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 Overview
Strategic Education, Inc. ("SEI," "we", "us" or "our") is an education services
company that seeks to provide the most direct path between learning and
employment through campus-based and online post-secondary education offerings
and through programs to develop job-ready skills for high-demand markets. We
operate primarily through our wholly-owned subsidiaries Strayer University and
Capella University, both accredited post-secondary institutions of higher
education located in the United States, as well as Torrens University, an
accredited post-secondary institution of higher education located in Australia.
Our operations 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 the Centers 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 at
Strayer University online, postponed large events such as graduation ceremonies,
and prohibited non-essential employee travel.
We are taking measures to provide financial relief to our students and employer
partners negatively affected by the COVID-19 crisis. Measures include payment
flexibility, scholarship opportunities, and other pricing relief. We expect that
these measures will enable more students to continue pursuing their education
during and after the COVID-19 crisis. 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 at Strayer 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, impacted Strayer University's student enrollment for several
quarters. Enrollment at Capella University and Torrens University also has been
impacted by the pandemic, though not as severely as at Strayer 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 of Torrens University and related assets in Australia and New
Zealand
On November 3, 2020, we completed the acquisition of Torrens University and
related assets in Australia and New Zealand ("ANZ"), pursuant to the sale and
purchase agreement dated July 29, 2020 (the "Purchase Agreement"). ANZ includes
Torrens University Australia, Think Education, and Media Design School, which
together provide diversified student curricula to over 19,000 students across
five industry verticals, including business, hospitality, health, education,
creative technology and design. We believe ANZ represents an attractive
portfolio of institutions with a similar focus on innovation, academic outcomes,
improved affordability and career advancement as us. We also believe that ANZ
provides an attractive platform for future growth, driven by Australia's status
as an attractive destination for international students, as well as the
potential to use ANZ as a platform for expansion across the ASEAN region.
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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 to November 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 ended December 31, 2020, we incurred $7.7 million in expenses
related to this acquisition, primarily related to legal, financial, and
accounting support services.
Acquisition of Capella Education Company
On August 1, 2018, we completed our merger with Capella Education Company
("CEC") pursuant to a merger agreement dated October 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 to August 1, 2018 do not
include the financial results of CEC, and are therefore not directly comparable.
During the years ended December 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 of December 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 eastern United States, and online. Strayer
University is accredited by the Middle States Commission on Higher Education
(hereinafter referred to as "Middle States" or "Middle States Commission"), an
institutional collegiate accrediting agency recognized by the Department 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 at
Strayer 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 the Strayer University enrollment
census date coincided with the end of the University's "drop-add" period,
approximately one week following the
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start of the academic term. The new census date is consistent with the approach
employed by Capella 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 the Higher
Learning Commission, an institutional collegiate accrediting agency recognized
by the Department of Education.
•Sophia Learning is an innovative company which leverages technology and high
quality academic content to provide self-paced online courses recommended by the
American 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 in Australia. Torrens
University offers undergraduate and graduate courses primarily in five fields of
study: business, design and creative technology, health, hospitality, and
education. Courses are offered both online and on physical campuses. Torrens
University is registered with the Tertiary Education Quality and Standards
Agency ("TEQSA"), the regulator for higher education providers and universities
throughout Australia, as an Australian University that is authorized to
self-accredit its courses.
•Think Education is a vocational registered training organization and accredited
higher education provider in Australia. Think Education delivers education at
several campuses in Sydney, Melbourne, Brisbane, and Adelaide as well as through
online study. Think Education and its colleges are accredited in Australia by
the TEQSA and the Australian Skills Quality Authority, the regulator for
vocational education and training organizations that operate in Australia.
•Media Design School is a private tertiary institution for creative and
technology qualifications in New Zealand. Media Design School offers
industry-endorsed courses in 3D animation and visual effects, game art, game
programming, graphic and motion design, digital media artificial intelligence,
and creative advertising. Media Design School is accredited in New Zealand by
the New Zealand Qualifications Authority, responsible for the quality assurance
of non-university tertiary training providers.
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 in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures of contingent
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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 in the United States,
Strayer University and Capella University offer educational programs primarily
on a quarter system having four academic terms, which generally coincide with
our quarterly financial reporting periods. Torrens University offers the
majority of its education programs on a trimester system having three primary
academic terms, which all occur within one calendar year. Approximately 96% of
our revenues during the year ended December 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 at Strayer University and Capella University finance their education in
a variety of ways, and historically about three quarters of our students have
participated in one or more financial aid program provided through Title IV of
the Higher Education Act. In addition, many of our working adult students
finance their own education or receive full or partial tuition reimbursement
from their employers. Those students who are veterans or active duty military
personnel have access to various additional government-funded educational
benefit programs.
In Australia, domestic students attending an ANZ institution finance their
education themselves or by taking a loan through the government's Higher
