Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DCD.C. 20549

FORM 10-Q

(Mark One)
Quarterly Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For the quarterly period ended SeptemberJune 30, 2017

2021

or
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 0-21039

Strayer

Strategic Education, Inc.

(Exact name of registrant as specified in this charter)

Maryland

52-1975978

(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

2303 Dulles Station Boulevard

Herndon, VA

20171

Herndon,

VA20171
(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (703) 561-1600

247-2500

Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueSTRANasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐   No  

As of October 23, 2017,July 16, 2021, there were outstanding 11,167,42524,612,624 shares of Common Stock, par value $0.01 per share, of the Registrant.

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STRAYERSTRATEGIC EDUCATION, INC.

INDEX

FORM 10-Q

PART I — FINANCIAL INFORMATION

3

4

5

6

7

22

29

29

30

30

31

31

31

31

32

33

CERTIFICATIONS

2

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Table of Contents

STRAYERPART I — FINANCIAL INFORMATION

Item 1. Financial Statements
STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

September 30, 2017

 

December 31, 2020June 30, 2021

ASSETS

 

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

 

 

Current assets:

Cash and cash equivalents

 

$

129,245

 

$

150,483

 

Cash and cash equivalents$187,509 $261,585 
Marketable securitiesMarketable securities7,557 4,040 

Tuition receivable, net

 

 

20,532

 

 

20,626

 

Tuition receivable, net50,169 78,609 

Income taxes receivable

 

 

 —

 

 

2,734

 

Income taxes receivable1,429 
Assets held for saleAssets held for sale5,801 

Other current assets

 

 

10,766

 

 

12,917

 

Other current assets39,458 43,600 

Total current assets

 

 

160,543

 

 

186,760

 

Total current assets286,122 393,635 

Property and equipment, net

 

 

73,124

 

 

74,335

 

Property and equipment, net158,854 153,812 

Deferred income taxes

 

 

31,096

 

 

34,609

 

Right-of-use lease assetsRight-of-use lease assets120,687 134,069 
Marketable securities, non-currentMarketable securities, non-current30,270 28,062 
Intangible assets, netIntangible assets, net326,420 289,985 

Goodwill

 

 

20,744

 

 

20,744

 

Goodwill1,318,526 1,303,863 

Other assets

 

 

13,189

 

 

12,127

 

Other assets54,928 59,887 

Total assets

 

$

298,696

 

$

328,575

 

Total assets$2,295,807 $2,363,313 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

 

 

Current liabilities:

Accounts payable and accrued expenses

 

$

41,132

 

$

50,514

 

Accounts payable and accrued expenses$104,742 $100,119 

Income taxes payable

 

 

1,883

 

 

 —

 

Income taxes payable4,015 

Deferred revenue

 

 

16,691

 

 

21,784

 

Other current liabilities

 

 

133

 

 

 —

 

Contract liabilitiesContract liabilities60,501 118,771 
Lease liabilitiesLease liabilities34,809 29,284 

Total current liabilities

 

 

59,839

 

 

72,298

 

Total current liabilities200,052 252,189 
Long-term debtLong-term debt141,823 141,748 
Deferred income tax liabilitiesDeferred income tax liabilities53,407 42,810 
Lease liabilities, non-currentLease liabilities, non-current106,151 148,382 

Other long-term liabilities

 

 

50,483

 

 

40,788

 

Other long-term liabilities46,055 45,004 

Total liabilities

 

 

110,322

 

 

113,086

 

Total liabilities547,488 630,133 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Commitments and contingencies00

Stockholders’ equity:

 

 

 

 

 

 

 

Stockholders’ equity:

Common stock, par value $0.01; 20,000,000 shares authorized; 11,093,489 and 11,167,425 shares issued and outstanding at December 31, 2016 and September 30, 2017, respectively

 

 

111

 

 

112

 

Common stock, par value $0.01; 32,000,000 shares authorized; 24,418,939 and 24,621,111 shares issued and outstanding at December 31, 2020 and June 30, 2021, respectivelyCommon stock, par value $0.01; 32,000,000 shares authorized; 24,418,939 and 24,621,111 shares issued and outstanding at December 31, 2020 and June 30, 2021, respectively244 246 

Additional paid-in capital

 

 

35,453

 

 

44,021

 

Additional paid-in capital1,519,549 1,523,022 
Accumulated other comprehensive incomeAccumulated other comprehensive income48,880 30,823 

Retained earnings

 

 

152,810

 

 

171,356

 

Retained earnings179,646 179,089 

Total stockholders’ equity

 

 

188,374

 

 

215,489

 

Total stockholders’ equity1,748,319 1,733,180 

Total liabilities and stockholders’ equity

 

$

298,696

 

$

328,575

 

Total liabilities and stockholders’ equity$2,295,807 $2,363,313 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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STRAYERSTRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

September 30,

 

September 30,

 

For the three months ended June 30,For the six months ended June 30,

 

2016

    

2017

    

2016

    

2017

    

2020202120202021

Revenues

    

$

102,156

 

$

108,512

 

$

321,809

 

$

336,144

 

Revenues$255,831 $299,173 $521,133 $589,509 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

Instruction and educational support

 

 

56,295

 

 

56,987

 

 

176,175

 

 

180,059

 

Marketing

 

 

25,388

 

 

26,790

 

 

61,434

 

 

64,734

 

Admissions advisory

 

 

4,691

 

 

5,318

 

 

13,171

 

 

14,813

 

Instructional and support costsInstructional and support costs125,544 152,938 258,480 305,743 

General and administration

 

 

10,952

 

 

11,193

 

 

33,211

 

 

36,017

 

General and administration67,301 93,395 136,527 180,240 
Amortization of intangible assetsAmortization of intangible assets15,417 19,392 30,834 38,799 
Merger and integration costsMerger and integration costs1,174 1,937 4,938 2,949 
Restructuring costsRestructuring costs4,811 23,078 

Total costs and expenses

 

 

97,326

 

 

100,288

 

 

283,991

 

 

295,623

 

Total costs and expenses209,436 272,473 430,779 550,809 

Income from operations

 

 

4,830

 

 

8,224

 

 

37,818

 

 

40,521

 

Income from operations46,395 26,700 90,354 38,700 

Investment income

 

 

115

 

 

303

 

 

327

 

 

737

 

Interest expense

 

 

161

 

 

162

 

 

481

 

 

481

 

Other incomeOther income1,639 757 3,762 2,924 

Income before income taxes

 

 

4,784

 

 

8,365

 

 

37,664

 

 

40,777

 

Income before income taxes48,034 27,457 94,116 41,624 

Provision for income taxes

 

 

1,906

 

 

2,138

 

 

14,580

 

 

13,670

 

Provision for income taxes13,882 7,481 24,725 12,071 

Net income

 

$

2,878

 

$

6,227

 

$

23,084

 

$

27,107

 

Net income$34,152 $19,976 $69,391 $29,553 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

Basic

 

$

0.27

 

$

0.58

 

$

2.18

 

$

2.54

 

Basic$1.57 $0.83 $3.18 $1.23 

Diluted

 

$

0.27

 

$

0.56

 

$

2.14

 

$

2.43

 

Diluted$1.55 $0.83 $3.15 $1.22 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

Basic

 

 

10,616

 

 

10,701

 

 

10,608

 

 

10,671

 

Basic21,764 23,975 21,787 23,974 

Diluted

 

 

10,828

 

 

11,210

 

 

10,803

 

 

11,174

 

Diluted22,012 24,126 22,041 24,139 

STRATEGIC EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the three months ended June 30,For the six months ended June 30,
2020202120202021
Net income$34,152 $19,976 $69,391 $29,553 
Other comprehensive income:
Foreign currency translation adjustment(9,276)(17,988)
Unrealized gains (losses) on marketable securities, net of tax406 35 426 (69)
Comprehensive income$34,558 $10,735 $69,817 $11,496 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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STRAYERSTRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

 

 

 

 

    

Shares

    

Par Value

    

Capital

    

Earnings

    

Total

 

Balance at December 31, 2015

 

11,027,177

 

$

110

 

$

24,738

 

$

118,008

 

$

142,856

 

Tax shortfall associated with stock-based compensation arrangements

 

 —

 

 

 —

 

 

(51)

 

 

 —

 

 

(51)

 

Restricted stock grants, net of forfeitures

 

66,781

 

 

 1

 

 

(1)

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

7,330

 

 

 —

 

 

7,330

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

23,084

 

 

23,084

 

Balance at September 30, 2016

 

11,093,958

 

$

111

 

$

32,016

 

$

141,092

 

$

173,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

 

 

 

 

 

Shares

    

Par Value

    

Capital

    

Earnings

    

Total

 

Balance at December 31, 2016

 

11,093,489

 

$

111

 

$

35,453

 

$

152,810

 

$

188,374

 

Restricted stock grants, net of forfeitures

 

73,936

 

 

 1

 

 

(1)

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

8,569

 

 

 —

 

 

8,569

 

Common stock dividends

 

 —

 

 

 —

 

 

 —

 

 

(8,561)

 

 

(8,561)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

27,107

 

 

27,107

 

Balance at September 30, 2017

 

11,167,425

 

$

112

 

$

44,021

 

$

171,356

 

$

215,489

 

For the three months ended June 30, 2020
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
SharesPar Value
Balance at March 31, 202022,213,587 $222 $1,287,406 $171,266 $253 $1,459,147 
Stock-based compensation— — 3,858 — 3,859 
Exercise of stock options, net5,252 — 339 — — 339 
Issuance of restricted stock, net4,097 — (6)— — (6)
Common stock dividends ($0.60 per share)— — — (13,347)— (13,347)
Unrealized gains on marketable securities, net of tax— — — — 406 406 
Net income— — — 34,152 — 34,152 
Balance at June 30, 202022,222,936 $222 $1,291,597 $192,072 $659 $1,484,550 


For the three months ended June 30, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
SharesPar Value
Balance at March 31, 202124,651,205 $247 $1,521,145 $174,469 $40,064 $1,735,925 
Stock-based compensation— — 4,167 — 4,168 
Exercise of stock options, net833 — 43 — 43 
Issuance of restricted stock, net6,567 (1)— — (1)
Repurchase of common stock(37,494)— (2,333)(571)— (2,904)
Common stock dividends ($0.60 per share)— — — (14,786)— (14,786)
Foreign currency translation adjustment— — — — (9,276)(9,276)
Unrealized gains on marketable securities, net of tax— — — — 35 35 
Net income— — — 19,976 — 19,976 
Balance at June 30, 202124,621,111 $246 $1,523,022 $179,089 $30,823 $1,733,180 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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STRAYERSTRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

STOCKHOLDERS’EQUITY

(in thousands)

thousands, except share data)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

    

2016

    

2017

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

23,084

 

$

27,107

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Amortization of gain on sale of assets

 

 

(211)

 

 

(133)

 

Amortization of deferred rent

 

 

(919)

 

 

(1,351)

 

Amortization of deferred financing costs

 

 

197

 

 

197

 

Depreciation and amortization

 

 

13,276

 

 

13,718

 

Deferred income taxes

 

 

(5,543)

 

 

(3,728)

 

Stock-based compensation

 

 

7,330

 

 

8,569

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Tuition receivable, net

 

 

425

 

 

(454)

 

Other current assets

 

 

(3,895)

 

 

(2,151)

 

Other assets

 

 

(2,264)

 

 

1,200

 

Accounts payable and accrued expenses

 

 

2,825

 

 

9,711

 

Income taxes payable and income taxes receivable

 

 

(4,854)

 

 

(4,401)

 

Deferred revenue

 

 

5,940

 

 

5,386

 

Other long-term liabilities

 

 

(5,284)

 

 

(9,298)

 

Net cash provided by operating activities

 

 

30,107

 

 

44,372

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7,501)

 

 

(14,573)

 

Cash used in acquisition, net of cash acquired

 

 

(7,635)

 

 

 —

 

Net cash used in investing activities

 

 

(15,136)

 

 

(14,573)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of contingent consideration

 

 

(1,358)

 

 

 —

 

Common dividends paid

 

 

 —

 

 

(8,561)

 

