The following discussion and analysis of our financial condition and results of
operations for the years ended December 31, 2022 and 2021 should be read in
conjunction with our consolidated financial statements and related notes that
appear in Item 8, Consolidated Financial Statements and Supplementary Data. In
addition to historical information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in Special Note Regarding Forward-Looking Statements and
in Item 1A, Risk Factors.
Executive Overview
GCE is a publicly traded education services company dedicated to serving
colleges and universities. GCE has developed significant technological
solutions, infrastructure and operational processes to provide services to these
institutions on a large scale. GCE's most significant university partner is GCU,
a comprehensive regionally accredited university that offers graduate and
undergraduate degree programs, emphases and certificates across nine colleges
both online, on ground at its campus in Phoenix, Arizona and at four off-campus
classroom and laboratory sites.
In January 2019, GCE began providing education services to numerous university
partners across the United States, through our wholly-owned subsidiary, Orbis
Education, which we acquired on January 22, 2019. Since the Acquisition, GCE,
together with Orbis Education, has continued to add additional university
partners. In the healthcare field, we work in partnership with a growing number
of top universities and healthcare networks across the country, offering
healthcare-related academic programs at off-campus classroom and laboratory
sites located near healthcare providers and developing high-quality,
career-ready graduates, who enter the workforce ready to meet the demands of the
healthcare industry. In addition, we have provided certain services to a
university partner to assist them in expanding their online graduate programs.
As of December 31, 2022, GCE provides education services to 27 university
partners across the United States.
We plan to continue to add additional university partners and to introduce
additional programs with both our existing partners and with new partners. We
may engage with both new and existing university partners to offer healthcare
programs, online only or hybrid programs, or, as is the case for our most
significant partner, GCU, both healthcare and other programs. In addition, we
have centralized a number of services that historically were provided separately
to university partners of Orbis Education; therefore, we refer to all university
partners as "GCE partners" or "our partners". We do disclose significant
information for GCU, such as enrollments, due to its size in comparison to our
other university partners.
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based
upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles, or GAAP. During
the preparation of these consolidated financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses, and related disclosures. On an
ongoing basis, we evaluate our estimates and assumptions, including those
discussed below. We base our estimates on historical experience and on various
other assumptions that we believe are reasonable under the circumstances. The
results of our analysis form the basis for making assumptions about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences may be material to
our consolidated financial statements.
We believe that the following critical accounting policies involve our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue recognition. GCE generates all of its revenue through services
agreements with its university partners ("Services Agreements"), pursuant to
which GCE provides integrated technology and academic services, marketing and
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communication services, and as applicable, certain back office services to its
university partners in return for a percentage of tuition and fee revenue.
GCE's Services Agreements have a single performance obligation, as the promises
to provide the identified services are not distinct within the context of these
agreements. The single performance obligation is delivered as our partners
receive and consume benefits, which occurs ratably over a series of distinct
service periods (daily or semester). Service revenue is recognized over time
using the output method of measuring progress towards complete satisfaction of
the single performance obligation. The output method provides a faithful
depiction of the performance toward complete satisfaction of the performance
obligation and can be tied to the time elapsed which is consumed evenly over the
service period and is a direct measurement of the value provided to our
partners. The service fees received from our partners over the term of the
agreement are variable in nature in that they are dependent upon the number of
students attending the university partner's program and revenues generated from
those students during the service period. Due to the variable nature of the
consideration over the life of the service arrangement, GCE considered forming
an expectation of the variable consideration to be received over the service
life of this one performance obligation. However, since the performance
obligation represents a series of distinct services, GCE recognizes the variable
consideration that becomes known and billable because these fees relate to the
distinct service period in which the fees are earned. GCE meets the criteria in
ASC 606 Revenue from Contracts with Customers and exercises the practical
expedient to not disclose the aggregate amount of the transaction price
allocated to the single performance obligation that is unsatisfied as of the end
of the reporting period. GCE does not disclose the value of unsatisfied
performance obligations because the directly allocable variable consideration is
allocated entirely to a wholly unsatisfied promise to transfer a service that
forms part of a single performance obligation. The service fees are calculated
and settled per the terms of the Services Agreements and result in a settlement
duration of less than one year for all partners. There are no refunds or return
rights under the Services Agreements.
