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," "potential" 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 the pace of student enrollment, our continued compliance
with Title IV of the Higher Education Act, and the regulations thereunder, as
well as other federal laws and regulations, institutional accreditation
standards and state regulatory requirements, rulemaking by the Department and
increased focus by the U.S. Congress on for-profit education institutions,
competitive factors, risks associated with the further spread of COVID-19,
including the ultimate impact of COVID-19 on people and economies, the impact 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 the Company's acquisition of Torrens University and
associated assets in Australia and New Zealand, 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 provides access to high-quality education through campus-based and
online post-secondary education offerings, as well as through programs to
develop job-ready skills for high-demand markets. We operate primarily through
our wholly-owned subsidiaries Strayer University and Capella University, both
accredited post-secondary institutions of higher education located in the United
States, as well as Torrens University, an accredited post-secondary institution
of higher education located in Australia. Our operations emphasize relationships
through our Alternative Learning segment with large employers to build employee
education benefits programs that provide employees with access to affordable and
industry relevant training, certificate, and degree programs, and also include
certain non-degree programs, mainly focused on software and application
development, and other vocational and training programs in a variety of fields.
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
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employee travel. As guidance has evolved, we have begun plans to reopen some
campus and office locations and permit business travel in limited circumstances.
We have taken measures to provide financial relief to our students and employer
partners negatively affected by the COVID-19 crisis, including 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. In the third quarter of 2020, we began
implementing a restructuring plan that included both voluntary and involuntary
employee terminations in an effort to reduce ongoing operating costs to align
with changes in enrollment. These headcount reductions resulted in a 5% decrease
to SEI's total workforce. During the first quarter of 2021, our restructuring
efforts included the closure of underutilized campus and corporate office space
in response to changes in enrollment trends and as a result of our
work-from-home policies. Of the campus closures, the majority have an
alternative location within relative proximity to support students as campus
interactions are needed.
As the pandemic has continued, we have seen deterioration in overall demand,
which has impacted our total enrollment results. The weakness has been most
pronounced in the United States, where total enrollment in our U.S. Higher
Education segment decreased 7% in the first quarter of 2021 compared to the same
period in 2020. 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, impacted student enrollment for several quarters. Enrollment
in Australia and New Zealand also has been impacted by the pandemic, though not
as severely. As a result of the near-term enrollment trends, we have enhanced
our cost management efforts to offset lower than expected revenue.
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 in a manner that protects the health and well-being of our
employees, students, and partners.
Acquisition of Torrens University and associated assets in Australia and New
Zealand
On November 3, 2020, we completed the acquisition of Torrens University and
associated assets in Australia and New Zealand ("ANZ"), pursuant to the sale and
purchase agreement dated July 29, 2020 (the "Purchase Agreement"). ANZ includes
Torrens University Australia, Think Education, and Media Design School, which
together provide diversified student curricula to over 19,000 students across
five industry verticals, including business, hospitality, health, education,
creative technology and design. We believe ANZ represents an attractive
portfolio of institutions with a similar focus on innovation, academic outcomes,
improved affordability and career advancement as us. We also believe that ANZ
provides an attractive platform for future growth, driven by Australia's status
as an attractive destination for international students, as well as the
potential to use ANZ as a platform for expansion across the ASEAN region.
Pursuant to the Purchase Agreement, the aggregate consideration paid was
approximately $658.4 million in cash, which reflected the original agreed upon
purchase price of $642.7 million, plus a $15.7 million adjustment reflecting an
estimated $11.0 million of net cash at close, and an estimated $4.7 million
related to higher net working capital. These estimated adjustments are subject
to a final true-up of net cash and net working capital, based on the closing
accounts to be finalized by both parties. The aggregate consideration paid in
the transaction was funded using cash on hand and borrowings under our revolving
credit facility.
Our financial results for any periods ended prior to November 3, 2020 do not
include the financial results of ANZ and are therefore not directly comparable.