Net cash used in financing activities

 

 

(1,358)

 

 

(8,561)

 

Net increase in cash and cash equivalents

 

 

13,613

 

 

21,238

 

Cash and cash equivalents — beginning of period

 

 

106,889

 

 

129,245

 

Cash and cash equivalents — end of period

 

$

120,502

 

$

150,483

 

Noncash transactions:

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

112

 

$

749

 

For the six months ended June 30, 2020
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
SharesPar Value
Balance at December 31, 201921,964,809 $220 $1,309,438 $152,819 $233 $1,462,710 
Impact of adoption of new accounting standard— — — (3,311)— (3,311)
Stock-based compensation— — 6,883 — 6,884 
Exercise of stock options, net19,567 — 1,185 — — 1,185 
Issuance of restricted stock, net240,329 (25,804)— — (25,802)
Repurchase of common stock(1,769)— (105)(142)— (247)
Common stock dividends ($1.20 per share)— — — (26,686)— (26,686)
Unrealized gains on marketable securities, net of tax— — — — 426 426 
Net income— — — 69,391 — 69,391 
Balance at June 30, 202022,222,936 $222 $1,291,597 $192,072 $659 $1,484,550 


For the six months ended June 30, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
SharesPar Value
Balance at December 31, 202024,418,939 $244 $1,519,549 $179,646 $48,880 $1,748,319 
Stock-based compensation— — 8,035 33 — 8,068 
Exercise of stock options, net1,632 — 113 — 113 
Issuance of restricted stock, net238,034 (2,342)— (2,340)
Repurchase of common stock(37,494)— (2,333)(571)— (2,904)
Common stock dividends ($1.20 per share)— — — (29,572)— (29,572)
Foreign currency translation adjustment— — — — (17,988)(17,988)
Unrealized losses on marketable securities, net of tax— — — — (69)(69)
Net income— — — 29,553 — 29,553 
Balance at June 30, 202124,621,111 $246 $1,523,022 $179,089 $30,823 $1,733,180 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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STRAYERSTRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended June 30,
20202021
Cash flows from operating activities:
Net income$69,391 $29,553 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs167 276 
Amortization of investment discount/premium68 40 
Depreciation and amortization51,981 66,624 
Deferred income taxes(6,736)(10,499)
Stock-based compensation6,884 8,068 
Impairment of right-of-use lease assets453 17,015 
Changes in assets and liabilities:
Tuition receivable, net3,820 (28,947)
Other assets(6,338)(9,308)
Accounts payable and accrued expenses(22,180)(7,835)
Income taxes payable and income taxes receivable15,303 5,444 
Contract liabilities2,053 58,937 
Other liabilities(2,925)(3,537)
Net cash provided by operating activities111,941 125,831 
Cash flows from investing activities:
Purchases of property and equipment(25,465)(23,138)
Purchases of marketable securities(1,863)
Proceeds from marketable securities18,869 5,595 
Other investments(693)(262)
Net cash used in investing activities(9,152)(17,805)
Cash flows from financing activities:
Common dividends paid(26,662)(29,549)
Net payments for stock awards(24,758)(2,283)
Repurchase of common stock(247)(2,904)
Net cash used in financing activities(51,667)(34,736)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(1,396)
Net increase in cash, cash equivalents, and restricted cash51,122 71,894 
Cash, cash equivalents, and restricted cash — beginning of period420,497 202,020 
Cash, cash equivalents, and restricted cash — end of period$471,619 $273,914 
Noncash transactions:
Non-cash additions to property and equipment$2,229 $6,600 
Right-of-use lease assets obtained in exchange for operating lease liabilities$7,870 $48,143 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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STRATEGIC EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.    Nature of Operations

Strayer

Strategic Education, Inc. (the(“Strategic Education” or the “Company”), a Maryland corporation, conductsis an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. As discussed in Note 2 and Note 3, the Company completed its operations through its wholly-owned subsidiaries,acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”) on November 3, 2020.
As discussed in Note 15, beginning in the first quarter of 2021 the Company changed the way management reports financial information relied on by the Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate the resources of the Company. The Company's revised organizational structure includes the following 3 operating and reportable segments: (1) U.S. Higher Education, which is primarily comprised of the Company's previous Strayer University (the “University”)and Capella University segments and is focused on providing flexible and affordable certificate and degree programs to working adults; (2) Alternative Learning, a new segment that is primarily focused on developing and maintaining relationships with large employers to build employee education benefits programs; and (3) Australia/New Zealand, which provides certificate and degree programs in Australia and New York Code and Design Academy (“NYCDA”).Zealand. The University is an accredited institutionAustralia/New Zealand segment was not changed as a result of higher education that provides undergraduate and graduate degrees in various fields of study through physical campuses, predominantly locatedthe Company's reorganization. Financial reporting under the new structure began in the eastern United States, and online. NYCDA is a New York City-based providerfirst quarter of web and application software development courses. NYCDA courses are delivered primarily on-ground2021. Prior period segment disclosures have been restated to students seekingconform to further their career in software application development. The Company has only one reportable segment.

the current period presentation.

2.    Significant Accounting Policies

Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. On January 13, 2016, the Company acquired all of the outstanding stock of NYCDA, and the results of NYCDA are included with the Company from the acquisition date. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

On November 3, 2020, the Company completed its acquisition of ANZ, whereby the Company was deemed the acquirer in the business combination for accounting purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, the financial results of the Company as of and for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and therefore are not directly comparable.
All information as of December 31, 2016June 30, 2020 and September 30, 2016 and 2017,2021, and for the three and ninesix months ended SeptemberJune 30, 20162020 and 20172021 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations, and cash flows of the Company. Certain amounts inThe condensed consolidated balance sheet as of December 31, 2020 has been derived from the prior periodaudited consolidated financial statements have been reclassified to conform to the current period’s presentation.at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principlesGAAP have been condensed or omitted. In addition, the Company had no items of other comprehensive income in the periods presented and accordingly comprehensive income is equal to net income. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172021 are not necessarily indicative of the results to be expected for the full fiscal year.

Revenue Recognition

The

Below is a description of the nature of the costs included in the Company’s operating expense categories.
Instructional and support costs ("I&SC") generally contain items of expense directly attributable to activities that support students. This expense category includes salaries and benefits of faculty and academic administrators, as well as admissions and administrative personnel who support and serve student interests. Instructional and support costs also include course development costs and costs associated with delivering course content, including educational programs typically are offered on a quarterly basissupplies, facilities, and such periods coincideall other physical plant and occupancy costs, with the Company’s quarterly financial reporting periods. Duringexception of costs attributable to the nine months ended September 30, 2017, mostcorporate offices. Bad debt expense incurred on delinquent student account balances is also included in instructional and support costs.
General and administration ("G&A") expenses include salaries and benefits of management and employees engaged in finance, human resources, legal, regulatory compliance, marketing and other corporate functions. Also included are the costs of advertising and production of marketing materials. General and administration expense also includes the facilities occupancy and other related costs attributable to such functions.
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Amortization of intangible assets consists of amortization and depreciation expense related to intangible assets and software assets acquired through the Company's merger with Capella Education Company ("CEC") and the Company's acquisition of ANZ.
Merger and integration costs include integration expenses associated with the Company's merger with CEC, and transaction and integration expenses associated with the Company's acquisition of ANZ.
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 and fixed assets associated with vacating leased space in connection with the Company's restructuring plans. See Note 5 for additional information.
Foreign Currency Translation and Transaction Gains and Losses
The United States Dollar ("USD") is the functional currency of the Company’s revenue cameCompany and its subsidiaries operating in the United States. The financial statements of its foreign subsidiaries are maintained in their functional currencies. The functional currency of each of the foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Financial statements of foreign subsidiaries are translated into USD using the exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the weighted-average exchange rates in effect during the period. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income within shareholders’ equity.
For any transaction that is in a currency different from the University, which derived approximately 96% of its revenues from tuition revenue, which is recognized inentity’s functional currency, the quarter of instruction. Tuition revenue is assessed for collectibility onCompany records a student-by-student basis throughout the quarter of instruction, and is shown net of any refunds, withdrawals, corporate discounts, scholarships, and employee tuition discounts. This collectibility assessment considers available sources of funds for the student including financial aid programs provided through Title IV of the Higher Education Act. The Company reassesses the collectibility of tuition revenue that it may earngain or loss based on new informationthe difference between the exchange rate at the transaction date and changes in the facts and circumstances relevant to a student’s ability to pay, includingexchange rate at the timing of a student’s withdrawal from a program of study.

At the start of each academic term or program, a liability (deferred revenue) 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 deferred revenue. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Deferred revenue is recorded as a current or long-term liabilitytransaction settlement date (or rate at period end, if unsettled), in the unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized. Revenues also include textbook-related income, certificate revenue, certain academic fees, licensing revenue, and other income, which are recognized when earned.

The Company’s refund policy typically permits students who complete less than halfstatements of a course to receive a partial refund of tuition for that course. Refunds reduce the tuition revenue that would have otherwise been recognized for that student. Since the University’s academic terms coincide with the Company’s financial reporting periods, nearly all refunds are processed and

income.

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Restricted Cash

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recorded within the same quarter as the corresponding revenue. The amount of tuition revenue refundable to students may vary based on the student’s state of residence. Unused books and related academic materials may be returned for a full refund within 21 days of the start of class; however, purchases of electronic content are not refundable if downloaded. Revenues derived from fees are not eligible for a refund.

Graduation Fund

In the third quarter of 2013, the University introduced the Graduation Fund, which allows new undergraduate students to earn tuition credits that are redeemable in the final year ofUnited States, a student’s course of study if he or she successfully remains in the program. New students registering in credit-bearing courses in any undergraduate program receive one free course for every three courses that are successfully completed. Students must meet all of the University’s admission requirements, and must be enrolled in a bachelor’s degree program. The Company’s employees and their dependents are not eligible for the 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. 

Revenue from students participating in the Graduation Fund is recorded in accordance with the Revenue Recognition Topic, ASC 605-50. The Company defers the value of benefits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its methodologies and assumptions underlying these estimates and, to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $19.3 million and is included in deferred revenue as a current liability in the unaudited condensed consolidated balance sheets.

The table below presents activity in the Graduation Fund for the nine months ended September 30, 2016 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

 

    

September 30,

 

 

 

2016

 

    

2017

 

Balance at beginning of period

 

$

20,937

 

    

$

29,499

 

Revenue deferred

 

 

14,753

 

 

 

17,494

 

Benefit redeemed

 

 

(9,139)

 

 

 

(12,551)

 

Balance at end of period

 

$

26,551

 

 

$

34,442

 

Restricted Cash

A significant portion of the Company’s revenues are funded by various federal and state government programs. The Company generally does not receive funds from these programs prior to the start of the corresponding academic term. The Company may be required to return certain funds for students who withdraw from theStrayer University or Capella University during the academic term. The Company had approximately $13,000$0.1 million and $8,000$0.3 million of these unpaid obligations as of December 31, 20162020 and SeptemberJune 30, 2017,2021, respectively. In Australia and New Zealand, advance tuition payments from international students are required to be restricted until that student commences his or her course. In addition, a portion of tuition prepayments from students enrolled in a vocational education and training program are held in trust by a third party law firm to adhere to tuition protection requirements. As of December 31, 2020 and June 30, 2021, the Company had approximately $13.9 million and $11.5 million, respectively, of restricted cash related to these unpaid obligations, whichrequirements in Australia and New Zealand. These balances are recorded as restricted cash and included in other current assets in the unaudited condensed consolidated balance sheets.

As part of commencing operations in Pennsylvania in 2003, the Company wasis required to maintain a “minimum protective endowment” of at least $0.5 million in an interest-bearing account. These funds are requiredaccount as long as the Company operates its campuses in the state. The Company holds these funds in an interest-bearing account, which is included in other assets.

