You should read the following discussion in conjunction with "Selected Financial Data," our consolidated financial statements and the notes thereto, the "Cautionary Notice Regarding Forward-Looking Statements," Item 1A entitled "Risk Factors," and the other information appearing elsewhere, or incorporated by reference, in this Annual Report on Form 10-K. Background and OverviewStrategic Education, Inc. ("SEI," "we", "us" or "our") is an education services company that seeks to provide the most direct path between learning and employment through campus-based and online post-secondary education offerings and through programs to develop job-ready skills for high-demand markets. We operate primarily through our wholly-owned subsidiariesStrayer University andCapella University , both accredited post-secondary institutions of higher education located inthe United States , as well asTorrens University , an accredited post-secondary institution of higher education located inAustralia . Our operations 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 global economy. 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. We are taking measures to provide financial relief to our students and employer partners negatively affected by the COVID-19 crisis. Measures include payment flexibility, scholarship opportunities, and other pricing relief. We expect that these measures will enable more students to continue pursuing their education during and after the COVID-19 crisis. In addition, we paused planned 2020 new campus expansion for campus projects that had not yet started, although we completed or executed leases on roughly half of the originally planned eight to twelve new campuses for 2020. In the third quarter of 2020, we began implementing a restructuring plan that includes both voluntary and involuntary employee terminations in an effort to reduce ongoing operating costs to align with changes in enrollment. The headcount reductions are expected to result in a 5% decrease to SEI's total workforce. This restructuring also includes the closure of underutilized campus and corporate office space. Of the planned 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 for the third and fourth quarters. The weakness has been most pronounced atStrayer University , where total enrollments for the third and fourth quarters declined 1% and 9%, respectively. While it is not possible to predict the magnitude or persistence of this deterioration, enrollment weakness that started in 2010, following the recession in 2008, impactedStrayer University's student enrollment for several quarters. Enrollment atCapella University andTorrens University also has been impacted by the pandemic, though not as severely as atStrayer University . As a result of the near-term enrollment trends we have enhanced our cost management efforts to offset lower than expected revenue, and these efforts may continue in 2021. 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 ofTorrens University and related assets inAustralia and New Zealand OnNovember 3, 2020 , we completed the acquisition ofTorrens University and related assets inAustralia and New Zealand ("ANZ"), pursuant to the sale and purchase agreement datedJuly 29, 2020 (the "Purchase Agreement"). ANZ includesTorrens University Australia ,Think Education , andMedia 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 byAustralia's status as an attractive destination for international students, as well as the potential to use ANZ as a platform for expansion across theASEAN region. 54 -------------------------------------------------------------------------------- Table of Contents 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 actual 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 toNovember 3, 2020 do not include the financial results of ANZ and are therefore not directly comparable. In 2019, ANZ's revenues were$191.1 million , and its income from continuing operations was$3.8 million . During the year endedDecember 31, 2020 , we incurred$7.7 million in expenses related to this acquisition, primarily related to legal, financial, and accounting support services. Acquisition ofCapella Education Company OnAugust 1, 2018 , we completed our merger withCapella Education Company ("CEC") pursuant to a merger agreement datedOctober 29, 2017 . The merger solidifies our position as a national leader in education innovation, and provides scale that will enable greater investment in improving student academic and career outcomes while maintaining our focus on affordability. The merger is also expected to create significant cost synergies for us. Pursuant to the merger, we issued 0.875 shares of our common stock for each issued and outstanding share of CEC common stock. Outstanding equity awards held by CEC employees and certain nonemployee directors of CEC were assumed by us and converted into comparable SEI awards at the exchange ratio. Outstanding equity awards held by CEC nonemployee directors who did not serve as directors of SEI after completion of the merger, and awards held by former employees of CEC who left before completion of the merger were settled upon completion of the merger as specified in the merger agreement. Our financial results for any periods ended prior toAugust 1, 2018 do not include the financial