NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Strategic Education, Inc. (“Strategic Education” or the “Company”), a Maryland corporation formerly known as Strayer Education, Inc., is a national leader in education innovation, dedicated to enabling economic mobility for working adults through education. The Company operates primarily through its wholly-owned subsidiaries Strayer University and Capella University (the "Universities"), both accredited post-secondary institutions of higher education. During the first quarter of 2020, the Company revised its reportable segments, as discussed further in Note 13. Prior period segment disclosures have been restated to conform to the current period presentation. The accompanying condensed consolidated financial statements and footnotes include the results of the Company’s two reportable segments: Strayer University and Capella University.
|
|
2.
|
Significant Accounting Policies
|
Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
All information as of June 30, 2019 and 2020, and for the three and six months ended June 30, 2019 and 2020 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations, and cash flows of the Company. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at that date. Certain amounts in the prior period financial statements have been reclassified to conform to the current period's presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.
Below is a description of the nature of the costs included in the Company’s operating expense categories.
Instructional and support costs ("I&SC") generally contain items of expense directly attributable to activities of the Strayer University and Capella University segments that support students and learners. This expense category includes salaries and benefits of faculty and academic administrators, as well as admissions and administrative personnel who support and serve student interests. Instructional and support costs also include course development costs and costs associated with delivering course content, including educational supplies, facilities, and all other physical plant and occupancy costs, with the exception of costs attributable to the corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instructional and support costs.
General and administration ("G&A") expenses include salaries and benefits of management and employees engaged in finance, human resources, legal, regulatory compliance, marketing and other corporate functions. Also included are the costs of advertising and production of marketing materials. General and administration expense also includes the facilities occupancy and other related costs attributable to such functions.
Amortization of intangibles assets consists of amortization and depreciation expense related to intangible assets and software assets acquired through the Company's merger with Capella Education Company ("CEC").
Merger and integration costs include integration expenses associated with the Company's merger with CEC, and transaction expenses associated with potential future business combinations.
New Accounting Standard for Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13" or "ASC 326"). ASU 2016-13 revises the accounting requirements related to the measurement of credit losses and requires organizations to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. During 2019, the FASB issued additional ASUs amending certain aspects of ASU 2016-13.
On January 1, 2020, the Company adopted the new accounting standard and all of the related amendments using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new credit loss standard to its tuition receivables by recording a $3.3 million adjustment, net of tax, to the opening balance of retained earnings. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326. The comparative information has not been restated and continues to be reported under the accounting standards in effect in those reporting periods.
The impact of adoption of ASC 326 on the Company's balance sheet was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2020
|
|
As Reported Under ASC 326
|
|
Pre-ASC 326 Adoption
|
|
Impact of ASC 326 Adoption
|
Tuition receivable, net
|
$
|
46,952
|
|
|
$
|
51,523
|
|
|
$
|
(4,571
|
)
|
Deferred income tax liabilities
|
$
|
46,681
|
|
|
$
|
47,942
|
|
|
$
|
(1,261
|
)
|
Retained earnings
|
$
|
149,509
|
|
|
$
|
152,819
|
|
|
$
|
(3,310
|
)
|
The Company does not expect ASC 326 to have a significant impact on its financial condition or results of operations on an ongoing basis.
Restricted Cash
A significant portion of the Company’s revenues are funded by various federal and state government programs. The Company generally does not receive funds from these programs prior to the start of the corresponding academic term. The Company may be required to return certain funds for students who withdraw from the Universities during the academic term. The Company had approximately $0.3 million and $0.8 million of these unpaid obligations as of December 31, 2019 and June 30, 2020, respectively, which are recorded as restricted cash and included in other current assets in the unaudited condensed consolidated balance sheets.
As part of commencing operations in Pennsylvania in 2003, the Company is required to maintain a “minimum protective endowment” of at least $0.5 million in an interest-bearing account as long as the Company operates its campuses in the state. The Company holds these funds in an interest-bearing account, which is included in other assets.
The following table illustrates the reconciliation of cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statements of cash flows as of June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
2019
|
|
2020
|
Cash and cash equivalents
|
$
|
375,515
|
|
|
$
|
470,319
|
|
Restricted cash included in other current assets
|
2
|
|
|
800
|
|
Restricted cash included in other assets
|
500
|
|
|
500
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
$
|
376,017
|
|
|
$
|
471,619
|
|
Tuition Receivable and Allowance for Credit Losses
The Company records tuition receivable and contract liabilities for its students upon the start of the academic term or program. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the Universities' student bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for credit losses is established based upon historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status, likelihood of future enrollment, degree mix trends and changes in the overall economic environment. The Company periodically assesses its methodologies for estimating credit losses in consideration of actual experience.
The Company’s tuition receivable and allowance for credit losses were as follows as of December 31, 2019 and June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
June 30, 2020
|
Tuition receivable
|
$
|
82,454
|
|
|
$
|
83,960
|
|
Allowance for credit losses
|
(30,931
|
)
|
|
(42,956
|
)
|
Tuition receivable, net
|
$
|
51,523
|
|
|
$
|
41,004
|
|
Approximately $1.0 million and $3.1 million of tuition receivable are included in other assets as of December 31, 2019 and June 30, 2020, respectively, because these amounts are expected to be collected after 12 months.