Income taxes. We recognize the amount of taxes payable or refundable for the
current year and deferred tax assets and liabilities for future tax consequences
of events that have been recognized in our consolidated financial statements or
tax returns. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which the temporary differences are expected to
be realized. Our deferred tax assets are subject to periodic recoverability
assessments. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount that more likely than not will be realized.
Realization of the deferred tax assets is principally dependent upon achievement
of projected future taxable income offset by deferred tax liabilities. We
evaluate the realizability of the deferred tax assets annually. Since becoming a
taxable corporation in August 2005, we have not recorded any valuation
allowances to date on our deferred income tax assets. We evaluate and account
for uncertain tax positions using a two-step approach. Recognition occurs when
we conclude that a tax position based solely on its technical merits, is
more-likely-than-not to be sustained upon examination. Measurement determines
the amount of benefit that is greater than 50% likely to be realized upon the
ultimate settlement with a taxing authority that has full knowledge of the
facts. Derecognition of a tax position that was previously recognized occurs
when we determine that a tax position no longer meets the more-likely-than-not
threshold of being sustained upon examination. As of December 31, 2022 and 2021,
GCE has reserved approximately $15,862 and $14,108, respectively, for uncertain
tax positions, including interest and penalties.
Results of Operations
In July 2019, the FASB issued Accounting Standards Update 2019-07, "Codification
Updates to SEC Sections- Amendments to SEC Paragraphs Pursuant to SEC Final Rule
Releases No. 33-10532, Disclosure Update and Simplification", which makes a
number of changes meant to simplify certain disclosures in financial condition
and results of operations, particularly by eliminating year-to-year comparisons
between prior periods previously disclosed. In complying with the relevant
aspects of the rule covering the current year annual report, we now include
disclosures on results of operations for fiscal year 2022 versus 2021 only. For
a discussion of the results of operations for fiscal year 2021 vs 2020, see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" in our Annual Report on Form 10-K filed with the SEC for the
fiscal year ended December 31, 2021 incorporated herein by reference.
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The following table sets forth certain income statement data as a percentage of
revenue for each of the periods indicated. Amortization of intangible assets
have been excluded from the table below:
Year Ended December 31,
2022 2021
Costs and expenses
Technology and academic services 16.5 % 14.7 %
Counseling services and support 30.0 27.8
Marketing and communication 21.5 20.4
General and administrative 5.0 4.7
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Service revenue. Our service revenue for the year ended December 31, 2022 was
$911.3 million, an increase of $14.7 million, or 1.6%, as compared to service
revenue of $896.6 million for the year ended December 31, 2021. The
increase year over year in service revenue was primarily due to increases in GCU
traditional campus enrollments and revenue per student year over year partially
offset by a decrease in online enrollments at GCU of 1.6% and to a lesser
extent, students in a university partner's Occupational Therapy Assistants
("OTA") program in which enrollment declined 11.3% between December 31, 2022 and
2021. The increase in revenue per student between years is primarily due to the
service revenue impact of the increased ground campus enrollments which
generates higher revenue per student due to the room, board and other ancillary
revenues earned by GCU and the higher revenue per student at off-campus
classroom and laboratory sites. Service revenue per student for Accelerated
Bachelor of Science in Nursing ("ABSN") program students at off-campus classroom
and laboratory sites generates a significantly higher revenue per student than
we earn under our agreement with GCU, as these agreements generally provide us
with a higher revenue share percentage, the partners have higher tuition rates
