30, 2023 compared to $177.2 million in the same period in 2022, primarily due to the timing of the academic term start dates and unfavorable foreign currency exchange impacts, partially offset by higher revenue per student as a result of students taking higher course loads.

Education Technology Services segment revenue increased 24.6% to $58.6 million in the nine months ended September 30, 2023 compared to $47.0 million in the same period in 2022, primarily as a result of growth in Sophia Learning subscriptions and higher employer affiliated enrollment.

Instructional and support costs.

Consolidated instructional and support costs increased to $314.4 million in the six months ended June 30, 2023 from $292.0 million in the six months ended June 30, 2022, 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 57.8% in the six months ended June 30, 2023 from 54.8% in the six months ended June 30, 2022.

Consolidated instructional and support costs increased to $470.2 million in the nine months ended September 30, 2023 compared to $445.2 million in the same period in 2022, principally due to increases in personnel-related costs, bad debt expense, student material costs, and technology-related costs, partially offset by lower facility costs and stock-based compensation expense, and favorable foreign currency exchange impacts.

Consolidated instructional and support costs as a percentage of revenues increased to 56.6% in the nine months ended September 30, 2023 from 56.0% in the nine months ended September 30, 2022.

General and administration expenses .

Consolidated general and administration expenses increased to $194.5 million in the six months ended June 30, 2023 from $191.5 million in the six months ended June 30, 2022, 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 decreased to 35.7% in the six months ended June 30, 2023 from 36.0% in the six months ended June 30, 2022.

Consolidated general and administration expenses increased to $292.1 million in the nine months ended September 30, 2023 compared to $289.3 million in the same period in 2022, 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 decreased to 35.2% in the nine months ended September 30, 2023 from 36.4% in the nine months ended September 30, 2022.

Amortization of intangible assets .

Amortization of intangible assets decreased to $7.0 million in the six months ended June 30, 2023 from $7.4 million in the six months ended June 30, 2022, due to favorable foreign currency exchange impacts.

Amortization of intangible assets decreased to $10.4 million in the nine months ended September 30, 2023 compared to $11.0 million in the same period in 2022, due to favorable foreign currency exchange impacts.

Merger and integration costs.

Merger and integration costs increased to $1.0 million in the six months ended June 30, 2023 from $0.7 million in the six months ended June 30, 2022, and are primarily related to integration expenses associated with the Company’s acquisition of ANZ.

Merger and integration costs increased to $1.3 million in the nine months ended September 30, 2023 compared to $0.9 million in the same period in 2022, and are primarily related to integration expenses associated with the Company’s acquisition of ANZ.

Restructuring costs .

Restructuring costs increased to $11.9 million in the six months ended June 30, 2023 from $5.5 million in the six months ended June 30, 2022, primarily due to higher severance and other personnel-related expenses from employee terminations, partially offset by a $2.1 million gain from the sale of property and equipment of an owned campus and lower right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the six months ended June 30, 2023.

Restructuring costs increased to $15.2 million in the nine months ended September 30, 2023 compared to $6.1 million in the same period in 2022, primarily due to higher severance and other personnel-related expenses from employee terminations and higher right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in the nine months ended September 30, 2023, partially offset by a $2.1 million gain from the sale of property and equipment of an owned campus in 2023.

Income from operations .

Consolidated income from operations decreased to $15.5 million in the six months ended June 30, 2023 from $35.3 million in the six months ended June 30, 2022, principally due to lower earnings in the USHE and ANZ segments, higher restructuring costs, and unfavorable foreign currency exchange impacts.

USHE segment income from operations decreased 40.3% to $16.3 million in the six months ended June 30, 2023 from $27.3 million in the six months ended June 30, 2022, primarily due to increased investments in marketing initiatives, partially offset by higher revenue due to an increase in enrollments.

Australia/New Zealand segment income from operations decreased 38.6% to $7.1 million in the six months ended June 30, 2023 from $11.6 million in the six months ended June 30, 2022, primarily driven by lower revenue due to the timing of academic term start dates, increased investments in marketing initiatives, and unfavorable foreign currency impacts, partially offset by personnel cost savings due to headcount reductions.

Education Technology Services segment income from operations increased 19.4% to $12.0 million in the six months ended June 30, 2023 from $10.0 million in the six months ended June 30, 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.

Consolidated income from operations decreased to $41.1 million in the nine months ended September 30, 2023 compared to $43.1 million in the same period in 2022, principally due to higher restructuring costs and unfavorable foreign currency exchange impacts, partially offset by higher earnings in the Education Technology Services and USHE segments as a result of revenue growth.

USHE segment income from operations increased 5.3% to $26.7 million in the nine months ended September 30, 2023 compared to $25.4 million in the same period in 2022, primarily due to higher revenue from an increase in enrollments.

