STRATEGIC EDUCATION, INC. The following discussion and analysis of our financial condition and results of operations is a supplement to and should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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 our acquisition of Torrens University and associated
assets in Australia and New Zealand , the risk that the benefits of our
acquisition of Torrens University and associated assets in Australia and New
Zealand may not be fully realized or may take longer to realize than expected,
the risk that our acquisition of Torrens University and associated assets in
Australia and New Zealand may not advance our business strategy and growth
strategy, risks related 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. You should not put undue reliance on any
forward-looking statements. 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, theSecurities and Exchange Commission . BackgroundStrategic 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 subsidiariesStrayer University andCapella University , both accredited post-secondary institutions of higher education located inthe United States , andTorrens University , an accredited post-secondary institution of higher education located inAustralia . Our operations emphasize relationships through our Education Technology Services segment with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. 29
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Company Response to COVID-19
The ongoing COVID-19 pandemic has caused significant volatility and disruption tothe 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 theCenters for Disease Control and Prevention . Specifically, we instituted a work-from-home policy for the vast majority of our workforce, closed physical campus locations, moved our on-ground courses atStrayer University online, postponed large events such as graduation ceremonies, and prohibited non-essential employee travel. As guidance has evolved, we have begun to reopen campus and office locations and permit business travel, after instituting a mandatory vaccination policy for all employees who may be required to be on-site at a Company facility or at a Company-sponsored event, subject to medical and religious accommodations (any employee receiving an accommodation is required to test at least weekly before being on-site). 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 pandemic. 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. Our restructuring efforts have also included the consolidation of underutilized facilities in response to changes in enrollment trends and as a result of our work-from-home policies. As the pandemic has continued, we have seen sustained weakness in demand, especially inthe United States , where total enrollment in ourU.S. Higher Education segment declined 13% in the first quarter of 2022, compared to the same period in 2021. Enrollment in ANZ also has been impacted by the pandemic and the related closure of international borders inAustralia and New Zealand .
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.
Company Overview
As of
•The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily throughStrayer University andCapella University , including the Jack Welch Management Institute MBA, which is a unit ofStrayer University . USHE also operates non-degree web and mobile application development courses throughHackbright Academy and Devmountain, which are units ofStrayer University . •Strayer University is accredited by theMiddle States Commission on Higher Education andCapella University is accredited by theHigher Learning Commission , both higher education institutional accrediting agencies recognized by theDepartment of Education . The USHE segment provides academic offerings both online and in physical classrooms, helping working adult students develop specific competencies they can apply in their workplace.
•In the first quarter of 2022, USHE enrollment decreased 13% to 78,172 compared to 89,482 for the same period in 2021.
•Trailing 4-quarter student persistence within USHE was 86.8% in the fourth quarter of 2021 compared to 86.7% for the same period in 2020. Student persistence is calculated as the rate of students continuing from one quarter to the next, adjusted for graduates, on a trailing 4-quarter basis. Student persistence is reported one quarter in arrears. The table below summarizes USHE trailing 4-quarter student persistence for the past 8 quarters. Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 87.2 % 86.6 % 86.8 % 86.7 % 86.5 % 87.0 % 86.9 % 86.8 %
Education Technology Services Segment
•Our Education Technology Services segment is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. The employer relationships developed by the Education Technology Services division are an important source of student enrollment forStrayer University andCapella University , and the majority of the revenue attributed to the Education Technology Services division is driven by the volume of enrollment 30
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derived from these employer relationships. Enrollments attributed to the Education Technology Services segment are determined based on a student's employment status and the existence of a corporate partnership arrangement with SEI. All enrollments attributed to the Education Technology Services division continue to be attributed to the division until the student graduates or withdraws, even if his or her employment status changes or if the partnership contract expires.
•In the first quarter of 2022, employer affiliated enrollment as a percentage of USHE enrollment was 23.0% compared to 20.7% for the same period in 2021.
•Education Technology Services also supports employer partners through Workforce Edge, a platform which provides employers a full-service education benefits administration solution, andSophia Learning , which enables lower cost education benefits programs through the use of low-cost online general education courses recommended by theAmerican Council on Education for credit at other colleges and universities.Australia /New Zealand Segment •Torrens University is the only investor-funded university inAustralia .Torrens University offers undergraduate, graduate, higher degree by research, and specialized degree courses primarily in five fields of study: business, design and creative technology, health, hospitality, and education. Courses are offered both online and at physical campuses.Torrens University is registered with theTertiary Education Quality and Standards Agency ("TEQSA"), the regulator for higher education providers and universities throughoutAustralia , as anAustralian University that is authorized to self-accredit its courses. •Think Education is a vocational registered training organization and accredited higher education provider inAustralia .Think Education delivers education at several campuses inSydney ,Melbourne ,Brisbane , andAdelaide as well as through online study.Think Education and its colleges are accredited inAustralia by the TEQSA and theAustralian Skills Quality Authority , the regulator for vocational education and training organizations that operate inAustralia . •Media Design School is a private tertiary institution for creative and technology qualifications inNew 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 inNew Zealand by theNew Zealand Qualifications Authority , the organization responsible for the quality assurance of non-university tertiary training providers.