than GCU and the majority of their students take more credits on average per
semester. Partner enrollments totaled 112,955 at December 31, 2022 as compared
to 112,554 at December 31, 2021. University partner enrollments at our
off-campus classroom and laboratory sites were 4,636, a decrease of 1.0% over
enrollments at December 31, 2021, which includes 320 and 269 GCU students at
December 31, 2022 and 2021, respectively. This growth rate has slowed over the
past year primarily due to the 11.3% decline in OTA students as the university
partner stopped admitting new students for most of 2021 due to clinical
placement backlog. Year over year ABSN students decreased 0.3% at December 31,
2022. None of our ABSN partners have stopped admitting new students due to the
clinical faculty challenges that began during the pandemic, however some
locations that were scheduled to open in 2021 and 2022 have been pushed back and
some existing partners have reduced incoming cohort sizes which has slowed the
growth. In addition, in a joint decision between us and one of our university
partners, two ABSN off-campus classroom and laboratory sites were closed at the
beginning of this year to allow the university partner to focus its resources
closer to its home location. Excluding the prior year enrollments from locations
that have been closed in the past twelve months, ABSN students grew by 3.6% year
over year. We did open six new off-campus classroom and laboratory sites in the
year ended December 31, 2022 increasing the total number of these sites to 35 at
December 31, 2022 and we anticipate opening six to eight more in 2023 which
should re-accelerate the ABSN student enrollment growth. Enrollments at GCU
increased to 108,639 at December 31, 2022, a slight increase of 0.5% over
enrollments at December 31, 2021 primarily due to the increase in ground
traditional and ABSN off-campus enrollments partially offset by the decrease in
GCU online enrollments between years. The decline in GCU online enrollments
between years is primarily due to recruitment challenges caused by reduced
access to schools, hospitals, and businesses where our potential students work
due to COVID-19. In the second half of 2022, we have seen an online new student
increase over the prior year. As the year-over-year comparables returned to
historical levels, and schools, hospitals, and businesses are generally
reopened, our online enrollment growth rate has begun to re-accelerate.
Enrollments for GCU ground students were 25,522 at December 31, 2022 up from
23,629 at December 31, 2021 primarily due to a 8.6% increase in traditional
ground students between years.
Technology and academic services. Our technology and academic services expenses
for the year ended December 31, 2022 were $150.5 million, an increase of $18.4
million, or 13.9%, as compared to technology and academic services expenses of
$132.1 million for the year ended December 31, 2021. Excluding the $5.0 million
reversal of the credit loss reserve in the fourth quarter of 2021 as a result of
the repayment by GCU for the Secured Note and capital expenditure loans, there
was an increase of $13.4 million or 9.8%, year over year. This increase was
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primarily due to increases in employee compensation and related expenses
including share-based compensation, in other technology and academic supply
costs, and in occupancy and depreciation including lease expenses of $9.2
million, $2.6 million and $1.6 million, respectively. The increases were
primarily due to increased headcount to support our 27 university partners, and
their increased enrollment growth, tenure-based salary adjustments, an increase
in benefit costs and the increased number of off-campus classroom and laboratory
sites open between years. Our technology and academic services expenses as
a percentage of service revenue, excluding the reversal of the $5.0 million
credit loss in 2021 increased 1.3% to 16.5% for the year ended December 31,
2022, from 15.2% for the year ended December 31, 2021 primarily due to our
services agreements with university partners that provide for off-campus
classroom and laboratory sites, which necessitate a higher level of technology
and academic services than does our agreement with GCU. We anticipate that
technology and academic services expenses as a percentage of revenue will
continue to increase in the future as we open more off-site classroom and
laboratory sites.