The following table illustrates changes in the Company’s allowance for credit losses for the three and six months ended June 30, 2019 and 2020 (in thousands). The provision for credit losses for the three and six months ended June 30, 2020 includes additional reserves to account for projected deterioration in collections performance in 2020 due to the COVID-19 pandemic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Allowance for credit losses, beginning of period
|
$
|
29,387
|
|
|
$
|
38,094
|
|
|
$
|
28,457
|
|
|
$
|
30,931
|
|
Impact of adopting ASC 326
|
—
|
|
|
—
|
|
|
—
|
|
|
4,571
|
|
Additions charged to expense
|
11,462
|
|
|
11,976
|
|
|
23,782
|
|
|
23,147
|
|
Adjustment to value of acquired receivables
|
2,207
|
|
|
—
|
|
|
2,207
|
|
|
—
|
|
Write-offs, net of recoveries
|
(12,323
|
)
|
|
(7,114
|
)
|
|
(23,713
|
)
|
|
(15,693
|
)
|
Allowance for credit losses, end of period
|
$
|
30,733
|
|
|
$
|
42,956
|
|
|
$
|
30,733
|
|
|
$
|
42,956
|
|
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 in a business combination. Indefinite-lived intangible assets, which include trade names, are recorded at fair value on their acquisition date. An indefinite life was assigned to the trade names because they have the continued ability to generate cash flows indefinitely.
Goodwill and the indefinite-lived intangible assets are assessed at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit or indefinite-lived intangible asset below its carrying amount. The Company 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.
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.
The Company reviews its 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.
Authorized Stock
The Company has authorized 32,000,000 shares of common stock, par value $0.01, of which 21,964,809 and 22,222,936 shares were issued and outstanding as of December 31, 2019 and June 30, 2020, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none of which is issued or outstanding. Before any preferred stock may be issued in the future, the Board of Directors would need to establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and the terms or conditions of the redemption of the preferred stock.
In April 2020, the Company’s Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock. The dividend was paid on June 8, 2020.
Net Income Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options, restricted stock, and restricted stock units. The dilutive effect of stock awards was determined using the treasury stock method. Under the treasury stock method, all of the following are assumed to be used to repurchase shares of the Company’s common stock: (1) the proceeds received from the exercise of stock options, and (2) the amount of compensation cost associated with the stock awards for future service not yet recognized by the Company. Stock options are not included in the computation of diluted earnings per share when the stock option exercise price of an individual grant exceeds the average market price for the period.
Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for the three and six months ended June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Weighted average shares outstanding used to compute basic earnings per share
|
21,777
|
|
|
21,764
|
|
|
21,638
|
|
|
21,787
|
|
Incremental shares issuable upon the assumed exercise of stock options
|
58
|
|
|
16
|
|
|
75
|
|
|
19
|
|
Unvested restricted stock and restricted stock units
|
274
|
|
|
232
|
|
|
366
|
|
|
235
|
|
Shares used to compute diluted earnings per share
|
22,109
|
|
|
22,012
|
|
|
22,079
|
|
|
22,041
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares of restricted stock excluded from the diluted earnings per share calculation
|
—
|
|
|
—
|
|
|
29
|
|
|
2
|
|
Comprehensive Income
Comprehensive income includes net income and all changes in the Company’s equity during a period from non-owner sources, which for the Company consists of unrealized gains and losses on available-for-sale marketable securities, net of tax. As of December 31, 2019 and June 30, 2020, the balance of accumulated other comprehensive income was $233,000, net of tax of $90,000 and $659,000, net of tax of $252,000, respectively. During the three and six months ended June 30, 2020, approximately $25,000, net of tax of $10,000, of unrealized gains on available-for-sale marketable securities was reclassified out of accumulated other comprehensive income to Other income on the unaudited condensed consolidated statements of income.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period reported. The most significant management estimates include allowances for credit losses, useful lives of property and equipment and intangible assets, incremental borrowing rates, potential sublease income and vacancy periods, accrued expenses, forfeiture rates and the likelihood of achieving performance criteria for stock-based awards, value of free courses earned by students that will be redeemed in the future, valuation of goodwill and intangible assets, and the provision for income taxes. During the six months ended June 30, 2020, management estimates also include potential impacts the COVID-19 pandemic will have on student enrollment, tuition pricing, and collections in future periods. The duration and severity of the COVID-19 pandemic and its impact on the Company’s condensed consolidated financial statements is subject to uncertainty. Actual results could differ from those estimates.
Recently Issued Accounting Standards Not Yet Adopted
ASUs recently issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements.
The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of classroom instruction and online courses. Tuition revenue is deferred and recognized ratably over the period of instruction, which varies depending on the course format and chosen program of study. Strayer University’s educational programs and Capella University’s GuidedPath classes typically are offered on a quarterly basis, and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period.
The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the three and six months ended June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Strayer University Segment
|
|
|
|
|
|
|
|
Tuition, net of discounts, grants and scholarships
|
$
|
126,932
|
|
|
$
|
133,544
|
|
|
$
|
252,915
|
|
|
$
|
274,042
|
|
Other(1)
|
4,796
|
|
|
4,536
|
|
|
9,559
|
|
|
9,692
|
|
Total Strayer University Segment
|
131,728
|
|
|
138,080
|
|
|
262,474
|
|
|
283,734
|
|
Capella University Segment
|
|
|
|
|
|
|
|
Tuition, net of discounts, grants and scholarships
|
107,947
|
|
|
112,483
|
|
|
218,168
|
|
|
226,669
|
|
Other(1)
|
5,435
|
|
|
5,268
|
|
|
10,976
|
|
|
10,730
|
|
Total Capella University Segment
|
113,382
|
|
|
117,751
|
|
|
229,144
|
|
|
237,399
|
|
Consolidated revenue
|
$
|
245,110
|
|
|
$
|
255,831
|
|
|
$
|
491,618
|
|
|
$
|
521,133
|
|
_________________________________________
|
|
(1)
|
Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other revenue streams.
|
Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and services. The Company applies the five-step revenue model under ASC 606 to determine when revenue is earned and recognized.
