Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our consolidated financial statements and the notes thereto, the “Cautionary Notice Regarding Forward-Looking Statements,” Part I, Item 1A “Risk Factors,” and the other information appearing elsewhere, or incorporated by reference, in this Annual Report on Form 10-K.
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.
Acquisition of Torrens University and associated assets in Australia and New Zealand
On November 3, 2020, we completed the acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”), pursuant to the sale and purchase agreement dated July 29, 2020. Pursuant to the purchase agreement, the aggregate consideration paid was approximately $658.4 million in cash, which reflected the original agreed upon purchase price of $642.7 million plus cash acquired in the transaction. We funded the acquisition using cash on hand and borrowings under our revolving credit facility. ANZ includes Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across five industry verticals, including business, hospitality, health, education, creative technology and design.
Our financial results for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and are therefore not directly comparable.
Segments Overview
As of December 31, 2022, we had the follow three 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 2022, USHE average total enrollment decreased 6.5% to 77,027 students compared to 82,425 students in 2021.
•Trailing 4-quarter student persistence within USHE was 87.7% in the third quarter of 2022 compared to 86.9% for the same period in 2021. Student persistence is calculated as the rate of students continuing from one quarter to the next, adjusted for graduates, on a trailing 4-quarter basis. Student persistence is reported one quarter in arrears. The table below summarizes USHE trailing 4-quarter student persistence for the past 8 quarters.
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| Q4 2020 | | Q1 2021 | | Q2 2021 | | Q3 2021 | | Q4 2021 | | Q1 2022 | | Q2 2022 | | Q3 2022 |
| 86.7 | % | | 86.5 | % | | 87.0 | % | | 86.9 | % | | 86.8 | % | | 87.1 | % | | 87.3 | % | | 87.7 | % |
•Trailing 4-quarter government provided grants and loans per credit earned within USHE decreased 5.3% as of the end of the third quarter of 2022. Government provided grants and loans per credit earned includes all Federal loans and grants for students (Title IV hereafter) in our USHE institutions, and is calculated on a trailing 4-quarter basis and reported one quarter in arrears. Title IV per credit earned has been declining as employer-affiliated enrollment has grown, and as more students earn credit through Sophia Learning and other affordable alternative pathways. The table below summarizes the percentage change in USHE trailing 4-quarter Title IV per credit earned for the past 8 quarters.
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| Q4 2020 | | Q1 2021 | | Q2 2021 | | Q3 2021 | | Q4 2021 | | Q1 2022 | | Q2 2022 | | Q3 2022 |
| (10.3) | % | | (15.1) | % | | (17.2) | % | | (15.1) | % | | (11.3) | % | | (8.1) | % | | (6.4) | % | | (5.3) | % |
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 2022, employer affiliated enrollment as a percentage of USHE enrollment was 24.4% compared to 21.0% in 2021.
•Education Technology Services also supports employer partners through Workforce Edge, a platform which provides employers a full-service education benefits administration solution, and Sophia Learning, which enables education benefits programs through the use of low-cost online general education-level courses recommended by the American Council on Education for credit at other colleges and universities.
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 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 2022, Australia/New Zealand enrollment increased to 19,388 compared to 19,350 for the same period in 2021.
We believe we have the right operating strategies in place to provide the most direct path between learning and employment for our students. 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 year ended December 31, 2022 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.
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 or graduate 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 or master’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 December 31, 2022, we had deferred $46.8 million for estimated redemptions earned under the Graduation Fund, as compared to $52.0 million at December 31, 2021. Each quarter, we assess our assumptions underlying our estimates for persistence and estimated redemptions based on actual experience. To date, any adjustments to our estimates have not been material. 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. During 2022 and 2021, our bad debt expense was 3.9% and 3.8% of revenue, respectively. A change in our allowance for credit losses of 1% of gross tuition receivable as of December 31, 2022 would have changed our income from operations by approximately $1.1 million.
Business combinations — We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, the purchase price be allocated to all tangible assets and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. The determination of the fair value of assets acquired and liabilities assumed requires many estimates and assumption with respect to the timing and amounts of cash flow projections, revenue growth rates, earnings before interest and taxes margins, student attrition rates, royalty rates, discount rates, and useful lives. These estimates are based on assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with corresponding offsets to goodwill. We applied the acquisition method of accounting to our acquisition of ANZ in 2020. Refer to Note 3, Business Combinations, within the footnotes to the consolidated financial statements for additional information.
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. We had significant additions to goodwill and tradename intangible assets related to our acquisition of ANZ in 2020.
Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment, 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 below its carrying amount. In 2022, we performed a qualitative impairment assessment, consistent with ASC 350,
of goodwill assigned to all reporting units, except for goodwill assigned to the ANZ reporting unit, as well as for indefinite-lived intangible assets, except for the ANZ trade names, to evaluate the recoverability of the related amounts. The qualitative factors considered included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value.
In 2022, in connection with the goodwill in our ANZ reporting unit as well as our ANZ indefinite-lived intangible assets, we performed a quantitative impairment assessment, consistent with ASC 350. To assess goodwill, we used an income-based approach to determine the fair value of the ANZ reporting unit, which consisted of a discounted cash flow model that included projections of future cash flows for the ANZ reporting unit, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return. To assess the indefinite-lived intangible assets, we used an income-based approach to determinate the fair value of the ANZ trade names, which consisted of a discounted cash flow model, using the relief from royalty method, that included a projection of future revenues for ANZ, identifying a royalty rate, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return. Based on the qualitative and quantitative impairment assessments performed, we concluded that no goodwill or indefinite-lived intangible asset impairments had been incurred during the years ended December 31, 2021 or 2022.
Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. 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 years ended December 31, 2021 or 2022.
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
As discussed above, we completed our acquisition of ANZ on November 3, 2020. Our results of operations include the results of ANZ from the acquisition date. Periods prior to November 3, 2020 do not include the financial results of ANZ. Accordingly, the financial results of each period presented are not directly comparable.
In 2022, we generated $1,065.5 million in revenue compared to $1,131.7 million in 2021. Our income from operations decreased to $70.8 million in 2022 compared to $73.9 million in 2021, primarily due to lower earnings in the USHE segment, partially offset by lower amortization expense of intangible assets, restructuring costs, and merger and integration costs. Our net income in 2022 was $46.7 million compared to $55.1 million in 2021. Diluted earnings per share was $1.94 in 2022 compared to $2.28 in 2021.
Year Ended December 31, 2022 Compared To Year Ended December 31, 2021
Revenues. Consolidated revenues decreased to $1,065.5 million in 2022, compared to $1,131.7 million in the same period in the prior year, primarily due to declines in enrollment and unfavorable foreign exchange impacts. In the USHE segment for the year ended December 31, 2022, total average enrollment decreased 6.5% to 77,027 from 82,425 in the prior year. USHE segment revenues decreased 7.0% to $771.0 million compared to $829.3 million in 2021 primarily as a result of declines in enrollment. In the Australia/New Zealand segment for the year ended December 31, 2022, total average enrollment increased to 19,388 from 19,350 in the prior year. Australia/New Zealand segment revenues decreased 7.7% to $230.7 million compared to $250.1 million in 2021, primarily due to unfavorable foreign exchange impacts and lower revenue-per-student. In the Education Technology Services segment, revenues for the year ended December 31, 2022 increased 21.9% to $63.8 million compared to $52.3 million in 2021, primarily as a result of growth in Sophia Learning and higher employer affiliated enrollment.
Instructional and support costs. Consolidated instructional and support costs decreased to $597.3 million in 2022 compared to $608.3 million in 2021, principally due to lower facility costs and bad debt expenses. Consolidated instructional and support costs as a percentage of revenues increased to 56.1% in 2022, from 53.7% in 2021.
General and administration expenses. Consolidated general and administration expenses increased to $379.8 million in 2022 compared to $361.3 million in 2021, principally due to increased investments in branding initiatives and partnerships with
brand ambassadors. Consolidated general and administration expenses as a percentage of revenues increased to 35.6% in 2022 from 31.9% in 2021.
Amortization of intangible assets. Amortization of intangible assets decreased to $14.4 million in 2022 compared to $51.5 million in 2021, due to the finite-lived intangible assets acquired through the merger with Capella Education Company being fully amortized as of the third quarter of 2021.
Merger and integration costs. Merger and integration costs decreased to $1.1 million in 2022 compared to $11.2 million in 2021, as a result of lower integration expenses associated with the acquisition of ANZ.
Restructuring costs. Restructuring costs decreased to $2.1 million in 2022 from $25.5 million in 2021, principally due to $3.7 million of right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in 2022, compared to $21.6 million in 2021, as well as higher severance and other personnel-related expenses from employee terminations in 2021.
Income from operations. Consolidated income from operations decreased to $70.8 million in 2022 compared to $73.9 million in 2021, primarily due to lower earnings in the USHE segment, partially offset by lower amortization expense of intangible assets, restructuring costs, and merger and integration costs. USHE segment income from operations decreased 63.2% to $38.6 million in 2022 compared to $104.9 million in 2021, primarily due to declines in enrollment, lower revenue-per-student, and increased investments in marketing initiatives. Australia/New Zealand segment income from operations decreased 15.0% to $30.5 million in 2022 compared to $35.9 million in 2021, primarily due to lower revenues and unfavorable foreign currency impacts. Education Technology Services segment income from operations decreased 9.6% to $19.3 million in 2022 compared to $21.3 million in 2021 as a result of increased investment in outreach to corporate partners, partially offset by growth in Sophia Learning and an increase in employer affiliated enrollment.
Other income (expense). Other income (expense) decreased to $1.2 million of expense in 2022 compared to $2.7 million of income in 2021, primarily due to a decrease in investment income from our limited partnership investments and an increase in interest expense, partially offset by an increase in interest income due to higher interest rates. We incurred $5.7 million of interest expense in 2022 compared to $3.6 million in 2021.
Provision for income taxes. Income tax expense was $22.9 million in 2022 compared to $21.5 million in 2021. Our effective tax rate for 2022 was 32.9%, compared to 28.1% in 2021. The increase in the effective tax rate in 2022 was primarily due to a $1.5 million tax shortfall recognized through share-based payment arrangements. Our effective tax rate, excluding these and other discrete tax adjustments, was 30.4% for 2022.
Net income. Net income decreased to $46.7 million in 2022 compared to $55.1 million in 2021 due to the factors discussed above.
Year Ended December 31, 2021 Compared To Year Ended December 31, 2020
Revenues. Consolidated revenues increased to $1,131.7 million in 2021 compared to $1,027.7 million in the same period in the prior year, primarily due to the inclusion of ANZ for the full year. In the USHE segment for the year ended December 31, 2021, total average enrollment decreased 11.0% to 82,425 from 92,637 in the prior year. USHE segment revenues decreased 14.2% to $829.3 million compared to $966.6 million in 2020 as a result of declines in enrollment and revenue-per-student due to higher scholarships and discounts. In the Education Technology Services segment, revenues for the year ended December 31, 2021 increased 38.7% to $52.3 million compared to $37.7 million in 2020 as a result of rapid growth in Sophia Learning and higher employer affiliated enrollment. In the Australia/New Zealand segment, revenues for the year ended December 31, 2021 were $250.1 million, compared to $23.4 million in 2020, which only reflects activity after the completion of the ANZ acquisition in November 2020. ANZ revenue includes a $3.6 million and $11.3 million purchase accounting reduction in 2021 and 2020, respectively, related to contract liabilities acquired in the acquisition.
Instructional and support costs. Consolidated instructional and support costs increased to $608.3 million in 2021 compared to $532.7 million in 2020, principally due to the inclusion of $129.6 million of instructional and support costs related to ANZ in 2021, compared to $19.7 million in 2020, partially offset by cost savings implemented as a result of the COVID-19 pandemic, which included lower expenses associated with travel and facilities costs, as well as savings from the employee restructuring plan implemented in the third quarter of 2020. Consolidated instructional and support costs as a percentage of revenues increased to 53.7% in 2021, from 51.8% in 2020.
General and administration expenses. Consolidated general and administration expenses increased to $361.3 million in 2021 compared to $295.2 million in 2020, principally due to the inclusion of $84.6 million of general and administration
expenses related to ANZ in 2021, compared to $17.0 million in 2020. Consolidated general and administration expenses as a percentage of revenues increased to 31.9% in 2021, from 28.7% in 2020.
Amortization of intangible assets. Amortization of intangible assets decreased to $51.5 million in 2021 compared to $64.2 million in 2020, due to lower amortization expense associated with intangible assets acquired through the merger with Capella Education Company, offset by additional amortization expense of intangible assets acquired in the acquisition of ANZ in November 2020.
Merger and integration costs. Merger and integration costs decreased to $11.2 million in 2021 compared to $13.8 million in 2020, principally due to lower transaction and integration expenses associated with the acquisition of ANZ and lower integration support costs related to the merger with Capella Education Company, partially offset by a charge taken in 2021 related to a premerger litigation settlement, net of insurance recovery.
Restructuring costs. Restructuring costs increased to $25.5 million in 2021 from $12.4 million in 2020, principally due to $21.6 million of right-of-use lease asset and fixed asset impairment charges associated with vacating leased space in 2021 based on an assessment of our real estate portfolio, partially offset by lower severance costs and a $2.7 million gain in 2021 from the sale of property and equipment of owned campuses that were closed in connection with the 2020 restructuring plan.
Income from operations. Consolidated income from operations decreased to $73.9 million in 2021 compared to $109.4 million in 2020, primarily due to lower earnings in the USHE segment and higher restructuring costs, partially offset by the inclusion of ANZ’s income from operations and lower amortization expense related to intangible assets. USHE segment income from operations decreased 45.8% to $104.9 million in 2021, compared to $193.4 million in 2020, primarily due to declines in enrollment and revenue-per-student due to higher scholarships and discounts. Education Technology Services segment income from operations increased 8.5% to $21.3 million in 2021, compared to $19.6 million in 2020 as a result of rapid growth in Sophia Learning, partially offset by increased investment in outreach to corporate partners. Income from operations for the Australia/New Zealand segment was $35.9 million in 2021, compared to a loss from operations of $13.3 million in 2020, following our acquisition of ANZ in November 2020.
Other income. Other income decreased to $2.7 million in 2021 compared to $4.6 million in 2020, as a result of an increase in interest expense related to our revolving credit facility which was used to partially fund the ANZ acquisition in November 2020, partially offset by higher investment income from our limited partnerships and other investments in 2021. We incurred $3.6 million of interest expense in 2021 compared to $1.4 million in 2020.
Provision for income taxes. Income tax expense was $21.5 million in 2021 compared to $27.7 million in 2020. Our effective tax rate for 2021 was 28.1% compared to 24.3% in 2020. The effective tax rate in 2020 included higher windfall tax benefits recognized through share-based payment arrangements. Our effective tax rate, excluding these and other discrete tax adjustments, was 28.5% for 2021.
Net income. Net income decreased to $55.1 million in 2021 compared to $86.3 million in 2020 due to the factors discussed above.
Non-GAAP Financial Measures
In the accompanying analysis of financial information for the three years ended December 31, 2022, we use certain financial measures including Adjusted Revenue, Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings per Share that are not required by or prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures, which are considered “non-GAAP financial measures” under SEC rules, are defined by us to exclude the following:
•purchase accounting adjustments to record acquired contract liabilities at fair value as a result of our acquisition of Torrens University and associated assets in Australia and New Zealand and to record amortization and depreciation expense related to intangible assets and software assets acquired through our merger with Capella Education Company and our acquisition of Torrens University and associated assets in Australia and New Zealand;
•transaction and 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 and right-of-use lease asset impairment charges associated with our restructuring;
•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 year ended December 31, 2022 are also presented on a constant currency basis.
When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying trends associated with our ongoing operations.
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 results for 2021 exclude an adjustment for foreign currency exchange impacts and are therefore not directly comparable to adjusted results previously reported for the year ended December 31, 2021. Adjusted income from operations was $88.3 million in 2022 compared to $165.7 million in 2021. Adjusted net income was $60.3 million in 2022 compared to $116.6 million in 2021, and adjusted diluted earnings per share was $2.51 in 2022 compared to $4.83 in 2021.