Counseling services and support. Our counseling services and support expenses
for the year ended December 31, 2022 were $273.3 million, an increase of $24.1
million, or 9.7%, as compared to counseling services and support expenses of
$249.2 million for the year ended December 31, 2021. This increase was primarily
attributable to increases in employee compensation and related expenses
including share-based compensation, increases in other counseling services and
support expenses and in depreciation, amortization and occupancy costs of $13.6
million, $9.8 million and $0.8 million, respectively. The increases in employee
compensation and related expenses were primarily due to increased headcount to
support our 27 university partners, and their increased enrollment growth,
tenure-based salary adjustments, and an increase in benefit costs. The increase
in other counseling services and support expenses is primarily the result of
increased travel costs to service our 27 university partners as compared to the
COVID-19 impacted 2021, during which significantly lower travel costs were
incurred. Occupancy and depreciation costs increased slightly due to the
increased number of off-campus classroom and laboratory sites open year over
year. Our counseling services and support expenses as a percentage of service
revenue increased 2.2% to 30.0% for the year ended December 31, 2022, from 27.8%
for the year ended December 31, 2021 primarily due to increased travel costs and
the increase in our employee base and their compensation to meet our university
partners' growth expectations and retain our employees increasing at a faster
rate than revenue growth. We anticipate that counseling services and support
expenses as a percentage of revenue will continue to increase on a year over
year basis in the first half of 2023 as a result of the investments made
primarily in the second half of 2022, but are hopeful that the growth rate will
be more in line with our revenue growth in the second half of 2023.
Marketing and communication. Our marketing and communication expenses for the
year ended December 31, 2022 were $196.1 million, an increase of $13.2 million,
or 7.2%, as compared to marketing and communication expenses of $182.9 million
for the year ended December 31, 2021. This increase was primarily attributable
to the increased cost to market our university partners' programs and due to the
marketing of new university partners and new off-campus classroom and laboratory
sites which resulted in increased advertising of $10.6 million and increased
employee compensation expenses and related expenses including share-based
compensation of $2.9 million, partially offset by a decrease in other marketing
supplies of $0.4 million. Our marketing and communication expenses as
a percentage of service revenue increased by 1.1% to 21.5% for the year ended
December 31, 2022, from 20.4% for the year ended December 31, 2021, primarily
due to the increase in the number of new university partners and their growth
expectations and increased off-campus classroom and laboratory sites open
between years. Although we will continue to invest heavily in this area, we are
hopeful that the growth rate will be more in line with our revenue growth in
2023.
General and administrative. Our general and administrative expenses for the year
ended December 31, 2022 were $45.5 million, an increase of $3.7 million, or
8.8%, as compared to general and administrative expenses of $41.8 million for
the year ended December 31, 2021. This increase was primarily due to increases
in other general and administrative expenses of $2.0 million and increases in
employee compensation and related expenses including share-based compensation of
$1.7 million. The increase in other general and administrative expenses is
primarily due to continued increases in travel costs and increases in charitable
contributions over the prior year. The increase in employee compensation and
related expenses is increased headcount to support our 27 university partners,
and their increased enrollment growth, tenure-based salary adjustments, and an
increase in benefit costs. Our general and administrative expenses as
a percentage of service revenue increased by 0.3% to 5.0% for the year ended
December 31, 2022, from 4.7% for the year ended December 31, 2021 due to the
other general and administrative expense and
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employee compensation costs growing at a faster rate than our revenue growth.
Although we will continue to invest heavily in this area, we are hopeful that
the growth rate will be more in line with our revenue growth in 2023.
Amortization of intangible assets. Amortization of intangible assets for the
years ended December 31, 2022 and 2021 were $8.4 million for both periods. As a
result of the Acquisition, certain identifiable intangible assets were created
(primarily customer relationships) that will be amortized over their expected
lives.
Interest income on Secured Note. Interest income on the Secured Note for the
year ended December 31, 2022 was nil as compared to $52.1 million for the year
ended December 31, 2021. GCE recognized interest income on its Secured Note with
GCU including borrowings made for capital expenditures, at an interest rate of
6%. The decrease over the prior year was due to GCU repaying $500.0 million of
the outstanding balance of the Secured Note receivable on October 29, 2021 and
the remaining balance of the Secured Note receivable of $469.9 million on
December 9, 2021. As the Secured Note receivable is paid off we do not
anticipate any interest income to be earned in the future.