Company Overview
In the first quarter of 2021, we changed the way management accounts for and
reports financial information relied on by the Chief Operating Decision Maker
("CODM") to evaluate performance and allocate the resources of the Company. Our
revised organizational structure includes the following three operating and
reportable segments: (1) U.S. Higher Education ("USHE"), which is primarily
comprised of SEI's previous Strayer University and Capella University segments
and is focused on providing flexible and affordable certificate and degree
programs to working adults; (2) Alternative Learning, a new segment that is
primarily focused on developing and maintaining relationships with large
employers to build employee education benefits programs; and (3) Australia/New
Zealand, which provides certificate and degree programs in Australia and New
Zealand. The Australia/New Zealand segment was not changed as a result of the
reorganization. We began reporting under the new segment structure in the first
quarter of 2021, and we have restated the results for the prior period to
conform to the current period presentation.
U.S. Higher Education Segment
•The USHE segment provides flexible and affordable certificate and degree
programs to working adults primarily through Strayer University and Capella
University, including the Jack Welch Management Institute MBA, which is a unit
of
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Strayer University. USHE also operates non-degree web and mobile application
development courses through Hackbright Academy and DevMountain, the latter being
a unit of Strayer University.
•Strayer University is accredited by the Middle States Commission on Higher
Education and Capella University is accredited by the Higher Learning
Commission, both institutional accrediting agencies recognized by the Department
of Education. The USHE segment provides academic offerings both online and in
physical classrooms, helping working adult students develop specific
competencies they can apply in their workplace.
•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 first quarter, USHE enrollment decreased 7% to 89,482 compared to 96,537
for the same period in 2020.
Alternative Learning Segment
•The Alternative Learning segment is primarily focused on developing and
maintaining relationships with large 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 Alternative Learning division are an important source of
student enrollment for Capella University and Strayer University, and the
majority of the revenue attributed to the Alternative Learning division is
driven by the volume of enrollment derived from these employer relationships.
Enrollments attributed to the Alternative Learning segment are determined based
on a student's employment status and the existence of a corporate partnership
arrangement with SEI. All enrollments attributed to the Alternative Learning
division, continue to be attributed to the division until the student graduates
or withdraws, even if his or her employment status changes or if the partnership
contract expires.
•In the first quarter, employer affiliated enrollment as a percentage of USHE
enrollment was 20.7% compared to 17.0% for the same period in 2020.
•Sophia Learning provides low-cost online general education courses recommended
by the American Council on Education for credit to other colleges and
universities.
•Workforce Edge is a platform which provides employers a full-service education
benefits administration solution.
•Digital Enablement Partnerships provide online course delivery and support
capabilities related to online course delivery to other higher education
institutions.
Australia/New Zealand
•Torrens University is the only investor-funded university in Australia. Torrens
University offers undergraduate and graduate courses primarily in five fields of
study: business, design and creative technology, health, hospitality, and
education. Courses are offered both online and on physical campuses. Torrens
University is registered with the Tertiary Education Quality and Standards
Agency ("TEQSA"), the regulator for higher education providers and universities
throughout Australia, as an Australian University that is authorized to
self-accredit its courses.
•Think Education is a vocational registered training organization and accredited
higher education provider in Australia. Think Education delivers education at
several campuses in Sydney, Melbourne, Brisbane, and Adelaide as well as through
online study. Think Education and its colleges are accredited in Australia by
the TEQSA and the Australian Skills Quality Authority, the regulator for
vocational education and training organizations that operate in Australia
•Media Design School is a private tertiary institution for creative and
technology qualifications in New Zealand. Media Design School offers
industry-endorsed courses in 3D animation and visual effects, game art, game
programming, graphic and motion design, digital media artificial intelligence,
and creative advertising. Media Design School is accredited in New Zealand by
the New Zealand Qualifications Authority, responsible for the quality assurance
of non-university tertiary training providers.
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•In the first quarter, Australia/New Zealand enrollment increased 12% to 21,469
compared to 19,192 for the same period in 2020.