Arrangements with students may have multiple performance obligations. For such arrangements, the Company allocates net tuition revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers and observable market prices. The standalone selling price of material rights to receive free classes in the future is estimated based on class tuition prices and likelihood of redemption based on historical student attendance and completion behavior.
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. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Contract liabilities are recorded as a current or long-term liability in the unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized.
Course materials available through Capella University enable students to access electronically all required materials for courses in which they enroll during the quarter. Revenue derived from course materials is recognized ratably over the duration of the course as the Company provides the student with continuous access to these materials during the term. For sales of certain other course materials, the Company is considered the agent in the transaction, and as such, the Company recognizes revenue net of amounts owed to the vendor at the time of sale. Revenues also include certain academic fees recognized within the quarter of instruction, and certificate revenue and licensing revenue, which are recognized as the services are provided.
Contract Liabilities – Graduation Fund
In 2013, Strayer University introduced the Graduation Fund, which allows new undergraduate students to 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. New students registering in credit-bearing courses in any undergraduate program receive one free course for every three courses that the student successfully completes. To be eligible, students must meet all of Strayer University’s admission requirements and must be enrolled in a bachelor’s degree program. The Company’s employees and their dependents are not eligible for the 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 response to the COVID-19 pandemic, Strayer University is temporarily allowing students to miss two consecutive terms without losing their Graduation Fund credits.
Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its methodologies and assumptions underlying these estimates, and to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $21.0 million and is included as a current contract liability in the unaudited condensed consolidated balance sheets. The remainder is expected to be redeemed within two to four years.
The table below presents activity in the contract liability related to the Graduation Fund (in thousands):
|
|
|
|
|
|
|
|
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
Balance at beginning of period
|
$
|
43,329
|
|
|
$
|
49,641
|
|
Revenue deferred
|
14,787
|
|
|
13,942
|
|
Benefit redeemed
|
(12,025
|
)
|
|
(11,235
|
)
|
Balance at end of period
|
$
|
46,091
|
|
|
$
|
52,348
|
|
Unbilled receivables – Student tuition
Academic materials may be shipped to certain new undergraduate students in advance of the term of enrollment. Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all performance obligations in the arrangement with the student. When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded. The balance of unbilled receivables related to such materials was $1.2 million as of June 30, 2020, and is included in tuition receivable.
|
|
4.
|
Restructuring and Related Charges
|
In October 2013, the Company implemented a restructuring to better align the Company’s resources with student enrollments at the time. This restructuring included the closing of 20 physical locations and reductions in the number of campus-based and corporate employees. At the time of this restructuring, a liability for lease obligations, some of which continue through 2022, was recorded and measured at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The estimation of future cash flows included non-cancelable contractual lease costs over the remaining terms of the leases discounted at the Company’s marginal borrowing rate of 4.5%, partially offset by estimated future sublease rental income discounted at credit-adjusted rates.
In addition, the Company has incurred personnel-related restructuring charges due to cost reduction efforts and management changes. These changes primarily related to the integration of CEC in order to establish an efficient ongoing cost structure for the Company.
The following details the changes in the Company’s restructuring liability during the six months ended June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease and Related Costs, Net
|
|
Severance and Other Employee
Separation Costs
|
|
Total
|
Balance at December 31, 2018
|
$
|
6,540
|
|
|
$
|
14,347
|
|
|
$
|
20,887
|
|
Restructuring and other charges(1)
|
—
|
|
|
2,086
|
|
|
2,086
|
|
Payments
|
—
|
|
|
(5,764
|
)
|
|
(5,764
|
)
|
Adjustments(2)
|
(6,540
|
)
|
|
—
|
|
|
(6,540
|
)
|
Balance at June 30, 2019
|
$
|
—
|
|
|
$
|
10,669
|
|
|
$
|
10,669
|
|
|
|
|
|
|
|
Balance at December 31, 2019(3)
|
$
|
—
|
|
|
$
|
8,283
|
|
|
$
|
8,283
|
|
Restructuring and other charges(1)
|
—
|
|
|
—
|
|
|
—
|
|
Payments
|
—
|
|
|
(3,986
|
)
|
|
(3,986
|
)
|
Adjustments
|
—
|
|
|
—
|
|
|
—
|
|
Balance at June 30, 2020(3)
|
$
|
—
|
|
|
$
|
4,297
|
|
|
$
|
4,297
|
|
_____________________________________
|
|
(1)
|
Restructuring and other charges were $0.2 million and $2.1 million for the three and six months ended June 30, 2019, respectively. Restructuring and other charges are included in Merger and integration costs on the unaudited condensed consolidated statements of income. There were no restructuring and other charges for the three and six months ended June 30, 2020.
|
|
|
(2)
|
Adjustments represent the impact of adopting ASC 842 on January 1, 2019. In accordance with ASC 842, the lease related restructuring liability balance as of December 31, 2018 was netted against the initial ROU lease asset recognized upon adoption. Asset retirement obligations related to these restructured properties are also included in the adjustments amount.
|
|
|
(3)
|
The current portion of restructuring liabilities was $6.4 million and $3.9 million as of December 31, 2019 and June 30, 2020, respectively, which are included in accounts payable and accrued expenses. The long-term portion is included in other long-term liabilities.