The tables below reconcile our reported results of operations to adjusted results (amounts in thousands, except per share data):
Reconciliation of Reported to Adjusted Results of Operations for the year ended December 31, 2022 (in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Non-GAAP Adjustments | | |
| | As Reported (GAAP) | | Purchase accounting adjustments(1) | | Merger and integration costs(2) | | Restructuring costs(3) | | Income from other investments(4) | | Tax adjustments(5) | | As Adjusted
(Non-GAAP) |
| Revenues | $ | 1,065,480 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,065,480 | |
| Total costs and expenses | $ | 994,720 | | | $ | (14,350) | | | $ | (1,117) | | | $ | (2,115) | | | $ | — | | | $ | — | | | $ | 977,138 | |
| Income from operations | $ | 70,760 | | | $ | 14,350 | | | $ | 1,117 | | | $ | 2,115 | | | $ | — | | | $ | — | | | $ | 88,342 | |
| Operating margin | 6.6% | | | | | | | | | | | | 8.3% |
| Income before income taxes | $ | 69,569 | | | $ | 14,350 | | | $ | 1,117 | | | $ | 2,115 | | | $ | (579) | | | $ | — | | | $ | 86,572 | |
| Net income | $ | 46,670 | | | $ | 14,350 | | | $ | 1,117 | | | $ | 2,115 | | | $ | (579) | | | $ | (3,419) | | | $ | 60,254 | |
| | | | | | | | | | | | | |
| Diluted earnings per share | $ | 1.94 | | | | | | | | | | | | | $ | 2.51 | |
| Weighted average diluted shares outstanding | 23,998 | | | | | | | | | | | | | 23,998 | |
Reconciliation of Reported to Adjusted Results of Operations for the year ended December 31, 2021 (in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Non-GAAP Adjustments | |
| | As Reported (GAAP) | | Purchase accounting adjustments(1) | | Merger and integration costs(2) | | Restructuring costs(3) | | Income from other investments(4) | | Tax adjustments(5) | | As Adjusted
(Non-GAAP) |
| Revenues | $ | 1,131,686 | | | $ | 3,646 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,135,332 | |
| Total costs and expenses | $ | 1,057,774 | | | $ | (51,495) | | | $ | (11,201) | | | $ | (25,472) | | | $ | — | | | $ | — | | | $ | 969,606 | |
| Income from operations | $ | 73,912 | | | $ | 55,141 | | | $ | 11,201 | | | $ | 25,472 | | | $ | — | | | $ | — | | | $ | 165,726 | |
| Operating margin | 6.5% | | | | | | | | | | | | 14.6% |
| Income before income taxes | $ | 76,599 | | | $ | 55,141 | | | $ | 11,201 | | | $ | 25,472 | | | $ | (5,300) | | | $ | — | | | $ | 163,113 | |
| Net income | $ | 55,087 | | | $ | 55,141 | | | $ | 11,201 | | | $ | 25,472 | | | $ | (5,300) | | | $ | (24,975) | | | $ | 116,626 | |
| | | | | | | | | | | | | |
| Diluted earnings per share | $ | 2.28 | | | | | | | | | | | | | $ | 4.83 | |
| Weighted average diluted shares outstanding | 24,122 | | | | | | | | | | | | | 24,122 | |
Reconciliation of Reported to Adjusted Results of Operations for the year ended December 31, 2020 (in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Non-GAAP Adjustments | |
| | As Reported (GAAP) | | Purchase accounting adjustments(1) | | Merger and integration costs(2) | | Restructuring costs(3) | | Income from other investments(4) | | Tax adjustments(5) | | As Adjusted
(Non-GAAP) |
| Revenues | $ | 1,027,653 | | | $ | 11,296 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,038,949 | |
| Total costs and expenses | $ | 918,269 | | | $ | (64,225) | | | $ | (13,770) | | | $ | (12,382) | | | $ | — | | | $ | — | | | $ | 827,892 | |
| Income from operations | $ | 109,384 | | | $ | 75,521 | | | $ | 13,770 | | | $ | 12,382 | | | $ | — | | | $ | — | | | $ | 211,057 | |
| Operating margin | 10.6% | | | | | | | | | | | | 20.3% |
| Income before income taxes | $ | 113,957 | | | $ | 75,521 | | | $ | 13,770 | | | $ | 12,382 | | | $ | (2,094) | | | $ | — | | | $ | 213,536 | |
| Net income | $ | 86,268 | | | $ | 75,521 | | | $ | 13,770 | | | $ | 12,382 | | | $ | (2,094) | | | $ | (33,141) | | | $ | 152,706 | |
| | | | | | | | | | | | | |
| Diluted earnings per share | $ | 3.77 | | | | | | | | | | | | | $ | 6.68 | |
| Weighted average diluted shares outstanding | 22,860 | | | | | | | | | | | | | 22,860 | |
__________________________________________________________________________________________(1)Reflects a purchase accounting adjustment to record acquired contract liabilities at fair value as a result of the Company’s acquisition of Torrens University and associated assets in Australia and New Zealand, and amortization and depreciation expense of intangible assets and software assets acquired through the Company’s merger with Capella Education Company and the Company’s acquisition of Torrens University and associated assets in Australia and New Zealand.
(2)Reflects transaction and integration expenses associated with the Company’s merger with Capella Education Company, including premerger litigation settlement, net of insurance recovery, and the Company’s acquisition of Torrens University and associated assets in Australia and New Zealand.
(3)Reflects severance costs and right-of-use lease asset impairment charges associated with the Company’s restructuring.
(4)Reflects income/loss recognized from the Company’s investments in partnership interests and other investments.
(5)Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 30.4% for 2022 and an adjusted effective tax rate of 28.5% for 2021 and 2020.
The table below presents our adjusted results of operations on a constant currency basis for the year ended December 31, 2022 (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| As Adjusted
(Non-GAAP) | | Constant currency adjustment(1) | | As Adjusted with Constant Currency
(Non-GAAP) |
| Revenues | $ | 1,065,480 | | | $ | 18,645 | | | $ | 1,084,125 | |
| Total costs and expenses | $ | 977,138 | | | $ | 15,816 | | | $ | 992,954 | |
| Income from operations | $ | 88,342 | | | $ | 2,829 | | | $ | 91,171 | |
| Operating margin | 8.3% | | | | 8.4% |
| Income before income taxes | $ | 86,572 | | | $ | 2,846 | | | $ | 89,418 | |
| Net income | $ | 60,254 | | | $ | 1,958 | | | $ | 62,212 | |
| | | | | |
| Diluted earnings per share | $ | 2.51 | | | | | $ | 2.59 | |
| Weighted average diluted shares outstanding | 23,998 | | | | 23,998 |
__________________________________________________________________________________________
(1)Reflects an adjustment to translate foreign currency results for the year ended December 31, 2022 at a constant exchange rate of 0.75 Australian Dollars to U.S. Dollars, which was the average exchange rate for the same period in 2021.
Liquidity and Capital Resources
At December 31, 2022, we had cash, cash equivalents, and marketable securities of $235.9 million compared to $298.8 million at December 31, 2021. We maintain our cash and cash equivalents primarily in demand deposit bank accounts and money market funds at high credit quality financial institutions, which are included in cash and cash equivalents at December 31, 2022 and 2021. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. We earned interest income of $3.8 million, $1.1 million, and $4.0 million in each of the years ended December 31, 2022, 2021, and 2020, respectively.
We are party to a credit facility (“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 LIBOR 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 December 31, 2022. As of December 31, 2022 and 2021, we had $101.4 million and $141.6 million, respectively, outstanding under our Revolving Credit Facility. During the year ended December 31, 2022, we repaid $40.0 million of the outstanding balance under our Revolving Credit Facility. During the years ended December 31, 2022 and 2021, we paid $4.2 million and $2.7 million, respectively, of interest and unused commitment fees related to our Revolving Credit Facility.
Our net cash provided by operating activities decreased in 2022 to $126.1 million, compared to $180.5 million in 2021. The decrease in net cash from operating activities was primarily driven by lower earnings in the USHE segment, partially offset by a decrease in cash used for working capital.
Our net cash used in investing activities decreased in 2022 to $31.4 million, compared to $33.1 million in 2021. The decrease in net cash used in investing activities was primarily driven by a decrease in capital expenditures, partially offset by lower cash proceeds from marketable securities and from the sale of property and equipment in 2022. Capital expenditures decreased to $43.2 million for the year ended December 31, 2022, compared to $49.4 million in 2021, due to the timing of capital projects.
Our net cash used in financing activities increased in 2022 to $142.4 million, compared to $67.9 million in 2021. The increase in net cash used in financing activities was primarily driven by a $40.0 million long-term debt payment in 2022 and a $34.2 million increase in repurchases of common stock. During the year ended December 31, 2022, we paid $40.1 million to repurchase 612,104 common shares in the open market under our repurchase program, compared to $5.9 million in 2021. As of December 31, 2022, we had $246.8 million remaining in share repurchase authorization to use through December 31, 2023.
The Board of Directors declared an annual cash dividend of $2.40 per common share, payable in equal parts quarterly. During the year ended December 31, 2022, we paid a total of $59.2 million in cash dividends on our common stock, compared to $59.0 million in 2021.
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.
Our material contractual cash commitments include minimum lease payments required under our lease agreements, capital commitments related to our four limited partnership investments and commitment fees associated with our Revolving Credit Facility.
The table below sets forth our contractual cash commitments associated with lease liabilities as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due By Period |
| Total | | Less than 1
Year | | 1-3
Years | | 3-5
Years | | More than
5 Years |
| Lease liabilities | $ | 183,829 | | | $ | 29,704 | | | $ | 54,444 | | | $ | 42,546 | | | $ | 57,135 | |
As of December 31, 2022, we have a commitment to invest up to $2.7 million in our four limited partnership investments through 2031. Due to the uncertainty with respect to the timing of future cash flows associated with the limited partnership investments, we are unable to make reasonably reliable estimates of the period in which such additional investments may take place.
Due to the uncertainty with respect to the timing of future borrowings associated with our credit facility, we are unable to make reasonably reliable estimates of any commitment fees charged on the unused portion of the credit facility. As of December 31, 2022, our maximum estimated commitment fee is $0.7 million per annum related to the unused portion of our credit facility.
Recently Issued Accounting Standards
Refer to Note 2, Significant Accounting Policies, within the footnotes to the consolidated financial statements for recently issued accounting standards.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Strategic Education, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Strategic Education, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Strayer University Graduation Fund Liability – Undergraduate Degree Programs
As described in Note 4 to the consolidated financial statements, the Company’s Strayer University Graduation Fund liability was $46.8 million as of December 31, 2022, of which $41.7 million related to students enrolled in undergraduate degree programs. Strayer University offers the Graduation Fund, a program which allows undergraduate and graduate 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. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future. Management’s estimate of the benefits that will be redeemed in the future is based on the Company’s historical experience of student persistence toward completion of a course of study within this program and similar programs. As disclosed by management, estimated redemption rates of eligible students vary based on their term of enrollment.
The principal considerations for our determination that performing procedures relating to the Strayer University Graduation Fund liability for undergraduate degree programs is a critical audit matter are (i) the significant judgment by management in estimating the liability and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimate of the liability and the estimated redemption rate assumption.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of the Graduation Fund liability for undergraduate degree programs, including controls over the estimated redemption rate assumption. These procedures also included, among others, testing management’s process for estimating the Graduation Fund liability for undergraduate degree programs, including (i) evaluating the appropriateness of the methodology; (ii) testing the completeness and accuracy of the underlying data used in management’s estimate; and (iii) evaluating the reasonableness of the estimated redemption rate assumption for the undergraduate degree programs. Evaluating management’s estimated redemption rate assumption involved evaluating whether the assumption was reasonable considering (i) historical estimated redemption rates and (ii) whether the assumption was consistent with evidence obtained in other areas of the audit.
Goodwill Impairment Assessment – Australia and New Zealand (“ANZ”) Reporting Unit
As described in Notes 2 and 10 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,251 million as of December 31, 2022, of which $519 million relates to the ANZ reporting unit. Management assesses goodwill 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 below its carrying amount. In 2022, management elected to bypass a qualitative impairment assessment for goodwill assigned to the ANZ reporting unit and proceeded directly to a quantitative impairment assessment using the first day of the fourth quarter of 2022 as the assessment date. Management used an income-based approach to determine the fair value of the ANZ reporting unit. The income approach consisted of a discounted cash flow model, which involved the use of critical assumptions and estimates related to the amounts and timing of expected future cash flows such as new international student enrollment growth, the discount rate, and the terminal growth rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the ANZ reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the ANZ reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to new international student enrollment growth, the discount rate, and the terminal growth rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s ANZ reporting unit. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the ANZ reporting unit; (ii) evaluating the appropriateness of the income approach; (iii) testing the completeness and accuracy of
underlying data used in the income approach; and (iv) evaluating the reasonableness of the significant assumptions used by management related to new international student enrollment growth, the discount rate and the terminal growth rate. Evaluating management’s assumptions related to the student enrollment growth involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s income approach; and (ii) the reasonableness of the discount rate and the terminal growth rate assumptions.
/s/ PricewaterhouseCoopers LLP
Washington, DC
February 27, 2023
We have served as the Company’s auditor since 1993.
STRATEGIC EDUCATION, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 268,918 | | | $ | 213,667 | |
| Marketable securities | 6,501 | | | 9,156 | |
| Tuition receivable, net | 51,277 | | | 62,953 | |
| Income taxes receivable | 313 | | | — | |
| Other current assets | 40,777 | | | 43,285 | |
| Total current assets | 367,786 | | | 329,061 | |
| Property and equipment, net | 150,589 | | | 132,845 | |
| Right-of-use lease assets | 149,587 | | | 125,248 | |
| Marketable securities, non-current | 23,377 | | | 13,123 | |
| Intangible assets, net | 276,380 | | | 260,541 | |
| Goodwill | 1,285,864 | | | 1,251,277 | |
| Other assets | 52,297 | | | 49,652 | |
| Total assets | $ | 2,305,880 | | | $ | 2,161,747 | |
| | | |
| LIABILITIES & STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 95,518 | | | $ | 90,588 | |
| Income taxes payable | — | | | 6,989 | |
| Contract liabilities | 73,232 | | | 88,488 | |
| Lease liabilities | 27,005 | | | 23,879 | |
| Total current liabilities | 195,755 | | | 209,944 | |
| Long-term debt | 141,630 | | | 101,396 | |
| Deferred income tax liabilities | 44,595 | | | 34,605 | |
| Lease liabilities, non-current | 162,821 | | | 134,006 | |
| Other long-term liabilities | 47,089 | | | 46,006 | |
| Total liabilities | 591,890 | | | 525,957 | |
| Commitments and contingencies | | | |
| Stockholders’ equity: | | | |
Common stock, par value $0.01; 32,000,000 shares authorized; 24,592,098 and 24,402,891 shares issued and outstanding at December 31, 2021 and 2022, respectively | 246 | | | 244 | |
| Additional paid-in capital | 1,529,969 | | | 1,510,924 | |
| Accumulated other comprehensive income (loss) | 9,203 | | | (35,068) | |
| Retained earnings | 174,572 | | | 159,690 | |
| Total stockholders’ equity | 1,713,990 | | | 1,635,790 | |
| Total liabilities and stockholders’ equity | $ | 2,305,880 | | | $ | 2,161,747 | |
The accompanying notes are an integral part of these consolidated financial statements.
STRATEGIC EDUCATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
| Revenues | $ | 1,027,653 | | | $ | 1,131,686 | | | $ | 1,065,480 | |
| Costs and expenses: | | | | | |
| Instructional and support costs | 532,661 | | | 608,261 | | | 597,321 | |
| General and administration | 295,231 | | | 361,345 | | | 379,817 | |
| Amortization of intangible assets | 64,225 | | | 51,495 | | | 14,350 | |
| Merger and integration costs | 13,770 | | | 11,201 | | | 1,117 | |
| Restructuring costs | 12,382 | | | 25,472 | | | 2,115 | |
| Total costs and expenses | 918,269 | | | 1,057,774 | | | 994,720 | |
| Income from operations | 109,384 | | | 73,912 | | | 70,760 | |
| Other income (expense) | 4,573 | | | 2,687 | | | (1,191) | |
| Income before income taxes | 113,957 | | | 76,599 | | | 69,569 | |
| Provision for income taxes | 27,689 | | | 21,512 | | | 22,899 | |
| Net income | $ | 86,268 | | | $ | 55,087 | | | $ | 46,670 | |
| Earnings per share: | | | | | |
| Basic | $ | 3.81 | | | $ | 2.30 | | | $ | 1.97 | |
| Diluted | $ | 3.77 | | | $ | 2.28 | | | $ | 1.94 | |
| Weighted average shares outstanding: | | | | | |
| Basic | 22,633 | | | 23,955 | | | 23,679 | |
| Diluted | 22,860 | | | 24,122 | | | 23,998 | |
STRATEGIC EDUCATION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
| Net income | $ | 86,268 | | | $ | 55,087 | | | $ | 46,670 | |
| Other comprehensive income: | | | | | |
| Foreign currency translation adjustments | 48,068 | | | (39,392) | | | (43,425) | |
| Unrealized gains (losses) on marketable securities, net of tax | 579 | | | (285) | | | (846) | |
| Comprehensive income | $ | 134,915 | | | $ | 15,410 | | | $ | 2,399 | |
The accompanying notes are an integral part of these consolidated financial statements.
