STRATEGIC EDUCATION, INC.
Cautionary Notice Regarding Forward-Looking Statements
Certain of the statements included in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as elsewhere in this
Quarterly Report on Form 10-Q are forward-looking statements made pursuant to
the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such
statements may be identified by the use of words such as "expect," "estimate,"
"assume," "believe," "anticipate," "may," "will," "forecast," "outlook," "plan,"
"project," or similar words, and include, without limitation, statements
relating to future enrollment, revenues, revenues per student, earnings growth,
operating expenses, capital expenditures and the ultimate effect of the COVID-19
pandemic on the Company's business and results. These statements are based on
the Company's current expectations and are subject to a number of assumptions,
risks and uncertainties. In accordance with the Safe Harbor provisions of the
Reform Act, the Company has identified important factors that could cause the
actual results to differ materially from those expressed in or implied by such
statements. The assumptions, risks and uncertainties include our continued
compliance with Title IV of the Higher Education Act, and the regulations
thereunder, as well as institutional accreditation standards and state
regulatory requirements, rulemaking by the Department and increased focus by the
U.S. Congress on for-profit education institutions, the pace of student
enrollment, competitive factors, risks associated with the further spread of
COVID-19, including the ultimate effect of COVID-19 on people and economies, the
effect of regulatory measures or voluntary actions that may be put in place to
limit the spread of COVID-19, including restrictions on business operations or
social distancing requirements, risks associated with the opening of new
campuses, risks associated with the offering of new educational programs and
adapting to other changes, risks associated with the acquisition of existing
educational institutions including in the case of the Company's acquisition of
Laureate's Australia and New Zealand business, the risk that the benefits of the
acquisition may not be fully realized or may take longer to realize than
expected, and the risk that the acquisition may not advance the Company's
business strategy and growth strategy, risks relating to the timing of
regulatory approvals, our ability to implement our growth strategy, the risk
that the combined company may experience difficulty integrating employees or
operations, risks associated with the ability of our students to finance their
education in a timely manner, and general economic and market conditions.
Further information about these and other relevant risks and uncertainties may
be found in Part II, "Item 1A. Risk Factors" of this Quarterly Report on
Form 10-Q, Part I, "Item 1A. Risk Factors" of the Company's Annual Report on
Form 10-K and in the Company's other filings with the Securities and Exchange
Commission . The Company undertakes no obligation to update or revise
forward-looking statements, except as required by law.
Additional Information
We maintain a website at http://www.strategiceducation.com. The information on
our website is not incorporated by reference in this Quarterly Report on Form
10-Q, and our web address is included as an inactive textual reference only. We
make available, free of charge through our website, our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission .
Background
Strategic Education, Inc. ("SEI," "we", "us" or "our") is an education services
company that seeks to provide the most direct path between learning and
employment through campus-based and online post-secondary education offerings
and through programs to develop job-ready skills for high-demand markets. We
operate primarily through our wholly-owned subsidiaries Strayer University and
Capella University (the "Universities"), both accredited post-secondary
institutions of higher education. Our operations also include certain non-degree
programs, mainly focused on software and application development.
Company Response to COVID-19
The ongoing COVID-19 pandemic has caused significant volatility and disruption
to the United States and international economies. SEI took early action to
protect the health and well-being of our students and employees in accordance
with government mandates and informed by guidance from the Centers for Disease
Control and Prevention . Specifically, we have instituted a work-from-home policy
for the vast majority of our workforce, closed physical campus locations, moved
our on-ground courses at Strayer University online, postponed large events such
as graduation ceremonies, and prohibited non-essential employee travel.