•In the first quarter of 2022,
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 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. 31
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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.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 endedMarch 31, 2022 consisted of tuition revenue.Capella University offers monthly start options for new students, who then transition to a quarterly schedule.Capella University also offers its FlexPath program, which allows students to determine their 12-week billing session schedule after they complete their first course. Tuition revenue for all students is recognized ratably over the course of instruction as the universities provide academic services, whether delivered in person at a physical campus or online. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts. The universities also derive revenue from other sources such as textbook-related income, certificate revenue, certain academic fees, licensing revenue, accommodation revenue, food and beverage fees, and other income, which are all recognized when earned. In accordance with ASC 606, materials provided to students in connection with their enrollment in a course are recognized as revenue when control of those materials transfers to the student. At the start of each academic term or program, a contract liability is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. Students atStrayer University andCapella University finance their education in a variety of ways, and historically about 75% of our students have participated in one or more financial aid program provided through Title IV of the Higher Education Act. In addition, many of our working adult students finance their own education or receive full or partial tuition reimbursement from their employers. Those students who are veterans or active duty military personnel have access to various additional government-funded educational benefit programs. InAustralia , 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. InNew 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 orNew Zealand government. 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 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 students attendingCapella 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. ForU.S. 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. InAustralia and New Zealand , government funding for eligible students is provided directly to the institution on an estimated basis annually. The 32
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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 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 ofStrayer 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 byStrayer University in the future. In response to the COVID-19 pandemic,Strayer University temporarily allowed students to miss three consecutive terms without losing theirGraduation 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 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 ofMarch 31, 2022 , we had deferred$51.2 million for estimated redemptions earned under theGraduation Fund , as compared to$52.0 million atDecember 31, 2021 . Each quarter, we assess our assumptions underlying our estimates for persistence and estimated redemptions based on actual experience. To date, any adjustments to our estimates have not been material. However, if actual persistence or redemption rates change, adjustments to the reserve may be necessary and could be material. Tuition receivable - We record estimates for our allowance for credit losses related to tuition receivable from students primarily based on our historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of recoveries. Our experience is that payment of outstanding balances is influenced by whether the student returns to the institution, as we require students to make payment arrangements for their outstanding balances prior to enrollment. Therefore, we monitor outstanding tuition receivable balances through subsequent terms, increasing the reserve on such balances over time as the likelihood of returning to the institution diminishes and our historical experience indicates collection is less likely. We periodically assess our methodologies for estimating credit losses in consideration of actual experience. If the financial condition of our students were to deteriorate based on current or expected future events resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. For the first quarter of 2022, our bad debt expense was 2.8% of revenue, compared to 3.7% for the same period in 2021. A change in our allowance for credit losses of 1% of gross tuition receivable as ofMarch 31, 2022 would have changed our income from operations by approximately$1.1 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 months endedMarch 31, 2022 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 period endedMarch 31, 2022 . Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. No impairment charges related to finite-lived intangible assets were recorded during the three month period endedMarch 31, 2022 . Other estimates - We record estimates for certain of our accrued expenses and for income tax liabilities. We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to 33