We believe we have the right operating strategies in place to provide the most
direct path between learning and employment for our students. We are constantly
innovating to differentiate ourselves in our markets and drive growth by
supporting student success, producing affordable degrees, optimizing our
comprehensive marketing strategy, serving a broader set of our students'
professional needs, and establishing new growth platforms. The talent of our
faculty and employees, supported by market leading technology, enable these
strategies. We believe our strategy will allow us to continue to deliver high
quality, affordable education, resulting in continued growth over the long-term.
We will continue to invest in this strategy to strengthen the foundation and
future of our business.

Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates and judgments related to its allowance for
credit losses; income tax provisions; the useful lives of property and equipment
and intangible assets; redemption rates for scholarship programs and valuation
of contract liabilities; fair value of right-of-use lease assets for facilities
that have been vacated; incremental borrowing rates; valuation of deferred tax
assets, goodwill, and intangible assets; forfeiture rates and achievability of
performance targets for stock-based compensation plans; and accrued expenses.
Management bases its estimates and judgments on historical experience and
various other factors and assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
regarding the carrying values of assets and liabilities that are not readily
apparent from other sources. Management regularly reviews its estimates and
judgments for reasonableness and may modify them in the future. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes that the following critical accounting policies are its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue recognition - Like many traditional institutions, Strayer University and
Capella University offer educational programs primarily on a quarter system
having four academic terms, which generally coincide with our quarterly
financial reporting periods. Torrens University offers the majority of its
education programs on a trimester system having three primary academic terms,
which all occur within the calendar year. Approximately 96% of our revenues
during the three months ended March 31, 2021 consisted of tuition revenue.
Capella University offers monthly start options for new students, who then
transition to a quarterly schedule. Capella University also offers its FlexPath
program, which allows students to determine their 12-week billing session
schedule after they complete their first course. Tuition revenue for all
students is recognized ratably over the course of instruction as the
universities 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, accommodation revenue, food and
beverage fees, and other income, which are all recognized when earned. In
accordance with ASC 606, materials provided to students in connection with their
enrollment in a course are recognized as revenue when control of those materials
transfers to the student. At the start of each academic term or program, a
contract liability is recorded for academic services to be provided, and a
tuition receivable is recorded for the portion of the tuition not paid in
advance. Any cash received prior to the start of an academic term or program is
recorded as a contract liability.
Students at Strayer University and Capella University finance their education in
a variety of ways, and historically about three quarters of our students have
participated in one or more financial aid program provided through Title IV of
the Higher Education Act. In addition, many of our working adult students
finance their own education or receive full or partial tuition reimbursement
from their employers. Those students who are veterans or active duty military
personnel have access to various additional government-funded educational
benefit programs.
In Australia, domestic students attending an ANZ institution finance their
education themselves or by taking a loan through the government's Higher
Education Loan Program or Vocational Student Loan Program. In New Zealand,
domestic students may utilize government loans to fund tuition, and in addition
may be eligible for a period of "fees free" study funded by the government.
International students attending an ANZ institution are not eligible for funding
from the Australian or New Zealand government.
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A typical class is offered in weekly increments over a six- to twelve-week
period, depending on the university and course type, and is followed by an exam.
Student attendance is based on physical presence in class for on-ground classes.
For online classes, attendance consists of logging into one's course shell and
performing an academically-related activity (e.g., engaging in a discussion post
or taking a quiz).
If a student withdraws from a course prior to completion, a portion of the
tuition may be refundable depending on when the withdrawal occurs. We use the
student's withdrawal date or last date of attendance for this purpose. Our
specific refund policies vary across the universities and non-degree programs.