|
5. Marketable Securities
The following is a summary of available-for-sale securities as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
Corporate debt securities
|
$
|
26,920
|
|
|
$
|
480
|
|
|
$
|
(8
|
)
|
|
$
|
27,392
|
|
Tax-exempt municipal securities
|
21,890
|
|
|
215
|
|
|
(74
|
)
|
|
22,031
|
|
Variable rate demand notes
|
5,600
|
|
|
—
|
|
|
—
|
|
|
5,600
|
|
Total
|
$
|
54,410
|
|
|
$
|
695
|
|
|
$
|
(82
|
)
|
|
$
|
55,023
|
|
The following is a summary of available-for-sale securities as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
Corporate debt securities
|
$
|
42,584
|
|
|
$
|
165
|
|
|
$
|
(40
|
)
|
|
$
|
42,709
|
|
Tax-exempt municipal securities
|
23,301
|
|
|
112
|
|
|
(215
|
)
|
|
23,198
|
|
Variable rate demand notes
|
5,600
|
|
|
—
|
|
|
—
|
|
|
5,600
|
|
Total
|
$
|
71,485
|
|
|
$
|
277
|
|
|
$
|
(255
|
)
|
|
$
|
71,507
|
|
The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2019 and June 30, 2020 were caused by changes in market values primarily due to interest rate changes. As of June 30, 2020, there were no securities in an unrealized loss position for a period longer than twelve months. The Company has no allowance for credit losses related to its available-for-sale securities as all investments are in investment grade securities. The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity. No impairment charges were recorded during the three and six months ended June 30, 2019 and 2020.
The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2019 and June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
June 30, 2020
|
Due within one year
|
$
|
34,874
|
|
|
$
|
23,106
|
|
Due after one year through five years
|
36,633
|
|
|
31,917
|
|
Total
|
$
|
71,507
|
|
|
$
|
55,023
|
|
Amounts due within one year in the table above included $5.6 million of variable rate demand notes, which have contractual maturities ranging from 17 years to 26 years as of June 30, 2020. The variable rate demand notes are floating rate municipal bonds with embedded put options that allow the Company to sell the security at par plus accrued interest on a settlement basis ranging from one day to seven days. The Company has classified these securities based on their effective maturity dates, which range from one day to seven days from the balance sheet date.
The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the three and six months ended June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Maturities of marketable securities
|
$
|
9,650
|
|
|
$
|
7,500
|
|
|
$
|
22,560
|
|
|
$
|
17,405
|
|
Sales of marketable securities
|
—
|
|
|
1,464
|
|
|
—
|
|
|
1,464
|
|
Total
|
$
|
9,650
|
|
|
$
|
8,964
|
|
|
$
|
22,560
|
|
|
$
|
18,869
|
|
The Company recorded approximately $35,000 in gross realized gains in net income during the three and six months ended June 30, 2020 related to the sale of marketable securities. The Company did not record any gross realized gains or losses in net income during the three and six months ended June 30, 2019.
|
|
6.
|
Fair Value Measurement
|
Assets and liabilities measured at fair value on a recurring basis consist of the following as of June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
June 30, 2020
|
|
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
5,876
|
|
|
$
|
5,876
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
27,392
|
|
|
—
|
|
|
27,392
|
|
|
—
|
|
Tax-exempt municipal securities
|
22,031
|
|
|
—
|
|
|
22,031
|
|
|
—
|
|
Variable rate demand notes
|
5,600
|
|
|
—
|
|
|
5,600
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
$
|
60,899
|
|
|
$
|
5,876
|
|
|
$
|
55,023
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred payments
|
$
|
2,428
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,428
|
|
Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
December 31, 2019
|
|
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
30,693
|
|
|
$
|
30,693
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
42,709
|
|
|
—
|
|
|
42,709
|
|
|
—
|
|
Tax-exempt municipal securities
|
23,198
|
|
|
—
|
|
|
23,198
|
|
|
—
|
|
Variable rate demand notes
|
5,600
|
|
|
—
|
|
|
5,600
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
$
|
102,200
|
|
|
$
|
30,693
|
|
|
$
|
71,507
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred payments
|
$
|
3,257
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,257
|
|
The Company measures the above items on a recurring basis at fair value as follows:
|
|
•
|
Money market funds – Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds, which are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders' equity. The Company's cash and cash equivalents held at December 31, 2019 and June 30, 2020 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.
|
|
|
•
|
Marketable securities – Classified in Level 2 and valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets. The Company does not hold securities in inactive markets.
|
|
|
•
|
Deferred payments – The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011. The deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using discounted cash flow models that encompass significant unobservable inputs. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The short-term portion of deferred payments was $0.8 million as of June 30, 2020 and is included in accounts payable and accrued expense.
|
The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and did not transfer assets or liabilities between levels of the fair value hierarchy during the six months ended June 30, 2019 and 2020.