Australia/New Zealand segment income from operations increased 2.3% to $21.0 million in the nine months ended September 30, 2023 compared to $20.5 million in the same period in 2022, primarily driven by personnel cost savings due to headcount reductions, partially offset by lower revenue due to the timing of academic term start dates and unfavorable foreign currency impacts.

Education Technology Services segment income from operations increased 33.1% to $20.3 million in the nine months ended September 30, 2023 compared to $15.2 million in the same period in 2022, primarily due to higher revenue as a result of growth in Sophia Learning subscriptions and an increase in employer affiliated enrollment, partially offset by increased investment in outreach to corporate partners.

Other income (expense).

Other income (expense) increased to $3.6 million of income in the six months ended June 30, 2023 from $0.9 million of expense in the six months ended June 30, 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 $3.8 million of interest expense in the six months ended June 30, 2023 compared to $2.0 million in the six months ended June 30, 2022.

Other income (expense) increased to $4.4 million of income in the nine months ended September 30, 2023 compared to $1.1 million of expense in the same period in 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 $5.8 million of interest expense in the nine months ended September 30, 2023 compared to $3.6 million in the nine months ended September 30, 2022.

Provision for income taxes.

Income tax expense was $6.8 million in the six months ended June 30, 2023, compared to $12.2 million in the six months ended June 30, 2022.

Income tax expense for the six months ended June 30, 2023 and 2022 include shortfall tax impacts of approximately $1.3 million and $1.4 million, respectively, related to share-based payment arrangements.

Net income decreased to $12.2 million in the six months ended June 30, 2023 from $22.2 million in the six months ended June 30, 2022 due to the factors discussed above.

Income tax expense was $14.8 million in the nine months ended September 30, 2023 compared to $13.6 million in the same period in 2022.

Income tax expense for the nine months ended September 30, 2023 and 2022 include shortfall tax impacts of approximately $1.4 million related to share-based payment arrangements.

Our effective tax rate for the nine months ended September 30, 2023 was 32.6%, compared to 32.5% for the same period in 2022.

Net income increased to $30.7 million in the nine months ended September 30, 2023 compared $28.3 million in the same period in 2022 due to the factors discussed above.

Non-GAAP Financial Measures

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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, 2023 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, 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 income from operations was $27.2 million in the second quarter of 2023 compared to $29.5 million in 2022.

Adjusted net income was $19.7 million in the second quarter of 2023 compared to $20.5 million in 2022, and adjusted diluted earnings per share was $0.82 in the second quarter of 2023 compared to $0.85 in 2022.

Adjusted income from operations was $35.4 million for the six months ended June 30, 2023 compared to $48.9 million for the same period in 2022.

Adjusted net income was $25.5 million for the six months ended June 30, 2023 compared to $33.5 million for the same period in 2022, and adjusted diluted earnings per share was $1.06 for the six months ended June 30, 2023 compared to $1.39 for the same period in 2022.

Adjusted income from operations was $32.6 million in the third quarter of 2023 compared to $12.2 million in 2022.

Adjusted net income was $23.3 million in the third quarter of 2023 compared to $8.0 million in 2022, and adjusted diluted earnings per share was $0.97 in the third quarter of 2023 compared to $0.33 in 2022.

Adjusted income from operations was $68.0 million for the nine months ended September 30, 2023 compared to $61.1 million for the same period in 2022.

Adjusted net income was $48.7 million for the nine months ended September 30, 2023 compared to $41.5 million for the same period in 2022, and adjusted diluted earnings per share was $2.03 for the nine months ended September 30, 2023 compared to $1.73 for the same period 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 June 30, 2023

Reconciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2023

Non-GAAP Adjustments

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Weighted average diluted shares outstanding 23,870 23,870

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

12 unchanged sentences

Weighted average diluted shares outstanding 23,902 23,902

Reconciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2023

Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2023

Non-GAAP Adjustments

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Weighted average diluted shares outstanding 23,952 23,952

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

The table below presents our adjusted results of operations on a constant currency basis for the three and six months ended June 30, 2023 (amounts in thousands, except per share data):

For the three months ended June 30, 2023 For the six months ended June 30, 2023

(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 nine months ended September 30, 2023, and an adjusted effective tax rate of 33.0% and 30.6% for the three and nine months ended September 30, 2022, respectively.

The table below presents our adjusted results of operations on a constant currency basis for the three and nine months ended September 30, 2023 (amounts in thousands, except per share data):

For the three months ended September 30, 2023 For the nine months ended September 30, 2023

(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, 2023 at a constant exchange rate of 0.72 Australian Dollars to U.S.

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

(1) Reflects an adjustment to translate foreign currency results for the three and nine months ended September 30, 2023 at a constant exchange rate of 0.68 and 0.71 Australian Dollars to U.S.

Dollars, respectively, which were the average exchange rates for the same periods in 2022.