results of CEC, and are therefore not directly comparable. During the years endedDecember 31, 2020 and 2019, we incurred$6.1 million and$21.9 million , respectively, in expenses related to the CEC merger, primarily attributable to financial advisory fees, consulting costs, legal fees, personnel, and other integration costs. During the fourth quarter of 2020, following the acquisition of ANZ, the Company revised its reportable segments to add ANZ to conform to the current period presentation. As ofDecember 31, 2020 , SEI had the following reportable segments: Strayer University Segment •Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice at 64 physical campuses, predominantly located in the easternUnited States , and online.Strayer University is accredited by theMiddle States Commission on Higher Education (hereinafter referred to as "Middle States" or "Middle States Commission "), an institutional collegiate accrediting agency recognized by theDepartment of Education . By offering its programs both online and in physical classrooms,Strayer University provides its working adult students flexibility and convenience. •The Jack Welch Management Institute ("JWMI") offers an executive MBA online and is a Top 25 Princeton Review ranked online MBA program. •DevMountain is a software development program offering affordable, high-quality, leading-edge software coding education at multiple campus locations and online. •Hackbright Academy is a software engineering school for women. Its primary offering is an intensive 12-week accelerated software development program, together with placement services and coaching. •In 2020,Strayer University's average total enrollment increased 2% to 52,167 students compared to 51,395 students in 2019. Student enrollment atStrayer University is more volatile in the current economic environment due to Strayer's mostly undergraduate student mix, which includes many first-time college students. In the first quarter of 2020,Strayer University adopted a new enrollment reporting census date, which occurs approximately two weeks following the start of the academic term. Previously theStrayer University enrollment census date coincided with the end of the University's "drop-add" period, approximately one week following the 55 -------------------------------------------------------------------------------- Table of Contents start of the academic term. The new census date is consistent with the approach employed byCapella University . All historical enrollment data included in this Form 10-K has been revised using the new census date. Year-over-year percentage change in enrollment for the new census date does not differ significantly from the prior approach. Capella University Segment •Capella University is an online post-secondary education company that offers a variety of doctoral, master's and bachelor's degree programs, primarily for working adults, in the following primary disciplines: public service leadership, nursing and health sciences, social and behavioral sciences, business and technology, education, and undergraduate studies.Capella University focuses on master's and doctoral degrees, with approximately 70% of its students enrolled in a master's or doctoral degree program.Capella University's academic offerings are built with competency-based curricula and are delivered in an online format that is convenient and flexible.Capella University designs its offerings to help working adult students develop specific competencies they can apply in their workplace.Capella University is accredited by theHigher Learning Commission , an institutional collegiate accrediting agency recognized by theDepartment of Education . •Sophia Learning is an innovative company which leverages technology and high quality academic content to provide self-paced online courses recommended by theAmerican Council on Education for college credit. •In 2020,Capella University's average total enrollment increased 3% to 40,471 students compared to 39,203 students in 2019. In the first quarter of 2020,Capella University consolidated two different enrollment reporting census dates into a single date, which occurs approximately two weeks following the start of the academic term. All historical enrollment data included in this Form 10-K has been revised using the new census date. Year-over-year percentage change in enrollment for the new census date does not differ significantly from the prior approach.Australia /New Zealand Segment •Torrens University is the only investor-funded University inAustralia .