NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The accompanying condensed 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 15.
2. Significant Accounting Policies
Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
All information as of March 31, 2022 and 2023, and for the three months ended March 31, 2022 and 2023 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations, and cash flows of the Company. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full fiscal year.
Below is a description of the nature of the costs included in the Company’s operating expense categories.
Instructional and support costs 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 acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”).
Merger and integration costs include integration expenses associated with the Company’s merger with Capella Education Company and 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 plans. See Note 4 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 unaudited condensed consolidated statements of income (loss).
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 $1.4 million and $1.5 million of these unpaid obligations as of December 31, 2022 and March 31, 2023, 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, 2022 and March 31, 2023, the Company had approximately $11.9 million and $14.0 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 unaudited condensed consolidated balance sheets.
As part of conducting 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 unaudited condensed consolidated statements of cash flows as of March 31, 2022 and 2023 (in thousands):
| | | | | | | | | | | |
| As of March 31, |
| 2022 | | 2023 |
| Cash and cash equivalents | $ | 293,419 | | | $ | 202,824 | |
| Restricted cash included in other current assets | 13,396 | | | 15,481 | |
| Restricted cash included in other assets | 500 | | | 500 | |
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 307,315 | | | $ | 218,805 | |
Marketable Securities
Investments in marketable securities are carried at either amortized cost or fair value. Investments in marketable securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in marketable securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale. 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 either held-to-maturity or available-for-sale.
The Company’s available-for-sale marketable securities consist of tax-exempt municipal securities and corporate debt securities, which 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 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, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2023 |
| Tuition receivable | $ | 110,066 | | | $ | 117,146 | |
| Allowance for credit losses | (47,113) | | | (45,286) | |
| Tuition receivable, net | $ | 62,953 | | | $ | 71,860 | |
Approximately $2.7 million and $2.5 million of tuition receivable, net, are included in other assets as of December 31, 2022 and March 31, 2023, respectively, because these amounts are expected to be collected after 12 months.
The following table illustrates changes in the Company’s allowance for credit losses for the three months ended March 31, 2022 and 2023 (in thousands).
| | | | | | | | | | | | | | | |
| For the three months ended March 31, | | |
| 2022 | | 2023 | | | | |
| Allowance for credit losses, beginning of period | $ | 48,783 | | | $ | 47,113 | | | | | |
| Additions charged to expense | 7,217 | | | 9,654 | | | | | |
| Write-offs, net of recoveries | (11,108) | | | (11,481) | | | | | |
| Allowance for credit losses, end of period | $ | 44,892 | | | $ | 45,286 | | | | | |
Assets Held for Sale
The Company classifies assets and liabilities as held for sale (“disposal group”) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable to be completed within one year, and the disposal group is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying amount or fair value less costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized until the date of sale. Assets are not depreciated
or amortized while they are classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as assets held for sale and liabilities held for sale in its unaudited condensed consolidated balance sheets.
Over the last several years, the Company has been evaluating its owned and leased real estate portfolio to identify underutilized facilities to either downsize or exit. One facility identified is an owned U.S. Higher Education campus, which the Company began marketing for sale in the fourth quarter of 2022. The long-lived assets being marketed for sale consist of land, buildings, and building improvements. The Company determined that it met all of the criteria to classify these assets as held for sale as of March 31, 2023. No impairment charge was recorded as the carrying amount of the net assets was less than the fair value less costs to sell. Fair value was determined based upon the anticipated sales price of these assets. Upon close, the Company will record any gain related to the sale of these assets in its consolidated statements of income (loss).
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.
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 24,402,891 and 24,591,375 shares were issued and outstanding as of December 31, 2022 and March 31, 2023, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none of which is issued or outstanding. Before any preferred stock may be issued in the future, the Board of Directors would need to establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and the terms or conditions of the redemption of the preferred stock.
In February 2023, the Company’s Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock. The dividend was paid on March 13, 2023.