Education Loan Program or Vocational Student Loan Program. In New Zealand,
domestic students may utilize government loans to fund tuition, and in addition
may be eligible for a period of 'fees free' study funded by the government.
International students attending an ANZ institution are not eligible for funding
from the Australian or New Zealand government.
A typical class is offered in weekly increments over a six- to twelve-week
period, depending on the University and course type, and is followed by an exam.
Student attendance is based on physical presence in class for on-ground classes.
For online classes, attendance consists of logging into one's course shell and
performing an academically-related activity (e.g., engaging in a discussion post
or taking a quiz).
If a student withdraws from a course prior to completion, a portion of the
tuition may be refundable depending on when the withdrawal occurs. We use the
student's withdrawal date or last date of attendance for this purpose. Our
specific refund policies vary across the Universities and non-degree programs.
For students attending Strayer University, our refund policy typically permits
students who complete less than half of a course to receive a partial refund of
tuition for that course. For students attending Capella University, our refund
policy varies based on course format. GuidedPath students are allowed a 100%
refund through the first five days of the course, a 75% refund from six to
twelve days, and 0% refund for the remainder of the period. FlexPath students
receive a 100% refund through the 12th calendar day of the course for their
first billing session only and a 0% refund after that date and for all
subsequent billing sessions. For domestic students attending an ANZ institution,
refunds are typically provided to students that withdraw within the first 20% of
a course term. For international students attending an ANZ institution, refunds
are provided to students that withdraw prior to the course commencement date. In
limited circumstances refunds to student attending an ANZ institution may be
granted after these cut-offs subject to an application for special consideration
by the student and approval of that application by the institution. Refunds
reduce the tuition revenue that otherwise would have been recognized for that
student. Since the academic terms coincide with our financial reporting periods
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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.
For U.S. students who receive funding under Title IV and withdraw, funds are
subject to return provisions as defined by the Department of Education. The
university is responsible for returning Title IV funds to the Department and
then may seek payment from the withdrawn student of prorated tuition or other
amounts charged to him or her. Loss of financial aid eligibility during an
academic term is rare and would normally coincide with the student's withdrawal
from the institution. When a student withdraws from all of 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. In Australia and New Zealand, government funding
for eligible students is provided directly to the institution on an estimated
basis annually. The amount of government funding provided is based on a
course-by-course forecast of enrollments that the institution submits for the
upcoming calendar year. Using the enrollment forecast provided as well as the
requesting institution's historical enrollment trends, the government approves a
fixed amount, which is then funded to the institution evenly on a monthly basis.
Periodic reconciliation and true-ups are undertaken between the relevant
government authority and the institution based on actual eligible enrollments,
which may result in a net amount being due to or from the government.
Students at Strayer University registering in credit-bearing courses in any
undergraduate program beginning in the summer 2013 term or graduate program
beginning in the summer 2020 term (fiscal third quarter), and subsequent terms
qualify for the Graduation Fund, whereby qualifying students earn tuition
credits that are redeemable in the final year of a student's course of study if
he or she successfully remains in the program. Students must meet all of 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 any Graduation 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 their Graduation Fund credits. In their final
academic year, qualifying students will receive one free course for every three
courses that the student successfully completed in prior years. Strayer
University's performance obligation associated with free courses that may be
redeemed in the future is valued based on a systematic and rational allocation
of the cost of honoring the benefit earned to each of the underlying revenue
transactions that result in progress by the student toward earning the benefit.
The estimated value of awards under the Graduation Fund that will be recognized
in the future is based on historical experience of students' persistence in
completing their course of study and earning a degree and the tuition rate in
effect at the time it was associated with the transaction. Estimated redemption
rates of eligible students vary based on their term of enrollment. As of
December 31, 2020, we had deferred $53.3 million for estimated redemptions
earned under the Graduation Fund, as compared to $49.6 million at December 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
of December 31, 2020 would have changed our income from operations by
approximately $1.0 million.
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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 ended December 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 ended December 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 on August 1, 2018 and our
acquisition of ANZ on November 3, 2020. Our results of operations include the
results of CEC and the results of ANZ from their respective acquisition dates.
Periods prior to August 1, 2018 do not include the financial results of CEC, and
periods prior to November 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 in Strayer University and Capella
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 in the United States of America ("GAAP"). These
measures, which are considered "non-GAAP financial measures" under SEC rules,
are defined by us to exclude the following:
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•purchase accounting adjustments to record acquired contract liabilities at fair
value as a result of the Company's merger with Capella Education Company in 2018
and the Company's acquisition of Torrens University and related assets in
Australia and New Zealand in 2020,
•amortization and depreciation expense related to intangible assets and software
assets acquired through the Company's merger with Capella Education Company and
the Company's acquisition of Torrens University and related assets in Australia
and New Zealand,
•transaction and integration expenses associated with the Company's merger with
Capella Education Company, and the Company's acquisition of Torrens University
and related assets in Australia 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
of The 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 ended
December 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