Changes in the fair value of the Company’s Level 3 liabilities during the six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
2019
|
|
2020
|
Balance as of the beginning of period
|
$
|
4,120
|
|
|
$
|
3,257
|
|
Amounts paid
|
(751
|
)
|
|
(808
|
)
|
Other adjustments to fair value
|
295
|
|
|
(21
|
)
|
Balance at end of period
|
$
|
3,664
|
|
|
$
|
2,428
|
|
|
|
7.
|
Accounts Payable and Accrued Expenses
|
Accounts payable and accrued expenses consist of the following as of December 31, 2019 and June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
June 30, 2020
|
Trade payables
|
$
|
47,503
|
|
|
$
|
33,861
|
|
Accrued compensation and benefits
|
33,924
|
|
|
23,689
|
|
Accrued student obligations
|
4,580
|
|
|
4,261
|
|
Real estate liabilities
|
751
|
|
|
486
|
|
Other
|
4,070
|
|
|
4,961
|
|
Accounts payable and accrued expenses
|
$
|
90,828
|
|
|
$
|
67,258
|
|
On August 1, 2018, the Company entered into an amended credit facility (the “Amended Credit Facility”), which provides for a senior secured revolving credit facility (the “Revolver”) in an aggregate principal amount of up to $250 million. The Amended Credit Facility provides the Company with an option, under certain conditions, to increase the commitments under the Revolver or establish one or more incremental term loans (each, an “Incremental Facility”) in an amount up to the sum of (x) $150 million and (y) if such Incremental Facility is incurred in connection with a permitted acquisition, any amount so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. The maturity date of the Amended Credit Facility is August 1, 2023. The Company paid approximately $1.2 million in debt financing costs associated with the Amended Credit Facility, and these costs are being amortized on a straight-line basis over the five-year term of the Amended Credit Facility.
Borrowings under the Revolver will bear interest at a per annum rate equal to, at the Company’s election, LIBOR or a base rate, plus a margin ranging from 1.50% to 2.00% depending on the Company’s leverage ratio. The Company also is subject to a quarterly unused commitment fee ranging from 0.20% to 0.30% per annum depending on the Company’s leverage ratio, times the daily unused amount under the Revolver.
The Amended Credit Facility is guaranteed by all domestic subsidiaries, subject to certain exceptions, and secured by substantially all of the assets of the Company and its subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants, representations, warranties, events of default, and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Amended Credit Facility. In addition, the Amended Credit Facility requires that the Company satisfy certain financial maintenance covenants, including:
|
|
•
|
A leverage ratio of not greater than 2 to 1. Leverage ratio is defined as the ratio of total debt to trailing four-quarter EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation).
|
|
|
•
|
A coverage ratio of not less than 1.75 to 1. Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense.
|
|
|
•
|
A U.S. Department of Education (“Department” or "Department of Education") Financial Responsibility Composite Score of not less than 1.5.
|
The Company was in compliance with all the terms of the Amended Credit Facility and had no borrowings outstanding under the Revolver as of June 30, 2020.
|
|
9.
|
Other Long-Term Liabilities
|
Other long-term liabilities consist of the following as of December 31, 2019 and June 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
June 30, 2020
|
Contract liabilities, net of current portion
|
$
|
30,925
|
|
|
$
|
32,210
|
|
Deferred payments related to acquisitions
|
4,963
|
|
|
4,232
|
|
Asset retirement obligations
|
1,961
|
|
|
1,902
|
|
Employee separation costs
|
1,838
|
|
|
361
|
|
Other
|
1,764
|
|
|
1,860
|
|
Other long-term liabilities
|
$
|
41,451
|
|
|
$
|
40,565
|
|
Contract Liabilities
As discussed in Note 3, in connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained (the Graduation Fund). Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year.
Deferred Payments Related to Acquisitions
In connection with previous acquisitions, the Company acquired certain assets and entered into deferred payment arrangements with the sellers. The deferred payment arrangements are valued at approximately $2.2 million and $1.4 million as of December 31, 2019 and June 30, 2020, respectively. In addition, one of the sellers contributed $2.8 million to the Company representing the seller’s continuing interest in the assets acquired.
Asset Retirement Obligations
Obligations related to lease agreements that require the leased premises to be returned in a predetermined condition.
Employee Separation Costs
Severance and other employee separation costs to be paid after one year.
The following table sets forth the amount of stock-based compensation expense recorded in each of the expense line items for the three and six months ended June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Instructional and support costs
|
$
|
1,017
|
|
|
$
|
1,356
|
|
|
$
|
1,875
|
|
|
$
|
2,386
|
|
General and administration
|
2,138
|
|
|
2,503
|
|
|
3,811
|
|
|
4,498
|
|
Merger and integration costs
|
411
|
|
|
—
|
|
|
890
|
|
|
—
|
|
Stock-based compensation expense included in operating expense
|
3,566
|
|
|
3,859
|
|
|
6,576
|
|
|
6,884
|
|
Tax benefit
|
923
|
|
|
993
|
|
|
1,682
|
|
|
1,770
|
|
Stock-based compensation expense, net of tax
|
$
|
2,643
|
|
|
$
|
2,866
|
|
|
$
|
4,894
|
|
|
$
|
5,114
|
|
During the six months ended June 30, 2019 and 2020, the Company recognized a tax windfall related to share-based payment arrangements of approximately $3.5 million and $2.8 million, respectively, which was recorded as an adjustment to the provision for income taxes.
During the six months ended June 30, 2019 and 2020, the Company recorded income tax expense of $24.9 million and $24.7 million, reflecting an effective tax rate of 40.9% and 26.3%, respectively.
In February 2019, to align compensation and benefit plans after completion of the merger with CEC, the Compensation Committee of the Company’s Board of Directors took action to terminate all deferred compensation arrangements, including for employees already participating in such arrangements. These changes affected the tax deductibility of certain arrangements, which resulted in a discrete item recorded during the three months ended March 31, 2019, reducing the Company’s deferred tax assets by $11.5 million and increasing the Company’s 2019 effective tax rate and future cash tax payments.
The Company had $1.2 million of unrecognized tax benefits as of December 31, 2019 and June 30, 2020. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the unaudited condensed consolidated statements of income. The Company incurred approximately $105,000 and $39,000 related to interest and penalties during the six months ended June 30, 2019 and 2020, respectively.
