Strategic Education, Inc. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations is a supplement to and should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022. Cautionary Notice Regarding Forward-Looking Statements 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, and capital expenditures. These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause the actual results to differ materially from those expressed in or implied by such statements. The assumptions, risks and uncertainties include the pace of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as other federal laws and regulations, institutional accreditation standards and state regulatory requirements, rulemaking and other action by the Department 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, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions including our acquisition of Torrens University and associated assets in Australia and New Zealand, the risk that the benefits of our acquisition of Torrens University and associated assets in Australia and New Zealand may not be fully realized or may take longer to realize than expected, the risk that our acquisition of Torrens University and associated assets in Australia and New Zealand may not advance our business strategy and growth strategy, risks related to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the combined company may experience difficulty integrating employees or operations, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. You should not put undue reliance on any forward-looking statements. Further information about these and other relevant risks and uncertainties may be found in Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K and in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking statements, except as required by law. Additional Information We maintain a website at http://www.strategiceducation.com. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Background Strategic Education, Inc. (“SEI,” “we”, “us” or “our”) is an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. We operate primarily through our wholly-owned subsidiaries Strayer University and Capella University, both accredited post-secondary institutions of higher education located in the United States, and Torrens University, an accredited post-secondary institution of higher education located in Australia. Our operations emphasize relationships through our Education Technology Services segment with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. 27 Table of Contents Segments Overview As of September 30, 2023, we had the following reportable segments: U.S. 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. USHE also operates non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University. • Strayer University is accredited by the Middle States Commission on Higher Education and Capella University is accredited by the Higher Learning Commission, both higher education institutional accrediting agencies recognized by the Department of Education. The USHE segment provides academic offerings both online and in physical classrooms, helping working adult students develop specific competencies they can apply in their workplace. • 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. Student persistence is reported one quarter in arrears. The table below summarizes USHE trailing 4-quarter student persistence for the past 8 quarters. Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 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 7.4% 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. Title IV per credit earned has been declining as employer-affiliated enrollment has grown, and as more students earn credit through Sophia Learning and other affordable alternative pathways. The table below summarizes the percentage change in USHE trailing 4-quarter Title IV per credit earned for the past 8 quarters. Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 (15.1) % (11.3) % (8.1) % (6.4) % (5.3) % (6.2) % (7.2) % (7.4) % Education Technology Services Segment • Our Education Technology Services segment is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. The employer relationships developed by the Education Technology Services division are an important source of student enrollment for Strayer University and Capella University, and the majority of the revenue attributed to the Education Technology Services division is driven by the volume of enrollment derived from these employer relationships. Enrollments attributed to the Education Technology Services segment are determined based on a student’s employment status and the existence of a corporate partnership arrangement with SEI. All enrollments attributed to the Education Technology Services division continue to be attributed to the division until the student graduates or withdraws, even if his or her employment status changes or if the partnership contract expires. • In the 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. Australia/New Zealand Segment • Torrens University is the only investor-funded university in Australia. Torrens University offers undergraduate, graduate, higher degree by research, and specialized degree courses primarily in five fields of study: business, design and creative technology, health, hospitality, and education. Courses are offered both online and at physical campuses. Torrens 28 Table of Contents University is registered with the Tertiary Education Quality and Standards Agency (“TEQSA”), the regulator for higher education providers and universities throughout Australia, as an Australian University that is authorized to self-accredit its courses. • Think Education is a vocational registered training organization and accredited higher education provider in Australia. Think Education delivers education at several campuses in Sydney, Melbourne, Brisbane, and Adelaide as well as through online study. Think Education and its colleges are accredited in Australia by the TEQSA and the Australian Skills Quality Authority, the regulator for vocational education and training organizations that operate in