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 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 , responsible for the quality assurance of non-university tertiary training providers. We believe we have the right operating strategies in place to provide the most direct path between learning and employment for our students. We focus on innovation continually to differentiate ourselves in our markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our students' professional needs, and establishing new growth platforms. Technology and the talent of our faculty and employees enable these strategies. We believe these strategies and enablers will allow us to continue to deliver high quality, affordable education, resulting in continued growth over the long-term. We will continue to invest in these enablers to strengthen the foundation and future of our business. We also believe our enhanced scale and capabilities allow us to continue to focus on innovative cost and revenue synergies, while improving the value provided to our students. Critical Accounting Policies and Estimates "Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent 56 -------------------------------------------------------------------------------- Table of Contents 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 inthe United States ,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 one calendar year. Approximately 96% of our revenues during the year endedDecember 31, 2020 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 atStrayer University andCapella 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. 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 57 -------------------------------------------------------------------------------- Table of Contents for most programs, nearly all refunds are processed and recorded in the same quarter as the corresponding revenue. For certain programs where courses may overlap a quarter-end date, the Company estimates a refund or withdrawal rate and does not recognize the related revenue until the uncertainty related to the refund is resolved. The portion of tuition revenue refundable to students may vary based on the student's state of residence. For students who withdraw from all their courses during the 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. 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. When a student withdraws from all of their 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. InAustralia 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 atStrayer University registering in credit-bearing courses in any undergraduate program beginning in the summer 2013 term or graduate program beginning in the summer 2020 term (fiscal third quarter), and subsequent terms qualify for theGraduation Fund , whereby qualifying students earn tuition credits that are redeemable in the final year of a student's course of study if he or she successfully remains in the program. Students must meet all of the University's admission requirements and not be eligible for any previously offered scholarship program. Our employees and their dependents are not eligible for the program. To maintain eligibility, students must be enrolled in a bachelor's or master's degree program. Students who have more than one consecutive term of non-attendance lose anyGraduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by the University in the future. In response to the COVID-19 pandemic,Strayer University is temporarily allowing students to miss two consecutive terms without losing theirGraduation Fund credits. In their final 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 ofDecember 31, 2020 , we had deferred$53.3 million for estimated redemptions earned under theGraduation Fund , as compared to$49.6 million atDecember 31, 2019 . Each quarter, we assess our methodologies and assumptions underlying our estimates for persistence and estimated redemptions based on actual experience. To date, any adjustments to our estimates have not been material. However, if actual persistence or redemption rates change, adjustments to the reserve may be necessary and could be material. Tuition receivable - We record estimates for our allowance for credit losses related to tuition receivable from students primarily based on our historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of recoveries. Our experience is that payment of outstanding balances is influenced by whether the student returns to the institution, as we require students to make payment arrangements for their outstanding balances prior to enrollment. Therefore, we monitor outstanding tuition receivable balances through subsequent terms, increasing the reserve on such balances over time as the likelihood of returning to the institution diminishes and our historical experience indicates collection is less likely. We periodically assess our methodologies for estimating credit losses in consideration of actual experience. If the financial condition of our students were to deteriorate based on current or expected future events resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. During 2019 and 2020, our bad debt expense was 4.9% and 4.8% of revenue, respectively. A change in our allowance for credit losses of 1% of gross tuition receivable as ofDecember 31, 2020 would have changed our income from operations by approximately$1.0 million . 58 -------------------------------------------------------------------------------- Table of Contents 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, the Company may record adjustments to the assets acquired and liabilities assumed, with corresponding offsets to goodwill. The Company applied the acquisition method of accounting to its merger with CEC in 2018 and its acquisition of ANZ in 2020. Refer to Note 3, Business Combinations, within the footnotes to the 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. We had significant additions to goodwill and tradename intangible assets related to our acquisitions of ANZ in 2020 and CEC in 2018.Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount. In 2020, we performed a qualitative impairment assessment, consistent with ASC 350, of goodwill and indefinite-lived intangible assets assigned to our reporting units to evaluate the recoverability of the related amounts. The qualitative factors considered included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and any other factors that have a significant bearing on fair value. No goodwill or indefinite-lived intangible asset impairments were recorded during the years endedDecember 31, 2019 or 2020. Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. No impairment charges related to finite-lived intangible assets were recorded during the years endedDecember 31, 2019 or 2020. Other estimates - We record estimates for certain of our accrued expenses and for income tax liabilities. We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary. Should actual results differ from our estimates, revisions to our accrued expenses, carrying amount of goodwill and intangible assets, stock-based compensation expense, and income tax liabilities may be required. Results of Operations As discussed above, we completed our merger with CEC onAugust 1, 2018 and our acquisition of ANZ onNovember 3, 2020 . Our results of operations include the results of CEC and the results of ANZ from their respective acquisition dates. Periods prior toAugust 1, 2018 do not include the financial results of CEC, and periods prior toNovember 3, 2020 do not include the financial results of ANZ. Accordingly, the financial results of each period presented are not directly comparable. In 2020, we generated$1,027.7 million in revenue compared to$997.1 million in 2019. Our income from operations decreased to$109.4 million in 2020 compared to$110.5 million in 2019, principally due to the inclusion of ANZ, which generated a$13.3 million loss from operations following the acquisition as well as restructuring costs incurred in 2020, partially offset by a decrease in merger and integration related costs and an increase inStrayer University andCapella University revenue due to enrollment growth. Our net income in 2020 was$86.3 million compared to$81.1 million in 2019. Diluted earnings per share was$3.77 in 2020 compared to$3.67 in 2019. In the accompanying analysis of financial information for 2020 and 2019, 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: 59 -------------------------------------------------------------------------------- Table of Contents •purchase accounting adjustments to record acquired contract liabilities at fair value as a result of the Company's merger withCapella Education Company in 2018 and the Company's acquisition ofTorrens University and related assets inAustralia and New Zealand in 2020, •amortization and depreciation expense related to intangible assets and software assets acquired through the Company's merger withCapella Education Company and the Company's acquisition ofTorrens University and related assets inAustralia and New Zealand , •transaction and integration expenses associated with the Company's merger withCapella Education Company , and the Company's acquisition ofTorrens University and related assets inAustralia and New Zealand , •severance costs and right-of-use lease asset impairment charges associated with the Company's restructuring •impairment charges for intangible assets related to the Company's acquisition ofThe New York Code and Design Academy , •income from partnership and other investments that are not part of our core operations, and •discrete tax adjustments related to stock-based compensation and other adjustments. When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying trends associated with the Company's ongoing operations. Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable to 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$211.1 million in 2020 compared to$194.1 million in 2019. Adjusted net income was$152.7 million in 2020 compared to$147.3 million in 2019, and adjusted diluted earnings per share was$6.68 in 2020 compared to$6.67 in 2019. Reconciliation of Reported to Adjusted Results of Operations for the year endedDecember 31, 2020 (in thousands, except per share data) Non-GAAP Adjustments Contract Amortization of Merger and As Adjusted As Reported liability intangible integration Restructuring Impairment of Income from other (Non- (GAAP) adjustment(1) assets(2) costs(3) costs(4) intangible assets(5) investments(6) Tax adjustments(7) GAAP) Revenues$ 1,027,653 $ 11,296 $ - $ - $ - $ - $ - $ -$ 1,038,949 Total costs and expenses 918,269 - (64,225) (13,770) (12,382) - - -
827,892
Income from operations 109,384 11,296 64,225 13,770 12,382 - - - 211,057 Operating margin 10.6% 20.3% Income before income taxes 113,957 11,296 64,225 13,770 12,382 - (2,094) - 213,536 Net income$ 86,268 $ 11,296 $ 64,225 $ 13,770 $ 12,382 $ - $ (2,094) $ (33,141)$ 152,706 Diluted earnings per share$ 3.77 $ 6.68 Weighted average diluted shares outstanding 22,860 22,860 60
-------------------------------------------------------------------------------- Table of Contents Reconciliation of Reported to Adjusted Results of Operations for the year endedDecember 31, 2019 (in thousands, except per share data) Non-GAAP Adjustments Contract Amortization of Merger and