The following table illustrates the reconciliation of cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statements of cash flows as of June 30, 2020 and 2021 (in thousands):
As of June 30,
20202021
Cash and cash equivalents$470,319 $261,585 
Restricted cash included in other current assets800 11,829 
Restricted cash included in other assets500 500 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows$471,619 $273,914 
Tuition Receivable and Allowance for Doubtful Accounts

Credit Losses

The Company adopted Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326") on January 1, 2020, which revised the accounting requirements related to the measurement of credit losses and requires organizations to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable and supportable forecasts about collectability.
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The Company records tuition receivable and deferred revenuecontract liabilities for its students upon the start of the academic term or course of instruction. Therefore, at the end of the quarter (and academic term), tuition receivable generally represents amounts due from students for educational services already provided and deferred revenue generally represents advance payments from students for academic services to be provided in the future.program. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the University’sCompany's student base.bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for doubtful accountscredit losses is established primarily based upon historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status, and likelihood of future enrollment. The Company periodically assesses its methodologiesenrollment, degree mix trends and changes in the overall economic environment. In the event that current collection trends differ from historical trends, an adjustment is made to the allowance for estimatingcredit losses and bad debts in consideration of actual experience.

debt expense.

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The Company’s tuition receivable and allowance for doubtful accountscredit losses were as follows as of December 31, 20162020 and SeptemberJune 30, 20172021 (in thousands):

 

 

 

 

 

 

 

    

December 31, 2016

    

September 30, 2017

 

December 31, 2020June 30, 2021

Tuition receivable

 

$

30,733

 

$

33,183

 

Tuition receivable$99,942 $128,200 

Allowance for doubtful accounts

 

 

(10,201)

 

 

(12,557)

 

Allowance for credit lossesAllowance for credit losses(49,773)(49,591)

Tuition receivable, net

 

$

20,532

 

$

20,626

 

Tuition receivable, net$50,169 $78,609 


Approximately $2.3$3.6 million and $2.6$3.2 million of tuition receivable isare included in other assets as of December 31, 20162020 and SeptemberJune 30, 2017,2021, respectively, because these amounts are expected to be collected after 12 months.

The following table illustrates changes in the Company’s allowance for doubtful accountscredit losses for the three and ninesix months ended SeptemberJune 30, 20162020 and 20172021 (in thousands):

.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the three months ended

    

For the nine months ended

    

For the three months ended June 30,For the six months ended June 30,

 

September 30,

 

September 30,

 

2020202120202021

 

2016

 

2017

 

2016

 

2017

 

Allowance for doubtful accounts, beginning of period

 

$

9,981

 

$

11,760

 

$

10,024

 

$

10,201

 

Allowance for credit losses, beginning of periodAllowance for credit losses, beginning of period$38,094 $49,179 $30,931 $49,773 
Impact of adopting ASC 326Impact of adopting ASC 3264,571 

Additions charged to expense

 

 

3,865

 

 

5,364

 

 

11,069

 

 

14,835

 

Additions charged to expense11,976 9,737 23,147 20,559 

Write-offs, net of recoveries

 

 

(4,052)

 

 

(4,567)

 

 

(11,299)

 

 

(12,479)

 

Write-offs, net of recoveries(7,114)(9,325)(15,693)(20,741)

Allowance for doubtful accounts, end of period

 

$

9,794

 

$

12,557

 

$

9,794

 

$

12,557

 

Allowance for credit losses, end of periodAllowance for credit losses, end of period$42,956 $49,591 $42,956 $49,591 

Fair Value

Assets Held for Sale
The Fair Value Measurement Topic, ASC 820-10Company classifies assets and liabilities as held for sale (“ASC 820-10”disposal group”), establishes when management, having the authority to approve the action, commits to a frameworkplan to sell the disposal group, the sale is probable to be completed within one year, and the disposal group is available for measuringimmediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, establishesand whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying amount or fair value hierarchyless costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized until the date of sale. Assets are not depreciated or amortized while they are classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as assets held for sale and liabilities held for sale in its unaudited condensed consolidated balance sheets.
During the first six months of 2021, the Company evaluated its leased and owned campus portfolio, which resulted in the decision to downsize or exit several of its underutilized campus locations and to begin marketing the long-lived assets related to two of its owned U.S. Higher Education campus locations for sale. The long-lived assets being marketed for sale consist of land, buildings, and building improvements. As a result, the Company determined that it met all of the criteria to classify these assets as held for sale as of June 30, 2021. NaN impairment charge was recorded as the carrying amount of the net assets was less than the fair value less costs to sell. Fair value was determined based upon the observabilityanticipated sales price of inputs used to measure fair value, and expands disclosures about fair value measurements. Assets and liabilities are classified in their entirety withinthese assets. Upon close, the fair value hierarchy based on the lowest level input that is significantCompany will record any gains related to the fair value measurement. Under ASC 820-10, fair valuesale of an investment is the price that would be received to sell an asset or to transfer a liability to an entitythese assets in an orderly transaction between market participants at the measurement date. The hierarchy gives the highest priority to assets and liabilities with readily available quoted prices in an active market and lowest priority to unobservable inputs which require a higher degreeits unaudited condensed consolidated statements of judgment when measuring fair value, as follows:

income.

·

Level 1 assets or liabilities use quoted prices in active markets for identical assets or liabilities as of the measurement date;

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·

Level 2 assets or liabilities use observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities; and

·

Level 3 assets or liabilities use unobservable inputs that are supported by little or no market activity.

The Company’s assets and liabilities that are subject to fair value measurement are categorized in oneTable of the three levels above. Fair values are based on the inputs available at the measurement dates, and may rely on certain assumptions that may affect the valuation of fair value for certain assets or liabilities.

Contents

Goodwill and Indefinite-Lived 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.assumed in a business combination. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. An indefinite life was assigned to the trade names because they have the continued ability to generate cash flows indefinitely.

Goodwill and the indefinite-lived intangible assets are assessed at least annually for impairment during the fourth quarter, 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 or indefinite-lived intangible asset below its carrying amount.

During The Company identifies its reporting units by assessing whether the three months ended September 30, 2017,components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components.

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.
The Company updatedreviews its revenue projections usedfinite-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 estimatethe extent the carrying amount of the assets exceeds the fair value of contingent consideration related to its acquisition of NYCDA (see Note 3). Accordingly, the Company reassessed the

assets.

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recoverability of goodwill assigned to NYCDA and performed Step 1 of the goodwill impairment test as well as a quantitative impairment test of the indefinite-lived intangible asset. Based on these tests, the Company determined the fair value of NYCDA exceeded its carrying value and there was no impairment of the goodwill and indefinite-lived intangible asset assigned to NYCDA as of September 30, 2017.

Authorized Stock

The Company has authorized 20,000,00032,000,000 shares of common stock, par value $.01,$0.01, of which 11,093,48924,418,939 and 11,167,42524,621,111 shares were issued and outstanding as of December 31, 20162020 and SeptemberJune 30, 2017,2021, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none0ne of which has beenis issued or outstanding since 2004.outstanding. Before any preferred stock may be issued in the future, the Board of Directors would need to establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, and the terms or conditions of the redemption of the preferred stock.

In July 2017,April 2021, the Company’s Board of Directors declared a regular, quarterly cash dividend of $0.25$0.60 per share of common stock. The dividend was paid on September 18, 2017.

Stock-Based Compensation

��

As required by the Stock Compensation Topic, ASC 718, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, restricted stock, restricted stock units, and employee stock purchases related to the Company’s Employee Stock Purchase Plan, based on estimated fair values. Stock-based compensation expense recognized in the unaudited consolidated statements of income for each of the three and nine months ended September 30, 2016 and 2017 is based on awards ultimately expected to vest and, therefore, has been adjusted for estimated forfeitures. The Company estimates forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate used is based on historical experience. The Company also assesses the likelihood that performance criteria associated with performance-based awards will be met. If it is determined that it is more likely than not that performance criteria will not be achieved, the Company revises its estimate of the number of shares it believes will ultimately vest.

Effective January 1, 2017, the Company adopted ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 impacts several aspects of the accounting for share-based payment transactions, including classification of certain items on the consolidated statement of cash flows and accounting for income taxes. Specifically, ASU 2016-09 requires excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in earnings, which may introduce significant volatility to the Company’s provision for income taxes. Also, all tax-related cash flows resulting from share-based payments will now be reported as operating activities in the statement of cash flows. The Company has elected to apply this cash flow guidance prospectively and there was no impact to the prior period presentation. In addition, pursuant to ASU 2016-09 the Company has elected to continue to estimate forfeitures ratably over the life of awards. The adoption of ASU 2016-09 has not materially impacted the Company’s financial statements. See note 6 for additional information.

June 7, 2021.

Net Income Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share reflects the potential dilution that could occur assuming conversion or exercise of all dilutive unexercised stock options, restricted stock, and restricted stock units. The dilutive effect of stock awards was determined using the treasury stock method. Under the treasury stock method, all of the following are assumed to be used to repurchase shares of the Company’s common stock: (1) the proceeds received from the exercise of stock options, and (2) the amount of compensation cost associated with the stock awards for future service not yet recognized by the Company. Stock options are not included in the computation of diluted earnings per share when the stock option exercise price of an individual grant exceeds the average market price for the period.

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Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20162020 and 20172021 (in thousands):

 

 

 

 

 

 

 

 

 

    

For the three months ended

    

For the nine months ended

    

 

September 30,

 

September 30,

 

For the three months ended June 30,For the six months ended June 30,

 

2016

    

2017

    

2016

    

2017

    

2020202120202021

Weighted average shares outstanding used to compute basic earnings per share

 

10,616

 

10,701

 

10,608

 

10,671

 

Weighted average shares outstanding used to compute basic earnings per share21,764 23,975 21,787 23,974 

Incremental shares issuable upon the assumed exercise of stock options

 

 —

 

38

 

 —

 

38

 

Incremental shares issuable upon the assumed exercise of stock options16 19 

Unvested restricted stock and restricted stock units

 

212

 

471

 

195

 

465

 

Unvested restricted stock and restricted stock units232 146 235 159 

Shares used to compute diluted earnings per share

 

10,828

 

11,210

 

10,803

 

11,174

 

Shares used to compute diluted earnings per share22,012 24,126 22,041 24,139 
Anti-dilutive shares excluded from the diluted earnings per share calculationAnti-dilutive shares excluded from the diluted earnings per share calculation385 252 

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Comprehensive Income Taxes

The Company provides for deferred

Comprehensive income taxes based on temporary differences between financial statementincludes net income and income tax bases of assets and liabilities using enacted tax rates in effectall changes in the year inCompany’s equity during a period from non-owner sources, which the differences are expected to reverse.

The Income Taxes Topic, ASC 740, requires the company to determine whether uncertain tax positions should be recognized within the Company’s financial statements. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Uncertain tax positions are recognized when a tax position, based solely on its technical merits, is determined to be more likely than not to be sustained upon examination. Upon determination, uncertain tax positions are measured to determine the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. A tax position is derecognized if it no longer meets the more likely than not threshold of being sustained.

The tax years 2014-2016 remain open for Federal tax examination and the tax years 2013-2016 remain open to examination by state and local taxing jurisdictions in which the Company is subject.

consists of unrealized gains and losses on available-for-sale marketable securities, net of tax, and foreign currency translation adjustments. As of December 31, 2020 and June 30, 2021, the balance of accumulated other comprehensive income was $48.9 million, net of tax of $0.3 million and $30.8 million, net of tax of $0.3 million, respectively. During the three and six months ended June 30, 2020, approximately $25,000, net of tax of $10,000, of unrealized gains on available-for-sale marketable securities was reclassified out of accumulated other comprehensive income to Other income on the unaudited condensed consolidated statements of income. There were 0 reclassifications out of accumulated other comprehensive income to net income for the three and six months ended June 30, 2021.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period reported. The most significant management estimates include allowances for doubtful accounts,credit losses, useful lives of property and equipment fair value of future contractual operating lease obligations,and intangible assets, incremental borrowing rates, potential sublease income and vacancy periods, accrued expenses, forfeiture rates and the likelihood of achieving performance criteria for stock-based awards, value of free courses earned by students that will be redeemed in the future, valuation of goodwill and intangible assets, fair value of contingent consideration, and the provision for income taxes. During the six months ended June 30, 2020 and 2021, management estimates also include potential impacts the COVID-19 pandemic will have on student enrollment, tuition pricing, and collections in future periods. The duration and severity of the COVID-19 pandemic and its impact on the Company’s condensed consolidated financial statements is subject to uncertainty. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of ASU 2014-09 is for a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The effective date of ASU 2014-09 is for fiscal years, and interim periods within those years, beginning after December 15, 2017. During 2016 and 2017, the FASB issued additional ASUs amending certain aspects of ASU 2014-09. ASU 2014-09 allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach, with the cumulative effect of initial application of the revised guidance recognized at the date of initial application.