Interest expense. Interest expense was $3.6 million for the year ended December
31, 2021 as compared to interest expense of nil for the year ended December 31,
2022. The decrease in interest expense is primarily due to the repayment and
termination of the credit facility in early November 2021, partially offset by
the write-off of the remaining deferred loan costs of $1.0 million in 2021 at
the time of the termination of the credit facility.
Investment interest and other. Investment interest and other for the year ended
December 31, 2022 was $2.6 million, an increase of $2.0 million, as compared to
$0.6 million for the year ended December 31, 2021. Interest rates have increased
in 2022 resulting in increased investment interest income.
Income tax expense. Income tax expense for the year ended December 31, 2022 was
$55.4 million, a decrease of $15.5 million, or 21.9%, as compared to income tax
expense of $70.9 million for the year ended December 31, 2021. This decrease is
the result of a decline in taxable income between years, partially offset by a
slight increase in our effective tax rate between years. Our effective tax rate
was 23.1% during the year ended December 31, 2022 as compared to 21.4% during
the year ended December 31, 2021. The effective tax rate in 2021 was favorably
impacted by higher excess tax benefits of $4.4 million compared to excess tax
benefits of $0.1 million for the year ended December 31, 2022. The inclusion of
excess tax benefits and deficiencies as a component of our income tax expense
increases the volatility within our provision for income taxes as the amount of
excess tax benefits or deficiencies from share-based compensation awards are
dependent on our stock price at the date the restricted awards vest, our stock
price on the date an option is exercised, and the quantity of options exercised.
In 2021 the remaining stock options that had been granted ten years prior were
exercised by certain of our executives prior to their expiration generating the
large excess tax benefit. As there are no stock options remaining, we anticipate
our excess tax benefit or expense will be similar to what it was in 2022 going
forward. Our restricted stock vests in March each year so any benefit or expense
will primarily impact the first quarter each year.
Net income. Our net income for the year ended December 31, 2022 was $184.7
million, a decrease of $75.6 million, or 29.1% as compared to $260.3 million for
the year ended December 31, 2021, due to the factors discussed above.
Seasonality
Our service revenue and operating results normally fluctuate as a result of
seasonal variations in our business, principally due to changes in our
university partners' enrollment. Our partners' enrollment varies as a result of
new enrollments, graduations, and student attrition. Service revenues in the
summer months (May through August) are lower primarily due to the majority of
GCU's traditional ground students not attending courses during the summer
months, which affects our results for our second and third fiscal quarters.
Since a significant amount of our costs are fixed, the lower revenue resulting
from the decreased summer enrollment has historically contributed to lower
operating margins during those periods. Partially offsetting this summer effect
has been the sequential quarterly increase in enrollments that has occurred as a
result of the traditional fall school start. This increase in enrollments also
has occurred in the first quarter, corresponding to calendar year matriculation.
Thus, we experience higher net revenue in the fourth quarter due to its overlap
with the semester encompassing the traditional fall school start and in the
first quarter due to its overlap
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with the first semester of the calendar year. A portion of our expenses do not
vary proportionately with these fluctuations in net revenue, resulting in higher
operating income in the first and fourth quarters relative to other quarters. We
expect quarterly fluctuation in operating results to continue as a result of
these seasonal patterns.
Liquidity and Capital Resources
As of December 31,
(In thousands) 2022 2021
Cash, cash equivalents and investments $ 181,704 $ 600,941
Overview
Our liquidity position, as measured by cash and cash equivalents and investments
decreased by $419.2 million between December 31, 2021 and December 31, 2022,
which was largely attributable to share repurchases in accordance with our share
repurchase program and capital expenditures during the year ended December 31,
2022 of $604.2 million and $35.2 million, respectively, partially offset by cash
provided by operating activities of $220.8 million. Our unrestricted cash and
cash equivalents and investments were $181.7 million and $600.9 million at
December 31, 2022 and 2021, respectively.