As Adjusted
As Reported liability intangible integration Restructuring Impairment of Income from other (Non- (GAAP) adjustment(1) assets(2) costs(3) costs(4) intangible assets(5) investments(6) Tax adjustments(7) GAAP) Revenues$ 997,137 $ - $ - $ - $ - $ - $ - $ -$ 997,137 Total costs and expenses 886,605 - (61,667) (21,923) - - - - 803,015 Income from operations 110,532 - 61,667 21,923 - - - - 194,122 Operating margin 11.1% 19.5% Income before income taxes 123,724 - 61,667 21,923 - - (3,446) - 203,868 Net income$ 81,138 $ -$ 61,667 $ 21,923 $ - $ - $ (3,446) $ (14,001)$ 147,281 Diluted earnings per share$ 3.67 $ 6.67 Weighted average diluted shares outstanding 22,097 22,097
Reconciliation of Reported to Adjusted Results of Operations for the year ended
Non-GAAP Adjustments Contract Amortization of Merger and Impairment of As Adjusted As Reported liability intangible integration Restructuring intangible Income from other (Non- (GAAP) adjustment(1) assets(2) costs(3) costs(4) assets(5) investments(6) Tax adjustments(7) GAAP) Revenues$ 634,185 $ 28,748 $ - $ - $ - $ - $ - $ -$ 662,933 Total costs and expenses 656,925 - (25,694) (45,745) - (19,909) - - 565,577 Income (loss) from operations (22,740) 28,748 25,694 45,745 - 19,909 - - 97,356 Operating margin -3.6% 14.7% Income (loss) before income taxes (19,139) 28,748 25,694 45,745 - 19,909 - - 100,957 Net income (loss)$ (15,671) $ 28,748 $ 25,694 $ 45,745 $ -$ 19,909 $ - $ (29,348)$ 75,077 Diluted earnings (loss) per share$ (1.03) $ 4.75 Weighted average diluted shares outstanding 15,190 15,801
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(1)Reflects purchase accounting adjustments to record acquired contract liabilities at fair value as a result of the Company's merger with CEC in 2018 and the Company's acquisition of ANZ in 2020. (2)Reflects amortization and depreciation expense of intangible assets and software assets acquired through the Company's merger with CEC and the Company's acquisition of ANZ. (3)Reflects transaction and integration expenses associated with the Company's merger with CEC and acquisition of ANZ. (4)Reflects severance costs and right-of-use lease asset impairment charges associated with the Company's restructuring. (5)Reflects impairment of goodwill and intangible assets in 2018 related to the Company's acquisition of theNew York Code and Design Academy . (6)Reflects income recognized from the Company's investments in partnership interests and other investments. (7)Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted annual effective tax rate of 28.5%, 27.8% and 25.6% for 2020, 2019 and 2018, respectively. 61 -------------------------------------------------------------------------------- Table of Contents Year EndedDecember 31, 2020 Compared To Year EndedDecember 31, 2019 Revenues. The increase in consolidated revenues compared to the same period in the prior year was primarily related to the acquisition of ANZ inNovember 2020 . Near term revenue growth at ourU.S. based Universities is expected to be impacted negatively by the ongoing COVID-19 pandemic with weaker demand and higher scholarships and discounts. In theStrayer University segment for the year endedDecember 31, 2020 , total enrollment grew 2% to 52,167 from 51,395 in the prior year. Revenue increased 0.1% to$537.6 million compared to$537.0 million in 2019 as a result of enrollment growth, partially offset by a decline in revenue per student due to higher scholarships and discounts we are offering in response to the COVID-19 pandemic. In theCapella University segment for the year endedDecember 31, 2020 , total enrollment grew 3% to 40,471 from 39,203 in 2019.Capella University segment revenue increased 1.4% to$466.6 million in 2020, compared to$460.2 million in 2019 as a result of the increase in enrollment, partially offset by lower revenue per student due to a mix shift to enrollment from corporate sponsored students who receive discounted tuition. Revenues for theAustralia /New Zealand segment were$23.4 million , following our acquisition of ANZ inNovember 2020 , and included an$11.3 million purchase accounting reduction related to contract liabilities acquired in the acquisition. Instructional and support costs. Consolidated instructional and support costs increased to$532.7 million in 2020, compared to$530.6 million in 2019, principally due to the inclusion of$19.7 million of instructional and support costs related to ANZ, partially offset by significant savings from the impact of the COVID-19 pandemic, which included lower expenses associated with travel, events, and facilities costs. Consolidated instructional and support costs as a percentage of revenues decreased to 51.8% in 2020, from 53.2% in 2019. General and administration expenses. Consolidated general and administration expenses increased to$295.2 million in 2020 compared to$272.4 million in 2019, principally due to the inclusion of$17.0 million of general and administration expenses related to ANZ, as well as increased investments in brand initiatives and partnerships with brand ambassadors. Consolidated general and administration expenses as a percentage of revenues increased to 28.7% in 2020 from 27.3% in 2019. Amortization of intangible assets. Amortization expense of intangible assets increased to$64.2 million in 2020 compared to$61.7 million in 2019, due to the additional amortization expense of intangible assets acquired in the acquisition of ANZ inNovember 2020 . Merger and integration costs. Merger and integration costs decreased to$13.8 million in 2020 compared to$21.9 million in 2019, as a result of lower expenses for integration support services and severance costs related to the merger with CEC, partially offset by transaction and integration expenses associated with the acquisition of ANZ. Restructuring costs. Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations as well as early lease termination costs and impairments of right-of-use lease assets associated with vacating leased space in connection with a restructuring plan implemented in 2020. Income from operations. Consolidated income from operations decreased to$109.4 million in 2020 compared to$110.5 million in 2019, principally due to the inclusion of ANZ, which generated a loss from operations following acquisition as well as restructuring costs incurred in 2020, partially offset by a decrease in merger and integration related costs and an increase inStrayer University andCapella University revenue due to enrollment growth.Strayer University segment income from operations increased 16.4% to$120.4 million in 2020, compared to$103.4 million in 2019, primarily due to expense savings related to campus closures during the COVID-19 pandemic, as well as lower marketing expense.Capella University segment income from operations increased 2.1% to$92.6 million in 2020, compared to$90.7 million in 2019, primarily due higher revenues as a result of enrollment growth. Loss from operations for theAustralia /New Zealand segment was$13.3 million in 2020, following our acquisition of ANZ inNovember 2020 . Other income. Other income decreased to$4.6 million in 2020 compared to$13.2 million in 2019, as a result of lower yields on money markets and marketable securities due to reductions in interest rates as a result of the COVID-19 crisis and a decrease in investment income from our limited partnerships and other investments. Other income is net of interest expense, which was$1.4 million and$0.8 million in 2020 and 2019, respectively. The increase in interest expense in 2020 is due to borrowing$141.8 million on our revolving credit facility to partially fund the ANZ acquisition inNovember 2020 . Provision for income taxes. Income tax expense was$27.7 million in 2020 compared to$42.6 million in 2019. Our effective tax rate for 2020 was 24.3%, compared to 34.4% in 2019. The tax rate in 2019 was unfavorably impacted by changes in previously deferred compensation arrangements, resulting in a discrete charge of$11.5 million to reduce the Company's deferred tax asset related to these arrangements. The tax rate for both periods reflects favorable discrete adjustments, primarily related to tax windfalls recognized through share-based payment arrangements. Our effective tax rate, excluding these and other discrete tax adjustments, was 28.5% for 2020. 62 -------------------------------------------------------------------------------- Table of Contents Net income. Net income was$86.3 million in 2020 compared to$81.1 million in 2019 due to the factors discussed above. Year EndedDecember 31, 2019 Compared To Year EndedDecember 31, 2018 Revenues. The increase in consolidated revenues compared to the same period in the prior year was primarily related to the inclusion of CEC revenue for the full year. In theStrayer University segment for the year endedDecember 31, 2019 , enrollment grew 11% to 51,395 from 46,143 in the prior year. Revenue grew 12.4% to$537.0 million compared to$477.8 million in 2018 as a result of the increase in enrollment.Capella University segment revenue was$460.2 million in 2019 compared to$156.3 million in the prior year, which reflects activity after the completion of the CEC merger onAugust 1, 2018 , and includes a$28.7 million purchase accounting reduction to the value of contract liabilities acquired in the merger. Instructional and support costs. Consolidated instructional and support costs increased to$530.6 million in 2019, compared to$371.5 million in 2018, principally due to the inclusion of instructional and support costs of CEC. Consolidated instructional and support costs as a percentage of revenues decreased to 53.2% in 2019 from 58.6% in 2018 due to cost synergies realized as a result of the CEC merger. General and administration expenses. Consolidated general and administration expenses increased to$272.4 million in 2019, from$194.0 million in 2018, principally due to the inclusion of general and administration expenses of CEC, as well as increased investments in branding initiatives and partnerships with brand ambassadors. Consolidated general and administration expenses as a percentage of revenues decreased to 27.3% in 2019 from 30.6% in 2018 due to cost synergies realized as a result of the CEC merger. Amortization of intangible assets. Amortization expense related to intangible assets acquired in the merger with CEC was$61.7 million in 2019 compared to$25.7 million in 2018. Merger and integration costs. Merger and integration costs were$21.9 million in 2019 compared to$45.7 million in 2018, and reflect expenses for legal, accounting, integration support services, and