For students attending Strayer University, our refund policy typically permits
students who complete less than half of a course to receive a partial refund of
tuition for that course. For students attending Capella University, our refund
policy varies based on course format. GuidedPath students are allowed a 100%
refund through the first five days of the course, a 75% refund from six to
twelve days, and 0% refund for the remainder of the period. FlexPath students
receive a 100% refund through the 12th calendar day of the course for their
first billing session only and a 0% refund after that date and for all
subsequent billing sessions. For domestic students attending an ANZ institution,
refunds are typically provided to students that withdraw within the first 20% of
a course term. For international students attending an ANZ institution, refunds
are provided to students that withdraw prior to the course commencement date. In
limited circumstances refunds to student attending an ANZ institution may be
granted after these cut-offs subject to an application for special consideration
by the student and approval of that application by the institution. Refunds
reduce the tuition revenue that otherwise would have been recognized for that
student. Since the academic terms coincide with our financial reporting periods
for most programs, nearly all refunds are processed and recorded in the same
quarter as the corresponding revenue. For certain programs where courses may
overlap a quarter-end date, we estimate a refund or withdrawal rate and do not
recognize the related revenue until the uncertainty related to the refund is
resolved. The portion of tuition revenue refundable to students may vary based
on the student's state of residence.
For students who withdraw from all their courses during the period of
instruction, we reassess collectibility 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 U.S. students who receive funding under Title IV and withdraw, funds are
subject to return provisions as defined by the Department of Education. The
university is responsible for returning Title IV funds to the Department and
then may seek payment from the withdrawn student of prorated tuition or other
amounts charged to him or her. Loss of financial aid eligibility during an
academic term is rare and would normally coincide with the student's withdrawal
from the institution. When a student withdraws from all of his or her courses,
we consider it to be a contract modification and reassess collectibility at that
time. As a result of this reassessment, we cease revenue recognition as our
historical experience has shown that amounts outstanding for this group of
students are not collectible. In Australia and New Zealand, government funding
for eligible students is provided directly to the institution on an estimated
basis annually. The amount of government funding provided is based on a
course-by-course forecast of enrollments that the institution submits for the
upcoming calendar year. Using the enrollment forecast provided as well as the
requesting institution's historical enrollment trends, the government approves a
fixed amount, which is then funded to the institution evenly on a monthly basis.
Periodic reconciliation and true-ups are undertaken between the relevant
government authority and the institution based on actual eligible enrollments,
which may result in a net amount being due to or from the government.
Students at Strayer University registering in credit-bearing courses in any
undergraduate program beginning in the summer 2013 term or graduate program
beginning in the summer 2020 term (fiscal third quarter), and subsequent terms
qualify for the Graduation Fund, whereby qualifying students earn tuition
credits that are redeemable in the final year of a student's course of study if
he or she successfully remains in the program. Students must meet all of Strayer
University's admission requirements and not be eligible for any previously
offered scholarship program. 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 any Graduation Fund credits earned to
date, but may earn and accumulate new credits if the student is reinstated or
readmitted by Strayer University in the future. In response to the COVID-19
pandemic, Strayer University is temporarily allowing students to miss two
consecutive terms without losing their Graduation Fund credits. In their final
academic year, qualifying students will receive one free course for every three
courses that the student successfully completed in prior years. Strayer
University's performance obligation associated with free courses that may be
redeemed in the future is valued based on a systematic and rational allocation
of the cost of honoring the benefit earned to each of the underlying revenue
transactions that result in progress by the student toward earning the benefit.
The estimated value of awards under the Graduation Fund that will be recognized
in the future is based on historical experience of students' persistence in
completing their course of study and earning a degree and the tuition rate in
effect at the time it was associated with the transaction. Estimated redemption
rates of eligible students vary based on their term of enrollment. As of
March 31, 2021, we had deferred $54.4 million
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for estimated redemptions earned under the Graduation Fund, as compared to $53.3
million at December 31, 2020. 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
first quarter of 2021, our bad debt expense was 3.7% of revenue, compared to
4.2% for the same period in 2020. A change in our allowance for credit losses of
1% of gross tuition receivable as of March 31, 2021 would have changed our
income from operations by approximately $1.1 million.