STRATEGIC EDUCATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated
Other Comprehensive Income (Loss) | | Total |
| Shares | | Par Value | | | | |
| Balance at December 31, 2019 | 21,964,809 | | | $ | 220 | | | $ | 1,309,438 | | | $ | 152,819 | | | $ | 233 | | | $ | 1,462,710 | |
| Impact of adoption of new accounting standard | — | | | — | | | — | | | (3,311) | | | — | | | (3,311) | |
| Issuance of common stock in public offering | 2,185,000 | | | 22 | | | 220,226 | | | — | | | — | | | 220,248 | |
| Stock-based compensation | — | | | — | | | 14,593 | | | 17 | | | — | | | 14,610 | |
| Exercise of stock options, net | 20,522 | | | — | | | 1,244 | | | — | | | — | | | 1,244 | |
| Issuance of restricted stock, net | 250,377 | | | 2 | | | (25,847) | | | — | | | — | | | (25,845) | |
| Repurchase of common stock | (1,769) | | | — | | | (105) | | | (142) | | | — | | | (247) | |
Common stock dividends ($2.40 per share) | — | | | — | | | — | | | (56,005) | | | — | | | (56,005) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | 48,068 | | | 48,068 | |
| Unrealized gains on marketable securities, net of tax | — | | | — | | | — | | | — | | | 579 | | | 579 | |
| Net income | — | | | — | | | — | | | 86,268 | | | — | | | 86,268 | |
| Balance at December 31, 2020 | 24,418,939 | | | $ | 244 | | | $ | 1,519,549 | | | $ | 179,646 | | | $ | 48,880 | | | $ | 1,748,319 | |
| Stock-based compensation | — | | | — | | | 18,094 | | | 55 | | | — | | | 18,149 | |
| Exercise of stock options, net | 1,632 | | | — | | | 113 | | | — | | | — | | | 113 | |
| Issuance of restricted stock, net | 248,496 | | | 3 | | | (2,997) | | | — | | | — | | | (2,994) | |
| Repurchase of common stock | (76,969) | | | (1) | | | (4,790) | | | (1,114) | | | — | | | (5,905) | |
Common stock dividends ($2.40 per share) | — | | | — | | | — | | | (59,102) | | | — | | | (59,102) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | (39,392) | | | (39,392) | |
| Unrealized losses on marketable securities, net of tax | — | | | — | | | — | | | — | | | (285) | | | (285) | |
| Net income | — | | | — | | | — | | | 55,087 | | | — | | | 55,087 | |
| Balance at December 31, 2021 | 24,592,098 | | | $ | 246 | | | $ | 1,529,969 | | | $ | 174,572 | | | $ | 9,203 | | | $ | 1,713,990 | |
| Stock-based compensation | — | | | — | | | 21,763 | | | 29 | | | — | | | 21,792 | |
| Exercise of stock options, net | 377 | | | — | | | 14 | | | — | | | — | | | 14 | |
| Issuance of restricted stock, net | 422,520 | | | 4 | | | (2,917) | | | — | | | — | | | (2,913) | |
| Repurchase of common stock | (612,104) | | | (6) | | | (37,905) | | | (2,205) | | | — | | | (40,116) | |
Common stock dividends ($2.40 per share) | — | | | — | | | — | | | (59,376) | | | — | | | (59,376) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | (43,425) | | | (43,425) | |
| Unrealized losses on marketable securities, net of tax | — | | | — | | | — | | | — | | | (846) | | | (846) | |
| Net income | — | | | — | | | — | | | 46,670 | | | — | | | 46,670 | |
| Balance at December 31, 2022 | 24,402,891 | | | $ | 244 | | | $ | 1,510,924 | | | $ | 159,690 | | | $ | (35,068) | | | $ | 1,635,790 | |
The accompanying notes are an integral part of these consolidated financial statements.
STRATEGIC EDUCATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 86,268 | | | $ | 55,087 | | | $ | 46,670 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Loss on sale of marketable securities | — | | | 781 | | | — | |
| Gain on sale of property and equipment | — | | | (2,656) | | | (2,886) | |
| Amortization of deferred financing costs | 466 | | | 552 | | | 552 | |
| Amortization of investment discount/premium | 146 | | | 70 | | | 32 | |
| Depreciation and amortization | 109,154 | | | 103,416 | | | 63,124 | |
| Deferred income taxes | (13,431) | | | (7,710) | | | (8,667) | |
| Stock-based compensation | 14,610 | | | 18,149 | | | 21,792 | |
| Impairment of right-of-use lease assets | 848 | | | 18,876 | | | 1,185 | |
| Changes in assets and liabilities: | | | | | |
| Tuition receivable, net | 19,659 | | | (196) | | | (12,558) | |
| Other assets | (32,326) | | | (6,964) | | | 3,584 | |
| Accounts payable and accrued expenses | (22,685) | | | (6,700) | | | (4,339) | |
| Income taxes payable and income taxes receivable | (4,020) | | | 1,196 | | | 7,580 | |
| Contract liabilities | (10,095) | | | 13,995 | | | 18,960 | |
| Other liabilities | (5,689) | | | (7,369) | | | (8,977) | |
| Net cash provided by operating activities | 142,905 | | | 180,527 | | | 126,052 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Cash paid for acquisition, net of cash acquired | (628,759) | | | — | | | (800) | |
| Purchases of property and equipment | (46,812) | | | (49,433) | | | (43,170) | |
| Purchases of marketable securities | (1,863) | | | — | | | — | |
| Proceeds from marketable securities | 36,192 | | | 9,300 | | | 6,420 | |
| Proceeds from sale of property and equipment | — | | | 8,331 | | | 6,525 | |
| Other investments | (950) | | | (1,292) | | | (335) | |
| Net cash used in investing activities | (642,192) | | | (33,094) | | | (31,360) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Net proceeds from issuance of common stock | 220,248 | | | — | | | — | |
| Proceeds from long-term debt | 145,630 | | | — | | | — | |
| Common dividends paid | (55,956) | | | (59,045) | | | (59,240) | |
| Net payments for stock awards | (24,741) | | | (2,938) | | | (3,004) | |
| Payments on long-term debt | (3,807) | | | — | | | (40,000) | |
| Payment of deferred financing costs | (1,940) | | | — | | | — | |
| Repurchase of common stock | (247) | | | (5,905) | | | (40,116) | |
| Net cash provided by (used in) financing activities | 279,187 | | | (67,888) | | | (142,360) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 1,623 | | | (2,353) | | | (4,090) | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (218,477) | | | 77,192 | | | (51,758) | |
| Cash, cash equivalents, and restricted cash — beginning of period | 420,497 | | | 202,020 | | | 279,212 | |
| Cash, cash equivalents, and restricted cash — end of period | $ | 202,020 | | | $ | 279,212 | | | $ | 227,454 | |
| Noncash transactions: | | | | | |
| Non-cash additions to property and equipment | $ | 4,079 | | | $ | 9,308 | | | $ | 1,718 | |
The accompanying notes are an integral part of these consolidated financial statements.
1. Nature of Operations
Strategic Education, Inc. (“Strategic Education” or the “Company”), a Maryland corporation, 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. 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. As discussed in Note 2 and Note 3, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”) on November 3, 2020.
The accompanying consolidated financial statements and footnotes include the results of the Company’s three reportable segments: (1) U.S. Higher Education (“USHE”), which is primarily comprised of Strayer University and Capella University and is focused on providing flexible and affordable certificate and degree programs to working adults; (2) Education Technology Services, which is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs; and (3) Australia/New Zealand, which through Torrens University and associated assets, provides certificate and degree programs in Australia and New Zealand. The Company’s reportable segments are discussed further in Note 21.
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. Certain immaterial prior year amounts have been reclassified to conform with the current year’s presentation.
On November 3, 2020, the Company completed its acquisition of ANZ, whereby the Company was deemed the acquirer in the business combination for accounting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, the financial results of the Company as of and for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and therefore are not directly comparable.
Below is a description of the nature of the costs included in the Company’s operating expense categories.
Instructional and support costs generally contain items of expense directly attributable to activities that support students. 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 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 intangible 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”) and the Company’s acquisition of ANZ.
Merger and integration costs include integration expenses associated with the Company’s merger with CEC, and transaction and integration expenses associated with the Company’s acquisition of ANZ.
Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations, as well as early lease termination costs and impairments of right-of-use lease assets and fixed assets associated with vacating leased space in connection with the Company’s restructuring plan. See Note 5 for additional information.
Foreign Currency Translation and Transaction Gains and Losses
The United States Dollar (“USD”) is the functional currency of the Company and its subsidiaries operating in the United States. The financial statements of its foreign subsidiaries are maintained in their functional currencies. The functional currency of each of the foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Financial statements of foreign subsidiaries are translated into USD using the exchange rates applicable to the dates of the
financial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the weighted-average exchange rates in effect during the period. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) within shareholders’ equity.
For any transaction that is in a currency different from the entity’s functional currency, the Company records a net gain or loss based on the difference between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) in the consolidated statements of income.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash maintained in mostly FDIC-insured bank accounts and cash invested in bank overnight deposits and money market mutual funds. The Company places its cash and temporary cash investments with various financial institutions. The Company considers all highly liquid instruments purchased with a maturity of three months or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
Most cash and cash equivalent balances are in excess of the FDIC insurance limit. The Company has not experienced any losses on its cash and cash equivalents.
Restricted Cash
In the United States, 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 a U.S. higher education institution during the academic term. The Company had approximately $0.7 million and $1.4 million of these unpaid obligations as of December 31, 2021 and 2022, respectively. In Australia and New Zealand, advance tuition payments from international students are required to be restricted until a student commences his or her course. In addition, a portion of tuition prepayments from students enrolled in a vocational education and training program are held in trust by a third party law firm to adhere to tuition protection requirements. As of December 31, 2021 and 2022, the Company had approximately $9.1 million and $11.9 million, respectively, of restricted cash related to these requirements in Australia and New Zealand. These balances are recorded as restricted cash and included in other current assets in the consolidated balance sheets.
As part of commencing operations in Pennsylvania, 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 consolidated statements of cash flows as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2022 |
| Cash and cash equivalents | $ | 268,918 | | | $ | 213,667 | |
| Restricted cash included in other current assets | 9,794 | | | 13,287 | |
| Restricted cash included in other assets | 500 | | | 500 | |
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 279,212 | | | $ | 227,454 | |
Marketable Securities
Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company’s marketable securities are designated as available-for-sale and consist of tax-exempt municipal securities and corporate debt securities.
Available-for-sale marketable securities are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized as a component of accumulated other comprehensive income (loss) within shareholders’ equity. Management reviews the fair value of the portfolio at least quarterly, and evaluates individual securities with fair value below amortized cost at the balance sheet date for impairment. In order to determine whether there is an impairment, management evaluates whether
the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis.
If management intends to sell an impaired debt security, or it is more likely than not the Company will be required to sell the security prior to recovering its amortized cost basis, an impairment is deemed to have occurred. The amount of an impairment related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of accumulated other comprehensive income (loss) within shareholders’ equity.
The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in other income. The contractual maturity date of available-for-sale securities is based on the days remaining to the effective maturity. The Company classifies marketable securities as either current or non-current assets based on management’s intent with regard to usage of those funds, which is dependent upon the security’s maturity date and liquidity considerations based on current market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current.
Tuition Receivable and Allowance for Credit Losses
The Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”) on January 1, 2020, which revised 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.
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 Company’s 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. In the event that current collection trends differ from historical trends, an adjustment is made to the allowance for credit losses and bad debt expense.
The Company’s tuition receivable and allowance for credit losses were as follows as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Tuition receivable | $ | 100,060 | | | $ | 110,066 | |
| Allowance for credit losses | (48,783) | | | (47,113) | |
| Tuition receivable, net | $ | 51,277 | | | $ | 62,953 | |
Approximately $2.5 million and $2.7 million of tuition receivable, net, are included in other assets as of December 31, 2021 and 2022, 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 each of the three years ended December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Allowance for credit losses, beginning of period | $ | 30,931 | | | $ | 49,773 | | | $ | 48,783 | |
| Impact of adopting ASC 326 | 4,571 | | | — | | | — | |
| Additions charged to expense | 49,130 | | | 43,040 | | | 41,226 | |
| Additions from merger | 3,503 | | | — | | | — | |
| Write-offs, net of recoveries | (38,362) | | | (44,030) | | | (42,896) | |
| Allowance for credit losses, end of period | $ | 49,773 | | | $ | 48,783 | | | $ | 47,113 | |
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. In accordance with the Property, Plant, and Equipment Topic, ASC 360, the carrying values of the Company’s assets are re-evaluated when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment loss has occurred based on expected undiscounted future cash flows, then a loss is recognized using a fair value-based model. During the years ended December 31, 2021 and 2022, the Company recognized $2.7 million and $2.5 million, respectively, of impairment charges related to property and equipment, which is included in Restructuring costs on the consolidated statements of income.
Depreciation and amortization of property and equipment is calculated using the straight-line method over the estimated useful lives ranging from three years to 40 years. Depreciation and amortization expense was $51.8 million, $59.1 million and $52.0 million for the years ended December 31, 2020, 2021, and 2022, respectively. Included in the 2020, 2021, and 2022 depreciation and amortization expense amount is $6.9 million, $7.2 million and $3.2 million of depreciation expense, respectively, related to computer software acquired in the Capella Education Company merger in 2018 and content acquired in the ANZ acquisition in 2020, which is included in Amortization of intangible assets on the consolidated statements of income. Repairs and maintenance costs are expensed as incurred.
As discussed in Note 5, the Company’s 2020 restructuring plan included an evaluation of the Company’s owned and leased real estate portfolio, which resulted in the consolidation and sale of underutilized facilities. The Company sold two of its owned U.S. Higher Education campuses in 2021 and one of its owned U.S. Higher Education campuses in 2022. The Company sold the long-lived assets, consisting of land, buildings, and building improvements, related to these owned campuses and recognized a $2.7 million and $2.9 million gain on sale during the years ended December 31, 2021 and 2022, respectively, which are included in Restructuring costs on the consolidated statements of income.
Construction in progress includes costs of computer software developed for internal use, which is accounted for in accordance with the Internal-Use Software Topic, ASC 350-40. Computer software development costs that are incurred in the preliminary project stage are expensed as incurred. During the development stage, direct consulting costs, payroll, and payroll-related costs for employees that are directly associated with the project are capitalized and amortized over the estimated useful life of the software once placed into operation. Purchases of property and equipment and changes in accounts payable for each of the three years in the period ended December 31, 2022 in the consolidated statements of cash flows have been adjusted to exclude non-cash purchases of property and equipment transactions during that period.
Deferred Costs
The Company defers certain commissions earned by third party international agents that are considered incremental and recoverable costs of obtaining a contract with customers of ANZ. These costs are amortized over the period of benefit which ranges from one to two years. In accordance with ASU 2018-15, which the Company adopted on January 1, 2020, the Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.
Leases
The Company determines if an arrangement is a lease at inception. The Company analyzes each lease agreement to determine whether it should be classified as a finance lease or operating lease. Leases with an initial term longer than 12 months are included in right-of-use (“ROU”) lease assets, lease liabilities, and lease liabilities, non-current on the Company’s consolidated balance sheets. The Company combines lease and non-lease components for all leases.
ROU lease assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU lease assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the implicit interest rate for most of the Company’s leases cannot be readily determined, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term for operating leases.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company subleases certain building space to third parties and sublease income is recognized on a straight-line basis over the lease term. See Note 8 for additional information.
Fair Value
The Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework for measuring fair value, establishes a fair value hierarchy based upon the observability of inputs used to measure fair value, and expands disclosures about fair value measurements. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the
lowest level input that is significant to the fair value measurement. Under ASC 820-10, fair value of an investment is the price that would be received to sell an asset or to transfer a liability to an entity in an orderly transaction between market participants at the measurement date. The hierarchy gives the highest priority to assets and liabilities with readily available quoted prices in an active market and lowest priority to unobservable inputs, which require a higher degree of judgment when measuring fair value, as follows:
•Level 1 assets or liabilities use quoted prices in active markets for identical assets or liabilities as of the measurement date;
•Level 2 assets or liabilities use observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities; and
•Level 3 assets or liabilities use unobservable inputs that are supported by little or no market activity.
The Company’s assets and liabilities that are subject to fair value measurement are categorized in one of the three levels above. Fair values are based on the inputs available at the measurement dates, and may rely on certain assumptions that may affect the valuation of fair value for certain assets or liabilities.
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 on the first day of 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.
The Company’s goodwill impairment test includes an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based on the qualitative assessment, or that a qualitative assessment should not be performed for a reporting unit, the Company proceeds with performing a quantitative goodwill impairment test. In performing the quantitative goodwill impairment test, the Company compares the fair value of the reporting unit to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recognized to the extent the fair value of the reporting unit is less than the carrying value of the reporting unit’s net assets.
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 24,592,098 and 24,402,891 shares were issued and outstanding as of December 31, 2021 and 2022, respectively. On August 10, 2020, the Company completed a public offering of 2,185,000 shares of its common stock for total cash proceeds of $220.2 million, net of underwriting discounts and offering costs of $9.2 million. 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.
The Board of Directors declared a quarterly cash dividend of $0.60 per common share for each quarter of 2022. The Company paid these quarterly cash dividends in each of March, June, September and December of 2022.
Advertising Costs
The Company expenses advertising costs in the quarter incurred. Advertising costs were $161.5 million, $165.1 million and $181.3 million for the years ended December 31, 2020, 2021, and 2022, respectively, and are included within General and administration expense on the consolidated statements of income.
Stock-Based Compensation
As required by the Stock Compensation Topic, ASC 718, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock, restricted stock units, performance stock units, and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values. The fair value of restricted stock awards granted is measured using the fair value of the Company’s common stock on the date of grant or the most recent modification date, whichever is later. The Company records compensation expense for all share-based payment awards ratably over the vesting period. For awards with graded vesting, the Company measures fair value and records compensation expense separately for each vesting tranche. Stock-based compensation expense recognized in the consolidated statements of income for each of the three years in the period ended December 31, 2022 is based on awards ultimately expected to vest and, therefore, has been adjusted for estimated forfeitures. The Company estimates forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate used is based on historical experience. The Company also assesses the likelihood that performance criteria associated with performance-based awards will be met. If it is determined that it is more likely than not that performance criteria will not be achieved, the Company revises its estimate of the number of shares it believes will ultimately vest. Refer to Note 16 for additional information.
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, restricted stock, and restricted stock units are excluded from the computation of diluted earnings per share when their effect would be anti-dilutive.
Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for each of the three years ended December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Weighted average shares outstanding used to compute basic earnings per share | 22,633 | | | 23,955 | | | 23,679 | |
| Incremental shares issuable upon the assumed exercise of stock options | 14 | | | 5 | | | 3 | |
| Unvested restricted stock and restricted stock units | 213 | | | 162 | | | 316 | |
| Shares used to compute diluted earnings per share | 22,860 | | | 24,122 | | | 23,998 | |
| | | | | |
| Anti-dilutive shares excluded from the diluted earnings per share calculation | 63 | | | 324 | | | 114 | |
Comprehensive Income (Loss)
Comprehensive income (loss) 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, and foreign currency translation adjustments. As of December 31, 2020 and 2021, the balance of accumulated other comprehensive income was $48.9 million, net of tax of $0.3 million and $9.2 million, net of tax of $0.2 million, respectively, and as of December 31, 2022 the balance of accumulated comprehensive loss was $35.1 million, net of tax of $0.1 million. During the year ended December 31, 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 (loss) to Other income on the consolidated statements of income. There were no reclassifications out of accumulated other comprehensive income (loss) to net income for the years ended December 31, 2021 and 2022.
Income Taxes
The Company provides for deferred income taxes based on temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized.
The Income Taxes Topic, ASC 740, requires the company to determine whether uncertain tax positions should be recognized within the Company’s financial statements. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Uncertain tax positions are recognized when a tax position, based solely on its technical merits, is determined more likely than not to be sustained upon examination. Upon determination, uncertain tax positions are measured to determine the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. A tax position is derecognized if it no longer meets the more likely than not threshold of being sustained.
The tax years since 2019 remain open for federal tax examination, the tax years since 2018 remain open to examination by certain states, and the tax years since 2017 remain open to examination by foreign taxing jurisdictions in which the Company is subject to taxation.
Other Investments
The Company holds investments in certain limited partnerships that invest in innovative companies in the health care and education-related technology fields. The Company accounts for the investments in limited partnerships under the equity method. The Company’s pro-rata share in the net income (loss) of the limited partnerships is included in Other income on the consolidated statements of income. The Company also holds investments accounted for at cost less impairment as these investments do not have readily determinable fair value.
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. Actual results could differ from those estimates.
Recently Issued Accounting Standards Not Yet Adopted
Accounting Standards Updates recently issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements.
3. Business Combinations
Acquisition of Torrens University and associated assets in Australia and New Zealand
On November 3, 2020, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand pursuant to the sale and purchase agreement dated July 29, 2020. The acquired operations include Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across five industry verticals, including business, hospitality, health, education, creative technology and design.
Pursuant to the purchase agreement, the aggregate consideration paid was approximately $658.4 million in cash, which reflected the original agreed upon purchase price of $642.7 million plus cash acquired in the transaction.
The Company applied the acquisition method of accounting to ANZ, whereby the excess of the acquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the acquisition was allocated to the Australia/New Zealand reportable segment in the amount of $546.3 million, and is not deductible for tax purposes.
The Company incurred $8.1 million of acquisition-related costs related to this acquisition. These costs were primarily attributable to legal, financial, and accounting support services incurred by the Company in connection with the acquisition, and are included in Merger and integration costs on the consolidated statements of income.
During the year ended December 31, 2021, the Company finalized the fair value of assets acquired and liabilities assumed. In 2021, the Company recorded a measurement period adjustment that reduced Property and equipment, net by $0.3 million and increased goodwill by $0.3 million. This measurement period adjustment is reflected in the fair value of assets acquired and liabilities assumed in the table below.
The fair value of assets acquired and liabilities assumed as well as a reconciliation to consideration transferred is presented in the table below (in thousands):
| | | | | |
| Cash and cash equivalents | $ | 16,082 | |
| Tuition receivable | 24,447 | |
| Other current assets | 17,713 | |
| Property and equipment, net | 41,508 | |
| Right-of-use lease assets | 44,229 | |
| Intangible assets | 103,161 | |
| Goodwill | 546,315 | |
| Other assets | 2,799 | |
| Total assets acquired | 796,254 | |
| Accounts payable and accrued expenses | (33,876) | |
| Income taxes payable | (229) | |
| Contract liabilities | (33,309) | |
| Lease liabilities | (9,685) | |
| Deferred income taxes | (18,712) | |
| Lease liabilities, non-current | (34,544) | |
| Other long-term liabilities | (7,520) | |
| Total liabilities assumed | (137,875) | |
| Total consideration | $ | 658,379 | |
The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets:
| | | | | | | | | | | |
| | Fair Value | | Weighted Average
Useful Life in Years |
| Trade names | $ | 68,774 | | | Indefinite |
| Student relationships | 34,387 | | | 3 |
| | $ | 103,161 | | | |
The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the assets and liabilities. The Company utilized the following assumptions, some of which include significant unobservable inputs which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:
•Intangible assets
▪Trade names - to determine the fair value of the trade names, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate. Key assumptions used in the valuation included revenue growth rates ranging from 2.5% to 6.3% per year, a royalty rate of 2.5% and a discount rate of 11%.
▪Student relationships - to determine the fair value of the student relationships, the Company used the excess earnings method, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, earnings before interest and taxes margins, annual attrition rate, and discount rate. Key assumptions used in the valuation included an annual attrition rate of 60% and a discount rate of 11%.
•Property and equipment - Included in property and equipment is course content of $10.0 million. To determine the fair value of course content, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate. Key assumptions used in the valuation included revenue growth rates ranging from 5.6% to 6.2%, a royalty rate of 3% and a discount rate of 11%. The course content will be amortized over 3 years. All other property and equipment was valued at estimated cost.
•Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin. Based on this method, fair value of contract liabilities were estimated to be 70% of carrying value as of the acquisition date.
•Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
The operations of ANZ were included in the consolidated financial statements as of the acquisition date. The revenue and net loss for ANZ reported within the consolidated statements of income for the year ended December 31, 2020 were $23.4 million and $10.5 million, respectively.
Pro Forma Financial information
The following unaudited pro forma information has been presented as if the ANZ acquisition occurred on January 1, 2020. The information is based on the historical results of operations of the acquired business, adjusted for:
•The allocation of purchase price and related adjustments, including the adjustments to amortization expense related to the fair value of intangible assets acquired;
•The exclusion of acquisition-related costs incurred during the year ended December 31, 2020;
•Associated tax-related impacts of adjustments; and
•Changes to align accounting policies.
The pro forma results do not necessarily represent what would have occurred if the acquisition had actually taken place on January 1, 2020, nor do they represent the results that may occur in the future. The pro forma adjustments are based on available information and upon assumptions the Company believes are reasonable to reflect the impact of this acquisition on the Company’s historical financial information on a supplemental pro forma basis. The following table presents the Company’s pro forma combined revenues and net income (in thousands). Pro forma results for the years ended December 31, 2021 and 2022 are not presented below because the results of ANZ are included in the Company’s December 31, 2021 and 2022 consolidated statements of income.
| | | | | |
| Pro Forma Combined |
| Year Ended December 31, 2020 |
| Revenue | $ | 1,244,440 | |
| Net Income | 105,431 | |
4. Revenue Recognition
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. 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.
The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the years ended December 31, 2020, 2021, and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| U.S. Higher Education Segment | | | | | |
| Tuition, net of discounts, grants and scholarships | $ | 928,476 | | | $ | 795,266 | | | $ | 738,050 | |
Other(1) | 38,103 | | | 34,004 | | | 32,929 | |
| Total U.S. Higher Education Segment | 966,579 | | | 829,270 | | | 770,979 | |
| Australia/New Zealand Segment | | | | | |
| Tuition, net of discounts, grants and scholarships | 22,431 | | | 245,791 | | | 224,400 | |
Other(1) | 950 | | | 4,333 | | | 6,347 | |
| Total Australia/New Zealand Segment | 23,381 | | | 250,124 | | | 230,747 | |
Education Technology Services Segment(2) | 37,693 | | | 52,292 | | | 63,754 | |
| Consolidated revenue | $ | 1,027,653 | | | $ | 1,131,686 | | | $ | 1,065,480 | |
___________________________________________________________
(1)Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other non-tuition revenue streams.
(2)Education Technology Services revenue is primarily derived from tuition revenue.
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 or scholarships in the future is estimated based on class tuition prices or amounts of scholarships, 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 consolidated balance sheets based on when the benefits are expected to be realized. Substantially all of the contract liability balance classified as short term at the beginning of the year was recognized into revenue during the year ended December 31, 2022.
Course materials are available to 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
Strayer University offers the Graduation Fund, which allows undergraduate and graduate 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. Students registering in credit-bearing courses in any undergraduate or graduate degree 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 or master’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.
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 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 $17.9 million and is included as a current contract liability in the 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 for the years ended December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Balance at beginning of period | $ | 53,314 | | | $ | 52,024 | |
| Revenue deferred | 21,067 | | | 16,897 | |
| Benefit redeemed | (22,357) | | | (22,079) | |
| Balance at end of period | $ | 52,024 | | | $ | 46,842 | |
The portion of the Graduation Fund balance related to students enrolled in undergraduate degree programs was $48.6 million and $41.7 million as of December 31, 2021 and 2022, respectively.
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 the 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.
Costs to Obtain a Contract
Certain commissions earned by third party international agents are considered incremental and recoverable costs of obtaining a contract with customers of ANZ. These costs are deferred and then amortized over the period of benefit which ranges from one year to two years.
5. Restructuring and Related Charges
In the third quarter of 2020, the Company began implementing a restructuring plan in an effort to reduce the ongoing operating costs of the Company to align with changes in enrollment following the COVID-19 pandemic. Under this plan, the Company incurred severance and other employee separation costs related to voluntary and involuntary employee terminations.
The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities for the years ended December 31, 2020, 2021, and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| CEC Integration Plan(1) | | 2020
Restructuring Plan | | Total |
| Balance at December 31, 2019 | $ | 8,283 | | | $ | — | | | $ | 8,283 | |
| Restructuring and other charges | — | | | 11,967 | | | 11,967 | |
| Payments | (6,448) | | | (10,680) | | | (17,128) | |
| Balance at December 31, 2020 | 1,835 | | | 1,287 | | | 3,122 | |
| Restructuring and other charges | — | | | 4,618 | | | 4,618 | |
| Payments | (1,835) | | | (4,293) | | | (6,128) | |
Balance at December 31, 2021(2) | — | | | 1,612 | | | 1,612 | |
| Restructuring and other charges | — | | | 1,241 | | | 1,241 | |
| Payments | — | | | (2,853) | | | (2,853) | |
| Balance at December 31, 2022 | $ | — | | | $ | — | | | $ | — | |
___________________________________________________________
(1)Restructuring plan implemented following the Company’s merger with CEC.
(2)Restructuring liabilities are included in accounts payable and accrued expenses.
The 2020 restructuring plan also included an evaluation of the Company’s owned and leased real estate portfolio, which resulted in the consolidation and sale of underutilized facilities. During the years ended December 31, 2020, 2021, and 2022, the Company recorded right-of-use lease asset charges of approximately $0.4 million, $18.9 million, and $1.2 million, respectively, related to facilities consolidated as a result of the restructuring plan. The Company recorded benefits related to the early termination and related extinguishment of lease liabilities of approximately $0.2 million and $1.2 million during the years ended December 31, 2021 and 2022, respectively. During the years ended December 31, 2021 and 2022, the Company recorded gains from the sale of property and equipment of owned campuses that were closed in connection with the 2020 restructuring plan of approximately $2.7 million and $2.9 million, respectively. The Company also recorded fixed asset impairment charges of approximately $2.7 million and $2.5 million during the years ended December 31, 2021 and 2022, respectively. All severance and other employee separation charges, right-of-use lease asset and fixed asset impairment charges, benefits from early lease terminations, and gains on the sale of property and equipment are included in Restructuring costs on the consolidated statements of income.
6. Marketable Securities
The following is a summary of available-for-sale securities as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized (Losses) | | Estimated Fair Value |
| Tax-exempt municipal securities | $ | 15,852 | | | $ | 2 | | | $ | (507) | | | $ | 15,347 | |
| Corporate debt securities | 7,140 | | | — | | | (208) | | | 6,932 | |
| | | | | | | |
| Total | $ | 22,992 | | | $ | 2 | | | $ | (715) | | | $ | 22,279 | |
The following is a summary of available-for-sale securities as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized (Losses) | | Estimated Fair Value |
| Tax-exempt municipal securities | $ | 18,546 | | | $ | 271 | | | $ | — | | | $ | 18,817 | |
| Corporate debt securities | 10,898 | | | 163 | | | — | | | 11,061 | |
| Total | $ | 29,444 | | | $ | 434 | | | $ | — | | | $ | 29,878 | |
The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2021 and 2022 were caused by changes in market values primarily due to interest rate changes. As of December 31, 2022, 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 years ended December 31, 2020, 2021, and 2022.
The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Due within one year | $ | 6,501 | | | $ | 9,156 | |
| Due after one year through three years | 23,377 | | | 13,123 | |
| Total | $ | 29,878 | | | $ | 22,279 | |
The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the years ended December 31, 2020, 2021, and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2021 | | December 31, 2022 |
| Maturities of marketable securities | $ | 34,728 | | | $ | 7,495 | | | $ | 6,420 | |
| Sales of marketable securities | 1,464 | | | 1,805 | | | — | |
| Total | $ | 36,192 | | | $ | 9,300 | | | $ | 6,420 | |
The Company recorded approximately $35,000 in gross realized gains and $0.8 million in gross realized losses in net income during the years ended December 31, 2020 and 2021, respectively. The Company did not record any gross realized gains or losses in net income during the year ended and December 31, 2022.
7. Property and Equipment
The composition of property and equipment as of December 31, 2021 and 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 | | Estimated useful
life (years) |
| Land | $ | 5,380 | | | $ | 3,597 | | | — | |
| Buildings and improvements | 16,691 | | | 9,856 | | | 5-40 |
| Furniture and office equipment | 65,054 | | | 40,539 | | | 5-7 |
| Computer hardware | 20,175 | | | 13,152 | | | 3-7 |
| Computer software | 199,635 | | | 212,832 | | | 3-10 |
| Leasehold improvements | 71,633 | | | 70,921 | | | 3-15 |
| Construction in progress | 9,246 | | | 7,016 | | | — | |
| | 387,814 | | | 357,913 | | | |
| Accumulated depreciation and amortization | (237,225) | | | (225,068) | | | |
| | $ | 150,589 | | | $ | 132,845 | | | |
Construction in progress includes costs associated with the construction and renovation of facilities and the development of information technology applications.
8. Leases
The Company has long-term, non-cancelable operating leases for campuses and other administrative facilities. These leases generally range from 3 years to 15 years and may include renewal options to extend the lease term. In addition, the leases commonly include lease incentives in the form of rent abatements and tenant improvement allowances. The Company subleases certain portions of unused building space to third parties.
The components of lease costs were as follows for the years ended December 31, 2020, 2021, and 2022 (in thousands)
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Lease Cost: | | | | | |
Operating lease cost(1) | $ | 28,337 | | | $ | 53,957 | | | $ | 28,404 | |
| Short-term lease cost | 534 | | | 1,768 | | | 641 | |
| Sublease income | (2,240) | | | (2,255) | | | (1,135) | |
| Total lease costs | $ | 26,631 | | | $ | 53,470 | | | $ | 27,910 | |
___________________________________________________________
(1)During the years ended December 31, 2020, 2021 and 2022, operating lease cost includes $0.8 million, $18.9 million, and $1.2 million of right-of-use lease asset impairment charges, respectively, related to redundant leased space that was vacated during the year.
The following table provides a summary of the Company’s average lease term and discount rate as of December 31, 2021 and 2022:
| | | | | | | | | | | |
| As of December 31, 2021 | | As of December 31, 2022 |
| Weighted average remaining lease term (years) | 7.8 | | 7.2 |
| Weighted average discount rate | 4.01 | % | | 4.05 | % |
Supplemental information related to the Company’s leases for the years ended December 31, 2020, 2021, and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | Year ended December 31, 2021 | | Year ended December 31, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 32,510 | | | $ | 43,021 | | | $ | 35,138 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | 12,763 | | | $ | 79,953 | | | $ | 4,674 | |
Maturities of lease liabilities (in thousands):
| | | | | |
| Year Ending December 31, | |
| 2023 | $ | 29,704 | |
| 2024 | 29,128 | |
| 2025 | 25,316 | |
| 2026 | 22,744 | |
| 2027 | 19,802 | |
| Thereafter | 57,135 | |
| Total lease payments | 183,829 | |
| Less: interest | (25,944) | |
| Present value of lease liabilities | $ | 157,885 | |
9. Fair Value Measurement
Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | December 31,
2022 | | 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 | $ | 217 | | | $ | 217 | | | $ | — | | | $ | — | |
| Marketable securities: | | | | | | | |
| Tax-exempt municipal securities | 15,347 | | | — | | 15,347 | | | — | |
| Corporate debt securities | 6,932 | | | — | | 6,932 | | | — | |
| | | | | | | |
| Total assets at fair value on a recurring basis | $ | 22,496 | | | $ | 217 | | | $ | 22,279 | | | $ | — | |
Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
| | December 31,
2021 | | 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 | $ | 4,134 | | | $ | 4,134 | | | $ | — | | | $ | — | |
| Marketable securities: | | | | | | | |
| Tax-exempt municipal securities | 18,817 | | | — | | | 18,817 | | | — | |
| Corporate debt securities | 11,061 | | | — | | | 11,061 | | | — | |
| Total assets at fair value on a recurring basis | $ | 34,012 | | | $ | 4,134 | | | $ | 29,878 | | | $ | — | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Deferred payments | $ | 658 | | | $ | — | | | $ | — | | | $ | 658 | |
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 money market funds, which are included in cash and cash equivalents in the accompanying 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 (loss) in stockholders’ equity. The Company’s cash and cash equivalents held at December 31, 2021 and 2022, 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 were classified within Level 3 as there was no liquid market for similarly priced instruments and were valued using discounted cash flow models that encompassed significant unobservable inputs. The assumptions used to prepare the discounted cash flows included estimates for interest rates, enrollment growth, retention rates, and pricing strategies. The final payment related to the deferred payment arrangements was made in the first quarter of 2022.