severance costs incurred in connection with the merger with CEC. In 2019, merger and integration costs also includes$6.0 million of right-of-use lease asset impairment charges related to redundant leased space that was vacated during the year. Impairment of intangible assets. In 2018, we recorded a goodwill impairment loss of$13.9 million and an intangible asset impairment loss of$5.7 million based on analyses performed during the year with respect to our acquisition of NYCDA. In addition, we recognized a$0.3 million charge to increase our liability for leases on facilities no longer in use in 2018. We had no adjustments in 2019. Income (loss) from operations. Consolidated income from operations was$110.5 million in 2019 compared to a loss from operations of$22.7 million in 2018, principally due to higher revenues due to enrollment growth and lower merger and integration costs and impairment charges than in 2018. Other income. Other income increased to$13.2 million in 2019 compared to$3.6 million in 2018, as a result of the inclusion of$3.4 million of investment income from partnership interests acquired in the CEC merger and other investments, higher yields on money markets and marketable securities, and an increase in our cash balance. Other income is net of interest expense, which was$0.8 million and$0.7 million in 2019 and 2018, respectively. Provision (benefit) for income taxes. Income tax expense was$42.6 million in 2019, compared to a benefit of$3.5 million in 2018. Our effective tax rate for 2019 was 34.4%, compared to 18.1% in 2018. The tax rate in 2019 was unfavorably impacted by changes in previously deferred compensation arrangements, resulting in a discrete charge of$11.5 million during the first quarter of 2019 to reduce the Company's deferred tax asset related to these arrangements. This charge is offset by favorable adjustments related to tax windfalls recognized through share-based payment arrangements. Our effective tax rate, excluding these and other discrete tax adjustments, was 27.8% in 2019. Net income (loss). Net income was$81.1 million in 2019 compared to a net loss of$15.7 million in 2018 due to the factors discussed above. Liquidity and Capital Resources AtDecember 31, 2020 , we had cash, cash equivalents, and marketable securities of$225.3 million compared to$491.2 million atDecember 31, 2019 . Most of our cash was held in demand deposit accounts at high credit quality financial institutions. 63 -------------------------------------------------------------------------------- Table of Contents OnNovember 3, 2020 , we entered into an amended credit facility ("Amended Credit Facility"), which provides for a senior secured revolving credit facility (the "Revolving Credit Facility") in an aggregate principal amount of up to$350 million . The Amended Credit Facility provides 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 the future in an aggregate amount of up to the sum of (x) the greater of (A)$300 million and (B) 100% of the Company's consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company's leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. In addition, the Amended Credit Facility provides for a subfacility for borrowings in certain foreign currencies in an amount equal to 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 ofDecember 31, 2020 . AtDecember 31, 2020 , we had$141.8 million outstanding on our Revolving Credit Facility. We had no borrowings outstanding as ofDecember 31, 2019 . During the years endedDecember 31, 2019 and 2020, we paid$0.5 million and$1.0 million , respectively, of interest and unused commitment fees related to our Revolving Credit Facility. Our net cash provided by operating activities decreased in 2020 to$142.9 million , as compared to$202.1 million for the same period in 2019. The decrease in net cash from operating activities was primarily driven by a decrease in working capital as a result of several one-time events, including a$25.3 million payment in the fourth quarter to acquire a full license to continue using the Jack Welch name and likeness for theJack Welch Management Institute . Capital expenditures were$46.8 million for the year endedDecember 31, 2020 , compared to$38.7 million for 2019. Capital expenditures for the year endingDecember 31, 2021 are expected to be between 4%-5% of revenue. InAugust 2020 , we completed a public offering of 2,185,000 shares of our common stock for total cash proceeds of$220.2 million , net of underwriting discounts and offering costs of$9.2 million . The funds from the stock offering were used to acquireTorrens University and related assets inAustralia and New Zealand . The Board of Directors declared an annual cash dividend of$2.40 per common share, payable in equal parts quarterly. During the year endedDecember 31, 2020 , we paid a total of$56.0 million in cash dividends on our common stock. During the year endedDecember 31, 2020 , we invested$0.2 million to repurchase 1,769 shares of common stock. AtDecember 31, 2020 , we had$250 million in repurchase authorization to use throughDecember 31, 2021 . We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash available 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 atDecember 31, 2020 and 2019. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. We earned interest income of$4.0 million ,$10.6 million , and$4.3 million in each of the years endedDecember 31, 2020 , 2019, and 2018, respectively. Contractual Obligations The table below sets forth our contractual commitments associated with lease liabilities as ofDecember 31, 2020 (in thousands): Payments Due By Period Less than 1 1-3 3-5 More than Total Year Years Years 5 Years Lease liabilities(1)$ 159,988 $ 40,336 $ 50,231 $ 34,523 $ 34,898