Australia. • Media Design School is a private tertiary institution for creative and technology qualifications in New Zealand. Media Design School offers industry-endorsed courses in 3D animation and visual effects, game art, game programming, graphic and motion design, digital media, artificial intelligence, and creative advertising. Media Design School 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 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. We are constantly innovating to differentiate ourselves in our markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our students’ professional needs, and establishing new growth platforms. The talent of our faculty and employees, supported by market leading technology, enable these strategies. We believe our strategy will allow us to continue to deliver high quality, affordable education, resulting in continued growth over the long-term. We will continue to invest in this strategy to strengthen the foundation and future of our business. Critical Accounting Policies and Estimates “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments related to its allowance for credit losses; income tax provisions; the useful lives of property and equipment and intangible assets; redemption rates for scholarship programs and valuation of contract liabilities; fair value of right-of-use lease assets for facilities that have been vacated; incremental borrowing rates; valuation of deferred tax assets, goodwill, and intangible assets; forfeiture rates and achievability of performance targets for stock-based compensation plans; and accrued expenses. Management bases its estimates and judgments on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments regarding the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly reviews its estimates and judgments for reasonableness and may modify them in the future. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following critical accounting policies are its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue recognition — Strayer University and Capella University offer educational programs primarily on a quarter system having four academic terms, which generally coincide with our quarterly financial reporting periods. 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, 2023 consisted of tuition revenue. Capella University offers monthly start options for new students, who then transition to a quarterly schedule. Capella University also offers its FlexPath program, which allows students to determine their 12-week billing session schedule after they complete their first course. Tuition revenue for all students is recognized ratably over the course of instruction as the universities provide academic services, whether delivered in person at a physical campus or online. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts. The universities also derive revenue from other sources such as textbook-related income, certificate revenue, certain academic fees, licensing revenue, accommodation revenue, food and beverage fees, and other income, which are all recognized when earned. In accordance with ASC 606, materials provided to students in connection with their enrollment in a course are recognized as revenue when control of those materials transfers to the student. At the start of each academic term or program, a contract liability is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. 29 Table of Contents Students at Strayer University and Capella University finance their education in a variety of ways, and historically about 75% of our students have participated in one or more financial aid program provided through Title IV of the Higher Education Act. In addition, many of our working adult students finance their own education or receive full or partial tuition reimbursement from their employers. 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 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. International students attending an ANZ institution are not eligible for funding from the Australian or New Zealand governments. A typical class is offered in weekly increments over a six- to twelve-week period, depending on the university and course type, and is followed by an exam. Student attendance is based on physical presence in class for on-ground classes. For online classes, attendance consists of logging into one’s course shell and performing an academically-related activity (e.g., engaging in a discussion post or taking a quiz). If a student withdraws from a course prior to completion, a portion of the tuition may be refundable depending on when the withdrawal occurs. We use the student’s withdrawal date or last date of attendance for this purpose. Our specific refund policies vary across the universities and non-degree programs. For students attending Strayer University, our refund policy typically permits students who complete less than half of a course to receive a partial refund of tuition for that course. For students attending Capella University, our refund policy varies based on course format. GuidedPath students are allowed a 100% refund through the first five days of the course, a 75% refund from six to twelve days, and 0% refund for the remainder of the period. FlexPath students receive a 100% refund through the 12th calendar day of the course for their first billing session only and a 0% refund after that date and for all subsequent billing sessions. For domestic students attending an ANZ institution, refunds are typically provided to students that withdraw within the first 20% of a course term. For international students attending an ANZ institution, refunds are provided to students that withdraw prior to the course commencement date. In limited circumstances, refunds to students attending an ANZ institution may be granted after these cut-offs subject to an application for special consideration by the student and approval of that application by the institution. Refunds reduce the tuition revenue that otherwise would have been recognized for that student. Since the academic terms coincide with our financial reporting periods for most