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 years ended December 31, 2021 or 2022.
Changes in the fair value of the Company’s Level 3 liabilities during the years ended December 31, 2021 and 2022 are as follows (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Balance as of the beginning of period | $ | 1,658 | | | $ | 658 | |
| Amounts paid | (1,470) | | | (658) | |
| Other adjustments to fair value | 470 | | | — | |
| Balance at end of period | $ | 658 | | | $ | — | |
10. Goodwill and Intangible Assets
Goodwill
During the first quarter of 2021, the Company reallocated a portion of its goodwill to the Education Technology Services segment based on a relative fair value analysis performed using several probability weighted scenarios. The following table presents changes in the carrying value of goodwill by segment for the years ended December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Higher Education | | Australia / New Zealand | | Education Technology Services | | Total |
| Balance as of December 31, 2020 | $ | 732,075 | | | $ | 586,451 | | | $ | — | | | $ | 1,318,526 | |
Reporting unit reallocation(1) | (100,000) | | | — | | | 100,000 | | | — | |
| Additions | — | | | — | | | — | | | — | |
| Impairments | — | | | — | | | — | | | — | |
| Currency translation adjustments | — | | | (32,924) | | | — | | | (32,924) | |
Adjustments to prior acquisitions(2) | — | | | 262 | | | — | | | 262 | |
| Balance as of December 31, 2021 | 632,075 | | | 553,789 | | | 100,000 | | | 1,285,864 | |
| Additions | — | | | 947 | | | — | | | 947 | |
| Impairments | — | | | — | | | — | | | — | |
| Currency translation adjustments | — | | | (35,621) | | | — | | | (35,621) | |
| Adjustments to prior acquisitions | — | | | 87 | | | — | | | 87 | |
| Balance as of December 31, 2022 | $ | 632,075 | | | $ | 519,202 | | | $ | 100,000 | | | $ | 1,251,277 | |
___________________________________________________(1)Represents the reallocation of goodwill as a result of the Company reorganizing its segments in 2021.
(2)Represents a measurement period adjustment recorded in 2021 related to the Company’s acquisition of ANZ, as discussed in Note 3.
The Company assesses goodwill 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 below its carrying amount.
In 2022, the Company performed a qualitative impairment assessment of goodwill assigned to all reporting units, except for the goodwill assigned to the ANZ reporting unit, using the first day of the fourth quarter of 2022 as the assessment date. The Company evaluated the likelihood of impairment by considering qualitative factors relevant to the reporting units, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value. Based on the results of its qualitative impairment analysis, the Company determined that no impairment indicators existed for these reporting units as of the assessment date.
In 2022, the Company performed a quantitative impairment assessment for goodwill assigned to the ANZ reporting unit using the first day of the fourth quarter of 2022 as the assessment date. The Company used an income-based approach to determine the fair value of the ANZ reporting unit. The income approach consisted of a discounted cash flow model that included projections of future cash flows for the ANZ reporting unit, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return. The determination of fair value consists of using unobservable inputs under the fair value measurement standards.
The Company believes that the most critical assumptions and estimates used in determining the estimated fair value of the ANZ reporting unit include, but are not limited to, the amounts and timing of expected future cash flows, new international student enrollment growth, the discount rate, and the terminal growth rate. The assumptions used in determining the expected future cash flows consider various factors such as historical operating trends, particularly in student enrollment and pricing, anticipated economic and regulatory conditions, reasonable expectations for planned business expansion opportunities, and long-term operating strategies and initiatives. The discount rate is based on the Company’s assumption of a prudent investor’s required rate of return for assuming the risk of investing in a particular company. The terminal growth rate reflects the sustainable operating income a reporting unit could generate in a perpetual state as a function of revenue growth, inflation, and future margin expectations. The Company believes that these assumptions are consistent with a reasonable market participant view while employing the concept of highest and best use of the asset.
Based on the results of its quantitative impairment assessment, the Company concluded that the fair value of its ANZ reporting unit exceeded its carrying value. Accordingly, no goodwill impairment charges were recorded during the years ended December 31, 2020, 2021, and 2022.
Intangible Assets
The following table represents the balance of the Company’s intangible assets as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Subject to amortization | | | | | | | | | | | |
| Student relationships | $ | 201,309 | | | $ | (180,007) | | | $ | 21,302 | | | $ | 200,185 | | | $ | (191,125) | | | $ | 9,060 | |
| Not subject to amortization | | | | | | | | | | | |
| Trade names | 255,078 | | | — | | | 255,078 | | | 251,481 | | | — | | | 251,481 | |
| Total | $ | 456,387 | | | $ | (180,007) | | | $ | 276,380 | | | $ | 451,666 | | | $ | (191,125) | | | $ | 260,541 | |
The Company’s finite-lived intangible assets are comprised of student relationships, which are being amortized on a straight-line basis over a three-year useful life. Straight-line amortization expense for finite-lived intangible assets reflects the pattern in which the economic benefits of the assets are consumed over their estimated useful lives. Amortization expense related to finite-lived intangible assets was $57.3 million, $44.3 million, and $11.1 million for the years ended December 31, 2020, 2021 and 2022, respectively. In 2023, the Company will recognize the remaining $9.1 million of amortization expense related to its finite-lived intangible assets.
Indefinite-lived intangible assets not subject to amortization consist of trade names. The Company assigned an indefinite useful life to its trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the useful life of the trade name intangibles.
The Company assesses indefinite-lived intangible assets 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 indefinite-lived intangible asset below its carrying amount.
In 2022, the Company performed a qualitative impairment assessment related to its indefinite-lived intangible assets, except for the ANZ trade names, using the first day of the fourth quarter of 2022 as the assessment date. The Company evaluated the likelihood of impairment by considering qualitative factors, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value. Based on the results of its qualitative impairment analysis, the Company determined that no impairment indicators existed for these indefinite-lived intangible assets as of the assessment date.
In 2022, the Company performed a quantitative impairment assessment for indefinite-lived intangible assets related to the ANZ trade names using the first day of the fourth quarter of 2022 as the assessment date. The Company used an income-based approach to determine the fair value of the ANZ trade names. The income approach consisted of a discounted cash flow model, using the relief from royalty method, which included a projection of future revenues for ANZ, identifying a royalty rate, calculating a terminal value, and discounting such cash flows by a risk adjusted rate of return. The determination of fair value of the ANZ trade name primarily consists of using unobservable inputs under the fair value measurement standards.
The Company believes that the most critical assumptions and estimates used in determining the estimated fair value of the ANZ trade names include, but are not limited to, the amounts and timing of future revenue growth rates, the royalty rate, the discount rate, and the terminal growth rate. The assumptions used in determining the expected future revenue growth rates consider various factors such as historical operating trends, particularly in student enrollment and pricing, anticipated economic and regulatory conditions, reasonable expectations for planned business expansion opportunities, and long-term operating strategies and initiatives. The royalty rate is based on the Company’s assumption of what a reasonable market participant would pay to license the ANZ trade names, expressed as a percentage of revenues. The discount rate is based on the Company’s assumption of a prudent investor’s required rate of return for assuming the risk of investing in a particular company. The terminal growth rate reflects the sustainable revenue growth the business could generate in a perpetual state as a function of inflationary expectations. The Company believes that these assumptions are consistent with a reasonable market participant view while employing the concept of highest and best use of the asset.
Based on the results of its quantitative impairment assessment, the Company concluded that the fair value of the ANZ trade names exceeded its carrying value. Accordingly, there were no impairment charges related to indefinite-lived intangible assets recorded during the years ended December 31, 2020, 2021, and 2022.
11. Other Current Assets
Other current assets consist of the following as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Prepaid expenses | 17,862 | | | 19,073 | |
| Restricted cash | 9,794 | | | 13,287 | |
| Cloud computing costs | 5,019 | | | 7,859 | |
| Other | 8,102 | | | 3,066 | |
| Other current assets | $ | 40,777 | | | $ | 43,285 | |
12. Other Assets
Other assets consist of the following as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Prepaid expenses, net of current portion | $ | 19,852 | | | $ | 18,192 | |
| Equity method investments | 15,582 | | | 13,879 | |
| Cloud computing arrangements | 5,957 | | | 7,507 | |
| Other investments | 3,576 | | | 3,396 | |
| Tuition receivable, net, non-current | 2,466 | | | 2,673 | |
| Other | 4,864 | | | 4,005 | |
| Other assets | $ | 52,297 | | | $ | 49,652 | |
Prepaid Expenses
Long-term prepaid expenses primarily relate to payments that have been made for future services to be provided after one year. In 2020, pursuant to the terms of the perpetual license agreement associated with JWMI, the Company made a final one-time cash payment of approximately $25.3 million for the right to continue to use the Jack Welch name and likeness. As of December 31, 2021 and 2022, $19.2 million and $17.7 million, respectively, of this payment is included in the prepaid expenses, net of current portion balance, as the payment is being amortized over an estimated useful life of 15 years.
Equity Method Investments
The Company holds 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 $2.7 million across these partnerships through 2031. The Company’s investments range from 3%-5% of any partnership’s interest and are accounted for under the equity method.
The following table illustrates changes in the Company’s limited partnership investments for the years ended December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| 2021 | | 2022 |
| Limited partnership investments, beginning of period | $ | 15,795 | | | $ | 15,582 | |
| Capital contributions | 892 | | | 160 | |
| Pro-rata share in the net income of limited partnerships | 4,925 | | | 348 | |
| Distributions | (6,030) | | | (2,211) | |
| Limited partnership investments, end of period | $ | 15,582 | | | $ | 13,879 | |
Cloud Computing Arrangements
The Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.
Other Investments
The Company holds investments in education tech start-ups focused on transformational technologies that improve student success. These investments are accounted for at cost less impairment as they do not have readily determinable fair value.
Tuition Receivable
Non-current tuition receivable, net, represents tuition that the Company expects to collect, but not within the next 12 months.
Other
Other is comprised primarily of deferred financing costs associated with the Company’s credit facility, deferred contract costs related to commissions paid by ANZ to third party international agents, and refundable security deposits associated with the Company’s leased campus and office space.
13. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Trade payables | $ | 45,340 | | | $ | 45,826 | |
| Accrued compensation and benefits | 27,424 | | | 32,608 | |
| Accrued student obligations and other | 22,754 | | | 12,154 | |
| Accounts payable and accrued liabilities | $ | 95,518 | | | $ | 90,588 | |
14. Long-Term Debt
On November 3, 2020, the Company entered into an amended credit facility (“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 the Company 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 the future in an aggregate amount of 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. The maturity date of the Amended Credit Facility is November 3, 2025. The Company paid approximately $1.9 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 Revolving Credit Facility bear interest at a per annum rate equal to LIBOR or a base rate, plus a margin ranging from 1.50% to 2.00% depending on 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 Revolving Credit Facility.
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 2.00 to 1.00. Leverage ratio is defined as the ratio of total debt (net of unrestricted cash in an amount not to exceed $150 million) to trailing four-quarter EBITDA.
•A coverage ratio of not less than 1.75 to 1.00. 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 1.0 for any fiscal year and not less than 1.5 for any two consecutive fiscal years.
The Company was in compliance with all the covenants of the Amended Credit Facility as of December 31, 2022.
As of December 31, 2021 and 2022, the Company had approximately $141.6 million and $101.4 million, respectively, outstanding under the Revolving Credit Facility. Approximately $3.6 million and $3.4 million was denominated in Australian dollars as of December 31, 2021 and 2022, respectively. During the year ended December 31, 2022, the Company repaid $40.0 million of the outstanding balance under the Revolving Credit Facility.
During the years ended December 31, 2020, 2021 and 2022, the Company paid $1.0 million, $2.7 million and $4.2 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility.
15. Other Long-Term Liabilities
Other long-term liabilities consist of the following as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| Contract liabilities, net of current portion | $ | 34,704 | | | $ | 36,540 | |
| Asset retirement obligations | 9,122 | | | 6,283 | |
| Other | 3,263 | | | 3,183 | |
| Other long-term liabilities | $ | 47,089 | | | $ | 46,006 | |
Contract Liabilities
As discussed in Note 4, 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.
Asset Retirement Obligations
Certain of the Company’s lease agreements require the leased premises to be returned in a predetermined condition.
16. Equity Awards
In connection with the merger with Capella Education Company on August 1, 2018, the Capella Education Company 2014 Equity Incentive Plan (the “2014 Capella Plan”) and the Capella Education Company 2005 Stock Incentive Plan (collectively, the “Capella Plans”) were assumed by the Company. Under the Capella Plans, shares of the Company’s common stock were permitted to be issued upon the exercise or settlement of equity awards that were granted prior to the merger date or pursuant to awards granted after the closing of the merger to legacy Capella Education Company employees under the 2014 Capella Plan.
On November 6, 2018, the Company’s shareholders approved the Strategic Education, Inc. 2018 Equity Compensation Plan (the “2018 Plan”), which replaced the Strayer Education, Inc. 2015 Equity Compensation Plan (the “2015 Plan”). The 2018 Plan provides for the granting of restricted stock, restricted stock units, stock options intended to qualify as incentive stock options, options that do not qualify as incentive stock options, and other forms of equity compensation and performance-based awards to employees, officers, and directors of the Company, or to a consultant or advisor to the Company, at the discretion of the Board of Directors. Vesting provisions are at the discretion of the Board of Directors. Options may be granted at option prices based at or above the fair market value of the shares at the date of grant. The maximum term of the awards granted under the 2018 Plan is ten years. The original number of shares of common stock authorized for issuance under the 2018 Plan was 700,000, plus the number of shares available for grant under the 2015 Plan at the time of stockholder approval of the 2018 Plan, plus the number of shares which may in the future become available under the 2015 Plan due to forfeitures of outstanding awards.
On April 27, 2022, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the total number of shares of common stock available for issuance under the 2018 Plan by the number of shares that were available for issuance under the 2014 Capella Plan as of the effective date of the First Amendment, plus the number of shares that may become available upon the future expiration, forfeiture or cancellation of outstanding awards under the Capella Plans. Subsequent to the shareholders approval of the First Amendment, all equity-based awards are granted under the 2018 Plan. As of December 31, 2022, 925,063 shares were available for issuance under the 2018 Plan.
As of December 31, 2022, the Company has issued and outstanding awards under the 2018 Plan, the Capella Education Company 2005 Stock Incentive Plan, and the Capella Education Company 2014 Equity Incentive Plan.
Dividends paid on unvested restricted stock are reimbursed to the Company, and dividend equivalents accumulated on unvested restricted stock units are forfeited, if the recipient forfeits his or her shares as a result of termination of employment prior to vesting in the award, other than as a result of the recipient’s death, disability, or certain qualifying terminations in connection with a change in control of the Company, or unless waived by the Company.
Restricted Stock and Restricted Stock Units
The table below sets forth the restricted stock and restricted stock units activity for each of the three years in the period ended December 31, 2022:
| | | | | | | | | | | |
| | Number of
shares or units | | Weighted-
average
grant price |
| Balance, December 31, 2019 | 468,950 | | | $ | 98.98 | |
| Grants | 150,107 | | | 140.39 | |
| Vested shares | (116,724) | | | 69.94 | |
| Forfeitures | (7,364) | | | 130.68 | |
| Balance, December 31, 2020 | 494,969 | | | 117.91 | |
| Grants | 321,965 | | | 88.02 | |
| Vested shares | (77,586) | | | 92.38 | |
| Forfeitures | (31,807) | | | 121.80 | |
| Balance, December 31, 2021 | 707,541 | | | 106.93 | |
| Grants | 534,652 | | | 50.72 | |
| Vested shares | (139,375) | | | 95.27 | |
| Forfeitures | (31,257) | | | 62.43 | |
| Balance, December 31, 2022 | 1,071,561 | | | $ | 81.70 | |
Stock Options
The table below sets forth the stock option activity and other stock option information for each of the three years in the period ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
shares | | Weighted-
average
exercise price | | Weighted-
average
remaining
contractual
life (years) | | Aggregate intrinsic value(1) (in thousands) |
| Balance, December 31, 2019 | 46,096 | | | $ | 63.49 | | | 5.2 | | $ | 4,398 | |
| Grants | — | | | — | | | | | |
| Exercises | (20,522) | | | 60.62 | | | | | |
| Forfeitures/Expirations | — | | | — | | | | | |
| Balance, December 31, 2020 | 25,574 | | | 65.80 | | | 5.0 | | 755 | |
| Grants | — | | | — | | | | | |
| Exercises | (1,632) | | | 69.44 | | | | | |
| Forfeitures/Expirations | (266) | | | 87.66 | | | | | |
| Balance, December 31, 2021 | 23,676 | | | 65.30 | | | 4.0 | | 93 | |
| Grants | — | | | — | | | | | |
| Exercises | (377) | | | 36.87 | | | | | |
| Forfeitures/Expirations | — | | | — | | | | | |
| Balance, December 31, 2022 | 23,299 | | | $ | 65.76 | | | 3.0 | | $ | 352 | |
| Exercisable, December 31, 2022 | 23,299 | | | $ | 65.76 | | | 3.0 | | $ | 352 | |
__________________________________________________________________________
(1)The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the respective trading day and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holder had all options been exercised on the respective trading day. The amount of intrinsic value will change based on the fair market value of the Company’s common stock.