Liquidity and Capital Resources

At June 30, 2023, we had cash, cash equivalents, and marketable securities of $215.1 million compared to $235.9 million at December 31, 2022 and $289.7 million at June 30, 2022.

We maintain our cash and cash equivalents primarily in money market funds and demand deposit bank accounts at high credit quality financial institutions, which are included in cash and cash equivalents at June 30, 2023 and 2022.

At September 30, 2023, we had cash, cash equivalents, and marketable securities of $198.6 million compared to $235.9 million at December 31, 2022 and $288.8 million at September 30, 2022.

In addition, we invest excess cash in U.S.

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

During the six months ended June 30, 2023 and 2022, we earned interest income of $4.6 million and $0.8 million, respectively.

During the nine months ended September 30, 2023 and 2022, we earned interest income of $7.6 million and $1.9 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.

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dollar equivalent of $150 million.

Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to LIBOR or a base rate, plus a margin ranging from 1.50% to 2.00%, depending on our leverage ratio.

Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to Term SOFR or a base rate, plus a margin ranging from 1.50% to 2.00%, depending on our leverage ratio.

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, 2023.

As of June 30, 2023 and 2022, we had $101.3 million and $141.4 million, respectively, outstanding under our Revolving Credit Facility.

During the six months ended June 30, 2023 and 2022, we paid $4.2 million and $1.2 million, respectively, of interest and unused commitment fees related to our Revolving Credit Facility.

On June 13, 2023, the Company amended its Revolving Credit Facility to replace references to LIBOR with alternative benchmark rates, including Term SOFR with respect to loans denominated in U.S.

dollars, beginning on June 30, 2023.

Our net cash provided by operating activities for the six months ended June 30, 2023 decreased to $40.7 million, compared to $80.7 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 six months ended June 30, 2023 increased to $23.8 million, compared to $20.8 million for the same period in 2022.

The increase in net cash used in investing activities was primarily driven by $16.9 million in purchases of marketable securities, partially offset by $5.9 million of cash proceeds related to the sale of property and equipment, higher cash proceeds from marketable securities and other investments and lower capital expenditures for the six months ended

June 30, 2023.

Capital expenditures decreased to $17.8 million for the six months ended June 30, 2023, compared to $22.7 million for the same period in 2022, primarily due to the timing of capital projects.

Our net cash used in financing activities for the six months ended June 30, 2023 decreased to $44.4 million, compared to $57.7 million for the same period in 2022.

The decrease in net cash used in financing activities was primarily driven by a $15.0 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 for each of the first two quarters of 2023.

During the six months ended June 30, 2023, we paid a total of $29.5 million in cash dividends on our common stock, compared to $29.9 million for the same period in 2022.

During the six months ended June 30, 2023, we paid $10.0 million to repurchase shares of common stock in the open market under our repurchase program, compared to $25.0 million for the same period in 2022.

As of June 30, 2023, we had $236.8 million of share repurchase authorization remaining to use through December 31, 2023.

For the second quarter of 2023 and 2022, bad debt expense as a percentage of revenue was 4.4% and 3.2%, respectively.

We were in compliance with all applicable covenants related to the Amended Credit Facility as of September 30, 2023.

In September 2023, the Company repaid $40.0 million of the outstanding balance under the Revolving Credit Facility.

As of September 30, 2023 and 2022, we had $61.2 million and $141.2 million, respectively, outstanding under our Revolving Credit Facility.

During the nine months ended September 30, 2023 and 2022, we paid $5.4 million and $3.0 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, 2023 decreased to $87.2 million, compared to $124.7 million for the same period in 2022.

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

Our net cash used in investing activities for the nine months ended September 30, 2023 increased to $30.5 million, compared to $30.3 million for the same period in 2022.

months ended September 30, 2023.

Capital expenditures decreased to $27.3 million for the nine months ended September 30, 2023, compared to $32.5 million for the same period in 2022, primarily due to the timing of capital projects.

Our net cash used in financing activities for the nine months ended September 30, 2023 increased to $99.1 million, compared to $84.5 million for the same period in 2022.

The increase in net cash used in financing activities was primarily driven by a $40.0 million long-term debt payment and an increase in net payments for employee stock awards, partially offset by a $26.9 million decrease in repurchases of common stock.

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 2023.

During the nine months ended September 30, 2023, we paid a total of $44.1 million in cash dividends on our common stock, compared to $44.6 million for the same period in 2022.

During the nine months ended September 30, 2023, we paid $10.0 million to repurchase shares of common stock in the open market under our repurchase program, compared to $36.9 million for the same period in 2022.

As of September 30, 2023, we had $236.8 million of share repurchase authorization remaining to use through December 31, 2023.

For the third quarter of 2023 and 2022, bad debt expense as a percentage of revenue was 5.2% and 4.5%, 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.

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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