Business combinations - We account for business combinations using the
acquisition method of accounting, which requires that once control is obtained,
the purchase price be allocated to all tangible assets and identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
values as of the acquisition date. Any excess purchase price over the fair value
of the net assets acquired is recorded as goodwill. The determination of the
fair value of assets acquired and liabilities assumed requires many estimates
and assumption with respect to the timing and amounts of cash flow projections,
revenue growth rates, earnings before interest and taxes margins, student
attrition rates, royalty rates, discount rates, and useful lives. These
estimates are based on assumptions believed to be reasonable, and when
appropriate, include assistance from independent third-party valuation firms.
During the measurement period, which is up to one year from the acquisition
date, we may record adjustments to the assets acquired and liabilities assumed,
with corresponding offsets to goodwill. We applied the acquisition method of
accounting to our acquisition of ANZ in 2020. Refer to Note 3, Acquisition of
Torrens University and Associated Assets in Australia and New Zealand, within
the footnotes to the condensed consolidated financial statements for additional
information.
Goodwill and intangible assets - Goodwill represents the excess of the purchase
price of an acquired business over the amount assigned to the assets acquired
and liabilities assumed. Indefinite-lived intangible assets, which include trade
names, are recorded at fair market value on their acquisition date. At the time
of acquisition, goodwill and indefinite-lived intangible assets are allocated to
reporting units. Management identifies its reporting units by assessing whether
the components of its operating segments constitute businesses for which
discrete financial information is available and management regularly reviews the
operating results of those components. Goodwill and indefinite-lived intangible
assets are assessed at least annually for impairment. No events or circumstances
occurred in the three months ended March 31, 2021 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 month periods ended March 31, 2021.
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 month periods ended March 31, 2021.
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.
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Results of Operations
As discussed above, we completed our acquisition of ANZ on November 3, 2020. Our
results of operations for the three months ended March 31, 2021 include the
results of ANZ, but the results of operations for the three months ended
March 31, 2020 do not include the financial results of ANZ. Accordingly, the
financial results of each period presented are not directly comparable.
In the first quarter of 2021, we generated $290.3 million in revenue compared to
$265.3 million in 2020. Our income from operations was $12.0 million for the
first quarter of 2021 compared to $44.0 million in 2020 primarily due to lower
earnings in the USHE segment, the inclusion of ANZ, which generated a loss from
operations in the quarter, and restructuring costs incurred in 2021. Net income
in the first quarter of 2021 was $9.6 million compared to $35.2 million for the
same period in 2020. Diluted earnings per share was $0.40 compared to $1.60 for
the same period in 2020.
In the accompanying analysis of financial information for 2021 and 2020, we use
certain financial measures including Adjusted Revenue, Adjusted Total Costs and
Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted
Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings
per Share that are not required by or prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). These
measures, which are considered "non-GAAP financial measures" under SEC rules,
are defined by us to exclude the following:
•purchase accounting adjustments to record acquired contract liabilities at fair
value as a result of our acquisition of Torrens University and associated assets
in Australia and New Zealand and to record amortization and depreciation expense
related to intangible assets and software assets acquired through our merger
with Capella Education Company and our acquisition of Torrens University and
associated assets in Australia and New Zealand;
•transaction and integration expenses associated with our merger with Capella
Education Company and our acquisition of Torrens University and associated
assets in Australia and New Zealand;
•severance costs and right-of-use lease asset impairment charges associated with
our restructuring;
•income from partnership and other investments that are not part of our core
operations;
•discrete tax adjustments related to stock-based compensation and other
adjustments; and
•foreign currency exchange impact related to translating foreign currency
results at a constant exchange rate.
When considered together with GAAP financial results, we believe these measures
provide management and investors with an additional understanding of our
business and operating results, including underlying trends associated with our
ongoing operations.
Non-GAAP financial measures are not defined in the same manner by all companies
and may not be comparable with other similarly titled measures of other
companies. Non-GAAP financial measures may be considered in addition to, but not
as a substitute for or superior to, GAAP results. A reconciliation of these
measures to the most directly comparable GAAP measures is provided below.