The Company received $1.2 million, $0.1 million, and $14 thousand of net cash proceeds related to stock options exercised during the years ended December 31, 2020, 2021, and 2022, respectively. The aggregate intrinsic value of the stock options exercised during the years ended December 31, 2020, 2021, and 2022 was $2.0 million, $24 thousand, and $15 thousand, respectively.
Valuation and Expense Information under Stock Compensation Topic ASC 718
At December 31, 2022, total stock-based compensation cost which has not yet been recognized was $42.0 million for unvested restricted stock and restricted stock units. This cost is expected to be recognized over the next 2.3 years on a weighted-average basis. Approximately 644,000 shares of restricted stock awards and restricted stock units are subject to performance conditions. The accrual for stock-based compensation for performance awards is based on the Company’s estimates that such performance criteria are probable of being achieved over the respective vesting periods. Such a determination involves judgment surrounding the Company’s ability to maintain regulatory compliance. If the performance targets are not reached during the respective vesting period, or it is determined it is more likely than not that the performance criteria will not be achieved, related compensation expense is adjusted.
The following table reflects the amount of stock-based compensation expense recorded in each of the expense line items for the years ended December 31, 2020, 2021, and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Instructional and support costs | $ | 5,111 | | | $ | 5,317 | | | $ | 7,026 | |
| General and administration | 9,499 | | | 13,535 | | | 14,766 | |
| Restructuring costs | — | | | (703) | | | — | |
| Stock-based compensation expense included in operating expense | 14,610 | | | 18,149 | | | 21,792 | |
| Tax benefit | 3,771 | | | 4,809 | | | 5,488 | |
| Stock-based compensation expense, net of tax | $ | 10,839 | | | $ | 13,340 | | | $ | 16,304 | |
During the year ended December 31, 2020, the Company recognized a windfall tax impact of approximately $2.8 million and during the years ended December 31, 2021, and 2022, the Company recognized shortfall tax impacts of approximately $18 thousand, and $1.5 million, respectively, related to share-based payment arrangements, which were adjustments to the provision for income taxes.
17. Other Employee Benefit Plans
The Company sponsors the Strategic Education, Inc. 401(k) Plan, which covers all eligible employees of the Company. The Company makes discretionary contributions to participants of the Strategic Education, Inc. 401(k) Plan through a Company match of 100% on the first 2%, and 50% on the next 2%, of the employee contributions, for a maximum company match of 3%. The Company’s contributions to these plans totaled $7.6 million, $7.4 million and $7.7 million for the years ended December 31, 2020, 2021, and 2022, respectively.
Pursuant to local laws, ANZ is required to make contributions on behalf of its employees for post-retirement superannuation benefits. In addition, ANZ has recorded a liability for long service leave, an entitlement for which employees meeting certain requirements are eligible for extended paid leave. The Company incurred $1.5 million, $8.4 million, and $8.7 million in expense related to these arrangements for the benefit of ANZ employees for the years ended December 31, 2020, 2021, and 2022, respectively.
In May 1998, the Company adopted the Strayer Education, Inc. Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees may purchase shares of the Company’s common stock, subject to certain limitations, at 90% of its market value at the date of purchase. Purchases are limited to 10% of an employee’s eligible compensation. The aggregate number of shares of common stock that may be made available for purchase by participating employees under the ESPP is 2,500,000 shares. Shares purchased in the open market for employees for the years ended December 31, 2020, 2021, and 2022 were as follows:
| | | | | | | | | | | |
| | Shares
purchased | | Average price
per share |
| 2020 | 7,274 | | | $ | 112.65 | |
| 2021 | 13,065 | | | $ | 68.94 | |
| 2022 | 16,183 | | | $ | 58.94 | |
18. Stock Repurchase Plan
In November 2003, the Company’s Board of Directors authorized the Company to repurchase up to an aggregate of $15 million in value of common stock in open market purchases from time to time at the discretion of the Company’s management depending on market conditions and other corporate considerations. The Company’s Board of Directors amended the program on various dates, increasing the repurchase amount authorized and extending the expiration date. At December 31, 2022, $246.8 million of the Company’s share repurchase authorization was remaining for repurchases through December 31, 2023. All of the Company’s share repurchases were effected in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. This stock repurchase plan may be modified, suspended, or terminated at any time by the Company without notice.
Repurchases of common stock are recorded as a reduction to additional paid-in capital in an amount equal to the price at which the repurchased shares were originally sold, with any excess cash paid to repurchase the shares being recorded as a reduction to retained earnings.
Shares of common stock repurchased on the open market under the Company’s repurchase program for the years ended December 31, 2020, 2021, and 2022 were as follows:
| | | | | | | | | | | |
| | Shares
repurchased | | Average price
paid per share |
| 2020 | 1,769 | | | $ | 139.78 | |
| 2021 | 76,969 | | | $ | 76.72 | |
| 2022 | 612,104 | | | $ | 65.54 | |
19. Commitments and Contingencies
The Company’s U.S. Higher Education institutions participate in various federal student financial assistance programs which are subject to audit by agencies, including the Department of Education, the Veterans Administration, and the
Department of Defense. Management believes that the potential effects of audit adjustments, if any, for the periods currently under audit will not have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial position, results of operations, or cash flows.
20. Income Taxes
The income tax provision for the years ended December 31, 2020, 2021 and 2022 is summarized below (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Current: | | | | | |
| Federal | $ | 31,398 | | | $ | 20,754 | | | $ | 13,825 | |
| State | 9,786 | | | 5,736 | | | 5,650 | |
| Foreign | 125 | | | 2,761 | | | 12,063 | |
| Total current | 41,309 | | | 29,251 | | | 31,538 | |
| Deferred: | | | | | |
| Federal | (8,537) | | | (10,128) | | | (1,978) | |
| State | (538) | | | (612) | | | (1,668) | |
| Foreign | (4,545) | | | 3,001 | | | (4,993) | |
| Total deferred | (13,620) | | | (7,739) | | | (8,639) | |
| Total provision for income taxes | $ | 27,689 | | | $ | 21,512 | | | $ | 22,899 | |
The U.S. and foreign components of income (loss) before income taxes for the years ended December 31, 2020, 2021 and 2022 are summarized below (in thousands): | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| United States | $ | 128,822 | | | $ | 57,804 | | | $ | 46,646 | |
| Foreign | (14,865) | | | 18,795 | | | 22,923 | |
| Total income before income taxes | $ | 113,957 | | | $ | 76,599 | | | $ | 69,569 | |
The Company is making an assertion that all earnings generated by its foreign subsidiaries are permanently reinvested in non-U.S. business or are distributable to the United States without material tax implications. As such, income taxes have not been accrued in the United States with respect to foreign subsidiary earnings. The Company intends to continue to reinvest the earnings outside of the United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, as a result, have not recognized additional tax expense on these earnings.
The tax effects of the principal temporary differences that give rise to the Company’s net deferred tax liability are as follows as of December 31, 2021 and 2022 (in thousands):
| | | | | | | | | | | |
| | 2021 | | 2022 |
| Lease liabilities | $ | 25,706 | | | $ | 21,674 | |
| Allowance for credit losses | 13,190 | | | 12,862 | |
| Contract liabilities | 10,214 | | | 9,527 | |
| Stock-based compensation | 7,758 | | | 8,138 | |
| Other | 6,195 | | | 4,363 | |
| Other facility-related costs | 1,916 | | | 1,313 | |
| Loss carryforward | 1,444 | | | 2,013 | |
| Intangible assets | (74,016) | | | (69,920) | |
| Property and equipment | (21,320) | | | (9,968) | |
| Right-of-use lease assets | (15,052) | | | (12,786) | |
| Valuation allowance | (630) | | | (1,821) | |
| Net deferred tax liability | $ | (44,595) | | | $ | (34,605) | |
As of December 31, 2022, Loss carryforward consists of net operating losses related to the states where the Company does not file a consolidated return. The company has state net operating loss carryforwards of $20.2 million which will expire from
2027 through 2043 and $14.3 million which have an indefinite carryover period. The change in the valuation allowance for deferred tax assets as of December 31, 2021 and 2022 was $0.6 million and $1.2 million, respectively, and is primarily related to net operating loss carryforwards in states where the Company does not file a consolidated tax return. The Company concluded that it was more likely than not that the deferred tax asset for the net operating loss carryforwards would not be realized due to negative evidence outweighing the positive evidence regarding the realization of the deferred tax assets. The Company will continue to evaluate its ability to realize its net deferred tax assets on a quarterly basis.
As of December 31, 2021 and 2022, the Company’s liabilities for unrecognized tax benefits are included in other long-term liabilities in the consolidated balance sheets. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the consolidated statements of income. The Company recognized approximately $33,000 and $55,000 of expense related to interest and penalties in 2021 and 2022, respectively. The total amount of interest and penalties included in the consolidated balance sheets was approximately $30,000 and $59,000 as of December 31, 2021 and 2022, respectively.
The following table summarizes changes in unrecognized tax benefits, excluding interest and penalties, for the respective periods (in thousands):
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2022 |
| Beginning unrecognized tax benefits | $ | 314 | | | $ | 1,043 | |
| Additions for tax positions taken in the prior year | 948 | | | — | |
| Reductions for tax positions taken in prior years | (219) | | | (95) | |
| Ending unrecognized tax benefits | $ | 1,043 | | | $ | 948 | |
The Company does not anticipate significant changes to unrecognized tax benefits within the next 12 months. As of December 31, 2022, $0.9 million of the Company’s total unrecognized tax benefits would favorably affect the Company’s effective tax rate, if recognized.
A reconciliation between the Company’s statutory tax rate and the effective tax rate for the years ended December 31, 2020, 2021, and 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Statutory federal rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefits | 5.6 | | | 3.4 | | | 3.2 | |
| Impact of foreign operations | (1.2) | | | 2.2 | | | 3.0 | |
| Nondeductible compensation | 2.2 | | | 1.9 | | | 2.4 | |
| Change in valuation allowance | — | | | 0.8 | | | 1.7 | |
| Excess tax benefit on share-based compensation | (2.0) | | | — | | | 1.7 | |
| Transaction costs | 0.6 | | | — | | | — | |
| Other | (1.9) | | | (1.2) | | | (0.1) | |
| Effective tax rate | 24.3 | % | | 28.1 | % | | 32.9 | % |
Cash payments for income taxes were $45.4 million, $27.3 million, and $26.8 million in 2020, 2021, and 2022, respectively.
21. Segment and Geographic Information
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’s organizational structure includes three operating and reportable segments: U.S. Higher Education, Education Technology Services, and Australia/New Zealand.
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.
The 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. 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.
The Australia/New Zealand segment is comprised of Torrens University, Think Education and Media Design School in Australia and New Zealand, which collectively offer certificate and degree programs in business, design, education, hospitality, healthcare, and technology through campuses in Australia, New Zealand, and online.
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 years ended December 31, 2020, 2021, and 2022 is presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Revenues | | | | | |
| U.S. Higher Education | $ | 966,579 | | | $ | 829,270 | | | $ | 770,979 | |
| Australia/New Zealand | 23,381 | | | 250,124 | | | 230,747 | |
| Education Technology Services | 37,693 | | | 52,292 | | | 63,754 | |
| Consolidated revenues | $ | 1,027,653 | | | $ | 1,131,686 | | | $ | 1,065,480 | |
| Income (loss) from operations | | | | | |
| U.S. Higher Education | $ | 193,393 | | | $ | 104,914 | | | $ | 38,605 | |
| Australia/New Zealand | (13,275) | | | 35,855 | | | 30,473 | |
| Education Technology Services | 19,643 | | | 21,311 | | | 19,264 | |
| Amortization of intangible assets | (64,225) | | | (51,495) | | | (14,350) | |
| Merger and integration costs | (13,770) | | | (11,201) | | | (1,117) | |
| Restructuring costs | (12,382) | | | (25,472) | | | (2,115) | |
| Consolidated income from operations | $ | 109,384 | | | $ | 73,912 | | | $ | 70,760 | |
The following table presents a schedule of significant non-cash items included in segment income (loss) from operations by reportable segment (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 |
| Depreciation and amortization | | | | | |
| U.S. Higher Education | $ | 41,822 | | | $ | 38,178 | | | $ | 35,863 | |
| Australia/New Zealand | 1,930 | | | 10,640 | | | 8,842 | |
| Education Technology Services | 828 | | | 1,067 | | | 1,589 | |
| Amortization of intangible assets | 64,225 | | | 51,495 | | | 14,350 | |
| Restructuring costs | 349 | | | 2,036 | | | 2,480 | |
| Consolidated depreciation and amortization | $ | 109,154 | | | $ | 103,416 | | | $ | 63,124 | |
| Stock-Based compensation | | | | | |
| U.S. Higher Education | $ | 14,452 | | | $ | 16,926 | | | $ | 19,572 | |
| Australia/New Zealand | 46 | | | 1,359 | | | 1,073 | |
| Education Technology Services | 112 | | | 567 | | | 1,147 | |
| Restructuring costs | — | | | (703) | | | — | |
| Consolidated stock-based compensation | $ | 14,610 | | | $ | 18,149 | | | $ | 21,792 | |
Geographic Information
The Company’s long-lived assets are comprised of Property and equipment, net and Right-of-use lease assets. The Company’s long-lived assets by geographic area as of December 31, 2021 and 2022 were as follows (in thousands):
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2022 |
| United States | $ | 156,389 | | | $ | 132,179 | |
| International | 143,787 | | | 125,914 | |
22. Litigation
The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. Certain of these matters are discussed below. 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 accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it will incur these costs in the future and the costs are reasonably estimable. 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.
Wright, et al. v. Capella Education Co., et al. (now captioned Ornelas, et al. v. Capella, et al.) was filed several years ago in the United States District Court for the District of Minnesota, Case No. 18-cv-1062. After the court granted Capella’s motion to dismiss in relation to all but one plaintiff, the plaintiff filed a motion for leave to file a second amended complaint on October 5, 2020, seeking to add six named plaintiffs as well as additional sub-classes and causes of action to the lawsuit. On September 22, 2021, the court affirmed a magistrate’s order granting plaintiff’s motion to amend, and plaintiffs subsequently filed their second amended complaint. The parties entered into a confidential settlement which became effective on April 20, 2022, and on April 25, 2022 the parties filed a joint stipulation of dismissal with prejudice. On May 17, 2022, the court entered an order of dismissal with prejudice.
On April 20, 2021, Capella University received a letter from the Department of Education referencing Wright, et al. v. Capella Education Co., et al. and indicating that the Department would require a fact-finding process pursuant to the borrower defense to repayment regulations to determine the validity of more than 1,000 borrower defense applications that have been submitted regarding Capella University. According to the Department, some of the applications allege similar claims as in the Wright matter concerning alleged misrepresentations of the length of time to complete doctoral programs. Capella University subsequently received approximately 500 applications for borrower defense to repayment. Capella University contested each claim for defense to repayment in individualized responses with supporting evidence, the last of which was sent to the Department in August 2021. Since that time, Capella University has not received any communication from the Department related to the set of borrower defense claims received in 2021, nor has Capella University received indication that any of these claims has been evaluated on the facts presented and adjudicated on the merits.
On June 22, 2022, in litigation in which Capella University is not a party, Sweet, et al. v. Miguel Cardona and the United States Department of Education, United States District Court for the Northern District of California, Case No. 3:19-cv-03674-WHA, the Department joined a proposed class settlement agreement that would result in a blanket grant of automatic, presumptive relief for all borrower defense to repayment applications filed by students at any of approximately 150 different listed institutions, including Capella University, through June 22, 2022. The class settlement agreement would also provide certain expedited review of borrower defense claims related to schools excluded from the automatic relief list, as well as for borrowers who applied during the period after execution of the settlement and before final approval. The Sweet settlement received preliminary court approval on August 4, 2022. A joint motion for final approval was filed on September 22, 2022, which multiple intervening higher education institutions and companies opposed. Following a fairness hearing, the court granted final approval of the settlement on November 16, 2022. Intervenors have appealed the court’s order and moved to stay the court’s final judgment approving the settlement pending resolution of the appeal.
In a July 25, 2022 filing in the same litigation, the Department stated that providing automatic relief to such borrowers “does not constitute the granting or adjudication of a borrower defense pursuant to the Borrower Defense Regulations, and therefore provides no basis to the Department for initiating a borrower defense recoupment proceeding against any institution identified” on the list. It is unclear whether the Department would attempt to seek recovery from Capella University for the amounts of discharged loans. The Department has indicated that any recoupment against institutions “could be imposed only after the Department initiated a separate, future proceeding, in accordance with regulations that require the Department to prove a sufficient basis for liability and provide schools with notice and an opportunity to be heard.” If the Department were to seek
recovery for the amounts of discharged loans, Capella University would dispute and defend against such efforts. At this time, the Company is unable to predict the ultimate outcome of Capella-related borrower defense applications.