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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 first quarter of 2022, we generated$258.9 million in revenue compared to$290.3 million in 2021. Our income from operations was$13.4 million for the first quarter of 2022 compared to$12.0 million in 2021, primarily due to lower restructuring costs and amortization expense of intangible assets, partially offset by lower earnings in the USHE segment. Net income in the first quarter of 2022 was$7.0 million compared to$9.6 million for the same period in 2021. Diluted earnings per share was$0.29 compared to$0.40 for the same period in 2021. In the accompanying analysis of financial information for 2022 and 2021, 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 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: •purchase accounting adjustments to record acquired contract liabilities at fair value as a result of our acquisition ofTorrens University and associated assets inAustralia and New Zealand and to record amortization and depreciation expense related to intangible assets and software assets acquired through our merger withCapella Education Company and our acquisition ofTorrens University and associated assets inAustralia and New Zealand ;
•transaction and integration expenses associated with our merger with
•severance costs and right-of-use lease asset impairment charges associated with our restructuring;
•income/loss from partnership and other investments that are not part of our core operations;
•discrete tax adjustments related to stock-based compensation and other adjustments; and
To illustrate currency impacts to operating results, Adjusted Revenue, Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings per Share for the three months endedMarch 31, 2022 are also presented on a constant currency basis utilizing an exchange rate of0.7728 Australian Dollars toU.S. Dollars, which was the average exchange rate for the same period in 2021. When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying trends associated with our ongoing operations. Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures may be considered in addition to, but not as a substitute for or superior to, GAAP results. A reconciliation of these measures to the most directly comparable GAAP measures is provided below. Adjusted results for 2021 exclude foreign currency exchange impacts and are therefore not directly comparable to adjusted results previously reported for the three months endedMarch 31, 2021 . Adjusted income from operations was$19.4 million in the first quarter of 2022 compared to$52.9 million in 2021. Adjusted net income was$13.1 million in the first quarter of 2022 compared to$37.0 million in 2021, and adjusted diluted earnings per share was$0.54 in the first quarter of 2022 compared to$1.53 in 2021. 34
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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
Non-GAAP Adjustments
Merger and
As Reported Purchase accounting integration Restructuring Income from other Tax As Adjusted
(GAAP) adjustments(1) costs(2) costs(3) investments(4) adjustments(5) (Non-GAAP)
Revenues $ 290,336 $ 2,223 $ - $ - $ - $ - $ 292,559
Total costs and expenses $ 278,336 $ (19,407) $ (1,012) $ (18,267) $ - $ - $ 239,650
Income from operations $ 12,000 $ 21,630 $ 1,012 $ 18,267 $ - $ - $ 52,909
Operating margin 4.1% 18.1%
Income before income taxes
$ 1,012 $ 18,267 $ (2,783) $ -$ 52,293 Net income$ 9,577 $ 21,630$ 1,012 $ 18,267 $ (2,783)$ (10,688) $ 37,015 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 endedMarch 31, 2022 Non-GAAP Adjustments Merger and As Reported Purchase accounting integration Restructuring Loss from other Tax As Adjusted (GAAP) adjustments(1) costs(2) costs(3) investments(4) adjustments(5) (Non-GAAP) Revenues$ 258,855 $ - $ - $ - $ - $ -$ 258,855 Total costs and expenses$ 245,414 $ (3,738) $ (410)$ (1,858) $ - $ -$ 239,408 Income from operations$ 13,441 $ 3,738 $ 410 $ 1,858 $ - $ -$ 19,447 Operating margin 5.2% 7.5% Income before income taxes$ 12,270 $ 3,738 $ 410 $ 1,858 $ 387 $ -$ 18,663 Net income$ 7,029 $ 3,738 $ 410 $ 1,858 $ 387 $ (358)$ 13,064 Diluted earnings per share$ 0.29 $ 0.54 Weighted average diluted shares outstanding 24,114 24,114
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(1)Reflects a purchase accounting adjustment to record acquired contract liabilities at fair value as a result of the Company's acquisition ofTorrens University and associated assets inAustralia and New Zealand , and amortization and depreciation expense of intangible assets and software assets acquired through the Company's merger withCapella Education Company and the Company's acquisition ofTorrens University and associated assets inAustralia and New Zealand . (2)Reflects transaction and integration expenses associated with the Company's merger withCapella Education Company , including premerger litigation settlement, and the Company's acquisition ofTorrens University and associated assets inAustralia and New Zealand . (3)Reflects severance costs and right-of-use lease asset impairment charges associated with the Company's restructuring. (4)Reflects income/loss recognized from the Company's investments in partnership interests and other investments. (5)Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 30.0% and 29.2% for the three months endedMarch 31, 2022 and 2021, respectively. 35
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The table below presents our adjusted results of operations on a constant
currency basis for the three months ended
As Adjusted with
Constant
As Adjusted Constant currency Currency
(Non-GAAP) adjustment(1) (Non-GAAP)
Revenues $ 258,855 $ 2,886 $ 261,741
Total costs and expenses $ 239,408 $ 3,150 $ 242,558
Income from operations $ 19,447 $ (264) $ 19,183
Operating margin 7.5% 7.3%
Income before income taxes $ 18,663 $ (268) $ 18,395
Net income $ 13,064 $ (210) $ 12,854
Diluted earnings per share $ 0.54 $ 0.53
Weighted average diluted shares outstanding 24,114 24,114
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(1)Reflects an adjustment to translate foreign currency results for the three months endedMarch 31, 2022 at a constant exchange rate of0.7728 Australian Dollars toU.S. Dollars, which was the average exchange rate for the same period in 2021.