Adjusted income from operations was $52.9 million in the first quarter of 2021
compared to $63.1 million in 2020. Adjusted net income was $37.0 million in the
first quarter of 2021 compared to $46.5 million in 2020, and adjusted diluted
earnings per share was $1.53 in the first quarter of 2021 compared to $2.11 in
2020.
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Table of Contents 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 ended March 31, 2021


                                                                                                                Non-GAAP Adjustments
                                                                              Merger and
                            As Reported         Purchase accounting           integration            Restructuring           Income from other                Tax                 Foreign exchange           As Adjusted
                              (GAAP)               adjustments(1)              costs(2)                 costs(3)               investments(4)            adjustments(5)            adjustments(6)            (Non-GAAP)
Revenues                  $    290,336          $           2,223          $            -          $             -          $               -          $             -          $          (2,019)         $    290,540
Total costs and expenses  $    278,336          $         (19,407)         $       (1,012)         $       (18,267)         $               -          $             -          $          (2,041)         $    237,609
Income from operations    $     12,000          $          21,630          $        1,012          $        18,267          $               -          $             -          $              22          $     52,931
Operating margin                     4.1%                                                                                                                                                                            18.2%
Income before income
taxes                     $     14,167          $          21,630          $        1,012          $        18,267          $          (2,783)         $             -          $              22          $     52,315
Net income                $      9,577          $          21,630          $        1,012          $        18,267          $          (2,783)         $       (10,688)         $              22          $     37,037

Diluted earnings per
share                     $       0.40                                                                                                                                                                     $       1.53
Weighted average diluted
shares outstanding                 24,153                                                                                                                                                                           24,153

Reconciliation of Reported to Adjusted Results of Operations for the three months ended March 31, 2020


                                                                                                                Non-GAAP Adjustments
                                                                              Merger and
                            As Reported         Purchase accounting           integration             Restructuring             Income from other                Tax                Foreign exchange          As Adjusted
                              (GAAP)               adjustments(1)              costs(2)                  costs(3)                investments(4)             adjustments(5)           adjustments(6)           (Non-GAAP)
Revenues                  $    265,302          $               -          $            -          $               -          $                -          $             -          $             -          $    265,302
Total costs and expenses  $    221,343          $         (15,417)         $       (3,764)         $               -          $                -          $             -          $             -          $    202,162
Income from operations    $     43,959          $          15,417          $        3,764          $               -          $                -          $             -          $             -          $     63,140
Operating margin                    16.6%                                                                                                                                                                             23.8%
Income before income
taxes                     $     46,082          $          15,417          $        3,764          $               -          $             (254)         $             -          $             -          $     65,009
Net income                $     35,239          $          15,417          $        3,764          $               -          $             (254)         $        (7,685)         $             -          $     46,481

Diluted earnings per
share                     $       1.60                                                                                                                                                                      $       2.11
Weighted average diluted
shares outstanding                 22,071                                                                                                                                                                            22,071

__________________________________________________________________________________________


(1)Reflects a purchase accounting adjustment to record acquired contract
liabilities at fair value as a result of the Company's acquisition of Torrens
University and associated assets in Australia and New Zealand, and amortization
and depreciation expense of intangible assets and software assets acquired
through the Company's merger with Capella Education Company and the Company's
acquisition of Torrens University and associated assets in Australia and New
Zealand.
(2)Reflects transaction and integration expenses associated with the Company's
merger with Capella Education Company and the Company's acquisition of Torrens
University and associated assets in Australia and New Zealand.
(3)Reflects severance costs and right-of-use lease asset impairment charges
associated with the Company's restructuring.
(4)Reflects income 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% and 29.2% for the three months ended
March 31, 2020 and 2021, respectively.
(6)Reflects foreign currency exchange impact related to translating foreign
currency results at a constant exchange rate of 0.743 Australian Dollars to U.S.
Dollars, which is the 2021 budget rate .