The Company paid $24.7 million and $16.2 million in income taxes during the six months ended June 30, 2019 and 2020, respectively.
The tax years since 2016 remain open for Federal tax examination and the tax years since 2015 remain open to examination by state and local taxing jurisdictions in which the Company is subject to taxation.
12. Other Investments
At June 30, 2020, the Company held $17.0 million in investments in certain limited partnerships that invest in various innovative companies in the health care and education-related technology fields. The Company has commitments to invest up to an additional $1.9 million across these partnerships through 2027. The Company's investments range from 3%-5% of any partnership’s interest and are accounted for under the equity method. At December 31, 2019, the Company's investment in limited partnerships was $15.8 million.
The following table illustrates changes in the Company’s limited partnership investments for the three and six months ended June 30, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30
|
|
2019
|
|
2020
|
|
2018
|
|
2019
|
Limited partnership investments, beginning of period
|
$
|
13,823
|
|
|
$
|
15,805
|
|
|
$
|
13,449
|
|
|
$
|
15,795
|
|
Capital contributions
|
245
|
|
|
175
|
|
|
513
|
|
|
293
|
|
Pro-rata share in the net income of limited partnerships
|
597
|
|
|
1,010
|
|
|
1,554
|
|
|
1,242
|
|
Distributions
|
(175
|
)
|
|
—
|
|
|
(1,026
|
)
|
|
(340
|
)
|
Limited partnership investments, end of period
|
$
|
14,490
|
|
|
$
|
16,990
|
|
|
$
|
14,490
|
|
|
$
|
16,990
|
|
13. Segment Reporting
Strategic Education is an educational 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. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. The Company merged DevMountain into Strayer University, which resulted in a change to the way management reviews financial information in 2020 and by which the Chief Operating Decision Maker evaluates performance and allocates the resources of the Company. Prior period segment disclosures have been recast to conform to the current period presentation.
The Company’s two operating segments, Strayer University and Capella University, meet the quantitative thresholds to qualify as reportable segments. The Strayer University segment is comprised of Strayer University, including its programs offered through the Jack Welch Management Institute and DevMountain, as well as Hackbright Academy. The Capella University segment consists of Capella University and Sophia Learning.
Revenue and operating expenses are generally directly attributable to the segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. The Company’s Chief Operating Decision Maker does not evaluate operating segments using asset information.
A summary of financial information by reportable segment for the three and six months ended June 30, 2019 and 2020 is presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
June 30,
|
|
For the six months ended
June 30,
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Revenues
|
|
|
|
|
|
|
|
Strayer University
|
$
|
131,728
|
|
|
$
|
138,080
|
|
|
$
|
262,474
|
|
|
$
|
283,734
|
|
Capella University
|
113,382
|
|
|
117,751
|
|
|
229,144
|
|
|
237,399
|
|
Consolidated revenues
|
$
|
245,110
|
|
|
$
|
255,831
|
|
|
$
|
491,618
|
|
|
$
|
521,133
|
|
Income from operations
|
|
|
|
|
|
|
|
Strayer University
|
$
|
24,433
|
|
|
$
|
35,813
|
|
|
$
|
48,236
|
|
|
$
|
72,416
|
|
Capella University
|
21,599
|
|
|
27,173
|
|
|
46,115
|
|
|
53,710
|
|
Amortization of intangible assets
|
(15,417
|
)
|
|
(15,417
|
)
|
|
(30,834
|
)
|
|
(30,834
|
)
|
Merger and integration costs
|
(3,019
|
)
|
|
(1,174
|
)
|
|
(10,198
|
)
|
|
(4,938
|
)
|
Consolidated income from operations
|
$
|
27,596
|
|
|
$
|
46,395
|
|
|
$
|
53,319
|
|
|
$
|
90,354
|
|
The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. From time to time, certain matters may arise that are other than ordinary and routine. The outcome of such matters is uncertain, and the Company may incur costs in the future to defend, settle, or otherwise resolve them. The Company currently believes that the ultimate outcome of such matters will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.
CARES Act
On March 27, 2020, Congress passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Securities ("CARES") Act. Among other things, the $2.2 trillion bill established some flexibilities related to the processing of federal student financial aid, established a higher education emergency fund, and created relief for some federal student loan borrowers. Through the CARES Act, Congress provided institutions of higher education relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of COVID-19, including removing the requirement that the institution return unearned funds to the Department of Education and providing loan cancellation for the portion of the Direct Loan associated with a payment period that the student did not complete due to COVID-19. The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to COVID-19, without requiring an appeal from the student. Additionally, under the legislation, institutions are permitted to transfer up to 100% of Federal Work Study funds into their Federal Supplemental Educational Opportunity Grant allocation and are granted a waiver of the 2019/2020 and 2020/2021 non-federal share institutional match. Institutions may continue to make Federal Work Study payments to student employees who are unable to meet their employment obligations due to COVID-19. The CARES Act also suspends payments and interest accrual on federal student loans until September 30, 2020, in addition to suspending involuntary collections such as wage garnishment, tax refund reductions, and reductions of federal benefits like Social Security benefits during the same timeframe. The Department issued and will continue to issue sub-regulatory guidance to institutions regarding implementation of the provisions included in the CARES Act.