23. Regulation
United States Regulation
CARES Act
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (“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, institutions of higher education were provided relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of the COVID-19 pandemic, 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 the COVID-19 pandemic. The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to the COVID-19 pandemic, without requiring an appeal from the student. Additionally, under the legislation, institutions are permitted to transfer up to 100% of Federal Work-Study (“FWS”) funds into their Federal Supplemental Educational Opportunity Grant (“FSEOG”) allocation and are granted a waiver of the 2019/2020 and 2020/2021 non-federal share institutional match. Institutions may continue to make FWS payments to student employees who are unable to meet their employment obligations due to the COVID-19 pandemic. The Department issued sub-regulatory guidance to institutions regarding implementation of the provisions included in the CARES Act.
The CARES Act also suspended 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. On March 30, 2021, the Secretary of Education also extended student loan relief to all Federal Family Education Loans (“FFEL”) not previously covered. Through a series of administrative actions, student loan relief has been extended, including on August 24, 2022, when the Department announced, “a final extension of the pause on student loan repayment, interest, and collections through December 31, 2022.” The restart of student loan repayments has subsequently been postponed further.
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 the COVID-19 pandemic. 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 for costs associated with significant changes to the delivery of instruction due to the COVID-19 pandemic, 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 received 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 University 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 University was ineligible for Education Stabilization funding.
American Rescue Plan Act of 2021
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Similar to previous stimulus packages, this legislation provided additional funding for the Higher Education Emergency Relief Fund. A small portion of the $39.6 billion allocated for institutions of higher education was made available for student emergency aid for students at for-profit institutions. Capella University disbursed $184,323 to students of the highest need in June 2021, and Strayer University disbursed $2,554,682 to students of the highest need in July 2021.
The legislation also amended the “90/10 Rule” to include “all federal education assistance” in the “90” side of the ratio calculation. See “Item 1. Business – Regulation – U.S. Regulatory Environment – The 90/10 Rule” for a description of the 90/10 Rule. The legislation required the Department to conduct a negotiated rulemaking process to modify related Department regulations, which the Department began in January 2022. In March 2022, the Institutional and Programmatic Eligibility negotiated rulemaking committee reached consensus on changes to the 90/10 Rule. On October 27, 2022, the Department of Education released final 90/10 regulations, which are consistent with the consensus language. The final regulations provided for an expanded definition of “federal education assistance” that will be periodically defined by the Secretary. On December 21, 2022, the Department released a list of federal agencies and federal education assistance programs that must be included as federal revenue in the 90/10 calculation. Such agencies include the U.S. Department of Defense (military tuition assistance) and the Department of Veterans Affairs (veterans education benefits), in addition to the Title IV programs already covered by the 90/10 Rule. The new 90/10 regulations are effective for fiscal years beginning on or after January 1, 2023.
Other legislation has been introduced in both chambers of Congress that seeks to modify the 90/10 Rule further, including proposals to change the ratio requirement to 85/15 (federal to nonfederal revenue), or to eliminate the 90/10 Rule. We cannot predict whether or how legislative or regulatory changes will affect the 90/10 Rule.
Consolidated Appropriations Act, 2021
On December 27, 2020, the President signed into law the Consolidated Appropriations Act of 2021. Among other things, this package funded the federal government through September 2021, provided additional COVID-related relief, and made a number of U.S. higher education changes.
The legislation includes a number of tax provisions, including replacing the tuition deduction with an expanded Lifetime Learning Credit, which now shares the higher income limitations of the American Opportunity Tax Credit. The legislation also extends until January 1, 2026 expanded employer-provided educational assistance permitting employers to pay up to $5,250 toward an employee’s federal student loans as a tax-free benefit.
In addition, the legislation includes a number of higher education-related provisions, including: adopting the FAFSA Simplification Act, which includes eliminating the “expected family contribution” from the Free Application for Federal Student Aid (“FAFSA”) and replacing it with a “Student Aid Index;” expanding eligibility for Pell Grants; restoring Pell Grant eligibility for incarcerated students attending non-profit institutions; restoring quarters/semesters of Pell eligibility to students who have successfully asserted a borrower defense to repayment; repealing the limitation on lifetime subsidized loan eligibility (known as “Subsidized Usage Limit Applies,” or SULA); and significantly simplifying the FAFSA form. The Department published a FAFSA Simplification Information webpage on October 14, 2022 and is expected to provide institutions with guidance on the higher education provisions included in the Consolidated Appropriations Act of 2021, which take effect on July 1, 2023.
The bill also provided $22.7 billion for higher education institutions and students impacted by COVID-19, including $680.9 million (3 percent of the total) for student emergency aid for students at for-profit institutions. In January 2021, the Department released a table of institutional allocation of funds which indicated that Capella University was eligible for $328,602 and Strayer University was eligible for $5,831,606, all of which was disbursed to students with the highest need in the form of direct grants in spring 2021.
Veterans Health Care and Benefits Improvement Act of 2020
On January 5, 2021, the President signed into law the Veterans Health Care and Benefits Improvement Act of 2020, which expanded student veterans’ protections. Among other things, the legislation requires a risk-based review of schools if an institution is operating under Heightened Cash Monitoring 2 or provisional approval status by the Department of Education, is subject to any punitive action by a federal or state entity, faces the loss or risk of loss of accreditation, or has converted from for-profit to non-profit status. The legislation also restores veterans benefits to students whose school closed, as long as the student transferred fewer than 12 credits from the closed school or program; protects students from debt collection by the VA for overpaid tuition benefits; and establishes a number of institutional requirements, including: providing clear disclosures about cost, loan debt, graduation and job placement rates, and acceptance of transfer credit; ensuring institutions are accommodating short absences due to service; prohibiting same-day recruitment and registration; and prohibiting more than three unsolicited recruiting contacts during any one-month period. Most provisions became effective August 1, 2021. Institutions were permitted to seek waivers for certain sections of the new law if they were not able to satisfy compliance requirements by August 1, 2021, but neither Strayer University nor Capella University sought a waiver.
THRIVE Act
On June 8, 2021, President Biden signed into law the Training in High-Demand Roles to Improve Veteran Employment Act (the “THRIVE Act”), which amended provisions of the Veterans Health Care and Benefits Improvement Act and the American Rescue Plan Act. The law requires the U.S. Department of Labor and VA to collaborate on a list of high-demand occupations for a rapid retraining assistance program. Additionally, the law requires the Government Accountability Office to report on the outcomes and effectiveness of retraining programs. The THRIVE Act amended the Veterans Health Care and Benefits Improvement Act by clarifying that programs pursued solely through distance education on a half-time basis or less are not eligible for the housing stipend that is generally available for retraining programs. As noted above, the Veterans Health Care and Benefits Improvement Act prohibits certain high-pressure recruiting tactics. The THRIVE Act requires the VA to take disciplinary action if a person with whom an institution has a recruiting or educational services agreement violates the VA’s incentive compensation bans.
REMOTE Act
On December 21, 2021, President Biden signed into law the Responsible Education Mitigating Options and Technical Extensions (“REMOTE”) Act, which amended provisions of the Veterans Health Care and Benefits Improvement Act, the American Rescue Plan Act, and the THRIVE Act. The law includes changes to help institutions satisfy the Veterans Health Care and Benefits Improvement Act’s requirements by using the College Financing Plan template, in addition to extending some COVID-related flexibilities previously granted amid the pandemic. The law also extended remote learning waivers through June 1, 2022, simplified the VA verification process for tuition reimbursement, and fixed a technical error to ensure U.S. institutions of higher education can continue to use incentive compensation to recruit foreign students without losing GI Bill funding for their students.
Ensuring the Best Schools for Veterans Act of 2022
On August 26, 2022, President Biden signed into law the Ensuring the Best Schools for Veterans Act of 2022, which amended prior statutory language and made modifications to how the VA operationalizes the 85/15 requirement (that is, the rule that generally forbids use of Department of Veterans Affairs benefits for students enrolling in a program in which more than 85% of students enrolled in the program have any portion of their tuition, fees, or other charges paid to or for them by the institution or by the VA). Among other things, the law clarifies that reporting associated with the 85/15 requirement does not apply to institutions at which 35% or fewer students receive GI bill benefits. The law also exempts programs for which fewer than 10 students have any portion of their tuition, fees, or other charges paid to or for them by the institution or by the VA.
Consolidated Appropriations Act, 2022
On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act of 2022. The bill allocated $76.4 billion to the Department of Education and its programs, including an increase to the maximum Pell Grant award, bringing the total to $6,895 for the 2022-23 award year. In addition, campus-based aid programs were increased, with $895 million allocated for the FSEOG program, an increase of $15 million above the FY 2021 enacted level, and $1.21 billion allocated for FWS, an increase of $20 million above the FY 2021 enacted level.
In addition to the increases in federal student aid funding, the bill provided $2.1 billion for career, technical, and adult education, $61 million above the FY 2021 enacted level, and an additional $3 billion for higher education programs, $452 million more than the FY 2021 enacted level. The bill also dictated Department requirements related to federal loan servicing, including appropriations for just over $2 billion for expenses related to the administration of the federal loan program, and made a number of changes to the FAFSA Simplification Act.
Consolidated Appropriations Act, 2023
In December 2022, the President signed the 2023 Consolidated Appropriations Act. Among other things, the act provides a $500 increase to the maximum Pell Grant, totaling $7,395 for FY 2023-24. The bill also increases funding to Federal Work Study, FSEOG, Federal TRIO programs, and HBCUs and MSIs. Additionally, the bill enacted language that would allow companies to make matching contributions to a retirement account for employees making qualified student loan payments. The bill level funds the Office of Federal Student Aid at $2.03 billion and does not provide new funding for President Biden’s student loan forgiveness plan.
Current Negotiated Rulemaking
On May 26, 2021, the Department first announced its intention to establish negotiated rulemaking committees to prepare proposed regulations for programs authorized under Title IV of the Higher Education Act of 1965, as amended. As part of the
notice, the Department suggested the following topics for regulation: change of ownership and change in control of institutions of higher education under 34 CFR § 600.31; certification procedures for participation in Title IV, HEA programs under 34 CFR § 668.13; standards of administrative capability under 34 CFR § 668.16; ability to benefit under 34 CFR § 668.156; borrower defense to repayment under 34 CFR §§ 682.410, 668.411, 685.206, and 685.222; discharges for borrowers with a total and permanent disability under 34 CFR §§ 674.61, 682.402, and 685.213; closed school discharges under 34 CFR §§ 685.214 and 682.402; discharges for false certification of student eligibility under 34 CFR §§ 685.215(a)(1) and 682.402; loan repayment plans under 34 CFR §§ 682.209, 682.215, 685.208, and 685.209; the Public Service Loan Forgiveness program under 34 CFR § 685.219; mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements (formerly under 34 CFR § 685.300) and associated counseling about such arrangements under 34 CFR § 685.304; financial responsibility for participating institutions of higher education under 34 CFR subpart L, such as events that indicate heightened financial risk; gainful employment (formerly located in 34 CFR subpart Q); and Pell Grant eligibility for prison education programs under 34 CFR part 690. Additionally, the Department invited public input on how it could address, through regulations, gaps in post-secondary outcomes such as retention, completion, loan repayment, and student loan default by race, ethnicity, gender, and other key student characteristics. To support this work, the Department held a series of virtual public hearings in June 2021, as well as accepted written comments. At the virtual public hearings and via written comments, members of the public discussed proposed changes for all of the issues noted above, as well as comments addressing data transparency, including disclosures of outcomes for veteran students. The Department indicated its intention to convene multiple committees, including the Affordability and Student Loans committee and the Institutional and Programmatic Eligibility committee, to engage in negotiated rulemaking in late 2021 and early 2022. See “Affordability and Student Loans Committee” and “Institutional and Programmatic Eligibility Committee” below.
In January 2023, the Department indicated its intention to establish one or more rulemaking committees in 2023 to propose new regulations on distance education, improving the use of deferments and forbearances, third-party servicers and related issues, cash management, return of federal funds, state authorization, accreditation and related issues, and TRIO programs.
Following completion of negotiated rulemaking committee meetings, the Department of Education issues proposed rules for public comment. If the negotiated rulemaking committee reaches consensus on a topic, the Department of Education is bound to propose a rule consistent with the consensus. Following public comment, the Department issues final regulations, which, if published by November 1, would generally take effect July 1 of the following year.
Gainful Employment
Under the Higher Education Act of 1965, as amended (“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 additional disclosure requirements that became effective January 1, 2017 and July 1, 2019 (the “2015 Regulations”).
On July 1, 2019, the Department of Education updated gainful employment final regulations, which contained a full repeal of the 2015 Regulations and became effective on July 1, 2020 (the “2019 Regulations”). Both Strayer University and Capella University implemented the 2019 Regulations early, by means permitted by the Secretary of Education, 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, Strayer University and Capella 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. On December 8, 2021, the Department announced its intention to establish negotiated rulemaking committees to develop proposed regulations for gainful employment and other topics related to programs authorized under Title IV of the HEA. Negotiated rulemaking committee sessions occurred January-March 2022, and the Institutional and Programmatic Eligibility committee did not reach consensus on the Gainful Employment topic. The Department has indicated its intention to publish draft Gainful Employment rules in April 2023, which would be effective no earlier than July 2024. We cannot predict what a future gainful employment regulation may include.
Borrower Defenses to Repayment
On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which govern borrower defense to repayment (“BDTR”) claims in connection with loans first disbursed on or after July 1, 2020, the date the 2019 BDTR Rule became effective.
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 non-monetary 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 disclosures are 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 in compliance with the terms of the regulations, the Department of Education may require the school to repay the amount of the discharged loan. On December 10, 2019, the Secretary of Education released a formula to calculate the amount of relief a borrower may receive for a successful BDTR application. This formula analyzed a borrower’s earnings as compared to median earnings of comparable programs to determine the amount of loans that would be discharged. Under this formula, even successful BDTR applicants may receive only a partial loan discharge.
On March 11, 2020, the 116th Congress passed a joint resolution providing for Congressional disapproval of the 2019 BDTR Rule. The President vetoed the joint resolution on May 29, 2020, and the House subsequently failed to override the veto during a vote on June 26, 2020.
On March 18, 2021, the Department revised its BDTR review process and repealed the previous administration’s partial relief formula. Under the updated BDTR procedures, the Department will grant full loan relief to borrowers with approved BDTR applications. Additionally, the Department has eliminated certain evidentiary requirements for borrowers who have received a loan cancellation due to total or permanent disability. These borrowers will no longer be required to provide proof of insufficient income for the relief program for the three years after discharge of their loans.
On August 10, 2021, the Department announced its intention to establish a negotiated rulemaking committee to develop proposed regulations for borrower defenses to repayment and other topics related to programs authorized under Title IV of the HEA. Negotiated rulemaking for the Affordability and Student Loans Committee began in October 2021 and concluded in December 2021, with the committee failing to reach consensus on Borrower Defense to Repayment. On October 31, 2022, the Department released final BDTR regulations. Among other things, the final rule sets a single standard and streamlined process for relief that will apply to all future and pending BDTR claims as of July 1, 2023, instead of various standards based on the date of the borrower’s first loan disbursement; define what kinds of misconduct could lead to borrower defense discharges, including substantial misrepresentations, substantial omissions of fact, breaches of contract, aggressive and deceptive recruitment, and state or federal judgments or final Department of Education actions that could give rise to a BDTR claim; establish a reconsideration process for borrowers whose claims are not approved for a full discharge; and create a process for forming groups of borrowers and adjudicating claims based on the common facts of those group claims. The final rule also sets the expectation that the Department will hold colleges accountable for the cost of discharges, including by establishing a recoupment process separate from the approval of BDTR claims. In addition, the final rule prohibits institutions from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class action waivers for claims related to the making of a Federal Direct Loan or the provision of educational services for which the loan was obtained.
On October 31, 2022, the Department published final rules updating the eligibility criteria for and the process by which borrowers can be eligible to receive a closed school loan discharge. The updated rules allow the Secretary to process automatic closed school discharges and establishes a discharge window of 180 days prior to the school’s closure. The regulation also
states that eligible borrowers may receive a discharge if the borrower does not complete either a teach-out or the continuation of their program at another location of the school, and gives the Secretary the authority to adjust the closure date in cases where the institution discontinues the programs in which most borrowers were enrolled. The new regulation is effective July 1, 2023.
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 and July 1, 2021. In January 2023, the Department indicated its intention to establish one or more negotiated rulemaking committees in 2023 to propose regulations regarding, among other things, accreditation and related issues and state authorization.
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 was non-binding. On October 26, 2020, a Senior Department Official (“SDO”) found HLC non-compliant, in part. While the SDO required that HLC submit periodic reporting for twelve months, the SDO did not restrict HLC’s scope of accreditation or ability to accredit new institutions. HLC did not appeal the Secretary’s decision. Both HLC and Middle States Commission on Higher Education (“Middle States”), the institutional accreditor for Strayer University, have applied for renewal of their recognition by the Department. NACIQI is scheduled to consider their applications in winter 2023 and already has solicited written comments from the public (which were due January 2022).
Distance Education and Innovation
On August 24, 2020, the Department of Education published final rules 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. Among other changes, the final rules established an updated definition of distance education; amended the existing definition of the credit hour; created a definition of academic engagement; and updated eligibility and program design, for programs offered through the direct assessment of learning. The final rules also made operational changes to several financial aid awarding, disbursing and refunding rules, including how aid can be delivered to students enrolled in subscription period programs, such as Capella University’s FlexPath offerings. The final rule became effective July 1, 2021. In January 2023, the Department indicated its intention to establish a negotiated rulemaking committee in 2023 to consider new proposed regulations on distance education.