The Company is finalizing its assessment of key revenue streams, including a comparison of current accounting policies and practices to the new standard, and is determining the appropriate changes to business processes and controls. Based on its evaluation to date, the Company believes that under the new standard the allocation of revenue to certain performance obligations may result in changes in the timing of revenue recognition between interim periods for one of its performance obligations. However, any changes associated with the adoption of ASU 2014-09 are not expected to have a significant impact on annual revenue recognized, and are not expected to have a material impact on the Company’s consolidated financial statements. The Company plans to adopt ASU 2014-09 using the modified retrospective approach and accordingly will complete the analysis of

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the cumulative effect adjustment to retained earnings and prepare enhanced disclosures pertaining to revenue recognition for the quarterly and annual filings beginning in the first quarter of 2018.

In February 2016, the FASB issuedRecently Issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new guidance requires the recognition of right-of-use assets and lease liabilities on the balance sheet for most leases. Under current guidance, operating leases are off-balance sheet. ASU 2016-02 also requires more extensive quantitative and qualitative disclosures about leasing arrangements. ASU 2016-02 applies to fiscal periods beginning after December 15, 2018, using the modified retrospective method, with early adoption permitted. The Company anticipates that the impact of ASU 2016-02 on its consolidated balance sheet will be material as the Company will record significant asset and liability balances in connection with its leased properties.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which applies to ASC Topic 326, Measurement of Credit Losses on Financial Instruments. The new guidance revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about collectibility. Assets must be presented in the financial statements at the net amount expected to be collected. The guidance will be effective for the Company's annual and interim reporting periods beginning January 1, 2020, with early adoption permitted. The Company is evaluating the impact this standard will have on its financial condition, results of operations, and disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230) (“ASU 2016-18”). Under ASU 2016-18, an entity should include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and the Company does not expect adoption of ASU 2016-18 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill. The amendments in this update should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019, though early adoption is permitted. The Company is evaluating the impact this standard will have on its financial condition, results of operations, and disclosures.

Other Not Yet Adopted

ASUs recently issued by the FASB but not yet effective are not expected to have a material effect on the Company’s consolidated financial statements.

3.    Acquisition of Torrens University and Associated Assets in Australia and New York Code and Design Academy

Zealand

On January 13, 2016,November 3, 2020, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand pursuant to the sale and purchase agreement dated July 29, 2020 (the "Purchase Agreement"). The acquired alloperations include Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across 5 industry verticals, including business, hospitality, health, education, creative technology and design.
Pursuant to the Purchase Agreement, the aggregate consideration paid was approximately $658.4 million in cash, which reflected the original agreed upon purchase price of $642.7 million, plus a $15.7 million adjustment reflecting an estimated $11.0 million of net cash at close, and an estimated $4.7 million related to higher net working capital. These estimated adjustments are subject to a final true-up of net cash and net working capital, based on the closing accounts to be finalized by both parties.
The Company applied the acquisition method of accounting to ANZ, whereby the excess of the outstanding stockacquisition date fair value of consideration transferred over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations, and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of the acquisition was allocated to the Australia/New York Code and Design Academy, Inc. (“NYCDA”), a provider of web and application software development courses primarily basedZealand reportable segment in the New York City area (the “Acquisition”). The Acquisition supportsamount of $546.3 million, and is not deductible for tax purposes.
Through June 30, 2021, the Company’s strategy to complement its traditional degree offerings with a broader platformCompany has incurred $8.1 million of educational services. The Company incurred transactionacquisition-related costs of approximately $0.2 million, which were includedhave been recognized in generalMerger and administrativeintegration costs in the unaudited condensed consolidated statements of income in the period thoseincome. These costs were incurred. primarily attributable to legal, financial, and accounting support services incurred by the Company in connection with the acquisition.
The Acquisition was accounted for as a business combination.

The purchase price included $2.4 million paid up front in cash, plus contingent cash payments of (a) uppreliminary opening balance sheet is subject to $12.5 million payableadjustment based on NYCDA’s results of operations over a five-year period (the “Earnout”), and (b) $5.5 million payable based on NYCDA’s receipt of state regulatory permits. Pursuant to the Acquisition, $1.0 millionfinal assessment of the Earnout may be accelerated upon receiptfair values of one of the state regulatory permits. The Company recorded total contingent consideration of $14.5 million at the time of acquisition. In April 2016certain acquired assets and August 2016, NYCDA received the state regulatory permitsliabilities, primarily intangible assets and income taxes. As the Company paid $6.0 and $0.5 millionfinalizes its assessment of contingent consideration to the sellers, respectively.

In addition, the Company paid a total of $4.6 million to two of NYCDA’s founders who are required to remain employed for at least three years from the acquisition date. If either of them terminates employment voluntarily, or is terminated for cause (as defined), he is required to reimburse the Company his respective portion of the retention amount. This amount was classified as prepaid compensation and is amortized to compensation expense over three years.

Total potential cash payments for the Acquisition, including the contingent cash payments and prepaid compensation, could total $25.0 million.

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The allocation of the purchase price was as follows (in thousands):

Purchase

Price

Allocation

Useful Life

Cash

$

790

Other assets

1,265

Intangibles:

  Trade name

5,660

Indefinite

  Goodwill

13,944

Liabilities assumed

(4,734)

     Total assets acquired and liabilities assumed, net

16,925

Less: contingent consideration

(14,500)

Less: cash acquired

(790)

     Cash paid for acquisition, net of cash acquired

$

1,635

The fair value of the Earnout was originally measured by applying a probability discounted cash flow model based on significant inputs not observable in the market (Level 3 inputs). Key assumptions include a discount rate of 4.5% and expected future value of payments, at the time, of $12.5 million. Following its initial recognition, the Company assesses the carrying value of the Earnout to the fair value of the remaining payments. Fair value is then adjusted as necessary to reflect revisions to the business plan, expectations relative to achieving the performance targets over the earnout period, and the impact of the discount rate. No adjustment to the Earnout was recorded in the three and nine months ended September 30, 2016. During the three months ended June 30, 2017, the Company updated its near-term revenue projections for NYCDA and reduced the balance of the contingent consideration by $2.3 million. During the three months ended September 30, 2017, following delays in implementing its marketing strategy to enroll new students, the Company further updated its revenue projections during the Earnout measurement period resulting in a reduction in the contingent consideration balance by an additional $5.5 million. The fair value of the Earnout at September 30, 2017 is zero, and the maximum possible amount that could be paid is $11.5 million.

The fair value of assets acquired and liabilities assumed, wasadditional purchase price adjustments may be recorded during the measurement period. The Company reflects measurement period adjustments in the period in which the adjustments occur. During the first quarter of 2021, the Company recorded a measurement period adjustment that reduced Property and equipment, net by $0.3 million and increased goodwill by $0.3 million.

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The preliminary fair value of assets acquired and liabilities assumed as well as a reconciliation to consideration transferred is presented in the table below (in thousands):
Cash and cash equivalents$16,082 
Tuition receivable24,447 
Other current assets17,713 
Property and equipment, net41,508 
Right-of-use lease assets44,229 
Intangible assets103,161 
Goodwill546,315 
Other assets2,799 
Total assets acquired796,254 
Accounts payable and accrued expenses(33,876)
Income taxes payable(229)
Contract liabilities(33,309)
Lease liabilities(9,685)
Deferred income taxes(18,712)
Lease liabilities, non-current(34,544)
Other long-term liabilities(7,520)
Total liabilities assumed(137,875)
Total consideration$658,379 
The table below presents a summary of intangible assets acquired (in thousands) and the weighted average useful lives of these assets:
 Fair ValueWeighted Average
Useful Life in Years
Trade names$68,774 Indefinite
Student relationships34,387 3
 $103,161 
The Company determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective items.assets and liabilities. The Company utilized the following assumptions, were used, the majoritysome of which include significant unobservable inputs (Level 3),which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:

Intangible assets
Trade names - to determine the fair value of the trade names, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate. Key assumptions used in the valuation included revenue growth rates ranging from 2.5% to 6.3% per year, a royalty rate of 2.5% and a discount rate of 11%.

Student relationships - to determine the fair value of the student relationships, the Company used the excess earnings method, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, earnings before interest and taxes margins, annual attrition rate, and discount rate. Key assumptions used in the valuation included an annual attrition rate of 60% and a discount rate of 11%.
Property and equipment - Included in property and equipment is course content of $10.0 million. To determine the fair value of course content, the Company used the relief from royalty approach, which involved the use of estimates and assumptions with respect to the timing and amounts of future cash flows, revenue growth rates, royalty rate, and discount rate. Key assumptions used in the valuation included revenue growth rates ranging from 5.6% to 6.2%, a royalty rate of 3% and a discount rate of 11%. The course content will be amortized over 3 years. All other property and equipment was valued at estimated cost.
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Contract liabilities - The Company estimated the fair value of contract liabilities using the cost build-up method, which represents the cost to deliver the services plus a normal profit margin. Based on this method, fair value of contract liabilities were estimated to be 70% of carrying value as of the acquisition date.
Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
4.    Revenue Recognition
The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of classroom instruction and online courses. Tuition revenue is deferred and recognized ratably over the period of instruction, which varies depending on the course format and chosen program of study. Strayer University’s educational programs and Capella University’s GuidedPath classes typically are offered on a quarterly basis, and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period. Torrens University offers the majority of its education programs on a trimester system having three primary academic terms, which all occur within the calendar year.
The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the three and six months ended June 30, 2020 and 2021 (in thousands):
For the three months June 30,For the six months ended June 30,
2020202120202021
U.S. Higher Education Segment
Tuition, net of discounts, grants and scholarships$237,696 $203,433 $483,016 $420,910 
    Other(1)
9,654 8,774 19,847 17,844 
Total U.S. Higher Education Segment247,350 212,207 502,863 438,754 
Australia/New Zealand Segment
Tuition, net of discounts, grants and scholarships72,340 122,562 
    Other(1)
1,720 2,763 
Total Australia/New Zealand Segment74,060 125,325 
Alternative Learning Segment(2)
8,481 12,906 18,270 25,430 
Consolidated revenue$255,831 $299,173 $521,133 $589,509 

·

Intangibles – Income approaches were used to value the substantial majority of the acquired intangibles. The trade name was valued using the relief-from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use.

(1)Other revenue is primarily comprised of academic fees, sales of course materials, placement fees and other non-tuition revenue streams.

·

Other assets and liabilities – The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.

(2)Alternative Learning revenue is primarily derived from tuition revenue.

4.

Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and services. The Company applies the five-step revenue model under ASC 606 to determine when revenue is earned and recognized.
Arrangements with students may have multiple performance obligations. For such arrangements, the Company allocates net tuition revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers and observable market prices. The standalone selling price of material rights to receive free classes in the future is estimated based on class tuition prices and likelihood of redemption based on historical student attendance and completion behavior.
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. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Contract liabilities are recorded as a current or long-term liability in the unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized.
Course materials are available to enable students to access electronically all required materials for courses in which they enroll during the quarter. Revenue derived from course materials is recognized ratably over the duration of the course as the Company provides the student with continuous access to these materials during the term. For sales of certain other course materials, the Company is considered the agent in the transaction, and as such, the Company recognizes revenue net of amounts owed to the
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vendor at the time of sale. Revenues also include certain academic fees recognized within the quarter of instruction, and certificate revenue and licensing revenue, which are recognized as the services are provided.
Contract Liabilities – Graduation Fund
Strayer University offers the Graduation Fund, which allows undergraduate and graduate students to 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 registering in credit-bearing courses in any undergraduate or graduate degree program receive 1 free course for every 3 courses that the student successfully completes. To be eligible, students must meet all of Strayer University’s admission requirements and must be enrolled in a bachelor’s or master's degree program. The Company’s employees and their dependents are not eligible for the program. Students who have more than 1 consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by Strayer University in the future. In response to the COVID-19 pandemic, Strayer University is temporarily allowing students to miss two consecutive terms without losing their Graduation Fund credits.
Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its methodologies and assumptions underlying these estimates, and to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $20.8 million and is included as a current contract liability in the unaudited condensed consolidated balance sheets. The remainder is expected to be redeemed within two to four years.
The table below presents activity in the contract liability related to the Graduation Fund (in thousands):
For the six months ended June 30,
20202021
Balance at beginning of period$49,641 $53,314 
Revenue deferred13,942 11,435 
Benefit redeemed(11,235)(11,185)
Balance at end of period$52,348 $53,564 
Unbilled receivables – Student tuition
Academic materials may be shipped to certain new undergraduate students in advance of the term of enrollment. Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all performance obligations in the arrangement with the student. When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded. The balance of unbilled receivables related to such materials was $0.5 million as of June 30, 2021, and is included in tuition receivable.
Costs to Obtain a Contract
Certain commissions earned by third party international agents are considered incremental and recoverable costs of obtaining a contract with customers of ANZ. These costs are deferred and then amortized over the period of benefit which ranges from one year to two years.
5.    Restructuring and Related Charges

In October 2013,2018 and 2019, the Company implementedincurred personnel-related restructuring charges due to cost reduction efforts and management changes. These changes related to the integration of CEC in order to establish an efficient ongoing cost structure for the Company. The severance and other employee separation costs incurred in connection with the integration of CEC are included in Merger and integration costs on the unaudited condensed consolidated statements of income.
In the third quarter of 2020, the Company began implementing a restructuring plan in an effort to better alignreduce the Company’s resources with student enrollments at the time. This restructuring included the closing of 20 physical locations and reductions in the number of campus-based and corporate employees. A liability for lease obligations, some of which continue through 2022, was recorded and is measured at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The estimation of future cash flows includes non-cancelable contractual leaseongoing operating costs over the remaining terms of the leases discounted atCompany to align with changes in enrollment following the Company’s marginal borrowing rate of 4.5%, partially offset by estimated future sublease rental income discounted at credit-adjusted rates. The Company’s estimates, which involve significant judgment, also considerCOVID-19 pandemic. Under this plan, the amount and timing of sublease rental income based on subleases that have been executed and subleases expected to be executed based on current commercial real estate market data and conditions,Company incurred severance and other qualitative factors specificemployee separation costs related to the facilities. The estimates are subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements.

13


voluntary and involuntary employee terminations.

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The following details the changes in the Company’s severance and other employee separation costs restructuring liability for lease and related costsliabilities during the ninesix months ended SeptemberJune 30, 20162020 and 20172021 (in thousands):

CEC
Integration Plan
2020
Restructuring Plan
Total
Balance at December 31, 2019$8,283 $$8,283 
Restructuring and other charges
Payments(3,986)(3,986)
Adjustments
Balance at June 30, 2020$4,297 $$4,297 
Balance at December 31, 2020(1)
$1,835 $1,287 $3,122 
Restructuring and other charges3,358 3,358 
Payments(1,344)(3,237)(4,581)
Adjustments
Balance at June 30, 2021(1)
$491 $1,408 $1,899 

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

 

2016

 

2017

 

Balance at beginning of period(1)

$

20,055

 

$

11,985

 

Adjustments(2)

 

(1,695)

 

 

375

 

Payments

 

(4,434)

 

 

(2,884)

 

Balance at end of period(1)

$

13,926

 

$

9,476

 

(1)Restructuring liabilities are included in accounts payable and accrued expenses.

In addition, the 2020 restructuring plan included an evaluation of the Company's owned and leased real estate portfolio, which resulted in the closure of underutilized campus and corporate offices. During the three and six months ended June 30, 2021, the Company recorded right-of-use lease asset charges of approximately $2.6 million and $17.0 million, respectively, related to the campus and corporate locations closed as a result of the restructuring plan. The Company also recorded fixed asset impairment charges of approximately $2.0 million during the six months ended June 30, 2021. All severance and other employee separation charges and right-of-use lease asset and fixed asset impairment charges related to the 2020 restructuring plan are included in Restructuring costs on the unaudited condensed consolidated statements of income.

(1)

The current portion of restructuring liabilities was $4.2 million and $3.2 million as of December 31, 2016 and September 30, 2017, respectively, which are included in accounts payable and accrued expenses. The long-term portion is included in other long-term liabilities.


(2)

Adjustments include accretion of interest on lease costs, partially offset by changes in the timing and expected income from sublease agreements.    

5.

6. Marketable Securities
The following is a summary of available-for-sale securities as of June 30, 2021 (in thousands):
Amortized CostGross Unrealized GainGross Unrealized (Losses)Estimated Fair Value
Tax-exempt municipal securities$18,493 $418 $$18,911 
Corporate debt securities12,882 309 13,191 
Total$31,375 $727 $$32,102 

The following is a summary of available-for-sale securities as of December 31, 2020 (in thousands):
Amortized CostGross Unrealized GainGross Unrealized (Losses)Estimated Fair Value
Tax-exempt municipal securities$19,924 $365 $$20,289 
Corporate debt securities17,086 452 17,538 
Total$37,010 $817 $$37,827 
The unrealized gains on the Company’s investments in corporate debt and municipal securities as of December 31, 2020 and June 30, 2021 were caused by changes in market values primarily due to interest rate changes. As of June 30, 2021, there were 0 securities in an unrealized loss position for a period longer than twelve months. The Company has 0 allowance for credit losses related to its available-for-sale securities as all investments are in investment grade securities. The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity. NaN impairment charges were recorded during the three and six months ended June 30, 2020 and 2021.
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The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2020 and June 30, 2021 (in thousands):
December 31, 2020June 30, 2021
Due within one year$7,557 $4,040 
Due after one year through five years30,270 28,062 
Total$37,827 $32,102 
The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the three and six months ended June 30, 2020 and 2021 (in thousands):
For the three months ended June 30,For the six months ended June 30,
2020202120202021
Maturities of marketable securities$7,500 $3,665 $17,405 $5,595 
Sales of marketable securities1,464 1,464 
Total$8,964 $3,665 $18,869 $5,595 
The Company recorded approximately $35,000 in gross realized gains in net income during the three and six months ended June 30, 2020 related to the sale of marketable securities. The Company did 0t record any gross realized gains or losses in net income during the three and six months ended June 30, 2021.
7.    Fair Value Measurement

Assets and liabilities measured at fair value on a recurring basis consist of the following as of SeptemberJune 30, 20172021 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

    

 

 

    

Quoted Prices in

    

Significant

    

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

September 30,

 

Assets/Liabilities

 

Inputs

 

Inputs

 

Fair Value Measurements at Reporting Date Using

 

2017

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

June 30, 2021Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

Money market funds

 

$

15,199

 

$

15,199

 

$

 —

 

$

 —

 

Money market funds$1,883 $1,883 $$
Marketable securities:Marketable securities:
Tax-exempt municipal securitiesTax-exempt municipal securities18,911 18,911 
Corporate debt securitiesCorporate debt securities13,191 13,191 
Total assets at fair value on a recurring basisTotal assets at fair value on a recurring basis$33,985 $1,883 $32,102 $

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

Deferred payments

 

$

4,424

 

$

 —

 

$

 —

 

$

4,424

 

Deferred payments$1,368 $$$1,368 

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Table of Contents
Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 20162020 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in

    

Significant

    

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

December 31,

 

Assets/Liabilities

 

Inputs

 

Inputs

 

Fair Value Measurements at Reporting Date Using

    

2016

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

December 31, 2020Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

Money market funds

 

$

5,103

 

$

5,103

 

$

 —

 

$

 —

 

Money market funds$2,841 $2,841 $$
Marketable securities:Marketable securities:
Tax-exempt municipal securitiesTax-exempt municipal securities20,289 20,289 
Corporate debt securitiesCorporate debt securities17,538 17,538 
Total assets at fair value on a recurring basisTotal assets at fair value on a recurring basis$40,668 $2,841 $37,827 $

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

Deferred payments

 

$

11,741

 

$

 —

 

$

 —

 

$

11,741

 

Deferred payments$1,658 $$$1,658 

The Company measures the above items on a recurring basis at fair value as follows:

·

Money market funds – Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds and are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders' equity. The Company's cash and cash equivalents held at December 31, 2016 and September 30, 2017 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.    

·

Deferred payments – The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011 and 2016. The deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using models that encompass significant unobservable inputs to estimate the operating results of the acquired assets. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, obtaining regulatory approvals for expansion into

14

Money market funds – Classified in Level 1 is excess cash the Company holds in both taxable and tax-exempt money market funds, which are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders' equity. The Company's cash and cash equivalents held at December 31, 2020 and June 30, 2021 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.

Marketable securities – Classified in Level 2 and valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets. The Company does not hold securities in inactive markets.

TableDeferred payments – The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011. The deferred payments are classified within Level 3 as there is no liquid market for similarly priced instruments and are valued using discounted cash flow models that encompass significant unobservable inputs. The assumptions used to prepare the discounted cash flows include estimates for interest rates, enrollment growth, retention rates, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The short-term portion of Contents

deferred payments was $1.4 million as of June 30, 2021 and is included in accounts payable and accrued expense.

new markets, and pricing strategies. These assumptions are subject to change as the underlying data sources evolve and the programs mature. The short-term portion of deferred payments was $1.4 million as of September 30, 2017 and is included in accounts payable and accrued expense.

The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and nodid not transfer assets or liabilities were transferred between levels of the fair value hierarchy during the ninesix months ended SeptemberJune 30, 2016 or 2017.

2020 and 2021.

Changes in the fair value of the Company’s Level 3 deferred payment liabilities during the ninesix months ended SeptemberJune 30, 20162020 and 20172021 are as follows (in thousands):

As of June 30,
20202021
Balance as of the beginning of period$3,257 $1,658 
Amounts paid(808)(730)
Other adjustments to fair value(21)440 
Balance at end of period$2,428 $1,368 

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8.    Goodwill and Intangible Assets
Goodwill
During the first quarter of 2021, the Company reallocated a portion of its goodwill to the Alternative Learning segment based on a relative fair value analysis performed using several probability weighted scenarios. The following table presents changes in the carrying value of goodwill by segment for the six months ended June 30, 2021 (in thousands):
 U.S. Higher EducationAustralia /
New Zealand
Alternative LearningTotal
Balance as of December 31, 2020$732,075 $586,451 $$1,318,526 
Reporting unit reallocation(1)
(100,000)100,000 
Additions
Impairments
Currency translation adjustments(14,925)(14,925)
Adjustments to prior acquisitions(2)
262 262 
Balance as of June 30, 2021$632,075 $571,788 $100,000 $1,303,863 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

September 30, 2016

 

September 30, 2017

 

Balance at beginning of period

 

$

3,278

 

$

11,741

 

Amounts paid

 

 

(7,358)

 

 

(1,133)

 

Contingent consideration in connection with NYCDA acquisition

 

 

14,500

 

 

 —

 

Other adjustments to fair value

 

 

1,920

 

 

(6,184)

 

Balance at end of period

 

$

12,340

 

$

4,424

 

(1)Represents the reallocation of goodwill as a result of the Company reorganizing its segments in the first quarter of 2021.

6.    Stock Options, Restricted Stock

(2)Represents a measurement period adjustment recorded in the first quarter of 2021, as discussed in Note 3.
The Company assesses goodwill at least annually for impairment during the fourth quarter, 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. No events or circumstances occurred in the three and Restricted Stock Units

On May 5, 2015,six months ended June 30, 2021 to indicate an impairment to goodwill at any of its segments. There were 0 impairment charges related to goodwill recorded during the three and six month periods ended June 30, 2020 and 2021.