Net Income (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) 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 (loss) per share for the three months ended March 31, 2022 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| For the three months ended March 31, | | |
| 2022 | | 2023 | | | | |
| Weighted average shares outstanding used to compute basic earnings (loss) per share | 23,948 | | | 23,430 | | | | | |
| Incremental shares issuable upon the assumed exercise of stock options | 2 | | | — | | | | | |
| Unvested restricted stock and restricted stock units | 164 | | | — | | | | | |
| Shares used to compute diluted earnings (loss) per share | 24,114 | | | 23,430 | | | | | |
| | | | | | | |
| Anti-dilutive shares excluded from the diluted earnings (loss) per share calculation | 420 | | | 593 | | | | | |
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) 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, 2022 and March 31, 2023, the balance of accumulated other comprehensive loss was $35.1 million, net of tax of $0.1 million and $44.3 million, net of tax of $0.1 million, respectively. There were no reclassifications out of accumulated other comprehensive income (loss) to net income (loss) for the three months ended March 31, 2022 and 2023.
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. 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 three months ended March 31, 2022 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
| 2022 | | 2023 | | | | | | | | |
| U.S. Higher Education Segment | | | | | | | | | | | |
| Tuition, net of discounts, grants and scholarships | $ | 187,355 | | | $ | 188,780 | | | | | | | | | |
Other(1) | 8,411 | | | 8,115 | | | | | | | | | |
| Total U.S. Higher Education Segment | 195,766 | | | 196,895 | | | | | | | | | |
| Australia/New Zealand Segment | | | | | | | | | | | |
| Tuition, net of discounts, grants and scholarships | 47,536 | | | 40,422 | | | | | | | | | |
Other(1) | 976 | | | 1,081 | | | | | | | | | |
| Total Australia/New Zealand Segment | 48,512 | | | 41,503 | | | | | | | | | |
Education Technology Services Segment(2) | 14,577 | | | 18,208 | | | | | | | | | |
| Consolidated revenue | $ | 258,855 | | | $ | 256,606 | | | | | | | | | |
_________________________________________
(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 unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized.
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 $18.9 million and is included as a current contract liability in the unaudited condensed consolidated balance sheets. The remainder is expected to be redeemed within two to four years.
The table below presents activity in the contract liability related to the Graduation Fund (in thousands):
| | | | | | | | | | | |
| For the three months ended March 31, |
| 2022 | | 2023 |
| Balance at beginning of period | $ | 52,024 | | | $ | 46,842 | |
| Revenue deferred | 4,368 | | | 4,652 | |
| Benefit redeemed | (5,182) | | | (5,574) | |
| Balance at end of period | $ | 51,210 | | | $ | 45,920 | |
Unbilled Receivables – Student Tuition
Academic materials may be shipped to certain new undergraduate students in advance of the term of enrollment. Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all performance obligations in the arrangement with the student. When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded.
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 our ANZ segment. These costs are deferred and then amortized over the period of benefit which ranges from one year to two years.
4. 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 related to the 2020 restructuring plan during the three months ended March 31, 2022 (in thousands):
| | | | | |
| 2020
Restructuring Plan |
| Balance at December 31, 2021 | $ | 1,612 | |
| Restructuring and other charges | 1,462 | |
| Payments | (2,382) | |
| Balance at March 31, 2022 | $ | 692 | |
The final severance payments under the 2020 restructuring plan were made in the third quarter of 2022.
From time to time, the Company also incurs severance and other employee separation costs related to reduction in force actions that are not tied to a formal restructuring plan. During the first quarter of 2023, the Company incurred severance and other employee separation costs related to involuntary employee terminations due to the elimination of certain positions. As a result, the Company recorded $2.3 million of severance and other employee separation charges during the three months ended March 31, 2023. Substantially all severance charges related to this action were paid during the first quarter of 2023.
The Company has also been evaluating its owned and leased real estate portfolio, which has resulted in the consolidation and sale of underutilized facilities. During the three months ended March 31, 2023, the Company recorded right-of-use lease asset charges of approximately $3.6 million related to facilities that were consolidated during the quarter. There were no right-of-use lease asset charges during the three months ended March 31, 2022. The Company recorded fixed asset impairment charges of approximately $0.2 million during the three months ended March 31, 2022. There were no fixed asset impairment charges recorded during the three months ended March 31, 2023. All severance and other employee separation charges and right-of-use lease asset and fixed asset impairment charges are included in Restructuring costs on the unaudited condensed consolidated statements of income (loss).