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 2020 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 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 obtain its own advisor), rulings on
questions of relevance by decision-makers, and the creation and maintenance of a record of the live hearing proceedings. The final rule became effective August 14, 2020.
On March 8, 2021, President Biden signed an executive order that requires the Secretary of Education and the Attorney General to review the previous administration’s rulemakings and guidance documents related to Title IX. In June 2021, the Department of Education held virtual public hearings to gather information for providing enforcement of Title IX, as part of the Office for Civil Rights’ (“OCR”) comprehensive review of the regulation. On June 16, 2021, OCR issued a notice of interpretation clarifying that the Department interprets Title IX and its enforcement authority under the regulation to include the prohibition of sex discrimination based on sexual orientation and gender identity. On July 20, 2021, the Department of Education released a Questions and Answers document outlining OCR’s interpretation of the Title IX regulations related to sexual harassment. On August 24, 2021, OCR, in alignment with recent federal court decisions, issued guidance indicating it would cease enforcement of Title IX’s current prohibition against consideration of statements made by individuals failing to submit to cross-examination. The June 2021 notice of interpretation is currently under legal challenge in Tennessee et al. v. United States Department of Education et al., United States District Court for the Eastern District of Tennessee, Case No. 3:21-cv-00308-CEA-DCP. A July 15, 2022 court-issued preliminary injunction prohibits the Department of Education from enforcing the challenged guidance in the plaintiff states.
On June 23, 2022, the Department of Education released proposed Title IX regulations for public comment. Among other changes, the proposed rule would address all forms of sex-based harassment (not only sexual harassment); clarify that Title IX’s prohibition against sex discrimination includes discrimination on the basis of sex stereotypes, sex characteristics, pregnancy or related conditions, sexual orientation and gender identity; and eliminate the requirement for live hearings at the post-secondary level. The public comment period on the proposed rule ended on September 12, 2022. When the Department publishes a final Title IX rule, it will indicate an effective date.
On October 4, 2022, OCR released a resource document for students and institutions in which it reinforced that current Title IX regulations prohibit discrimination based on pregnancy, childbirth, false pregnancy, termination of pregnancy or recovery therefrom. The resource document further emphasized that Title IX requires institutions to treat pregnancy, childbirth, false pregnancy, termination of pregnancy and recovery therefrom the same as other temporary disabilities with respect to medical benefits, services, plans, and policies, and detailed requirements for leave and reinstatement for both students and employees.
Affordability and Student Loans Committee
On August 10, 2021, the Department announced its intention to establish the Affordability and Student Loans committee, to prepare proposed regulations to address the following topics: borrower defense to repayment, closed school discharges, discharges for borrowers with a total and permanent disability, discharges for false certification by a school of a student’s eligibility to receive a loan, loan repayment plans, interest capitalization, mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements and associated counseling about such arrangements, Pell Grant eligibility for prison education programs, and the Public Service Loan Forgiveness program. The Department also announced the formation of a Prison Education Program Subcommittee. The Department selected negotiators in September 2021, with negotiations occurring October-December 2021. In December 2021, the Affordability and Student Loans committee reached consensus on four of twelve topics: discharges for false certification of student eligibility, Pell Grant eligibility for prison education programs, discharges for borrowers with total and permanent disability, and interest capitalization. It did not reach consensus on borrower defenses to repayment and other topics. If the negotiated rulemaking committee reaches consensus on a topic, the Department of Education is bound to propose a rule consistent with the consensus.
In the absence of consensus, the Department of Education has discretion to propose a rule for public comment.
On July 6, 2022, the Department released proposed rules governing student loan discharges and processes, including borrower defense to repayment. The proposed rules also addressed closed school discharges, arbitration proceedings, public service loan forgiveness, interest capitalization, total and permanent disability discharges, and false certification. The public comment period on the proposed rules ended on August 12, 2022. As discussed above, the Department published final rules on October 31, 2022.
Institutional and Programmatic Eligibility Committee
On December 8, 2021, the Department announced its intention to establish the Institutional and Programmatic Eligibility committee, to prepare proposed regulations to address the following topics: 90/10, ability to benefit, certification procedures for participating in Title IV programs, change of ownership and change in control of institutions of higher education, financial responsibility for participating institutions of higher education, gainful employment, and standards of administrative capability.
Committee meetings occurred January-March 2022. In March 2022, the committee reached consensus on two of seven topics: ability to benefit and changes to the 90/10 rule. On July 26, 2022, the Department released proposed regulations related to the 90/10 rule, and change of ownership and change in control of institutions of higher education. On October 27, 2022, the Department of Education released final 90/10 regulations, which are consistent with the consensus language.
The 90/10 rule’s final regulations include changes to requirements impacting non-Title IV program revenue, and the treatment of “federal education assistance funds” within the calculation. The final regulations indicate that the Secretary of Education will identify via Federal Register notice, the federal agencies and educational assistance funds provided by that agency that will count toward the “90” portion of the 90/10 calculation. On December 21, 2022, the Department released a list of federal agencies and federal education assistance programs that must be included as federal revenue in the 90/10 calculation. Such agencies include the U.S. Department of Defense (military tuition assistance) and the Department of Veterans (veterans education benefits), in addition to the Title IV programs already covered by the 90/10 Rule. The final regulations also include modifications to the criteria for revenue generated from non-Title IV programs, allowing institutions to count funds as non-Federal revenue only for programs that: (1) do not include any courses offered in an eligible program that is provided by the institution; (2) are provided by the institution and taught by one of the institution’s instructors; and (3) are located at the institution’s main campus, one of its approved additional locations, at another school facility approved by the appropriate State agency or accrediting agency, or at an employer facility. In the preamble to the final 90/10 regulations and in subsequent sub-regulatory guidance, the Department indicated that non-Title IV programs that are offered in part or in whole through distance education are not eligible to be included in the “10” portion of the calculation. The final regulations establish new disclosure requirements for institutions that fail the 90/10 rule, including a student notification requirement, and clarify reporting requirements and liabilities for institutions that lose access to Title IV because of failing the 90/10 calculation. The new 90/10 regulations are effective for fiscal years beginning on or after January 1, 2023.
During the negotiated rulemaking process, the Department also proposed a number of changes to financial responsibility regulations, but did not reach consensus on the language. The proposal included new mandatory and discretionary triggers that would require the posting of financial protections. Among other things, the Department proposed a discretionary trigger in the event of significant fluctuations in Title IV aid; a discretionary trigger for pending borrower defense claims; and a discretionary trigger for when institutions close most or all on-ground locations but maintain an online presence.
The Department also proposed as part of the negotiated rulemaking process the reestablishment of gainful employment regulations, which would apply to all programs (including non-degree programs) at proprietary institutions and non-degree programs at public and private nonprofit institutions. Among other items, the Department proposed to use the first four digits of the CIP (Classification of Instructional Program) code to identify gainful employment programs; to remove the “zone” concept pertaining to debt-to-earnings rates; and to establish that a program would fail the debt-to-earnings rate measure if, among other measures, its debt-to-earnings rate is greater than 8 percent and its discretionary earnings rate is greater than 20 percent. The Department also proposed including Parent PLUS loans when determining student debt load, and included a new “earnings threshold” measure comparing the median annual earnings for students who completed the program to the median earnings for a working adult aged 25-34 with only a high school diploma in the state in which the institution is located (or nationally based on the percentage of students located in the same state as the institution). The Department’s proposal would deem a program ineligible for Title IV funding if the program failed either metric (debt-to-earnings or earnings threshold) two out of three consecutive years.
Among other topics, the Department proposed a number of additional changes to regulations regarding administrative capability, change of control and certification issues, none of which reached consensus. In June 2022, the Department indicated its intention to publish proposed rules regarding gainful employment, ability to benefit, financial responsibility, administrative capability, and certification procedures in April 2023. We cannot predict the outcome of the negotiated rulemaking process.
Student Loan Relief
On August 24, 2022, the Department announced that it would provide student loan relief to eligible borrowers to address financial hardships in connection with the COVID-19 pandemic. Under the relief measures, up to $10,000 in student debt will be forgiven for individual borrowers earning less than $125,000 or married couples or heads of household earning less than $250,000, and up to $20,000 will be forgiven for such borrowers who formerly received Pell Grants. In a memorandum prepared by the Department’s General Counsel, the Department stated that it has interpreted provisions of the Higher Education Relief Opportunities for Students Act of 2003 to authorize the Secretary to exercise broad discretion in granting student loan relief. Since the Department’s student loan relief announcement, multiple lawsuits have been filed against the Department challenging its authority to grant such relief. The U.S. Supreme Court has granted petitions to review injunctions issued by two federal courts that blocked implementation of the Department’s student loan relief program, with oral arguments scheduled for February 28, 2023. We cannot predict the outcome of these lawsuits. On November 22, 2022, the Department announced further extension of the pause on student loan repayment and noted that payments will resume 60 days following
implementation of the relief program or resolution of the litigation. If the Department has not implemented the relief program or the litigation has not resolved by June 30, 2023, the Department has stated that payments would resume 60 days thereafter.
On January 10, 2023, the Department proposed regulations to create a new income-driven repayment plan to reduce future monthly payments for lower- and middle-income borrowers. Among other things, the proposed regulation would revise the Revised Pay As You Earn (REPAYE) regulations, eliminate negative amortization, and offer $0 monthly payments for any individual borrower who makes less than roughly $30,600 annually and any borrower in a family of four who makes less than about $62,400. The Department accepted public comments on the proposal for 30 days.
Compliance Reviews
Strayer University and Capella University 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 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 Department issued its preliminary report on November 13, 2020, and Capella University responded to the report. On February 9, 2021, Capella University received the Department’s Final Program Review Determination, which closed the Program Review without further action required on the part of Capella University.
On March 17, 2021, the Department informed Strayer University that it planned to conduct an announced, remote program review. The review commenced on April 19, 2021 and covered the 2019-2020 and 2020-2021 federal student financial aid years. On September 21, 2021, Strayer University received the Department’s Final Program Review Determination, which closed the Program Review without further action required on the part of Strayer University.
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 December 13, 2021, 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 September 30, 2025.
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 University must apply for and receive approval from the Department in connection with new locations or the addition of new Title IV-eligible educational programs. Capella University filed its application for recertification in advance of the September 30, 2022 deadline and, consistent with Department of Education practice, continues to offer federal financial aid under a Provisional Program Participation Agreement, until the Department addresses the recertification application.
Office of Enforcement
On October 8, 2021, the Department of Education announced establishment of an Office of Enforcement within the Department’s Office of Federal Student Aid, designed to strengthen oversight over and enforcement against post-secondary schools that participate in federal student loan, grant, and work-study programs. The Office of Enforcement restores an office first established by the Department in 2016. The Department announced the Office of Enforcement would comprise four existing divisions: Administrative Actions and Appeals Services Group, Borrower Defense Group, Investigations Group, and Resolution and Referral Management Group. The Department intends the Office of Enforcement to coordinate with other state and federal partners, including the Department of Justice, Consumer Financial Protection Bureau, Federal Trade Commission, and state attorneys general.
Federal Trade Commission
On October 6, 2021 the Federal Trade Commission (“FTC”) announced that it is resurrecting Penalty Offense Authority under Section 5(m) of the FTC Act (the “Act”). Under the Act, the FTC may secure penalties against entities not a party to an original proceeding if the FTC can show that the entity had actual knowledge that the conduct in question was found to be
unfair or deceptive. Entities that have actual knowledge of acts or practices the FTC has found to be unlawful and that subsequently engage in such unlawful acts or practices may be held liable for civil penalties up to $43,792 per violation.
Also on October 6, 2021, in an effort to establish actual knowledge and create a pathway for penalties in the event of post-notice acts or practices, the FTC issued notice to the 70 largest for-profit schools based on enrollment and revenues. The notice included a list of acts and practices that the FTC has determined are unfair or deceptive, including but not limited to acts relating to misrepresentation of employment opportunities and other benefits, together with citation to various prior determinations from cases previously litigated by the FTC.
Strayer University and Capella University received the FTC’s notice on October 7, 2021. The FTC made clear that receipt of the notice itself does not reflect any assessment as to whether Strayer University or Capella University has engaged in deceptive or unfair conduct.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (“CFPB”) is a U.S. government agency established to protect the interests of consumers in their dealings with banks, lenders and other financial institutions. On April 4, 2022, the Company received correspondence from the CFPB, in which the CFPB took the position that it has supervisory authority over the Company as a covered person that offers or provides private education loans pursuant to 12 U.S.C. 5514(a)(1)(D) and further indicated the CFPB is considering whether to cite violations based on preliminary findings that the Company may have violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5301 et seq., due to alleged student loan servicing and collections practices or policies. Specifically, the CFPB referred to Capella University and Strayer University’s historical practice of withholding official transcripts from students who were delinquent in paying amounts due, a practice which both universities discontinued prior to receipt of the correspondence. The CFPB subsequently sent a letter on July 8, 2022, indicating that it believed the withholding of transcripts was a violation, and requiring the Company to cease withholding transcripts for those with an outstanding balance and to take other remedial actions. The Company had already discontinued its historical practice prior to the CFPB’s notice and informed the CFPB that it completed the remedial actions in the allotted thirty days. While the Company disagrees with CFPB’s position as to its supervisory authority and disputes any alleged legal or regulatory violations, SEI is cooperating with CFPB’s inquiry and responded to CFPB as requested on April 25, 2022. On April 26, 2022, the CFPB informed the Company that it intended to conduct an announced education loan exam in June 2022. The examination started on June 13, 2022. Fieldwork concluded on August 5, 2022. On September 12, 2022, the CFPB informed the Company of a preliminary finding related to a product that is no longer utilized, and invited the Company’s response. The Company timely responded to the CFPB’s letter, disagreeing with the preliminary finding and noting that the product to which it related is no longer utilized. On November 29, 2022, the CFPB informed the Company that, within 90 days, it should remediate the finding for any impacted students, and it identified areas for the Company to address to ensure regulatory compliance. The Company has taken remedial action and responded to the CFPB within the 90-day deadline.
Australian Regulation
The Company operates two post-secondary educational institutions in Australia, Torrens University Australia Limited (“Torrens”) and Think: Colleges Pty Ltd (“Think”). In Australia, a distinction is made between higher education and vocational education organizations.
Higher education providers consist of public and private universities, Australian branches of overseas universities and other higher education providers. Higher education qualifications consist of undergraduate awards (bachelor’s degrees, associate degrees and diplomas) and postgraduate awards (graduate certificates and diplomas, master’s degrees and doctoral degrees). The regulation of higher education providers is undertaken at a national level by the Tertiary Education Quality and Standards Agency (“TEQSA”). All organizations that offer higher education qualifications in or from Australia must be registered by TEQSA. Higher education providers that have not been granted self-accrediting status must also have their courses of study accredited by TEQSA. Registration as a higher education provider is for a fixed period of up to seven years. TEQSA regularly reviews the conduct and operation of accredited higher education providers.
The vocational education and training (“VET”) sector consists of technical and further education institutes, agricultural colleges, adult and community education providers, community organizations, industry skill centers and private providers. VET qualifications include certificates, diplomas and advanced diplomas. The regulation of VET providers is undertaken at a national level by the Australian Skills Quality Authority (“ASQA”). Organizations providing VET courses in Australia must be registered by ASQA as a Registered Training Organisation (“RTO”). Courses offered by RTOs need to be accredited by ASQA. Registration as an RTO is for a fixed period of up to seven years. ASQA regularly reviews the conduct and operations of RTOs.
Torrens is one of 44 universities in Australia. It is a for-profit entity and registered as a university by TEQSA. As a self-accrediting university, it is not required to have its courses of study accredited by TEQSA. Torrens is also registered by ASQA as an RTO and is thus entitled to offer vocational and training courses.
Think is one of approximately 5,000 RTOs in Australia and in that capacity is regulated by ASQA. It is also registered as a higher education provider by TEQSA. Its higher education courses require, and have received, accreditation by TEQSA.
Australia also maintains a Commonwealth Register of Institutions and Courses for Overseas Students (“CRICOS”) for Australian education providers that recruit, enroll and teach overseas students. Registration in CRICOS allows providers to offer courses to overseas students studying on Australian student visas. Both Torrens and Think are so registered.
The Commonwealth government has established income-contingent loan schemes that assist eligible fee-paying students to pay all or part of their tuition fees (separate schemes exist for higher education and vocational courses). Under the schemes, the relevant fees are paid directly to the institutions. A corresponding obligation then exists from the participating student to the Commonwealth government. Neither Torrens nor Think have any responsibility in connection with the repayment of these loans by students and, generally, this assistance is not available to international students. Both Torrens and Think are registered for the purposes of these plans (a precondition to their students being eligible to receive such loans).
New Zealand Regulation
The Company operates a post-secondary educational institution in New Zealand, Media Design School Limited (“MDS”). MDS is a Private Training Establishment (“PTE”); a private organization offering education or training. It is a globally renowned and specialist provider of design and creative technology education with qualifications ranging from diplomas to postgraduate degrees. MDS also has access to New Zealand Government student finance where study loans are offered to students who are New Zealand citizens or ordinarily resident in New Zealand, subject to certain conditions.