programs, nearly all refunds are processed and recorded in the same quarter as the corresponding revenue. For certain programs where courses may overlap a quarter-end date, we estimate a refund or withdrawal rate and do not recognize the related revenue until the uncertainty related to the refund is resolved. The portion of tuition revenue refundable to students may vary based on the student’s state of residence. For U.S. students who receive funding under Title IV and withdraw, funds are subject to return provisions as defined by the Department of Education. The university is responsible for returning Title IV funds to the Department and then may seek payment from the withdrawn student of prorated tuition or other amounts charged to him or her. Loss of financial aid eligibility during an academic term is rare and would normally coincide with the student’s withdrawal from the institution. In Australia and New Zealand, government funding for eligible students is provided directly to the institution on an estimated basis annually. The amount of government funding provided is based on a course-by-course forecast of enrollments that the institution submits for the upcoming calendar year. Using the enrollment forecast provided as well as the requesting institution’s historical enrollment trends, the government approves a fixed amount, which is then funded to the institution evenly on a monthly basis. Periodic reconciliation and true-ups are undertaken between the relevant government authority and the institution based on actual eligible enrollments, which may result in a net amount being due to or from the government. Students at Strayer University registering in credit-bearing courses in any undergraduate program qualify for the Graduation Fund, whereby qualifying students earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. Students must meet all of Strayer University’s admission requirements and not be eligible for any previously offered scholarship program. To maintain eligibility, students must be enrolled in a bachelor’s degree program. Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by Strayer University in the future. In their final academic year, qualifying students will receive one free course for every three courses that the student successfully completed in prior years. Strayer University’s performance obligation associated with free courses that may be redeemed in the future is valued based on a systematic and rational allocation of the cost of honoring the benefit earned to each of the underlying revenue transactions that result in progress by the student toward earning the benefit. The estimated value of awards under the Graduation Fund that will be recognized in the future is based on historical experience of students’ persistence in completing their course of study and earning a degree and the tuition rate in effect at the time it was associated with the transaction. Estimated redemption rates of eligible students vary based on their term of enrollment. As of September 30, 2023, we had deferred $44.5 million for 30 Table of Contents 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. However, if actual persistence or redemption rates change, adjustments to the reserve may be necessary and could be material. Tuition receivable — We record estimates for our allowance for credit losses related to tuition receivable from students primarily based on our historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of recoveries. Our experience is that payment of outstanding balances is influenced by whether the student returns to the institution, as we require students to make payment arrangements for their outstanding balances prior to enrollment. Therefore, we monitor outstanding tuition receivable balances through subsequent terms, increasing the reserve on such balances over time as the likelihood of returning to the institution diminishes and our historical experience indicates collection is less likely. We periodically assess our methodologies for estimating credit losses in consideration of actual experience. If the financial condition of our students were to deteriorate based on current or expected future events resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. For the 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. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. At the time of acquisition, goodwill and indefinite-lived intangible assets are allocated to reporting units. Management identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components. 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, 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. Finite-lived intangible assets consist of student relationships. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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, 2023. Other estimates — We record estimates for certain of our accrued expenses and for income tax liabilities. We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary. Should actual results differ from our estimates, revisions to our accrued expenses, carrying amount of goodwill and intangible assets, stock-based compensation expense, and income tax liabilities may be required. Results of Operations 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 Revenues. 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 31 Table of Contents 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 $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 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 $3.4 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 $0.3 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 $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 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 $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 . 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 Revenues. 