We are taking measures to provide financial relief to our students and employer
partners negatively affected by the COVID-19 crisis. Measures include payment
flexibility, scholarship opportunities, and other pricing relief. We expect that
these measures will enable more students to continue pursuing their education
during and after the COVID-19 crisis, and that revenue-per-student
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Table of Contents will range from flat to down 2% compared to 2019. In addition, we have decided to pause planned 2020 new campus expansion for campus projects that have not yet started, although we have completed or executed leases on roughly half of the originally planned eight to twelve new campuses for 2020. In the third quarter of 2020, we began implementing a restructuring plan that includes both voluntary and involuntary employee terminations in an effort to reduce ongoing operating costs to align with changes in enrollment. These headcount reductions are expected to result in a 5% decrease to SEI's total workforce. As the pandemic has continued, we have seen deterioration in overall demand, including lower new student enrollment and lower continuation rates, which has impacted our total enrollment results for the third and fourth quarters. The weakness has been most pronounced atStrayer University , where new student enrollment for the third quarter declined approximately 28% and we expect the percentage change in new student enrollment for the fourth quarter to be similar to the third quarter. While it is not possible to predict the magnitude or persistence of this deterioration, enrollment weakness that started in 2010, following the recession in 2008, impactedStrayer University's new student enrollment for several quarters. Enrollment atCapella University also has been impacted by the pandemic, though not as severely as atStrayer University . As a result of the near-term enrollment trends we have enhanced our cost management efforts to offset lower than expected revenue, and now project 2020 revenue to be flat to slightly up compared to 2019, and adjusted operating income and income before income taxes to increase in the low to mid-single digits from 2019. The Company does not intend to disclose anticipated enrollment figures or trends in future periodic filings or earnings releases, except as may be required by law. We believe our current financial position and expected operating results, and ability to further control costs are sufficient to support the ongoing operation of SEI and its two Universities in a manner that protects the health and well-being of our employees, students, and partners. Recent Developments OnNovember 3, 2020 , we completed the previously announced acquisition of theAustralia and New Zealand operations of Laureate Education Inc., in accordance with a sale and purchase agreement datedJuly 29, 2020 (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the aggregate consideration paid was approximately$662.0 million in cash, which reflected the original agreed upon purchase price of$642.7 million , plus a$19.3 million adjustment reflecting an estimated$16.0 million of net cash at close, and an estimated$3.3 million related to higher net working capital. These estimated adjustments will be subject to a final true-up of net cash and net working capital, based on the actual closing accounts to be agreed upon no more than 60 days following close. The aggregate consideration paid in the transaction was funded using cash on hand and borrowings under our revolving credit facility. Company Overview During the first quarter of 2020, the Company revised its reportable segments and restated the results for the prior period to conform to the current period presentation. As ofSeptember 30, 2020 , SEI had the following reportable segments: Strayer University Segment •Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice at 78 physical campuses, predominantly located in the easternUnited States , and online.Strayer University is accredited by theMiddle States Commission on Higher Education ("Middle States" or "Middle States Commission "), an institutional collegiate accrediting agency recognized by theDepartment of Education . By offering its programs both online and in physical classrooms,Strayer University provides its working adult students flexibility and convenience. •The Jack Welch Management Institute ("JWMI") offers an executive MBA online and is a Top 25 Princeton Review ranked online MBA program. •DevMountain is a software development program offering affordable, high-quality, leading-edge software coding education at multiple campus locations and online. •Hackbright Academy is a software engineering school for women. Its primary offering is an intensive 12-week accelerated software development program, together with placement services and coaching. •In the third quarter,Strayer University's enrollment decreased 1% to 48,774 compared to 49,194 for the same period in 2019. New student enrollment for the period decreased 28% and continuing student enrollment for the period increased 6%. New student enrollment atStrayer University is more volatile in the current economic environment due to Strayer's mostly undergraduate student mix, which includes many first-time college students. In the first quarter of 2020, Strayer 26