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Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31,
2020
Revenues. Consolidated revenue increased to $290.3 million, compared to $265.3
million in the same period in the prior year, primarily due to the inclusion of
ANZ. In the USHE segment for the three months ended March 31, 2021, total
enrollment decreased 7% to 89,482 from 96,537 for the same period in 2020. USHE
segment revenue decreased 11.3% to $226.5 million compared to $255.5 million in
2020 as a result of declines in enrollment and revenue-per-student due to higher
scholarships and discounts we are offering in response to the COVID-19 pandemic.
Near term revenue growth in the USHE segment is expected to continue to be
impacted negatively by the ongoing COVID-19 pandemic with weaker demand for
enrollments and higher scholarships and discounts. In the Alternative Learning
segment, revenue for the three months ended March 31, 2021 increased 27.9% to
$12.5 million compared to $9.8 million in 2020 as a result of rapid growth in
Sophia Learning, and increasing employer affiliated enrollment. Revenues for the
Australia/New Zealand segment were $51.3 million and included a $2.2 million
purchase accounting reduction related to contract liabilities acquired in the
acquisition.
Instructional and support costs. Consolidated instructional and support costs
increased to $152.8 million, compared to $132.9 million in the same period in
the prior year, principally due to the inclusion of instructional and support
costs related to ANZ, partially offset by cost savings implemented as a result
of the impact of the COVID-19 pandemic, which included lower expenses associated
with travel and facilities costs, as well as savings from the employee
restructuring plan implemented in the third quarter of 2020. Consolidated
instructional and support costs as a percentage of revenues increased to 52.6%
in the first quarter of 2021 from 50.1% in the first quarter of 2020.
General and administration expenses. Consolidated general and administration
expenses increased to $86.8 million in the first quarter of 2021 compared to
$69.2 million in the prior year, principally due to the inclusion of general and
administration expenses related to ANZ, as well as increased investments in
branding initiatives and partnerships with brand ambassadors. Consolidated
general and administration expenses as a percentage of revenues increased to
29.9% in the first quarter of 2021 from 26.1% in the first quarter of 2020.
Amortization of intangible assets. Amortization of intangible assets increased
to $19.4 million in the first quarter of 2021 compared to $15.4 million in 2020,
due to the additional amortization expense of intangible assets acquired in the
acquisition of ANZ in November 2020.
Merger and integration costs. Merger and integration costs decreased to $1.0
million in the first quarter of 2021 compared to $3.8 million for the same
period in 2020, as a result of lower expenses for integration support services
and severance costs related to the merger with Capella Education Company,
partially offset by transaction and integration expenses associated with the
acquisition of ANZ.
Restructuring costs. Restructuring costs primarily include impairments of
right-of-use lease assets and fixed assets associated with vacating leased space
based on an assessment of our real estate portfolio completed in the quarter
ended March 31, 2021, as well as severance and other personnel-related expenses
from voluntary and involuntary employee terminations in connection with a
restructuring plan implemented in 2020.

Income from operations. Consolidated income from operations decreased to $12.0
million in the first quarter of 2021 compared to $44.0 million in the first
quarter of 2020, principally due to lower earnings in the USHE segment, the
inclusion of ANZ, which generated a loss from operations in the quarter, and
restructuring costs incurred in 2021. USHE segment income from operations
decreased 15.8% to $47.8 million in the first quarter of 2021, compared to $56.7
million in the first quarter of 2020, primarily due to lower enrollments and
increased scholarship offerings during the COVID-19 pandemic. In the Alternative
Learning segment, income from operations for the three months ended March 31,
2021 decreased 8.1% to $5.9 million compared to $6.4 million in 2020 as a result
of increased investment in outreach to corporate partners. Loss from operations
for the Australia/New Zealand segment was $2.9 million primarily driven by a
$2.2 million purchase accounting reduction related to contract liabilities
acquired in the acquisition.