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 32 Table of Contents 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 $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 $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 $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 $1.3 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 $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 $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 $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 $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 . 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. 33 Table of Contents 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: • 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; • severance costs, lease and fixed asset impairment charges, gains on sale of real estate and early termination of leased facilities, and other costs associated with our restructuring activities; • income/loss from partnership and other investments that are not part of our core operations; and • 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, 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. Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures may be considered in addition to, but not as a substitute for or superior to, GAAP results. A reconciliation of these measures to the most directly comparable GAAP measures is provided below. 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 September 30, 2023 Non-GAAP Adjustments As Reported (GAAP) Amortization of intangible assets (1) Merger and integration costs (2) Restructuring costs (3) Income from other investments (4) Tax adjustments (5) As Adjusted (Non-GAAP) Revenues $ 285,936 $ — $ — $ — $ — $ — $ 285,936 Total costs and expenses $ 260,307 $ (3,382) $ (330) $ (3,262) $ — $ — $ 253,333 Income from operations $ 25,629 $ 3,382 $ 330 $ 3,262 $ — $ — $ 32,603 Operating margin 9.0% 11.4% Income before income taxes $ 26,471 $ 3,382 $ 330 $ 3,262 $ (215) $ — $ 33,230 Net income $ 18,459 $ 3,382 $ 330 $ 3,262 $ (215) $ (1,957) $ 23,261 Diluted earnings per share $ 0.77 $ 0.97 Weighted average diluted shares outstanding 23,870 23,870 34 Table of Contents Reconciliation of Reported to Adjusted Results of Operations for the three months ended September 30, 2022 Non-GAAP Adjustments As Reported (GAAP) Amortization of intangible assets (1) Merger and integration costs (2) Restructuring costs (3) Income from other investments (4) Tax adjustments (5) As Adjusted (Non-GAAP) Revenues $ 263,123 $ — $ — $ — $ — $ — $ 263,123 Total costs and expenses $ 255,316 $ (3,522) $ (269) $ (610) $ — $ — $ 250,915 Income from operations $ 7,807 $ 3,522 $ 269 $ 610 $ — $ — $ 12,208 Operating margin 3.0% 4.6% 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 Weighted average diluted shares outstanding 23,902 23,902 Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2023 Non-GAAP Adjustments As Reported (GAAP) Amortization of intangible assets (1) Merger and integration costs (2) Restructuring costs (3) Income from other investments (4) Tax adjustments (5) As Adjusted (Non-GAAP) Revenues $ 830,222 $ — $ — $ — $ — $ — $ 830,222 Total costs and expenses $ 789,125 $ (10,364) $ (1,335) $ (15,208) $ — $ — $ 762,218 Income from operations $ 41,097 $ 10,364 $ 1,335 $ 15,208 $ — $ — $ 68,004 Operating margin 5.0% 8.2% Income before income taxes $ 45,508 $ 10,364 $ 1,335 $ 15,208 $ (2,826) $ — $ 69,589 Net income $ 30,662 $ 10,364 $ 1,335 $ 15,208 $ (2,826) $ (6,031) $ 48,712 Diluted earnings per share $ 1.28 $ 2.03 Weighted average diluted shares outstanding 23,952 23,952 Reconciliation of Reported to Adjusted Results of Operations for the nine months ended September 30, 2022 Non-GAAP Adjustments As Reported (GAAP) Amortization of intangible assets (1) Merger and integration costs (2) Restructuring costs (3) Income from other investments (4) Tax adjustments (5) As Adjusted (Non-GAAP) 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 __________________________________________________________________________________________ (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, lease and fixed asset impairment charges, gains on sale of real estate and early termination of leased facilities, and other costs associated with the Company’s restructuring activities. (4) Reflects income/loss recognized from the Company’s investments in partnership interests and other investments. (5) Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 30.0% for the three and 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. 35 Table of Contents 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 As Adjusted (Non-GAAP) Constant currency adjustment (1) As Adjusted with Constant Currency (Non-GAAP) As Adjusted (Non-GAAP) Constant currency adjustment (1) As Adjusted with Constant Currency (Non-GAAP) Revenues $ 285,936 $ 2,453 $ 288,389 $ 830,222 $ 10,015 $ 840,237 Total costs and expenses $ 253,333 $ 2,029 $ 255,362 $ 762,218 $ 8,370 $ 770,588 Income from operations $ 32,603 $ 424 $ 33,027 $ 68,004 $ 1,645 $ 69,649 Operating margin 11.4% 11.5% 8.2% 8.3% Income before income taxes $ 33,230 $ 464 $ 33,694 $ 69,589 $ 1,737 $ 71,326 Net income $ 23,261 $ 325 $ 23,586 $ 48,712 $ 1,217 $ 49,929 Diluted earnings per share $ 0.97 $ 0.99 $ 2.03 $ 2.08 Weighted average diluted shares outstanding 23,870 23,870 23,952 23,952 __________________________________________________________________________________________ (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 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. 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 September 30, 2023 and 2022. In addition, we invest excess cash in U.S. treasury bills with maturities of three months or less, which are included in cash and cash equivalents. We also hold marketable securities, which primarily include tax-exempt municipal securities, corporate debt securities, and term deposits. 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. 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. dollar equivalent of $150 million. 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 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. 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 nine 36 Table of Contents 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. 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.