5. Marketable Securities
The following is a summary of available-for-sale and held-to-maturity securities as of March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized (Losses) | | Estimated Fair Value |
| Available-for-sale securities: | | | | | | | |
| Tax-exempt municipal securities | $ | 14,793 | | | $ | 2 | | | $ | (400) | | | $ | 14,395 | |
| Corporate debt securities | 6,237 | | | — | | | (170) | | | 6,067 | |
| Total available-for sale securities | $ | 21,030 | | | $ | 2 | | | $ | (570) | | | $ | 20,462 | |
| | | | | | | |
| Held-to-maturity securities: | | | | | | | |
| Term deposits | $ | 16,727 | | | $ | — | | | $ | — | | | $ | 16,727 | |
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 |
| Available-for-sale securities: | | | | | | | |
| 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 Company had no held-to-maturity securities as of December 31, 2022.
The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2022 and March 31, 2023 were caused by changes in market values primarily due to interest rate changes. As of March 31, 2023, the fair value of the Company’s securities which were in an unrealized loss position for a period longer than twelve months was $19.5 million. 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. As such, no impairment charges were recorded during the three months ended March 31, 2022 and 2023. The Company has no allowance for credit losses related to its available-for-sale or held-to-maturity securities as all investments are in investment grade securities.
The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | March 31, 2023 |
| Available-for-sale securities | | Held-to-maturity securities | | Available-for-sale securities | | Held-to-maturity securities |
| Due within one year | $ | 9,156 | | | $ | — | | | $ | 7,763 | | | $ | 16,727 | |
| Due after one year through three years | 13,123 | | | — | | | 12,699 | | | — | |
| Total | $ | 22,279 | | | $ | — | | | $ | 20,462 | | | $ | 16,727 | |
The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the three months ended March 31, 2022 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
| 2022 | | 2023 | | | | | | | | |
| Maturities of marketable securities | $ | 1,100 | | | $ | 1,960 | | | | | | | | | |
| Sales of marketable securities | — | | | — | | | | | | | | | |
| Total | $ | 1,100 | | | $ | 1,960 | | | | | | | | | |
The Company did not record any gross realized gains or losses in net income (loss) during the three months ended March 31, 2022 and March 31, 2023.
6. Fair Value Measurement
Assets measured at fair value on a recurring basis consist of the following as of March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| March 31, 2023 | | 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 | $ | 100,323 | | | $ | 100,323 | | | $ | — | | | $ | — | |
| Available-for-sale securities: | | | | | | | |
| Tax-exempt municipal securities | 14,395 | | | — | | | 14,395 | | | — | |
| Corporate debt securities | 6,067 | | | — | | | 6,067 | | | — | |
| Total assets at fair value on a recurring basis | $ | 120,785 | | | $ | 100,323 | | | $ | 20,462 | | | $ | — | |
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 | | | $ | — | | | $ | — | |
| Available-for-sale 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 | | | $ | — | |
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 unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The Company’s cash and cash equivalents and held-to-maturity securities held at December 31, 2022 and March 31, 2023 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.
•Available-for-sale 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 three months ended March 31, 2022 and 2023.
Changes in the fair value of the Company’s Level 3 liabilities during the three months ended March 31, 2022 are as follows (in thousands):
| | | | | |
| As of March 31, 2022 |
| Balance as of the beginning of period | $ | 658 | |
| Amounts paid | (658) | |
| Other adjustments to fair value | — | |
| Balance at end of period | $ | — | |
7. Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying value of goodwill by segment for the three months ended March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Higher Education | | Australia /
New Zealand | | Education Technology Services | | Total |
| Balance as of December 31, 2022 | $ | 632,075 | | | $ | 519,202 | | | $ | 100,000 | | | $ | 1,251,277 | |
| Additions | — | | | — | | | — | | | — | |
| Impairments | — | | | — | | | — | | | — | |
| Currency translation adjustments | — | | | (7,947) | | | — | | | (7,947) | |
| Adjustments to prior acquisitions | — | | | — | | | — | | | — | |
| Balance as of March 31, 2023 | $ | 632,075 | | | $ | 511,255 | | | $ | 100,000 | | | $ | 1,243,330 | |
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. No events or circumstances occurred in the three months ended March 31, 2023 to indicate an impairment to goodwill at any of its segments. There were no impairment charges related to goodwill recorded during the three months ended March 31, 2022 and 2023.