Intangible Assets
The following table represents the balance of the Company’s shareholders approvedintangible assets as of December 31, 2020 and June 30, 2021 (in thousands):
 December 31, 2020June 30, 2021
 Gross Carrying AmountAccumulated AmortizationNetGross Carrying AmountAccumulated AmortizationNet
Subject to amortization      
Student relationships$202,861 $(135,703)$67,158 $202,145 $(169,540)$32,605 
Not subject to amortization
Trade names259,262 — 259,262 257,380 — 257,380 
Total$462,123 $(135,703)$326,420 $459,525 $(169,540)$289,985 
The Company’s finite-lived intangible assets are comprised of student relationships, which are being amortized on a straight-line basis over a three year useful life. Straight-line amortization expense for finite-lived intangible assets reflects the Strayer Education, Inc. 2015 pattern in which the economic benefits of the assets are consumed over their estimated useful lives. Amortization expense related to finite-lived intangible assets was $27.7 million and $33.8 million for the six months ended June 30, 2020 and 2021, respectively.
Indefinite-lived intangible assets not subject to amortization consist of trade names. The Company assigned an indefinite useful life to its trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the useful life of the trade name intangibles.
The Company assesses indefinite-lived intangible assets at least annually for impairment during the fourth quarter, 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 indefinite-lived intangible asset below its carrying amount. No events or circumstances occurred in the three and six months ended June 30, 2021 to indicate an impairment to indefinite-lived intangible assets. There was 0 impairment charge related to indefinite-lived intangible assets recorded during the three and six months ended June 30, 2020 and 2021.
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9. Other Assets

Other assets consist of the following as of December 31, 2020 and June 30, 2021 (in thousands):
December 31, 2020June 30, 2021
Prepaid expenses, net of current portion$22,418 $21,271 
Equity method investments15,795 17,401 
Cloud computing arrangements6,385 8,112 
Other investments2,527 2,999 
Other7,803 10,104 
Other assets$54,928 $59,887 
Prepaid Expenses
Long-term prepaid expenses primarily relate to payments that have been made for future services to be provided after one year. In the fourth quarter of 2020, pursuant to the terms of the perpetual license agreement associated with the Jack Welch Management Institute ("JWMI"), the Company made a final one-time cash payment of approximately $25.3 million for the right to continue to use the Jack Welch name and likeness. As of June 30, 2021, $19.9 million of this payment is included in the prepaid expenses, net of current portion balance, as the payment is being amortized over an estimated useful life of 15 years.
Equity Compensation Plan (the “2015 Plan”Method Investments
The Company holds investments in certain limited partnerships that invest in various innovative companies in the health care and education-related technology fields. The Company has commitments to invest up to an additional $1.5 million across these partnerships through 2027. The Company's investments range from 3%-5% of any partnership’s interest and are accounted for under the equity method.
The following table illustrates changes in the Company’s limited partnership investments for the three and six months ended June 30, 2020 and 2021 (in thousands):
For the three months ended June 30,For the six months ended June 30,
2020202120202021
Limited partnership investments, beginning of period$15,805 $17,879 $15,795 $15,795 
Capital contributions175 190 293 262 
Pro-rata share in the net income of limited partnerships1,010 889 1,242 3,603 
Distributions(1,557)(340)(2,259)
Limited partnership investments, end of period$16,990 $17,401 $16,990 $17,401 
Cloud Computing Arrangements
The Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.
Other Investments
The Company's venture fund, SEI Ventures, makes investments in education tech start-ups focused on transformational technologies that improve student success. These investments are accounted for at cost less impairment as they do not have readily determinable fair value.
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10.    Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of December 31, 2020 and June 30, 2021 (in thousands):
December 31, 2020June 30, 2021
Trade payables$64,049 $59,820 
Accrued compensation and benefits33,160 30,955 
Accrued student obligations4,017 4,084 
Real estate liabilities668 640 
Other2,848 4,620 
Accounts payable and accrued expenses$104,742 $100,119 
11.    Long-Term Debt
On November 3, 2020, the Company 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 the grantingCompany with an option, subject to obtaining additional loan commitments and satisfaction of restricted stock, restricted stock units, stock options intendedcertain conditions, to qualifyincrease 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 incentive stock options, options that do not qualifystock-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 incentive stock options,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. The maturity date of the Amended Credit Facility is November 3, 2025. The Company paid approximately $1.9 million in debt financing costs associated with the Amended Credit Facility, and other formsthese costs are being amortized on a straight-line basis over the five-year term of equity compensationthe Amended Credit Facility.
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 the Company’s leverage ratio. The Company also is subject to a quarterly unused commitment fee ranging from 0.20% to 0.30% per annum depending on the Company’s leverage ratio, times the daily unused amount under the Revolving Credit Facility.
The Amended Credit Facility is guaranteed by all domestic subsidiaries, subject to certain exceptions, and performance-based awards to employees, officers and directorssecured by substantially all of the assets of the Company orand its subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants, representations, warranties, events of default, and remedies upon default, including acceleration and rights to a consultant or advisor toforeclose on the collateral securing the Amended Credit Facility. In addition, the Amended Credit Facility requires that the Company atsatisfy certain financial maintenance covenants, including:
A leverage ratio of not greater than 2.00 to 1.00. Leverage ratio is defined as the discretionratio of total debt (net of unrestricted cash in an amount not to exceed $150 million) to trailing four-quarter EBITDA.
A coverage ratio of not less than 1.75 to 1.00. Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense.
A U.S. Department of Education (the “Department” or "Department of Education") Financial Responsibility Composite Score of not less than 1.0 for any fiscal year and not less than 1.5 for any two consecutive fiscal years.
The Company was in compliance with all the terms of the BoardAmended Credit Facility as of Directors. Vesting provisions are atJune 30, 2021.
As of December 31, 2020 and June 30, 2021, the discretionCompany had approximately $141.8 million and $141.7 million, respectively, outstanding under the Revolving Credit Facility. Approximately $3.8 million and $3.7 million was denominated in Australian dollars as of December 31, 2020 and June 30, 2021, respectively.
During the six months ended June 30, 2020 and 2021, the Company paid $0.3 million and $1.4 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility.
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12.    Other Long-Term Liabilities
Other long-term liabilities consist of the Boardfollowing as of Directors. Options may be granted at option prices based at or aboveDecember 31, 2020 and June 30, 2021 (in thousands):
December 31, 2020June 30, 2021
Contract liabilities, net of current portion$34,866 $33,676 
Asset retirement obligations7,647 8,651 
Deferred payments related to acquisitions715 
Other2,827 2,677 
Other long-term liabilities$46,055 $45,004 
Contract Liabilities
As discussed in Note 4, in connection with its student tuition contracts, the fair market value of the shares at the date of grant. The maximum term of the awards granted under the 2015 Plan is ten years. The number of shares of common stock reserved for issuance under the 2015 Plan is 500,000 authorized but unissued shares, plus the number of shares available for grant under the Company’s previously existing equity compensation plans at the time of stockholder approval of the 2015 Plan, and plus the number of shares which mayCompany has an obligation to provide free classes in the future become availableshould certain eligibility conditions be maintained (the Graduation Fund). Long-term contract liabilities represent the amount of revenue under any previously existing equity compensation plan due to forfeitures of outstanding awards.

In February 2017,these arrangements that the Company’s Board of Directors approved grants of 67,599 shares of restricted stock to certain employees. These shares, which vest over a four-year period, were granted pursuant to the 2015 Plan. The Company’s stock price closed at $81.66 on the date of these grants.

In May 2017, the Company’s Board of Directors approved grants of 7,541 shares of restricted stock. These shares, which vest annually over a three-year period, were awarded to non-employee membersCompany expects will be realized after one year.

Asset Retirement Obligations
Certain of the Company’s Board of Directors, as part ofCompany's lease agreements require the Company’s annual director compensation program and the 2015 Plan. The Company’s stock price closed at $86.83 on the date of these grants.

Dividends paid on unvested restricted stock are reimbursedleased premises to be returned in a predetermined condition.

Deferred Payments Related to Acquisitions
In connection with previous acquisitions, the Company ifacquired certain assets and entered into deferred payment arrangements with the recipient forfeits his or her shares as a result of termination of employment prior to vesting in the award, unless waived by the Board of Directors.

Restricted Stock and Restricted Stock Units

The table below sets forth the restricted stock and restricted stock units activity for the nine months ended September 30, 2017:

 

 

 

 

 

 

 

 

    

Number of

shares or units

    

Weighted-

average

Grant price

 

Balance, December 31, 2016

 

727,100

 

$

97.53

 

Grants

 

75,140

 

 

82.18

 

Vested shares

 

(84,718)

 

 

66.60

 

Forfeitures

 

(1,204)

 

 

62.28

 

Balance, September 30, 2017

 

716,318

 

$

99.64

 

sellers.

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13.    Equity Awards

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Stock Options

The table below sets forth the stock option activity and other stock option information as of and for the nine months ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Weighted-

    

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

Weighted-

 

remaining

 

Aggregate

 

 

 

Number of

 

average

 

contractual

 

intrinsic value(1)

 

 

    

shares

    

exercise price

    

life (years)

    

(in thousands)

 

Balance, December 31, 2016

 

100,000

 

$

51.95

 

4.1

 

$

2,868

 

Grants

 

 

 

 

 

 

 

 

 

Exercises

 

 

 

 

 

 

 

 

 

Forfeitures/Expirations

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

100,000

 

$

51.95

 

3.3

 

$

3,532

 

Exercisable, September 30, 2017

 

100,000

 

$

51.95

 

3.3

 

$

3,532

 


(1)

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the respective trading day and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holder had all options been exercised on the respective trading day. The amount of intrinsic value will change based on the fair market value of the Company’s common stock.

Valuation and Expense Information under Stock Compensation Topic ASC 718

At September 30, 2017, total stock-based compensation cost which has not yet been recognized was $17.8 million for unvested restricted stock, restricted stock units, and stock option awards. This cost is expected to be recognized over the next 24 months on a weighted-average basis. Awards of approximately 561,000 shares of restricted stock and restricted stock units are subject to performance conditions. The accrual for stock-based compensation for performance awards is based on the Company’s estimates that such performance criteria are probable of being achieved over the respective vesting periods. Such a determination involves judgment surrounding the Company’s ability to maintain regulatory compliance. If the performance targets are not reached during the respective vesting period, or it is determined it is more likely than not that the performance criteria will not be achieved, related compensation expense is adjusted.

The following table sets forth the amount of stock-based compensation expense recorded in each of the expense line items for the three and ninesix months ended SeptemberJune 30, 20162020 and 20172021 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the three months ended

 

For the nine months ended

 

For the three months ended June 30,For the six months ended June 30,

 

September 30,

 

September 30,

 

2020202120202021

 

2016

    

2017

    

2016

    

2017

    

Instruction and educational support

 

$

522

 

$

548

 

$

678

 

$

1,363

 

Marketing

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Admissions advisory

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Instructional and support costsInstructional and support costs$1,356 $1,281 $2,386 $2,506 

General and administration

 

 

1,882

 

 

2,366

 

 

6,652

 

 

7,206

 

General and administration2,503 3,368 4,498 6,043 
Restructuring costsRestructuring costs(481)(481)

Stock-based compensation expense included in operating expense

 

 

2,404

 

 

2,914

 

 

7,330

 

 

8,569

 

Stock-based compensation expense included in operating expense3,859 4,168 6,884 8,068 

Tax benefit

 

 

957

 

 

1,151

 

 

2,857

 

 

3,384

 

Tax benefit993 1,131 1,770 2,131 

Stock-based compensation expense, net of tax

 

$

1,447

 

$

1,763

 

$

4,473

 

$

5,185

 

Stock-based compensation expense, net of tax$2,866 $3,037 $5,114 $5,937 

During the ninesix months ended SeptemberJune 30, 2016,2020 and 2021, the Company recognized a $2.8 million windfall tax benefit and an $18,000 tax shortfall, respectively, related to share-based payment arrangements, of approximately $51,000, which was recorded as an adjustment to additional paid-in capital. During the nine months ended September 30, 2017, the Company recognized a tax windfall related to share-based payment arrangements of approximately $0.6 million, which was recorded as an adjustment to the provision for income taxes followingtaxes.
14.    Income Taxes

During the adoption of ASU 2016-09. No stock options were exercised during the ninesix months ended SeptemberJune 30, 2016 or 2017.