Based on our current level of operations and anticipated growth, we believe that
our cash flow from operations and other sources of liquidity, including cash and
cash equivalents, will provide adequate funds for ongoing operations, planned
capital expenditures, and working capital requirements for at least the next
24 months.
Cash Flows from Operating Activities
Year Ended December 31,
(In thousands) 2022 2021
Net cash provided by operating activities $ 220,819 $ 313,119
The decrease in cash generated from operating activities between the years ended
December 31, 2021 and 2022 was primarily due to a decrease in net income and
changes in other working capital balances. We define working capital as the
assets and liabilities, other than cash, generated through GCE's primary
operating activities. Changes in these balances are included in the changes in
assets and liabilities presented in the statement of cash flows.
Cash Flows from Investing Activities
Year Ended December 31,
(In thousands) 2022 2021
Net cash (used in) provided by investing activities $ (97,139) $ 950,979
Investing activities consumed $97.1 million of cash in fiscal 2022. Investing
activities provided $951.0 million of cash in fiscal 2021 primarily due to the
repayment of the Secured Note receivable by GCU for $969.9 million.
In 2022 and 2021 cash used in investing activities was primarily related to
capital expenditures of $35.2 million and $28.9 million, respectively. Capital
expenditures for both fiscal years primarily consisted of leasehold improvements
and equipment for new off-campus classroom and laboratory sites, as well as
purchases of computer equipment, internal use software projects and furniture
and equipment to support our increasing employee headcount. The Company intends
to continue to spend approximately $30.0 million to $35.0 million per year for
capital expenditures.
Purchases from investments, net of proceeds, were $61.5 million. Proceeds from
investments, net of purchases of short-term investments, were $10.5 million in
fiscal 2021. In 2022 and 2021, the Company elected to utilize its excess cash
balances from both operating cash flows and the payoff of the Secured Note to
repurchase its shares.
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Cash Flows from Financing Activities
Year Ended December 31,
(In thousands) 2022 2021
Net cash used in financing activities $ (604,212) $ (908,926)
Financing activities consumed $604.2 million of cash in fiscal 2022 compared to
$908.9 in fiscal 2021. During 2021 principal and revolver payments were $107.8
million. 2021 payments represented quarterly term loan repayments through the
third quarter with the remaining balance of the credit facility paid and the
credit facility terminated in October 2021, when the Secured Note receivable
began to be repaid by GCU.
Proceeds received from option exercises totaled $2.7 million in fiscal 2021.
During fiscal 2022 and 2021, $599.6 million and $797.8 million, respectively,
was used to purchase treasury stock in accordance with GCE's share repurchase
program. In 2022 and 2021, $4.6 million and $6.0 million, respectively, of cash
was utilized to purchase common shares withheld in lieu of income taxes
resulting from the vesting of restricted share awards. The Company intends to
continue using a portion of its cash flows from operations to repurchase its
shares.
Share Repurchase Program
In January 2021, July 2021, and January 2022 our Board of Directors increased
the authorization under its existing stock repurchase program by $100.0 million,
$970.0 million and $175.0 million respectively, reflecting an aggregate
authorization for share repurchases since the initiation of the program of
$1,645.0 million. The current expiration date on the repurchase authorization by
our Board of Directors is December 31, 2023. Repurchases occur at the Company's
discretion and the Company may modify, suspend or discontinue the repurchase
authorization at any time.
Under our share repurchase authorization, we may purchase shares in the open
market or in privately negotiated transactions, pursuant to the applicable SEC
rules. The amount and timing of future share repurchases, if any, will be made
as market and business conditions warrant.