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Table of Contents University adopted a new enrollment reporting census date, which occurs approximately two weeks following the start of the academic term. Previously theStrayer University enrollment census date coincided with the end of the University's "drop-add" period, approximately one week following the start of the academic term. The new census date is consistent with the approach employed byCapella University . All historical enrollment data included in this Form 10-Q has been revised using the new census date. Year-over-year percentage change in enrollment for the new census date does not differ significantly from the prior approach. Capella University Segment •Capella University is an online post-secondary education company that offers a variety of doctoral, master's and bachelor's degree programs, primarily for working adults, in the following primary disciplines: public service leadership, nursing and health sciences, social and behavioral sciences, business and technology, education, and undergraduate studies.Capella University focuses on master's and doctoral degrees, with approximately 70% of its learners enrolled in a master's or doctoral degree program.Capella University's academic offerings are built with competency-based curricula and are delivered in an online format that is convenient and flexible.Capella University designs its offerings to help working adult learners develop specific competencies they can apply in their workplace.Capella University is accredited by theHigher Learning Commission , an institutional regional collegiate accrediting agency recognized by theDepartment of Education . •Sophia Learning is an innovative company which leverages technology and high quality academic content to provide self-paced online courses recommended by theAmerican Council on Education for college credit. •In the third quarter,Capella University's enrollment increased 4% to 40,268 compared to 38,885 for the same period in 2019. New student enrollment for the period increased 4% and continuing student enrollment for the period increased 4%. In the first quarter of 2020,Capella University consolidated two different enrollment reporting census dates into a single date, which occurs approximately two weeks following the start of the academic term. All historical enrollment data included in this Form 10-Q has been revised using the new census date. Year-over-year percentage change in enrollment for the new census date does not differ significantly from the prior approach. We believe we have the right operating strategies in place to provide the most direct path between learning and employment for our students. We focus on innovation continually to differentiate ourselves in our markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our students' professional needs, and establishing new growth platforms. Technology and the talent of our faculty and employees enable these strategies. We believe these strategies and enablers will allow us to continue to deliver high-quality, affordable education, resulting in continued growth over the long-term. We will continue to invest in these enablers to strengthen the foundation and future of our business. We also believe our enhanced scale and capabilities allow us to continue to focus on innovative cost and revenue synergies, while improving the value provided to our students. Critical Accounting Policies and Estimates "Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments related to its allowance for credit losses; income tax provisions; the useful lives of property and equipment and intangible assets; redemption rates for scholarship programs and valuation of contract liabilities; fair value of right-of-use lease assets for facilities that have been vacated; incremental borrowing rates; valuation of deferred tax assets, goodwill, and intangible assets; forfeiture rates and achievability of performance targets for stock-based compensation plans; and accrued expenses. Management bases its estimates and judgments on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments regarding the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly reviews its estimates and judgments for reasonableness and may modify them in the future. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following critical accounting policies are its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue recognition - Like many traditional institutions,Strayer University andCapella University offer educational programs primarily on a quarter system having four academic terms, which generally coincide with our quarterly financial reporting periods. Approximately 96% of our revenues during the nine months endedSeptember 30, 2020 consisted of tuition revenue. 27
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Table of ContentsCapella University offers monthly start options for new students, who then transition to a quarterly schedule.Capella University also offers its FlexPath program, which allows students to determine their 12-week billing session schedule after they complete their first course. Tuition revenue for all students is recognized ratably over the course of instruction as the Universities and the schools offering non-degree programs provide academic services, whether delivered in person at a physical campus or online. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts. The Universities also derive revenue from other sources such as textbook-related income, certificate revenue, certain academic fees, licensing revenue, and other income, which are all recognized when earned. In accordance with ASC 606, materials provided to students in connection with their enrollment in a course are recognized as revenue when control of those materials transfers to the student. At the start of each academic term or program, a contract liability is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. Students of the Universities finance their education in a variety of ways, and historically about three quarters of our students have participated in one or more financial aid programs provided through Title IV of the Higher Education Act. In addition, many of our working adult students finance their own education or receive full or partial tuition reimbursement from their employers. Those students who are veterans or active duty military personnel have access to various additional government-funded educational benefit programs. A typical class is offered in weekly increments over a six- to twelve-week period, depending on the University and course type, and is followed by an exam. Students who withdraw from a course may be eligible for a refund of tuition charges based on the timing of the withdrawal. We use the student's withdrawal date or last date of attendance for this purpose. Student attendance is based on physical presence in class for on-ground classes. For online classes, attendance consists of logging into one's course shell and performing an academically-related activity (e.g., engaging in a discussion post or taking a quiz). If a student withdraws from a course prior to completion, a portion of the tuition may be refundable depending on when the withdrawal occurs. Our specific refund policies vary across the Universities and non-degree programs. For students attendingStrayer University , our refund policy typically permits students who complete less than half of a course to receive a partial refund of tuition for that course. For learners attendingCapella University , our refund policy varies based on course format. GuidedPath learners are allowed a 100% refund through the first five days of the course, a 75% refund from six to twelve days, and 0% refund for the remainder of the period. FlexPath learners receive a 100% refund through the 12th calendar day of the course for their first billing session only and a 0% refund after that date and for all subsequent billing sessions. Refunds reduce the tuition revenue that otherwise would have been recognized for that student. Since the Universities' academic terms coincide with our financial reporting periods for most programs, nearly all refunds are processed and recorded in the same quarter as the corresponding revenue. For certain programs where courses may overlap a quarter-end date, the Company estimates a refund rate and does not recognize the related revenue until the uncertainty related to the refund is resolved. The portion of tuition revenue refundable to students may vary based on the student's state of residence. For students who withdraw from all their courses during the quarter of instruction, we reassess collectability of tuition and fees for revenue recognition purposes. In addition, we cease revenue recognition when a student fully withdraws from all of his or her courses in the academic term. Tuition charges billed in accordance with our billing schedule may be greater than the pro rata revenue amount, but the additional amounts are not recognized as revenue unless they are collected in cash and the term is complete. For students who receive funding under Title IV and withdraw, funds are subject to return provisions as defined by theDepartment of Education . The university is responsible for returning Title IV funds to the Department and then may seek payment from the withdrawn student of prorated tuition or other amounts charged to him or her. Loss of financial aid eligibility during an academic term is rare and would normally coincide with the student's withdrawal from the institution. As discussed above, we cease revenue recognition upon a student's withdrawal from all of his or her classes in an academic term until cash is received and the term is complete. Students atStrayer University registering in credit-bearing courses in any undergraduate program beginning in the summer 2013 term or graduate program beginning in the summer 2020 term (fiscal third quarter), and subsequent terms, qualify for theGraduation Fund , whereby qualifying students earn tuition credits that are redeemable in the final year of a student's course of study if he or she successfully remains in the program. Students must meet all of the University's admission requirements and not be eligible for any previously offered scholarship program. Our employees and their dependents are not eligible for the program. To maintain eligibility, students must be enrolled in a bachelor's or master's degree program. Students who have more than one consecutive term of non-attendance lose anyGraduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by the University in the future. In response to the COVID-19 pandemic,Strayer University is temporarily allowing students to miss two consecutive terms without losing theirGraduation Fund credits. In their final 28
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Table of Contents academic year, qualifying students will receive one free course for every three courses that the student successfully completed in prior years. The University's performance obligation associated with free courses that may be redeemed in the future is valued based on a systematic and rational allocation of the cost of honoring the benefit earned to each of the underlying revenue transactions that result in progress by the student toward earning the benefit. The estimated value of awards under theGraduation Fund that will be recognized in the future is based on historical experience of students' persistence in completing their course of study and earning a degree and the tuition rate in effect at the time it was associated with the transaction. Estimated redemption rates of eligible students