Finally, the CARES Act allocated $14 billion to higher education through the creation of the Education Stabilization Fund. Fifty percent of the emergency funds received by institutions must go directly to students in the form of emergency financial aid grants to cover expenses related to the disruption of campus operations due to COVID-19. Students who were previously enrolled in exclusively online courses prior to March 13, 2020 are not eligible for these grants. Institutions may use remaining emergency funds not given to students on costs associated with significant changes to the delivery of instruction due to COVID-19, as long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising; endowments; or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship.
Institutions receive funds under the Education Stabilization Fund based on a formula that factors in their relative percentage of full-time, Federal Pell Grant-eligible students who were not exclusively enrolled in online education prior to the emergency period. On April 9, 2020, the Department published guidance and funding levels for the Education Stabilization Fund, indicating that Strayer University was eligible to receive $5,792,122. Given that Strayer University is predominantly online, and very few students take only on-ground classes, Strayer declined to accept the funds allocated to it because most students would not have expenses related to the disruption of campus operations. Instead, Strayer University provided a $500 tuition grant for all students who had enrolled in on-ground classes for the Spring term, prior to the classes being converted to online. Because Capella University’s students are exclusively online, Capella was ineligible for Education Stabilization funding.
Gainful Employment
Under the Higher Education Act ("HEA"), a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation. The Department of Education published final regulations related to gainful employment that went into effect on July 1, 2015, with the additional disclosure requirements that became effective January 1, 2017 and July 1, 2019 (the “2015 Regulations”).
On July 1, 2019, the Department of Education released final gainful employment regulations, which contained a full repeal of the 2015 Regulations and became effective on July 1, 2020. Both Capella University and Strayer University implemented the July 2019 regulations early, by means permitted by the Secretary, and accordingly were not required to report gainful employment data for the 2018-2019 award year. For the period between July 2019 and July 1, 2020, Capella and Strayer University were not required to comply with gainful employment disclosure and template publication requirements and were not required to comply with the
regulation’s certification requirements with respect to programmatic accreditation and program satisfaction of prerequisites for professional licensure/state certification.
Borrower Defenses to Repayment
On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which governs borrower defense to repayment claims in connection with loans first disbursed on or after July 1, 2020, the date the 2019 BDTR Rule became effective. The 2019 BDTR Rule supplants the 2016 Borrower Defense to Repayment rule.
Under the 2019 BDTR Rule, an individual borrower can assert a defense to repayment and be eligible for relief if she or he establishes, by a preponderance of the evidence, that (1) the institution at which the borrower enrolled made a misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan or a loan repaid by a Direct Consolidation Loan; (2) the misrepresentation directly and clearly related to the borrower’s enrollment or continuing enrollment at the institution or the institution’s provision of education services for which the loan was made; and (3) the borrower was financially harmed by the misrepresentation. The Department will grant forbearance on all loans related to a claim at the time the claim is made.
The 2019 BDTR Rule defines “financial harm” as the amount of monetary loss that a borrower incurs as a consequence of a misrepresentation. The Department will determine financial harm based upon individual earnings and circumstances, which must include consideration of the individual borrower’s career experience subsequent to enrollment and may include, among other factors, evidence of program-level median or mean earnings. “Financial harm” does not include damages for nonmonetary loss, and the act of taking out a Direct Loan, alone, does not constitute evidence of financial harm. Financial harm also cannot be predominantly due to intervening local, regional, national economic or labor market conditions, nor can it arise from the borrower’s voluntary change in occupation or decision to pursue less than full-time work or decision not to work. The 2019 BDTR Rule contains certain limitations and procedural protections. Among the most prominent of these restrictions, the regulation contains a three-year limitation period of claims, measured from the student’s separation from the institution, does not permit claims to be filed on behalf of groups, and requires that institutions receive access to any evidence in the Department’s possession to inform its response. The 2019 BDTR Rule permits the usage of pre-dispute arbitration agreements and class action waivers as conditions of enrollment, so long as the institution provides plain-language disclosures to students and the disclosure is placed on the institution’s website. The regulations also allow for a borrower to choose whether to apply for a closed school loan discharge or accept a teach-out opportunity. In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure, though the final rule does not allow for an automatic closed school loan discharge. Institutions are required to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the borrower defense to repayment, closed school discharge, false certification discharge, and unpaid refund discharge regulations. If the Secretary discharges a loan in whole or in part, the Department of Education may require the school to repay the amount of the discharged loan.
On March 11, 2020, the 116th Congress passed a joint resolution providing for Congressional disapproval of the 2019 BDTR Rule. President Trump vetoed the joint resolution on May 29, 2020, and the House subsequently failed to override the veto during a vote on June 26, 2020.
Accrediting Agencies and State Authorization
On November 1, 2019, the Department of Education published final rules amending regulations governing the recognition of accrediting agencies, certain student assistance provisions including state authorization rules, and institutional eligibility. Among other changes, the final rules revise the definition of “state authorization reciprocity agreement” such that member states may enforce their own general-purpose state laws and regulations, but may not impose additional requirements related to state authorization of distance education directed at all or a subgroup of educational institutions. The regulations also clarify that state authorization requirements related to distance education courses are based on the state where a student is “located,” as determined by the institution, and not the state of the student’s “residence.” In addition, the final rules remove certain disclosure requirements related to programs offered solely through distance education, and they replace those requirements with certain disclosure requirements applicable to all programs that lead to professional licensure or certification, regardless of the delivery modality of those programs. The Department’s new rules also refine the process for recognition and review of accrediting agencies, the criteria used by the Department to recognize accrediting agencies, and the Department’s requirements for accrediting agencies in terms of their oversight of accredited institutions and programs. The final regulations became effective on July 1, 2020, excepting certain provisions which were eligible to be implemented early by institutions, and certain provisions relating to recognition of accrediting agencies effective January 1 or July 1, 2021. Neither Capella University nor Strayer University opted for early implementation.