On March 10, 2021, the Company entered into an accelerated share repurchase
("ASR") agreement with Morgan Stanley & Co. LLC ("Morgan Stanley") to repurchase
up to $35.0 million of its outstanding shares of common stock as part of the
Company's share repurchase program. Under the ASR agreement, the Company
received initial delivery of approximately 275,889 shares of common stock,
representing approximately 80% of the number of shares of common stock initially
underlying the ASR agreement based on the closing price of the common stock of
$101.49, on March 9, 2021. The total number of shares that the Company
repurchased under the ASR program was based on the volume-weighted average price
of the common stock during the term of the ASR agreement, less a discount, and
was subject to potential adjustments pursuant to the terms and conditions of the
ASR agreement. The final settlement of the share repurchases under the ASR
agreement was completed on May 4, 2021 with additional delivery of 45,914 shares
of common stock. The ASR agreement resulted in a total of 321,803 shares
repurchased at an average cost of $108.76.
On May 14, 2021, the Company entered into an ASR agreement with Morgan Stanley
to repurchase up to $50.0 million of its outstanding shares of common stock as
part of the Company's share repurchase program. Under the ASR agreement, the
Company received initial delivery on May 17, 2021 of approximately 418,279
shares of common stock, representing approximately 80% of the number of shares
of common stock initially underlying the ASR agreement based on the closing
price of the common stock of $95.63, on May 14, 2021. The total number of shares
that the Company repurchased under the ASR program was based on the
volume-weighted average price of the common stock during the term of the ASR
agreement, less a discount, and was subject to potential adjustments pursuant to
the terms and conditions of the ASR agreement. The final settlement of the share
repurchases under the ASR agreement was completed on August 13, 2021 with
additional delivery of 139,270 shares of common stock. The ASR agreement
resulted in a total of 557,549 shares repurchased at an average cost of $89.68.
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Since 2011, we have purchased 21.6 million shares of common stock at an
aggregate cost of $1,649.2 million, which includes 6,794,693 shares of common
stock at an aggregate cost of $599.6 million during the year ended December 31,
2022.
Contractual Obligations
Our contractual obligations primarily consist of capital expenditures primarily
for new off-campus classroom and laboratory sites opening and continued spend on
computer equipment, software licenses, internal software development and
furniture and equipment to support our increasing employee headcount. See
Note 9 - Leases, in Item 8, Consolidated Financial Statements and Supplementary
Data. There are no other material contractual obligations or commitments for the
Company.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have had or are
reasonably likely to have a material current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
Adjusted EBITDA (Non-GAAP Financial Measure)
In addition to our GAAP results, we use Adjusted EBITDA as a supplemental
measure of our operating performance and as part of our compensation
determinations. Adjusted EBITDA is not required by or presented in accordance
with GAAP and should not be considered as an alternative to net income,
operating income, or any other performance measure derived in accordance with
GAAP, or as an alternative to cash flow from operating activities or as a
measure of our liquidity.
Adjusted EBITDA is defined as net income plus interest expense, less interest
income and other gain (loss) recognized on investments, plus income tax expense,
plus depreciation and amortization (EBITDA), as adjusted for (i) contributions
to private Arizona school tuition organizations in lieu of the payment of state
income taxes; (ii) share-based compensation, and (iii) unusual charges or gains,
such as litigation and regulatory reserves, impairment charges and asset
write-offs, and exit or lease termination costs. We present Adjusted EBITDA, a
non-GAAP financial measure, because we consider it to be an important
supplemental measure of our operating performance. We also make certain
compensation decisions based, in part, on our operating performance, as measured
by Adjusted EBITDA. All of the adjustments made in our calculation of Adjusted
EBITDA are adjustments to items that management does not consider to be
reflective of our core operating performance. Management considers our core
operating performance to be that which can be affected by our managers in any
particular period through their management of the resources that affect our
underlying revenue and profit generating operations during that period and does
not consider the items for which we make adjustments (as listed above) to be
reflective of our core performance.