vary based on their term of enrollment. As ofSeptember 30, 2020 , we had deferred$51.6 million for estimated redemptions earned under theGraduation Fund , as compared to$49.6 million atDecember 31, 2019 . Each quarter, we assess our methodologies and assumptions underlying our estimates for persistence and estimated redemptions based on actual experience. To date, any adjustments to our estimates have not been material. However, if actual persistence or redemption rates change, adjustments to the reserve may be necessary and could be material. Tuition receivable - We record estimates for our allowance for credit losses related to tuition receivable from students primarily based on our historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of recoveries. Our experience is that payment of outstanding balances is influenced by whether the student returns to the institution, as we require students to make payment arrangements for their outstanding balances prior to enrollment. Therefore, we monitor outstanding tuition receivable balances through subsequent terms, increasing the reserve on such balances over time as the likelihood of returning to the institution diminishes and our historical experience indicates collection is less likely. We periodically assess our methodologies for estimating credit losses in consideration of actual experience. If the financial condition of our students were to deteriorate based on current or expected future events resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. For the third quarter of 2020, our bad debt expense was 4.7% of revenue, compared to 5.0% for the same period in 2019. A change in our allowance for credit losses of 1% of gross tuition receivable as ofSeptember 30, 2020 would have changed our income from operations by approximately$0.9 million .Goodwill and intangible assets -Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. At the time of acquisition, goodwill and indefinite-lived intangible assets are allocated to reporting units. Management identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components.Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment. No events or circumstances occurred in the three and nine months endedSeptember 30, 2020 to indicate an impairment to goodwill or indefinite-lived intangible assets. Accordingly, no impairment charges related to goodwill or indefinite-lived intangible assets were recorded during the three and nine month periods endedSeptember 30, 2020 . Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. No impairment charges related to finite-lived intangible assets were recorded during the three and nine month periods endedSeptember 30, 2020 . Other estimates - We record estimates for certain of our accrued expenses and for income tax liabilities. We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary. Should actual results differ from our estimates, revisions to our accrued expenses, carrying amount of goodwill and intangible assets, stock-based compensation expense, and income tax liabilities may be required. Results of Operations In the third quarter of 2020, we generated$239.0 million in revenue compared to$241.7 million in 2019. Our income from operations was$15.4 million for the third quarter of 2020 compared to$20.0 million in 2019 due primarily to restructuring costs incurred as a result of the Company's workforce reductions as well as higher merger and integration related costs. Net income in the third quarter of 2020 was$11.0 million compared to$16.7 million for the same period in 2019. Diluted earnings per share was$0.47 compared to$0.75 for the same period in 2019. For the nine months endedSeptember 30, 2020 , we generated$760.2 million in revenue, compared to$733.4 million for the same period in 2019. Our income from operations was$105.8 million for the nine months endedSeptember 30, 2020 compared to$73.3 million for the same period in 2019. Net income was$80.4 million for the nine months endedSeptember 30, 2020 compared to$52.6 million for the same period in 2019, and diluted earnings per share was$3.58 in the nine months endedSeptember 30, 2020 compared to$2.38 for the same period in 2019. 29
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Table of Contents In the accompanying analysis of financial information for 2020 and 2019, we use certain financial measures including Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings per Share that are not required by or prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). These measures, which are considered "non-GAAP financial measures" underSEC rules, are defined by us to exclude the following: •amortization and depreciation expense related to intangible assets and software assets acquired through the Company's merger withCapella Education Company , •integration expenses associated with the Company's merger withCapella Education Company , and transaction expenses associated with the Company's acquisition of theAustralia and New Zealand operations of Laureate, •severance costs associated with the Company's restructuring, •income from partnership and other investments that are not part of our core operations, and •discrete tax adjustments related to stock-based compensation and other adjustments. When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying trends associated with the Company's ongoing operations. Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures may be considered in addition to, but not as a substitute for or superior to, GAAP results. A reconciliation of these measures to the most directly comparable GAAP measures is provided below. Adjusted income from operations was$37.8 million in the third quarter of 2020 compared to$36.9 million in 2019. Adjusted net income was$27.4 million in the third quarter of 2020 compared to$28.4 million in 2019, and adjusted diluted earnings per share was$1.18 in the third quarter of 2020 compared to$1.28 in 2019. Adjusted income from operations was$163.9 million in the nine months endedSeptember 30, 2020 compared to$131.3 million for the same period in 2019. Adjusted net income was$119.3 million in the nine months endedSeptember 30, 2020 compared to$100.3 million for the same period in 2019, and adjusted diluted earnings per share was$5.32 in the nine months endedSeptember 30, 2020 compared to$4.54 for the same period in 2019. The tables below reconcile our reported results of operations to adjusted results (amounts in thousands, except per share data): Reconciliation of Reported to Adjusted Results of Operations for the three months endedSeptember 30, 2020 Non-GAAP Adjustments Amortization of Merger and As Reported intangible integration Restructuring Income from other Tax As Adjusted (GAAP) assets(1) costs(2) costs(3) investments(4) adjustments(5) (Non-GAAP) Revenues$ 239,026 $ - $ - $ - $ - $ -$ 239,026 Total costs and expenses 223,604 (15,417) (2,920) (4,024) - - 201,243 Income from operations 15,422 15,417 2,920 4,024 - - 37,783 Operating margin 6.5% 15.8% Income before income taxes 16,334 15,417 2,920 4,024 (391) - 38,304 Net income$ 10,960 $ 15,417 $ 2,920 $ 4,024 $ (391)$ (5,543) $ 27,387 Diluted earnings per share$ 0.47 $ 1.18 Weighted average diluted shares outstanding 23,214 23,214 30
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Table of Contents
Reconciliation of Reported to Adjusted Results of Operations for the three
months ended
Non-GAAP Adjustments
Amortization of Merger and
As Reported intangible integration Restructuring Income from other Tax As Adjusted
(GAAP) assets(1) costs(2) costs(3) investments(4) adjustments(5) (Non-GAAP)
Revenues $ 241,747 $ - $ - $ - $ - $ - $ 241,747
Total costs and expenses 221,747 (15,417) (1,500) - - - 204,830
Income from operations 20,000 15,417 1,500 - - - 36,917
Operating margin 8.3% 15.3%
Income before income taxes 23,243 15,417 1,500 - (706) - 39,454
Net income $ 16,692 $ 15,417 $ 1,500 $ - $ (706) $ (4,496) $ 28,407
Diluted earnings per share $ 0.75 $ 1.28
Weighted average diluted
shares outstanding 22,129 22,129
Reconciliation of Reported to Adjusted Results of Operations for the nine months
ended
Non-GAAP Adjustments
Amortization of Merger and
As Reported intangible integration Restructuring Income from other Tax As Adjusted
(GAAP) assets(1) costs(2) costs(3) investments(4) adjustments(5) (Non-GAAP)
Revenues $ 760,159 $ - $ - $ - $ - $ - $ 760,159
Total costs and expenses 654,383 (46,251) (7,858) (4,024) - - 596,250
Income from operations 105,776 46,251 7,858 4,024 - - 163,909
Operating margin 13.9% 21.6%
Income before income taxes 110,450 46,251 7,858 4,024 (1,780) - 166,803
Net income $ 80,351 $ 46,251 $ 7,858 $ 4,024 $ (1,780) $ (17,441) $ 119,263
Diluted earnings per share $ 3.58 $ 5.32
Weighted average diluted
shares outstanding 22,432 22,432
Reconciliation of Reported to Adjusted Results of Operations for the nine months
ended
Non-GAAP Adjustments
Amortization of Merger and
As Reported intangible integration Restructuring Income from other Tax As Adjusted
(GAAP) assets(1) costs(2) costs(3) investments(4) adjustments(5) (Non-GAAP)
Revenues $ 733,365 $ - $ - $ - $ - $ - $ 733,365
Total costs and expenses 660,046 (46,251) (11,698) - - - 602,097
Income from operations 73,319 46,251 11,698 - - - 131,268
Operating margin 10.0% 17.9%
Income before income taxes 84,014 46,251 11,698 - (3,334) - 138,629
Net income $ 52,601 $ 46,251 $ 11,698 $ - $ (3,334) $ (6,907) $ 100,309
Diluted earnings per share $ 2.38 $ 4.54
Weighted average diluted
shares outstanding 22,096 22,096
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Table of Contents __________________________________________________________________________________________ (1)Reflects amortization and depreciation expense of intangible assets and software assets acquired through the Company's merger withCapella Education Company . (2)Reflects integration expenses associated with the Company's merger withCapella Education Company , and transaction expenses associated with the Company's acquisition of theAustralia and New Zealand operations of Laureate. (3)Reflects severance costs associated with the Company's restructuring. (4)Reflects income recognized from the Company's investments in partnership interests and other investments. (5)Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 28.5% for the three and nine months endedSeptember 30, 2020 and an adjusted effective tax rate of 28.0% and 27.6% for the three and nine months endedSeptember 30, 2019 , respectively. Three Months EndedSeptember 30, 2020 Compared to the Three Months EndedSeptember 30, 2019 Revenues. Consolidated revenue decreased to$239.0 million , compared to$241.7 million in the same period in the prior year, primarily due to a decline in revenue per student as a result of enhanced scholarships and discounts we are offering our students at both Universities. Future revenue growth at both Universities is expected to be affected negatively as a result of the COVID-19 pandemic because of potential declines in enrollment as well as the enhanced scholarships and discounts we are offering our students. In theStrayer University segment for the three months endedSeptember 30, 2020 , enrollment decreased 1% to 48,774 from 49,194 for the same period in 2019. Revenue decreased 1.2% to$128.4 million compared to$130.0 million in 2019 as a result of the decline in enrollment and lower revenue-per-student. In