Intangible Assets
The following table represents the balance of the Company’s intangible assets as of December 31, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | March 31, 2023 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Subject to amortization | | | | | | | | | | | |
| Student relationships | $ | 200,185 | | | $ | (191,125) | | | $ | 9,060 | | | $ | 200,107 | | | $ | (193,862) | | | $ | 6,245 | |
| Not subject to amortization | | | | | | | | | | | |
| Trade names | 251,481 | | | — | | | 251,481 | | | 250,470 | | | — | | | 250,470 | |
| Total | $ | 451,666 | | | $ | (191,125) | | | $ | 260,541 | | | $ | 450,577 | | | $ | (193,862) | | | $ | 256,715 | |
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 $2.9 million and $2.7 million for the three months ended March 31, 2022 and 2023, respectively.
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. No events or circumstances occurred in the three months ended March 31, 2023 to indicate an impairment to indefinite-lived intangible assets. There were no impairment charges related to indefinite-lived intangible assets recorded during the three months ended March 31, 2022 and 2023.
8. Other Current Assets
Other current assets consist of the following as of December 31, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2023 |
| Prepaid expenses | $ | 19,073 | | | $ | 27,650 | |
| Restricted cash | 13,287 | | | 15,481 | |
| Cloud computing arrangements | 7,859 | | | 7,587 | |
| Other | 3,066 | | | 3,328 | |
| Other current assets | $ | 43,285 | | | $ | 54,046 | |
9. Other Assets
Other assets consist of the following as of December 31, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2023 |
| Prepaid expenses, net of current portion | $ | 18,192 | | | $ | 17,975 | |
| Equity method investments | 13,879 | | | 14,874 | |
| Cloud computing arrangements, net of current portion | 7,507 | | | 9,032 | |
| Other investments | 3,396 | | | 2,806 | |
| Tuition receivable, net, non-current | 2,673 | | | 2,539 | |
| Other | 4,005 | | | 3,954 | |
| Other assets | $ | 49,652 | | | $ | 51,180 | |
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 the Jack Welch Management Institute, 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, 2022 and March 31, 2023, $17.7 million and $17.3 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 $2.6 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 three months ended March 31, 2022 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
| 2022 | | 2023 | | | | | | | | |
| Limited partnership investments, beginning of period | $ | 15,582 | | | $ | 13,879 | | | | | | | | | |
| Capital contributions | — | | | 118 | | | | | | | | | |
| Pro-rata share in the net income (loss) of limited partnerships | (313) | | | 877 | | | | | | | | | |
| Distributions | (1,382) | | | — | | | | | | | | | |
| Limited partnership investments, end of period | $ | 13,887 | | | $ | 14,874 | | | | | | | | | |
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 technology 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.
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2023 |
| Trade payables | $ | 45,826 | | | $ | 54,497 | |
| Accrued compensation and benefits | 32,608 | | | 28,330 | |
| Accrued student obligations and other | 12,154 | | | 10,320 | |
| Accounts payable and accrued expenses | $ | 90,588 | | | $ | 93,147 | |
11. 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 (the “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 terms of the Amended Credit Facility as of March 31, 2023.
As of December 31, 2022 and March 31, 2023, the Company had approximately $101.4 million and $101.3 million, respectively, outstanding under the Revolving Credit Facility. Approximately $3.4 million and $3.3 million was denominated in Australian dollars as of December 31, 2022 and March 31, 2023, respectively.
During the three months ended March 31, 2022 and 2023, the Company paid $0.4 million and $2.4 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility.
12. Other Long-Term Liabilities
Other long-term liabilities consist of the following as of December 31, 2022 and March 31, 2023 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | March 31, 2023 |
| Contract liabilities, net of current portion | $ | 36,540 | | | $ | 34,881 | |
| Asset retirement obligations | 6,283 | | | 5,966 | |
| Other | 3,183 | | | 3,193 | |
| Other long-term liabilities | $ | 46,006 | | | $ | 44,040 | |
Contract Liabilities
As discussed in Note 3, in connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained (the Graduation Fund). Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year.
Asset Retirement Obligations
Certain of the Company’s lease agreements require the leased premises to be returned in a predetermined condition.
13. Equity Awards
The following table sets forth the amount of stock-based compensation expense recorded in each of the expense line items for the three months ended March 31, 2022 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
| 2022 | | 2023 | | | | | | | | |
| Instructional and support costs | $ | 1,607 | | | $ | 1,866 | | | | | | | | | |
| General and administration | 3,461 | | | 3,766 | | | | | | | | | |
| Stock-based compensation expense included in operating expense | 5,068 | | | 5,632 | | | | | | | | | |
| Tax benefit | 1,334 | | | 1,479 | | | | | | | | | |
| Stock-based compensation expense, net of tax | $ | 3,734 | | | $ | 4,153 | | | | | | | | | |
During the three months ended March 31, 2022 and 2023, the Company recognized shortfall tax impacts of approximately $1.3 million and $1.4 million, respectively, related to share-based payment arrangements, which were adjustments to the provision for income taxes.