Three Months Ended
Revenues. Consolidated revenue decreased to$258.9 million , compared to$290.3 million in the same period in the prior year, primarily due to declines in enrollment. In the USHE segment for the three months endedMarch 31, 2022 , total enrollment decreased 13% to 78,172 from 89,482 for the same period in 2021. USHE segment revenue decreased 13.6% to$195.8 million compared to$226.5 million in 2021 primarily as a result of declines in enrollment. Near term revenue in the USHE segment is expected to continue to be impacted negatively by the ongoing COVID-19 pandemic with weaker demand for enrollments. In theAustralia /New Zealand segment for the three months endedMarch 31, 2022 , total enrollment decreased 4% to 20,575 from 21,469 for the same period in 2021.Australia /New Zealand segment revenue decreased 5.4% to$48.5 million compared to$51.3 million in 2021 as a result of declines in enrollment and revenue-per-student. In the Education Technology Services segment, revenue for the three months endedMarch 31, 2022 increased 16.4% to$14.6 million compared to$12.5 million in 2021 as a result of growth inSophia Learning and higher employer affiliated enrollment. Instructional and support costs. Consolidated instructional and support costs decreased to$144.6 million , compared to$152.8 million in the same period in the prior year, principally due to lower facility costs and bad debt expense. Consolidated instructional and support costs as a percentage of revenues increased to 55.9% in the first quarter of 2022 from 52.6% in the first quarter of 2021. General and administration expenses. Consolidated general and administration expenses increased to$94.8 million in the first quarter of 2022 compared to$86.8 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 36.6% in the first quarter of 2022 from 29.9% in the first quarter of 2021. Amortization of intangible assets. Amortization of intangible assets decreased to$3.7 million in the first quarter of 2022 compared to$19.4 million in 2021, due to the finite-lived intangible assets acquired through the merger withCapella Education Company being fully amortized as of the third quarter of 2021. Merger and integration costs. Merger and integration costs decreased to$0.4 million in the first quarter of 2022 compared to$1.0 million for the same period in 2021, as a result of lower integration expenses associated with the acquisition of ANZ.
Restructuring costs. Restructuring costs decreased to
Income from operations. Consolidated income from operations increased to$13.4 million in the first quarter of 2022 compared to$12.0 million in the first quarter of 2021, principally due to lower restructuring costs and amortization expense of intangible assets, partially offset by lower earnings in the USHE segment. USHE segment income from operations decreased 67.6% to$15.5 million in the first quarter of 2022, compared to$47.8 million in the first quarter of 2021, primarily due to lower enrollments and increased investments in marketing initiatives. In theAustralia /New Zealand segment, loss from operations was$0.7 million in the first quarter of 2022, compared to a$2.9 million loss in the first quarter of 2021, primarily driven by a$2.2 million purchase 36
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accounting reduction in 2021 related to contract liabilities acquired in the acquisition. In the Education Technology Services segment, income from operations for the three months endedMarch 31, 2022 decreased 19.9% to$4.7 million compared to$5.9 million in 2021 as a result of increased investment in outreach to corporate partners, partially offset by growth inSophia Learning and an increase in employer affiliated enrollment. Other income (expense). Other income (expense) decreased to$1.2 million of expense in the first quarter of 2022 compared to$2.2 million of income in the first quarter of 2021, as a result of a decrease in investment income from our limited partnership investments. We incurred$0.9 million of interest expense in the three months endedMarch 31, 2022 and 2021. Provision for income taxes. Income tax expense was$5.2 million in the first quarter of 2022, compared to$4.6 million in the first quarter of 2021. Our effective tax rate for the quarter was 42.7%, compared to 32.4% for the same period in 2021. The increase in the effective tax rate in 2022 was primarily due to a$1.3 million tax shortfall recognized through share-based payment arrangements.
Net income. Net income decreased to
Liquidity and Capital Resources
At
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 theU.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 ofMarch 31, 2022 . As ofMarch 31, 2022 and 2021, we had$141.7 million and$141.8 million , respectively, outstanding under our Revolving Credit Facility. During the three months endedMarch 31, 2022 and 2021, we paid$0.4 million and$0.7 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 endedMarch 31, 2022 was$56.6 million , compared to$78.8 million for the same period in 2021. The decrease in net cash from operating activities was primarily driven by lower earnings in the USHE segment, partially offset by favorable timing of payments of working capital.
Capital expenditures decreased to
The Board of Directors declared a regular, quarterly cash dividend of$0.60 per share of common stock inFebruary 2022 . During the three months endedMarch 31, 2022 , we paid a total of$15.0 million in cash dividends on our common stock. During the three months endedMarch 31, 2022 , we paid$4.0 million to repurchase common shares in the open market under our repurchase program. As ofMarch 31, 2022 , we had$246.0 million of share repurchase authorization remaining to use throughDecember 31, 2022 .
For the first quarter of 2022 and 2021, bad debt expense as a percentage of revenue was 2.8% and 3.7%, 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 atMarch 31, 2022 and 2021. We also hold marketable securities, which primarily include tax-exempt municipal 37
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securities and corporate debt securities. During the three months ended
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