theCapella University segment for the three months endedSeptember 30, 2020 , enrollment grew 4% to 40,268 from 38,885 for the same period in 2019.Capella University segment revenue decreased 1.0% to$110.6 million compared to$111.8 million in the same period in the prior year as a result of a decline in revenue-per-student. Instructional and support costs. Consolidated instructional and support costs decreased to$127.2 million , compared to$132.5 million in the same period in the prior year, principally due to efficiencies gained through our technology investments, which have also helped improve student success, and cost synergies realized as a result of the merger with CEC. Consolidated instructional and support costs as a percentage of revenues decreased to 53.2% in the third quarter of 2020 from 54.8% in the third quarter of 2019. General and administration expenses. Consolidated general and administration expenses increased to$74.1 million in the third quarter of 2020 compared to$72.3 million in the prior year, principally due to increased investments in branding initiatives and partnerships with brand ambassadors. Consolidated general and administration expenses as a percentage of revenues increased to 31.0% in the third quarter of 2020 from 29.9% in the third quarter of 2019. Amortization of intangible assets. Amortization expense related to intangible assets acquired in the merger with CEC was$15.4 million in the third quarter of both 2020 and 2019. Merger and integration costs. Merger and integration costs were$2.9 million in the third quarter of 2020 compared to$1.5 million for the same period in 2019 and reflect expenses for integration support services and severance costs incurred in connection with the merger with CEC as well as transaction expenses associated with the Company's acquisition of theAustralia and New Zealand operations of Laureate incurred in the third quarter of 2020. Restructuring costs. Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations in connection with the Company's workforce reduction efforts implemented in the third quarter of 2020. Income from operations. Consolidated income from operations decreased to$15.4 million in the third quarter of 2020 compared to$20.0 million in the third quarter of 2019, due primarily to restructuring costs incurred as a result of the Company's workforce reductions as well as higher merger and integration related costs.Strayer University segment income from operations increased 26.8% to$22.8 million in the third quarter of 2020, compared to$18.0 million in the third quarter of 2019, primarily due to expense savings related to campus closures during the pandemic, as well as lower marketing expense.Capella University segment income from operations decreased 20.9% to$15.0 million in the third quarter of 2020 compared to$18.9 million for the same period in 2019, primarily due to higher investments in branding initiatives. Other income. Other income decreased to$0.9 million in the third quarter of 2020 compared to$3.2 million in the third quarter of 2019, as a result of lower yields on money markets and marketable securities and a decrease in investment income from our limited partnership and other investments. We expect interest income in 2020 to be negatively affected by reductions in interest rates as a result of the COVID-19 crisis. Provision for income taxes. Income tax expense was$5.4 million in the third quarter of 2020, compared to$6.6 million in the third quarter of 2019. Our effective tax rate for the quarter was 32.9%, compared to 28.2% for the same period in 2019. The increase in the effective tax rate is primarily due to non-deductible transaction expenses incurred in the current year period. 32
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Table of Contents Net income. Net income decreased to$11.0 million in the third quarter of 2020 compared to$16.7 million in the third quarter of 2019 due to the factors discussed above.
Nine Months Ended
Revenues. Consolidated revenue increased to$760.2 million , compared to$733.4 million in the same period in the prior year, primarily due to enrollment growth at the Universities. In theStrayer University segment, revenue grew 5.0% to$412.1 million in the nine months endedSeptember 30, 2020 from$392.5 million in the nine months endedSeptember 30, 2019 , primarily due to enrollment growth. In theCapella University segment, revenue increased 2.1% to$348.0 million in the nine months endedSeptember 30, 2020 , compared to$340.9 million in the nine months endedSeptember 30, 2019 , primarily due to enrollment growth. Instructional and support costs. Consolidated instructional and support costs decreased to$385.7 million in the nine months endedSeptember 30, 2020 from$397.3 million in the nine months endedSeptember 30, 2019 , principally due to significant savings from the impact of the pandemic, which included lower expenses associated with travel, events, facilities, and healthcare. Consolidated instructional and support costs as a percentage of revenues decreased to 50.7% in the nine months endedSeptember 30, 2020 from 54.2% in the nine months endedSeptember 30, 2019 . General and administration expenses. Consolidated general and administration expenses increased to$210.6 million in the nine months endedSeptember 30, 2020 from$204.8 million in the nine months endedSeptember 30, 2019 , principally due to increased investments in branding initiatives and partnerships with brand ambassadors. Consolidated general and administration expenses as a percentage of revenues decreased to 27.7% in the nine months endedSeptember 30, 2020 from 27.9% in the nine months endedSeptember 30, 2019 .