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(1)Excludes$60.0 million of legally binding minimum payments for leases signed but not yet commenced. Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits atDecember 31, 2020 , we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore,$0.3 million of unrecognized tax benefits have been excluded from the contractual obligations table above. 64 -------------------------------------------------------------------------------- Table of Contents Due to the uncertainty with respect to the timing of future borrowings associated with our credit facility, we are unable to make reasonably reliable estimates of any commitment fees charged on the unused portion of the credit facility. Therefore, the maximum estimated commitment fee of$0.6 million per annum is excluded from the contractual obligations table above. As ofDecember 31, 2020 , the Company has a commitment to invest up to$1.8 million in three limited partnership investments through 2027. Due to the uncertainty with respect to the timing of future cash flows associated with the limited partnership investments, we are unable to make reasonably reliable estimates of the period in which such additional investments may take place. Therefore,$1.8 million of potential limited partnership investment commitments have been excluded from the contractual obligations table above. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of the Securities Exchange Commission Regulation S-K. Recently Issued Accounting Standards Refer to Note 2, Significant Accounting Policies, within the footnotes to the consolidated financial statements for recently issued accounting standards. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk We are subject to the impact of interest rate changes and may be subject to changes in the market values of our future investments. We invest our excess cash in bank overnight deposits, money market funds and marketable securities. We have not used derivative financial instruments in our investment portfolio. Earnings from investments in bank overnight deposits, money market mutual funds, and marketable securities may be adversely affected in the future should interest rates decline, although such a decline may reduce the interest rate payable on any borrowings under our revolving credit facility. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. As ofDecember 31, 2020 , a 1% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows related to investments in cash equivalents or interest earning marketable securities. OnNovember 3, 2020 , we entered into an amended credit facility ("Amended Credit Facility"), which amended our prior credit facility to extend the maturity date of the revolving credit facility fromAugust 1, 2023 toNovember 3, 2025 , and to increase available borrowings from$250 million to$350 million , with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the revolving credit facility or establish one or more incremental term loans (each, an "Incremental Facility") in the future in an aggregate amount of up to the sum of (x) the greater of (A)$300 million and (B) 100% of the Company's consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company's leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. In addition, the Amended Credit Facility provides for a subfacility for borrowings in certain foreign currencies in an amount equal to theU.S. dollar equivalent of$150 million . AtDecember 31, 2020 , we had$141.8 million outstanding on our revolving credit facility. Borrowings under the Amended 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. An increase in LIBOR would affect interest expense on any outstanding balance of the revolving credit facility. For every 100 basis points increase in LIBOR, we would incur an incremental$3.5 million in interest expense per year assuming the entire$350 million revolving credit facility was utilized. Foreign Currency Risk The United States Dollar ("USD") is our reporting currency. The functional currency of each of our foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Revenues denominated in currencies other than the USD, resulting from our acquisition of ANZ onNovember 3, 2020 , accounted for 2.3% of our consolidated revenues for the year endedDecember 31, 2020 . We therefore have foreign currency risk related to these currencies, which is primarily the Australian dollar. Accordingly, changes in exchange rates, and in particular a weakening of 65 -------------------------------------------------------------------------------- Table of Contents foreign currencies relative to the USD may negatively affect our revenue and operating income as expressed in the USD. We do not use foreign exchange contracts or derivatives to hedge any foreign currency exposures. 66
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