14. Income Taxes
During the three months ended March 31, 2022 and 2023, the Company recorded income tax expense of $5.2 million and $1.1 million, respectively. Income tax expense for the three months ended March 31, 2022 and 2023 include shortfall tax impacts of approximately $1.3 million and $1.4 million, respectively, related to share-based payment arrangements.
The Company had $0.9 million of unrecognized tax benefits as of December 31, 2022 and March 31, 2023. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the unaudited condensed consolidated statements of income (loss).
The Company paid $0.5 million and $3.8 million in income taxes during the three months ended March 31, 2022 and 2023, respectively.
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.
15. Segment Reporting
Strategic Education is an educational services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. The Company’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 three months ended March 31, 2022 and 2023 is presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
| 2022 | | 2023 | | | | | | | | |
| Revenues | | | | | | | | | | | |
| U.S. Higher Education | $ | 195,766 | | | $ | 196,895 | | | | | | | | | |
| Australia/New Zealand | 48,512 | | | 41,503 | | | | | | | | | |
| Education Technology Services | 14,577 | | | 18,208 | | | | | | | | | |
| Consolidated revenues | $ | 258,855 | | | $ | 256,606 | | | | | | | | | |
| Income (loss) from operations | | | | | | | | | | | |
| U.S. Higher Education | $ | 15,483 | | | $ | 9,589 | | | | | | | | | |
| Australia/New Zealand | (749) | | | (7,182) | | | | | | | | | |
| Education Technology Services | 4,713 | | | 5,796 | | | | | | | | | |
| Amortization of intangible assets | (3,738) | | | (3,532) | | | | | | | | | |
| Merger and integration costs | (410) | | | (425) | | | | | | | | | |
| Restructuring costs | (1,858) | | | (5,595) | | | | | | | | | |
| Consolidated income (loss) from operations | $ | 13,441 | | | $ | (1,349) | | | | | | | | | |
16. 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.
On April 20, 2021, Capella University received a letter from the Department of Education referencing Wright, et al. v. Capella Education Co., et al. (subsequently captioned Ornelas, et al. v. Capella, et al.), United States District Court for the District of Minnesota, Case No. 18-cv-1062, 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 appealed the court’s order and moved to stay the court’s final judgment approving the settlement pending resolution of the appeal. Intervenors’ attempts to stay the judgment pending full consideration of appeal have been denied.
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.
17. Regulation
Our higher education institutions are subject to uncertain and varying laws and regulations, and any changes to these laws or regulations or their application to us may materially adversely affect our business, financial condition, and results of operations. Other than as set forth below, there have been no material changes to the laws and regulations affecting our higher education institutions that are described in our Annual Report on Form 10-K for the year ended December 31, 2022.
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 CARES Act 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 November 22, 2022, when the Department announced an extension to “alleviate uncertainty for borrowers” as the U.S. Supreme Court prepared to decide the legality of broad debt relief. In that announcement, the Department indicated that payments will resume 60 days after the Department is permitted to implement the program or the litigation is resolved. If the litigation has not been resolved by June 30, 2023, payments will resume 60 days after that. The U.S. Supreme Court heard oral arguments on February 28, 2023 and has yet to issue a decision.
American Rescue Plan Act of 2021
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Among other things, the legislation 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” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 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 of Education. On December 20, 2022, the Department published guidance indicating that non-Title IV eligible programs offered in part or in whole via distance education are not eligible to be counted in the “10” side of the ratio calculation. On December 21, 2022, the Department released a non-exhaustive 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.
Current Negotiated Rulemaking
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. The Department invited interested parties to comment on the topics suggested by the Department at three public hearings held from April 11-13, 2023. The Department also accepted written comments through April 24, 2023.
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.
Borrower Defenses to Repayment
On March 16, 2022, Federal Student Aid (“FSA”) announced that it is monitoring complaints and borrower defense to repayment (“BDTR”) applications from veterans, service members and their family members who report claims of deceptive recruitment and enrollment practices, including misrepresentations related to cost, financing, and application of military and veteran benefits. The Department indicated that it will seek all appropriate corrective measures pursuant to the BDTR regulations if it finds that an institution has engaged in substantial misrepresentation or fraudulent conduct, and that it will share information and complaints with the Department of Defense and Department of Veterans Affairs.