Amortization of intangible assets. Amortization expense related to intangible
assets acquired in the merger with CEC was
Merger and integration costs. Merger and integration costs were$7.9 million in the nine months endedSeptember 30, 2020 compared to$11.7 million in for the same period in 2019 and reflect expenses for integration support services and severance costs incurred in connection with the merger with CEC as well as transaction expenses associated with the Company's acquisition of theAustralia and New Zealand operations of Laureate. Restructuring costs. Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations in connection with the Company's workforce reduction efforts implemented in the third quarter of 2020. Income from operations. Consolidated income from operations increased to$105.8 million in the nine months endedSeptember 30, 2020 compared to$73.3 million in the nine months endedSeptember 30, 2019 , principally due to higher revenues as a result of enrollment growth at both Universities and lower merger and integration related costs.Strayer University segment income from operations increased 43.8% to$95.2 million in the nine months endedSeptember 30, 2020 , compared to$66.2 million in the nine months endedSeptember 30, 2019 , primarily due to higher revenues due to enrollment growth and lower expenses.Capella University segment income from operations increased 5.6% to$68.7 million in the nine months endedSeptember 30, 2020 , compared to$65.0 million for the same period in 2019, primarily due to higher revenues due to enrollment growth. Other income. Other income decreased to$4.7 million in the nine months endedSeptember 30, 2020 compared to$10.7 million in the nine months endedSeptember 30, 2019 , as a result of lower yields on money markets and marketable securities and a decrease in investment income from our limited partnership and other investments. We expect interest income in 2020 to be negatively affected by reductions in interest rates as a result of the COVID-19 crisis. Provision for income taxes. Income tax expense was$30.1 million in the nine months endedSeptember 30, 2020 compared to$31.4 million in the nine months endedSeptember 30, 2019 . Our effective tax rate for the nine months endedSeptember 30, 2020 was 27.3% compared to 37.4% for the nine months endedSeptember 30, 2019 . The tax rate in 2019 was unfavorably impacted by changes in previously deferred compensation arrangements, resulting in a discrete charge of$11.5 million to reduce the Company's deferred tax asset related to these arrangements. The tax rate for both periods reflects favorable discrete adjustments, primarily related to tax windfalls recognized through share-based payment arrangements.
Net income. Net income increased to
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Table of Contents Liquidity and Capital Resources AtSeptember 30, 2020 , we had cash, cash equivalents, and marketable securities of$768.9 million compared to$491.2 million atDecember 31, 2019 and$457.1 million atSeptember 30, 2019 . AtSeptember 30, 2020 , most of our cash was held in demand deposit accounts at high credit quality financial institutions. OnNovember 3, 2020 , in connection with closing the acquisition of Laureate'sAustralia and New Zealand operations, we borrowed$141.8 million on our credit facility and paid approximately$662.0 million to complete the transaction. Our net cash provided by operating activities for the nine months endedSeptember 30, 2020 was$158.8 million , compared to$141.4 million for the same period in 2019. The increase in net cash from operating activities was largely due to the increase in net income. Capital expenditures increased to$34.8 million for the nine months endedSeptember 30, 2020 , compared to$27.8 million for the same period in 2019, due to investments in software, technology infrastructure and facilities renovations. We are party to a credit facility (the "Amended Credit Facility"), which provides for a senior secured revolving credit facility (the "Revolver") in an aggregate principal amount of up to$350 million . Borrowings under the Amended Credit Facility bear interest at LIBOR or a base rate, plus a margin ranging from 1.50% to 2.00%, depending on our leverage ratio. An unused commitment fee ranging from 0.20% to 0.30%, depending on our leverage ratio, accrues on unused amounts. During the nine months endedSeptember 30, 2020 and 2019, we paid unused commitment fees of$0.4 million . The Amended Credit Facility provides the Company with an option, under certain conditions, to increase the commitments under the Revolver or establish one or more incremental term loans (each, an "Incremental Facility") in an amount up to the sum of (x)$150 million and (y) if such Incremental Facility is incurred in connection with a permitted acquisition, any amount so long as the Company's leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. We were in compliance with all applicable covenants related to the Amended Credit Facility as ofSeptember 30, 2020 . We had no borrowings outstanding during each of the nine months endedSeptember 30, 2020 andSeptember 30, 2019 . InAugust 2020 , we completed a public offering of 2,185,000 shares of our common stock for total cash proceeds of$220.2 million , net of underwriting discounts and offering costs of$9.2 million . The Board of Directors declared a regular, quarterly cash dividend of$0.60 per share of common stock for each of the first three quarters of 2020. During the nine months endedSeptember 30, 2020 , we paid a total of$41.3 million in cash dividends on our common stock. During the nine months endedSeptember 30, 2020 , we invested approximately$0.2 million to repurchase common shares in the open market under our repurchase program. As ofSeptember 30, 2020 , we had$249.8 million of share repurchase authorization remaining to use throughDecember 31, 2020 . For the third quarter of 2020 and 2019, bad debt expense as a percentage of revenue was 4.7% and 5.0%, respectively. We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under our Amended Credit Facility will be sufficient to meet our requirements for at least the next 12 months. Currently, we maintain our cash primarily in demand deposit bank accounts and money market funds, which are included in cash and cash equivalents atSeptember 30, 2020 and 2019. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. During the nine months endedSeptember 30, 2020 and 2019, we earned interest income of$3.6 million and$8.0 million , respectively.
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