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7.    Other Long-Term Liabilities

Other long-term liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

December 31, 2016

    

September 30, 2017

 

Deferred revenue, net of current portion

 

$

17,981

 

$

18,274

 

Deferred rent and other facility costs

 

 

8,251

 

 

7,406

 

Loss on facilities not in use

 

 

7,813

 

 

6,227

 

Deferred payments related to acquisitions

 

 

13,754

 

 

5,979

 

Lease incentives

 

 

2,684

 

 

2,902

 

Other long-term liabilities

 

$

50,483

 

$

40,788

 

Deferred Revenue

The Company provides for certain scholarship2020 and awards programs, such as the Graduation Fund (see Note 2 for additional information), that can be redeemed in the future by students after meeting certain eligibility requirements. The Company also has licensed certain of its non-credit bearing course content to a third party. Long-term deferred revenue represents the amount of revenue under these arrangements that2021, the Company expects will be realized after one year.

Deferred Rent and Other Facility Costs and Loss on Facilities Not in Use

The Company records a liability for lease costsrecorded income tax expense of campuses and non-campus facilities that are not currently in use (see Note 4). For facilities still in use, the Company records rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a liability.

Deferred Payments Related to Acquisitions

In the first quarter of 2016, the Company acquired NYCDA and entered into deferred payment arrangements with the sellers in connection with this transaction. In April and August 2016, NYCDA received state regulatory permits and the Company subsequently paid $6.0$24.7 million and $0.5$12.1 million, reflecting an effective tax rate of deferred payments to the sellers,26.3% and 29.0%, respectively. The fair value of the deferred payment arrangements at September 30, 2017 is zero, and the maximum possible amount that could be paid is $11.5 million. See Note 3 for further information on the NYCDA deferred payments.

In 2011, the Company acquired certain assets and entered into deferred payment arrangements with the sellers. The deferred payment arrangements are valued at approximately $3.4 million and $3.2 million as of December 31, 2016 and September 30, 2017, respectively. In addition, one of the sellers contributed $2.8 million to the Company representing the seller’s continuing interest in the assets acquired.

Lease Incentives

In conjunction with the opening of new campuses or renovating existing ones, the Company, in some instances, was reimbursed by the lessors for improvements made to the leased properties. In accordance with ASC 840-20, the underlying assets were capitalized as leasehold improvements and a liability was established for the reimbursements. The leasehold improvements and the liability are amortized on a straight-line basis over the corresponding lease terms, which generally range from five to ten years.

8.    Income Taxes

The Company had $0.3 million of unrecognized tax benefits at Septemberas of December 31, 2020 and June 30, 2017, resulting from2021. Interest and penalties, including those related to uncertain tax positions, taken during the nine months ended September 30, 2017. In addition, the Company recognized approximately $0.3 million of benefits in each of the nine months ended September 30, 2016 and 2017 related to tax positions taken during prior years. The Company did not incur expense for interest and penaltiesare included in the nine months ended September 30, 2017, and recorded approximately $0.1 million of expenseprovision for interest and penaltiesincome taxes in the nine months ended September 30, 2016.

The Company does not expect its unrecognized tax benefits will be realized. If amounts accrued are different than amounts ultimately assessed by taxing authorities, the Company would record an adjustment to income tax expense. The Company does not anticipate significant changes to other unrecognized tax benefits.

unaudited condensed consolidated statements of income.

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The Company paid $25.0$16.2 million and $21.8$17.0 million in income taxes during the ninesix months ended SeptemberJune 30, 2020 and 2021, respectively.

The tax years since 2017 remain open for Federal tax examination and the tax years since 2016 remain open to examination by state and 2017, respectively.

9.Litigation

From timelocal taxing jurisdictions in which the Company is subject to time,taxation.

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15. Segment Reporting
Strategic Education is an educational services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. In the first quarter of 2021, the Company changed the way management reports financial information relied on by the Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate the resources of the Company. The Company’s revised organizational structure includes 3 operating and reportable segments: U.S. Higher Education (“USHE”), which is primarily comprised of the Company's previous Strayer University and Capella University segments, Alternative Learning, and Australia/New Zealand. Financial reporting under the new organizational structure began in the first quarter of 2021. Prior period segment disclosures have been recast to conform to the current period presentation.
The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University. USHE also operates non-degree web and mobile application development courses through Hackbright Academy and DevMountain, the latter being a unit of Strayer University.
The Alternative Learning segment is primarily focused on developing and maintaining relationships with large employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. The employer relationships developed by the Alternative Learning division are an important source of student enrollment for Capella University and Strayer University, and the majority of the revenue attributed to the Alternative Learning division is driven by the volume of enrollment derived from these employer relationships. Alternative Learning also generates revenue through Workforce Edge, a platform which provides employers a full-service education benefits administration solution. Lastly, Alternative Learning generates revenue through Sophia Learning, a provider of low-cost online general education courses recommended by the American Council on Education for transfer credit to other colleges and universities, and Digital Enablement Partnerships, which provide online course delivery and support capabilities related to online course delivery to other higher education institutions.
The Australia/New Zealand segment is comprised of Torrens University, Think Education and Media Design School in Australia and New Zealand, which collectively offer certificate and degree programs in business, design, education, hospitality, healthcare, and technology through campuses in Australia, New Zealand, and online.
Revenue and operating expenses are generally directly attributable to the segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. The Company’s CODM does not evaluate operating segments using asset information.
A summary of financial information by reportable segment for the three and six months ended June 30, 2020 and 2021 is presented in the following table (in thousands):
For the three months ended June 30,For the six months ended June 30,
2020202120202021
Revenues
U.S. Higher Education$247,350 $212,207 $502,863 $438,754 
Australia/New Zealand74,060 125,325 
Alternative Learning8,481 12,906 18,270 25,430 
Consolidated revenues$255,831 $299,173 $521,133 $589,509 
Income (loss) from operations
U.S. Higher Education$58,765 $32,059 $115,508 $79,813 
Australia/New Zealand15,601 12,652 
Alternative Learning4,221 5,180 10,618 11,061 
Amortization of intangible assets(15,417)(19,392)(30,834)(38,799)
Merger and integration costs(1,174)(1,937)(4,938)(2,949)
Restructuring costs(4,811)(23,078)
Consolidated income from operations$46,395 $26,700 $90,354 $38,700 
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16.    Litigation
The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. ThereFrom time to time, certain matters may arise that are no pending material legal proceedings to whichother than ordinary and routine. The outcome of such matters is uncertain, and the Company may incur costs in the future to defend, settle, or otherwise resolve them. The Company currently believes that the ultimate outcome of such matters will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.
17.    Regulation
United States Regulation
American Rescue Plan Act of 2021

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Similar to previous stimulus packages, this legislation provided additional funding for the Higher Education Emergency Relief Fund. A small portion of the $39.6 billion allocated for institutions of higher education has been made available for student emergency aid for students at for-profit institutions. Capella University was eligible for and disbursed $184,323 to students of the highest need in June 2021, and Strayer University is eligible and plans to disburse $2,554,773 to students of the highest need in July 2021.

The legislation also amends the “90/10 Rule” to include “all federal education assistance” in the “90” side of the ratio calculation. See “Item 1. Business – Regulation – U.S. Regulatory Environment – The 90/10 Rule” of the Company’s Annual Report on Form 10-K for a description of the 90/10 Rule. The legislation requires the Department to conduct a negotiated rulemaking process to modify related Department regulations. This rulemaking process may result in a definition of “federal education assistance” that will include tuition assistance programs offered by the U.S. Department of Defense and U.S. Department of Veterans Affairs, in addition to the Title IV programs already covered by the 90/10 Rule. Under the legislation, these revisions to the 90/10 Rule would apply to institutional fiscal years beginning on or after January 1, 2023.

Further legislation has been introduced in both chambers of Congress that seek to modify the 90/10 Rule further, including proposals to change the ratio requirement to 85/15 (federal to nonfederal revenue). We cannot predict whether Congress will pass any of these legislative proposals.
Consolidated Appropriations Act, 2021

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021. Among other things, this package funded the government through September 2021, provides additional COVID-related relief, and made a number of U.S. higher education changes.

The legislation includes a number of tax provisions, including replacing the tuition deduction with an expanded Lifetime Learning Credit, which now shares the higher income limitations of the American Opportunity Tax Credit; and extends until January 1, 2026 expanded employer-provided educational assistance permitting employers to pay up to $5,250 toward an employee’s federal student loans as a tax-free benefit.

The legislation also includes a number of higher education-related provisions, including: eliminating the “expected family contribution” from the Free Application for Federal Student Aid (“FAFSA”) and replacing it with a “Student Aid Index;” expanding eligibility for Pell Grants; restoring Pell Grant eligibility for incarcerated students attending non-profit institutions; restoring quarters/semesters of Pell eligibility to students who have successfully asserted a borrower defense to repayment; repealing the limitation on lifetime subsidized loan eligibility (known as “Subsidized Usage Limit Applies,” or SULA); and significantly simplifying the FAFSA form. The Department is expected to provide, but has not yet provided, institutions with guidance on the higher education provisions included in the Consolidated Appropriations Act of 2021, which take effect on July 1, 2023.

Additionally, the bill provides $22.7 billion for higher education institutions and students impacted by COVID-19, including $680.9 million (3 percent of the total) for student emergency aid for students at for-profit institutions. In January 2021, the Department released a table of institutional allocation of funds which indicated that Capella University was eligible for $328,602 and Strayer University was eligible for $5,831,606, all of which was disbursed to students with the highest need, in the form of direct grants in spring 2021.
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Veterans Health Care and Benefits Improvement Act of 2020

On January 5, 2021, President Trump signed into law the Veterans Health Care and Benefits Improvement Act of 2020, which expands student veterans’ protections. Among other things, the legislation requires a risk-based review of schools if an institution is operating under Heightened Cash Monitoring 2 or provisional approval status by the Department of Education, is subject to any punitive action by a federal or state entity, faces the loss or risk of loss of accreditation, or has converted from for-profit to non-profit status. The legislation also restores veterans benefits to students whose school closed, as long as the student transferred fewer than 12 credits from the closed school or program; protects students from debt collection by the Department of Veterans Affairs (“VA”) for overpaid tuition benefits; and establishes a number of institutional requirements, including: providing clear disclosures about cost, loan debt, graduation and job placement rates, and acceptance of transfer credit; ensuring institutions are accommodating short absences due to service; prohibiting same-day recruitment and registration; and prohibiting more than three unsolicited recruiting contacts. The legislation will require guidance from the Department of Veterans Affairs, and most provisions are effective August 1, 2021. Institutions may seek waivers for certain sections of the new law if they were not able to satisfy compliance requirements by August 1, 2021, but neither Strayer University nor Capella University will seek a waiver.
THRIVE Act

On June 8, 2021, President Biden signed into law the Training in High-Demand Roles to Improve Veteran Employment Act (the “THRIVE Act”), which amended provisions of the Company’s propertyVeterans Health Care and Benefits Improvement Act and the American Rescue Plan Act. The law requires the Department of Labor and VA to collaborate on a list of high-demand occupations for a rapid retraining assistance program. Additionally, the law requires the Government Accountability Office to report on the outcomes and effectiveness of retraining programs. The THRIVE Act amends the Veterans Health Care and Benefits Improvement Act by clarifying that programs pursued solely through distance education on a half-time basis or less are not eligible for the housing stipend that is subject.

10.  Regulation

generally available for retraining programs. As noted above, the Veterans Health Care and Benefits Improvement Act prohibits certain high-pressure recruiting tactics. The Company,THRIVE Act requires the University,VA to take disciplinary action if a person with whom an institution has a recruiting or educational services agreement violates the VA’s incentive compensation bans.