On July 29, 2020, the National Advisory Committee on Institutional Quality and Integrity (“NACIQI”) held a meeting to review compliance by the Higher Learning Commission (“HLC”) with Department of Education requirements for recognized accrediting agencies. HLC is the institutional accreditor for Capella University. On June 30, 2020, the Department released a staff report that outlined HLC’s alleged noncompliance with its own policies and the Department’s regulations with regard to a change of ownership
approval process for the acquisition of the Art Institute of Colorado and the Illinois Institute of Art, by Dream Center Educational Holdings. The staff report noted noncompliance in the areas of due process, consistency in decision making, and proper appeals procedures. The staff report proposed a one-year prohibition on HLC accrediting new institutions and a required compliance report on HLC’s remedial actions. NACIQI voted 9-2 to reject the staff report’s proposed sanctions, but NACIQI’s recommendation is non-binding. A Senior Department Official will make the decision on any action regarding HLC’s recognition by the Department. That decision can be appealed to the Secretary of Education. The Company cannot predict what conclusions the Department will reach regarding HLC.
Distance Education and Innovation
On April 2, 2020, the Department of Education published proposed regulations related to distance education and innovation to amend the sections of the institutional eligibility regulations issued under the HEA regarding establishing eligibility, maintaining eligibility, and losing eligibility. The proposed rules are the third package of regulations reflecting consensus language from the Accreditation and Innovation negotiated rulemaking, which took place from January to April, 2019. Among other changes, the proposed rules would establish an updated definition of distance education; amend the existing definition of the credit hour; create a definition of academic engagement; and update eligibility, program design, and disbursement rules for programs offered through the direct assessment of learning. The Department accepted public comments through May 4, 2020. If the final regulations are published by November 1, 2020, they will be effective July 1, 2021.
Title IX
On May 6, 2020, the Department of Education published final rules related to implementation of Title IX of the Education Amendments of 1972 (“Title IX”), which prohibits discrimination on the basis of sex in education programs that receive funding from the federal government. The final rules define what constitutes sexual harassment for purposes of Title IX in the administrative enforcement context, describe what actions trigger an institution’s obligation to respond to incidents of alleged sexual harassment, and specify how an institution must respond to allegations of sexual harassment. Among other things, the new rules include a requirement for live hearings on Title IX sexual harassment claims, which includes direct and cross-examination of parties, university-provided advisors (in the event a student or party does not provide an advisor), rulings on questions of relevance by decision-makers, and the creation and maintenance of a record of the live hearing proceedings. If pending litigation seeking court intervention to delay or vacate the final Title IX rule is unsuccessful, it will become effective August 14, 2020.
Compliance Reviews
The Universities are subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department, its Office of Inspector General, state licensing agencies, guaranty agencies, and accrediting agencies. In 2014, the Department conducted four campus-based program reviews of Strayer University locations in three states and the District of Columbia. The reviews covered federal financial aid years 2012-2013 and 2013-2014, and two of the reviews also covered compliance with the Clery Act, the Drug-Free Schools and Communities Act, and related regulations. For three of the program reviews, Strayer University received correspondence from the Department in 2015 closing the program reviews with no further action required by Strayer University. For the other program review, in 2016, Strayer University received a Final Program Review Determination Letter that identified a payment of less than $500 due to the Department based on an underpayment on a return to Title IV calculation and otherwise closed the review. Strayer University remitted payment and received a letter from the Department indicating that no further action was required and that the matter was closed.
In June 2019, the Department conducted an announced, on-site program review at Capella University, focused on Capella University’s FlexPath program. The review covered the 2017-2018 and 2018-2019 federal student financial aid years. The program review has not concluded. In general, after the Department conducts its site visit and reviews data supplied by the institution, it sends the institution a program review report. The institution has the opportunity to respond to any findings in the report. The Department then issues a Final Program Review Determination, which identifies any liabilities. The institution may appeal any monetary liabilities specified in the Final Program Review Determination.
Program Participation Agreement
Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department. Under the agreement, the institution agrees to follow the Department’s rules and regulations governing Title IV programs. On October 11, 2017, the Department and Strayer University executed a new Program Participation Agreement, approving Strayer University’s continued participation in Title IV programs with full certification through June 30, 2021. Strayer University is required to apply for recertification by March 31, 2021.
As a result of the August 1, 2018 merger, Capella University experienced a change of ownership, with the Company as its new owner. On January 18, 2019, consistent with standard procedure upon a Title IV institution’s change of ownership, the Department and Capella University executed a new Provisional Program Participation Agreement, approving Capella’s continued participation in Title IV programs with provisional certification through December 31, 2022. As is typical, the Provisional Program Participation Agreement subjects Capella University to certain requirements during the period of provisional certification, including that Capella must apply for and receive approval from the Department in connection with new locations or addition of new Title IV-eligible educational programs. Capella will be required to apply for recertification by September 30, 2022.
16. Subsequent Events
On July 29, 2020, the Company announced it entered into a definitive agreement to acquire the Australia and New Zealand operations of Laureate Education, Inc. The transaction is valued at approximately $642.7 million, subject to potential adjustments, and has been unanimously approved by the Boards of Directors of both companies. The transaction is subject to the satisfaction of certain customary closing conditions and regulatory approvals and is expected to close by the first quarter of 2021. The Company has received commitments from its lenders to expand its existing revolving credit facility from $250 million to $350 million coinciding with the close of the transaction.