On March 14, 2023, the Department of Education announced that the Office of Enforcement of FSA will use “secret shoppers” to monitor post-secondary institutions’ compliance with the laws and regulations governing participation in federal student aid programs. The Department indicated that secret shoppers will evaluate recruitment, enrollment, financial aid, and other practices of post-secondary institutions to help identify potentially deceptive or predatory practices used to recruit and enroll students. The Department noted that findings from secret shopping may serve as evidence in ongoing investigations and reviews or serve as the basis for opening new investigations and reviews. The Department further noted that, where appropriate and permissible, FSA may refer secret shopping findings to other offices within the Department, as well as other state and federal enforcement agencies.
Accrediting Agencies 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. Both Middle States and HLC appeared before NACIQI in February-March 2023 as part of the recognition process. NACIQI voted to recommend renewal of recognition for five years in the case of both HLC and Middle States. The Senior Department Official will review NACIQI’s recommendations and make final determinations on agency recognition within 90 days of the NACIQI meeting.
State Authorization Reciprocity Agreement (SARA)
Strayer University and Capella University participate in the State Authorization Reciprocity Agreement (“SARA”), which allows the Universities to enroll students in distance education programs in each SARA member state, including 49 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Each of the Universities applies separately to non-SARA member states (i.e., California) for authorization to enroll students, if such authorization is required by the state. On March 1, 2023, SARA’s coordinating entity, the National Council for State Authorization Reciprocity Agreements (“NC-SARA”), held its first of two public comment forums to seek input on potential changes to NC-SARA policies. The forum included a discussion of 63 proposed policy changes, some of which, if adopted, would significantly alter the distance education reciprocity agreements, including a proposal that NC-SARA permit states to apply more stringent standards to for-profit institutions or to eliminate the ability of for-profit institutions to participate in the agreements altogether. In addition to the public comment forums, written comments are accepted through May 17, 2023. NC-SARA’s four regional compacts and the NC-SARA board of directors will vote on each proposal presented by September 1, 2023, and October 25, 2023, respectively. We cannot predict whether NC-SARA will adopt any of these proposals. The adoption of certain proposals, including the proposal to alter standards or to eliminate the ability of for-profit institutions to participate in the agreements, could have a material adverse effect on Strayer University, Capella University, and the Company.
Title IX
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, and the Department has indicated its intention to publish a final Title IX rule in May 2023. When the Department publishes the final Title IX rule, it will indicate an effective date.
Third-Party Servicers
Department of Education regulations permit an institution to enter into a written contract with a third-party servicer for the administration of any aspect of the institution’s participation in Title IV programs. The third-party servicer must, among other obligations, comply with Title IV requirements and be jointly and severally liable with the institution to the Secretary of Education for any violation by the servicer of any Title IV provision. An institution must report to the Department of Education new contracts or any significant modifications to contracts with third-party servicers as well as other matters related to third-party servicers. On February 15, 2023 the Department released a Dear Colleague Letter (“DCL”) (GEN 23-03) with updated guidance expanding the definition of third-party servicers and covered activities to include vendors providing student recruitment and retention services, software products and services related to Title IV administration activities, and educational content and instruction, initially requiring institutions to be in compliance with the new guidance by May 1, 2023. On February 28, 2023, the Department extended the effective date of the updated guidance and reporting requirements from May 1, 2023 to September 1, 2023. On April 11, 2023, the Department again delayed the effective date until six months after the Department publishes a new, revised final guidance letter on the topic. Until that time, DCLs GEN 12-08, GEN 15-01, and GEN 16-15 (as amended by the March 8, 2017, electronic announcement) remain in effect. Additionally, in March 2023, the Department indicated via Federal Register publication its intention to establish a negotiated rulemaking committee in 2023 to consider new proposed regulations on third-party servicers and related issues. There is also litigation challenging the Department’s guidance because the Department did not use the negotiated rulemaking process; the complaint was filed on April 4, 2023.
Program Participation Agreement
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 subjected 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 on April18, 2023, Capella University and the Department of Education executed a fully certified Program Participation Agreement, approving Capella University’s continued participation in Title IV programs through September 30, 2025.