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Reconciliation of Reported to Adjusted Results of Operations for the year ended
December 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 December 31, 2018 (in thousands, except per share data)


                                                                                                                     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

___________________________________________________


(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 the New 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.
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Year Ended December 31, 2020 Compared To Year Ended December 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 in November 2020.
Near term revenue growth at our U.S. based Universities is expected to be
impacted negatively by the ongoing COVID-19 pandemic with weaker demand and
higher scholarships and discounts. In the Strayer University segment for the
year ended December 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 the Capella University segment for the
year ended December 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 the Australia/New Zealand segment were $23.4 million, following our
acquisition of ANZ in November 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 in November 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 in Strayer University
and Capella 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 the
Australia/New Zealand segment was $13.3 million in 2020, following our
acquisition of ANZ in November 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 in November 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.
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Net income. Net income was $86.3 million in 2020 compared to $81.1 million in
2019 due to the factors discussed above.
Year Ended December 31, 2019 Compared To Year Ended December 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 the Strayer University segment for the year ended December 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 on August 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
At December 31, 2020, we had cash, cash equivalents, and marketable securities
of $225.3 million compared to $491.2 million at December 31, 2019. Most of our
cash was held in demand deposit accounts at high credit quality financial
institutions.
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On November 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 the U.S. dollar equivalent of $150 million. Borrowings
under the Revolving Credit Facility bear interest at a per annum rate equal to
LIBOR or a base rate, plus a margin ranging from 1.50% to 2.00% depending on our
leverage ratio. An unused commitment fee ranging from 0.20% to 0.30% per annum,
depending on our leverage ratio, accrues on unused amounts. We were in
compliance with all applicable covenants related to the Amended Credit Facility
as of December 31, 2020. At December 31, 2020, we had $141.8 million outstanding
on our Revolving Credit Facility. We had no borrowings outstanding as of
December 31, 2019. During the years ended December 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 the Jack Welch Management
Institute.
Capital expenditures were $46.8 million for the year ended December 31, 2020,
compared to $38.7 million for 2019. Capital expenditures for the year ending
December 31, 2021 are expected to be between 4%-5% of revenue.

In August 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 acquire Torrens University and related assets in Australia 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 ended December 31,
2020, we paid a total of $56.0 million in cash dividends on our common stock.
During the year ended December 31, 2020, we invested $0.2 million to repurchase
1,769 shares of common stock. At December 31, 2020, we had $250 million in
repurchase authorization to use through December 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
at December 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 ended December 31, 2020, 2019, and 2018, respectively.
Contractual Obligations
The table below sets forth our contractual commitments associated with lease
liabilities as of December 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

__________________________________________________________


(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 at December 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.
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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 of December 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 of December 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 of
December 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.
On November 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 from August 1, 2023 to November 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 the U.S. dollar equivalent of $150 million.
At December 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 on November 3, 2020, accounted for 2.3% of our consolidated revenues for the
year ended December 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
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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.
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