Other income. Other income increased to $2.2 million in the first quarter of
2021 compared to $2.1 million in the first quarter of 2020, as a result of
investment income in our limited partnership investments, offset by an increase
in interest expense due to the $141.8 million balance outstanding on our
revolving credit facility which was used to partially fund the ANZ acquisition
in November 2020. We incurred $0.9 million of interest expense in the three
months ended March 31, 2021 compared to $0.2 million in 2020.
Provision for income taxes. Income tax expense was $4.6 million in the first
quarter of 2021, compared to $10.8 million in the first quarter of 2020. Our
effective tax rate for the quarter was 32.4%, compared to 23.5% for the same
period in 2020. The effective tax rate in 2020 includes higher windfall tax
benefits recognized through share-based payment arrangements.
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Net income. Net income decreased to $9.6 million in the first quarter of 2021
compared to $35.2 million in the first quarter of 2020 due to the factors
discussed above.
Liquidity and Capital Resources
At March 31, 2021, we had cash, cash equivalents, and marketable securities of
$274.0 million compared to $225.3 million at December 31, 2020 and $506.3
million at March 31, 2020. At March 31, 2021, most of our cash was held in
demand deposit accounts at high credit quality financial institutions.

We are party to a credit facility (the "Amended Credit Facility"), which
provides for a senior secured revolving credit facility (the "Revolving Credit
Facility") in an aggregate principal amount of up to $350 million. The Amended
Credit Facility provides us with an option, subject to obtaining additional loan
commitments and satisfaction of certain conditions, to increase the commitments
under the Revolving Credit Facility or establish one or more incremental term
loans (each, an "Incremental Facility") in an amount up to the sum of (x) the
greater of (A) $300 million and (B) 100% of the Company's consolidated EBITDA
(earnings before interest, taxes, depreciation, amortization, and noncash
charges, such as stock-based compensation) calculated on a trailing four-quarter
basis and on a pro forma basis, and (y) if such Incremental Facility is incurred
in connection with a permitted acquisition or other permitted investment, any
amounts so long as the Company's leverage ratio (calculated on a trailing
four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. In
addition, the Amended Credit Facility provides for a subfacility for borrowings
in certain foreign currencies in an amount equal to the U.S. dollar equivalent
of $150 million. Borrowings under the Revolving Credit Facility bear interest at
a per annum rate equal to LIBOR or a base rate, plus a margin ranging from 1.50%
to 2.00%, depending on our leverage ratio. An unused commitment fee ranging from
0.20% to 0.30% per annum, depending on our leverage ratio, accrues on unused
amounts. We were in compliance with all applicable covenants related to the
Amended Credit Facility as of March 31, 2021. At March 31, 2021, we had $141.8
million outstanding on our Revolving Credit Facility. We had no borrowings
outstanding as of March 31, 2020. During the three months ended March 31, 2021
and 2020, we paid $0.7 million and $0.1 million, respectively of interest and
unused commitment fees related to our Revolving Credit Facility.

Our net cash provided by operating activities for the three months ended
March 31, 2021 was $78.8 million, compared to $68.7 million for the same period
in 2020. The increase in net cash from operating activities was largely driven
by the inclusion of ANZ.

Capital expenditures decreased to $12.7 million for the three months ended March 31, 2021, compared to $14.3 million for the same period in 2020, due to the timing of capital projects.



The Board of Directors declared a regular, quarterly cash dividend of $0.60 per
share of common stock in February 2021. During the three months ended March 31,
2021, we paid a total of $14.8 million in cash dividends on our common stock.
During the three months ended March 31, 2021, we did not repurchase any shares
of common stock on the open market under our repurchase program. As of March 31,
2021, we had $250.0 million of share repurchase authorization remaining to use
through December 31, 2021.
For the first quarter of 2021 and 2020, bad debt expense as a percentage of
revenue was 3.7% and 4.2%, 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
at March 31, 2021 and 2020. We also hold marketable securities, which primarily
include tax-exempt municipal securities and corporate debt securities. During
the three months ended March 31, 2021 and 2020, we earned interest income of
$0.3 million and $2.1 million, respectively.

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