We believe Adjusted EBITDA allows us to compare our current operating results
with corresponding historical periods and with the operational performance of
other companies in our industry because it does not give effect to potential
differences caused by variations in capital structures (affecting relative
interest expense, including the impact of write-offs of deferred financing costs
when companies refinance their indebtedness), tax positions (such as the impact
on periods or companies of changes in effective tax rates or net operating
losses), the book amortization of intangibles (affecting relative amortization
expense), and other items that we do not consider reflective of underlying
operating performance. We also present Adjusted EBITDA because we believe it is
frequently used by securities analysts, investors, and other interested parties
as a measure of performance.
In evaluating Adjusted EBITDA, investors should be aware that in the future we
may incur expenses similar to the adjustments described above. Our presentation
of Adjusted EBITDA should not be construed as an inference that our future
results will be unaffected by expenses that are unusual, non-routine, or
non-recurring. Adjusted EBITDA has limitations as an analytical tool in that,
among other things, it does not reflect:
? cash expenditures for capital expenditures or contractual commitments;
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? changes in, or cash requirements for, our working capital requirements;
? interest expense, or the cash required to replace assets that are being
depreciated or amortized; and
the impact on our reported results of earnings or charges resulting from the
? items for which we make adjustments to our EBITDA, as described above and set
forth in the table below.
In addition, other companies, including other companies in our industry, may
calculate these measures differently than we do, limiting the usefulness of
Adjusted EBITDA as a comparative measure. Because of these limitations, Adjusted
EBITDA should not be considered as a substitute for net income, operating
income, or any other performance measure derived in accordance with GAAP, or as
an alternative to cash flow from operating activities or as a measure of our
liquidity. We compensate for these limitations by relying primarily on our GAAP
results and use Adjusted EBITDA only as a supplemental performance measure. For
more information, see our consolidated financial statements and the notes to
those consolidated financial statements included elsewhere in this Annual Report
on Form 10-K.
The following table reconciles net income to Adjusted EBITDA for the periods
indicated:
Year Ended December 31,
2022 2021
Net income $ 184,675 $ 260,344
Plus: interest expense 2 3,601
Less: interest income on Secured Note - (52,090)
Less: investment interest and other (2,621) (610)
Plus: income tax expense 55,444 70,945
Plus: amortization of intangible assets 8,419 8,419
Plus: depreciation and amortization 22,758 21,994
EBITDA 268,677 312,603
Plus: contributions in lieu of state income taxes(a) 5,000 5,000
Plus: loss on fixed asset disposal(b)
1,249 -
Less: reversal of credit loss reserve(c) - (5,000)
Plus: share-based compensation(d) 12,642 11,526
Plus: litigation and regulatory reserves(e) 3,768 3,225
Adjusted EBITDA $ 291,336 $ 327,354
Represents contributions to various private Arizona school tuition
organizations to assist with funding for education. In connection with such
contributions made, we received a dollar-for-dollar state income tax credit,
which resulted in a reduction in our effective income tax rate to 23.1% and
(a) 21.4% for the years ended December 31, 2022 and 2021, respectively. Had these
contributions not been made, our effective tax rate would have been 24.7% and
22.6% for 2022 and 2021, respectively. Such contributions are viewed by our
management to be made in lieu of payments of state income taxes and are
therefore excluded from evaluation of our core operating performance.
(b) Represent loss on fixed asset disposals.
(c) Represents the reversal of the credit loss reserve on the Secured Note
receivable due to repayment in full by GCU in the fourth quarter of 2021.
(d) Reflects share-based compensation expense related to GCE employees.
(e) Reflects primarily regulatory litigation as GCE retained responsibility for
all liabilities of GCU arising prior to the closing date of the Transaction.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies, in Item 8, Consolidated
Financial Statements and Supplementary Data.
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