CARES Act

On March 27, 2020, Congress passed and NYCDAPresident Trump signed into law the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Among other things, the $2.2 trillion bill established some flexibilities related to the processing of federal student financial aid, established a higher education emergency fund, and created relief for some federal student loan borrowers. Through the CARES Act, Congress provided institutions of higher education relief from conducting a return to Title IV (R2T4) calculation in cases where the student withdrew because of COVID-19, including removing the requirement that the institution return unearned funds to the Department of Education and providing loan cancellation for the portion of the Direct Loan associated with a payment period that the student did not complete due to COVID-19. The CARES Act also allows institutions to exclude from satisfactory academic progress calculations any attempted credits that the student did not complete due to COVID-19, without requiring an appeal from the student. Additionally, under the legislation, institutions are subjectpermitted to significant state regulatory oversight,transfer up to 100% of Federal Work Study funds into their Federal Supplemental Educational Opportunity Grant allocation and are granted a waiver of the 2019/2020 and 2020/2021 non-federal share institutional match. Institutions may continue to make Federal Work Study payments to student employees who are unable to meet their employment obligations due to COVID-19. The CARES Act also suspended payments and interest accrual on federal student loans until September 30, 2020, in addition to suspending involuntary collections such as well aswage garnishment, tax refund reductions, and reductions of federal regulatory oversight,benefits like Social Security benefits during the same timeframe. On August 8, 2020, President Trump issued a memorandum directing the Secretary of Education to take action to extend CARES Act student loan relief through December 31, 2020. On December 4, 2020, the Secretary of Education extended CARES Act student loan relief through January 31, 2021. On January 20, 2021, the Secretary of Education extended CARES Act student loan relief through September 30, 2021. On March 30, 2021, the Secretary of Education also extended student loan relief to Federal Family Education Loans that are in default. The Department issued and will continue to issue sub-regulatory guidance to institutions regarding implementation of the provisions included in the caseCARES Act.

Finally, the CARES Act allocated $14 billion to higher education through the creation of the CompanyEducation Stabilization Fund. Fifty percent of the emergency funds received by institutions must go directly to students in the form of emergency financial aid grants to cover expenses related to the disruption of campus operations due to COVID-19. Students who were previously enrolled in exclusively online courses prior to March 13, 2020 are not eligible for these grants. Institutions may use remaining emergency funds not given to students on costs associated with significant changes to the delivery of instruction due to COVID-19, as long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising; endowments; or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship.
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Institutions receive funds under the University.

Education Stabilization Fund based on a formula that factors in their relative percentage of full-time, Federal Pell Grant-eligible students who were not exclusively enrolled in online education prior to the emergency period. On April 9, 2020, the Department published guidance and funding levels for the Education Stabilization Fund, indicating that Strayer University was eligible to receive $5,792,122. Given that Strayer University is predominantly online, and very few students take only on-ground classes, Strayer declined to accept the funds allocated to it because most students would not have expenses related to the disruption of campus operations. Instead, Strayer University provided a $500 tuition grant for all students who had enrolled in on-ground classes for the Spring term, prior to the classes being converted to online. Because Capella University’s students are exclusively online, Capella was ineligible for Education Stabilization funding.

Gainful Employment

Under the Higher Education Act ("HEA"), a proprietary institution offering programs of study other than a baccalaureate degree in liberal arts (for which there is a limited statutory exception) must prepare students for gainful employment in a recognized occupation. On October 31, 2014, theThe Department of Education (the “Department”) published final regulations related to gainful employment. The regulationsemployment that went into effect on July 1, 2015, with the exception of newadditional disclosure requirements that were originally scheduled to go into effectbecame effective January 1, 2017 but which have now been delayed, to some extent, untiland July 1, 2018. Additionally,2019 (the “2015 Regulations”).
On July 1, 2019, the Department announced, on June 16, 2017, its intention to conduct negotiated rulemaking proceedings to revise the gainful employment regulations. Those proceedings are expected to begin in December 2017.

Theof Education released final gainful employment regulations, include two debt-to-earnings measures, consisting of an annual income rate andwhich contained a discretionary income rate. The annual income rate measures student debt in relation to earnings, and the discretionary income rate measures student debt in relation to discretionary income. A program passes if the program’s graduates:

·

have an annual income rate that does not exceed 8%; or

·

have a discretionary income rate that does not exceed 20%.

In addition, a program that does not pass eitherfull repeal of the debt-to-earnings metrics,2015 Regulations and that has an annual income rate between 8% and 12%, or a discretionary income rate between 20% and 30%, is considered to be in a warning zone. A program fails if the program’s graduates have an annual income rate of 12% or greater and a discretionary income rate of 30% or greater. A program would become Title IV-ineligible for three years if it fails both metrics for two out of three consecutive years, or fails to pass at least one metric for four consecutive award years. The regulations provide a means by which an institution may challenge the Department’s calculation of any of the debt metrics prior to loss of Title IV eligibility. On January 8, 2017, Strayer received its final 2015 debt-to-earnings measures. None of Strayer’s programs failed the debt-to-earnings metrics. Two active programs, the Associate in Arts in Accounting and Associate in Arts in Business Administration, are “in the zone,” which means each program remains fully eligible unless (1) either program has a combination of zone and failing designations for four consecutive years, in which case it would become Title IV-ineligible in the fifth year; or (2) either program fails the metrics for two out of three consecutive years, in which case the program could become ineligible for the following award year.

If an institution is notified by the Secretary of Education that a program could become ineligible, based on its final rates, for the next award year:

·

The institution must provide a warning with respect to the program to students and prospective students indicating, among other things, that students may not be able to use Title IV funds to attend or continue in the program; and

·

The institution must not enroll, register or enter into a financial commitment with a prospective student until a specified time after providing the warning to the prospective student. 

The new regulations also require institutions annually to report student- and program-level data to the Department, and comply with additional disclosure requirements. Final regulations adopted by the Department, which generally became effective on July 1, 2011,2020. Both Capella University and Strayer University implemented the July 2019 regulations early, by means permitted by the Secretary, and accordingly were not required to report gainful employment data for the 2018-2019 award year. For the period between July 2019 and July 1, 2020, Capella University and Strayer University were not required to comply with gainful employment disclosure and template publication requirements and were not required to comply with the regulation’s certification requirements with respect to programmatic accreditation and program satisfaction of prerequisites for professional licensure/state certification. On May 26, 2021, the Department announced its intention to establish negotiated rulemaking committees to prepare proposed regulations for gainful employment and other topics related to programs authorized under Title IV of the Higher Education Act of 1965, as amended. See “Current Negotiated Rulemaking” below. We cannot predict the outcome of the negotiated rulemaking process.

Borrower Defenses to Repayment

On September 23, 2019, the Department published final Borrower Defense to Repayment regulations (the “2019 BDTR Rule”), which governs borrower defense to repayment claims in connection with loans first disbursed on or after July 1, 2020, the date the 2019 BDTR Rule became effective. The 2019 BDTR Rule supplants the 2016 Borrower Defense to Repayment rule.

Under the 2019 BDTR Rule, an individual borrower can assert a defense to repayment and be eligible for relief if she or he establishes, by a preponderance of the evidence, that (1) the institution at which the borrower enrolled made a misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan or a loan repaid by a Direct Consolidation Loan; (2) the misrepresentation directly and clearly related to the borrower’s enrollment or continuing enrollment at the institution or the institution’s provision of education services for which the loan was made; and (3) the borrower was financially harmed by the misrepresentation. The Department will grant forbearance on all loans related to a claim at the time the claim is made.
The 2019 BDTR Rule defines “financial harm” as the amount of monetary loss that a borrower incurs as a consequence of a misrepresentation. The Department will determine financial harm based upon individual earnings and circumstances, which must include consideration of the individual borrower’s career experience subsequent to enrollment and may include, among other factors, evidence of program-level median or mean earnings. “Financial harm” does not include damages for non-monetary loss, and the act of taking out a Direct Loan, alone, does not constitute evidence of financial harm. Financial harm also cannot be predominantly due to intervening local, regional, national economic or labor market conditions, nor can it arise from the borrower’s voluntary change in occupation or decision to pursue less than full-time work or decision not to work. The 2019 BDTR Rule contains certain limitations and procedural protections. Among the most prominent of these restrictions, the regulation contains a three-year limitation period of claims, measured from the student’s separation from the institution, does not permit claims to be filed on behalf of groups, and requires that institutions receive access to any evidence in the Department’s possession to inform its response. The 2019 BDTR Rule permits the usage of pre-dispute arbitration agreements and class action waivers as conditions of enrollment, so long as the institution provides plain-language disclosures to students and the disclosures are placed on the institution’s website. The regulations also allow for a borrower to choose whether to apply for a closed school loan discharge or accept a teach-out opportunity. In addition, the closed school discharge window is expanded from 120 days to 180 days prior to the school’s closure, though the final rule does not allow for an automatic closed school loan discharge. Institutions are required to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the
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borrower defense to repayment, closed school discharge, false certification discharge, and unpaid refund discharge regulations. If the Secretary discharges a loan in whole or in part, the Department of Education may require anthe school to repay the amount of the discharged loan. On December 10, 2019, the Secretary of Education released a formula to calculate the amount of relief a borrower may receive for a successful BDTR application. This formula analyzed a borrower’s earnings as compared to median earnings of comparable programs to determine the amount of loans that would be discharged. Under this formula, even successful BDTR applicants may receive only a partial loan discharge.
On March 11, 2020, the 116th Congress passed a joint resolution providing for Congressional disapproval of the 2019 BDTR Rule. President Trump vetoed the joint resolution on May 29, 2020, and the House subsequently failed to override the veto during a vote on June 26, 2020.
On March 18, 2021, the Department revised its BDTR review process and repealed the previous administration’s partial relief formula. Under the new BDTR procedures, the Department will grant full loan relief to borrowers with approved BDTR applications. Additionally, the Department has eliminated certain evidentiary requirements for borrowers who have received a loan cancellation due to total or permanent disability. These borrowers will no longer be required to provide proof of insufficient income for the relief program for the three years after discharge of their loans.
On May 26, 2021, the Department announced its intention to establish negotiated rulemaking committees to prepare proposed regulations for borrower defenses to repayment and other topics related to programs authorized under Title IV of the Higher Education Act of 1965, as amended. See “Current Negotiated Rulemaking” below. We cannot predict the outcome of the negotiated rulemaking process.
Accrediting Agencies and State Authorization
On November 1, 2019, the Department of Education published final rules amending regulations governing the recognition of accrediting agencies, certain student assistance provisions including state authorization rules, and institutional eligibility. Among other changes, the final rules revise the definition of “state authorization reciprocity agreement” such that member states may enforce their own general-purpose state laws and regulations, but may not impose additional requirements related to state authorization of distance education directed at all or a subgroup of educational institutions. The regulations also clarify that state authorization requirements related to distance education courses are based on the state where a student is “located,” as determined by the institution, and not the state of the student’s “residence.” In addition, the final rules remove certain disclosure requirements related to use a template designedprograms offered solely through distance education, and they replace those requirements with certain disclosure requirements applicable to all programs that lead to professional licensure or certification, regardless of the delivery modality of those programs. The Department’s new rules also refine the process for recognition and review of accrediting agencies, the criteria used by the Department to discloserecognize accrediting agencies, and the Department’s requirements for accrediting agencies in terms of their oversight of accredited institutions and programs. The final regulations became effective on July 1, 2020, excepting certain provisions which were eligible to prospective students,be implemented early by institutions, and certain provisions relating to recognition of accrediting agencies effective January 1 and July 1, 2021. Neither Capella University nor Strayer University opted for early implementation.
On July 29, 2020, the National Advisory Committee on Institutional Quality and Integrity (“NACIQI”) held a meeting to review compliance by the Higher Learning Commission (“HLC”) with respectDepartment of Education requirements for recognized accrediting agencies. HLC is the institutional accreditor for Capella University. On June 30, 2020, the Department released a staff report that outlined HLC’s alleged noncompliance with its own policies and the Department’s regulations with regard to

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a change of ownership approval process for the acquisition of the Art Institute of Colorado and the Illinois Institute of Art, by Dream Center Educational Holdings. The staff report noted noncompliance in the areas of due process, consistency in decision making, and proper appeals procedures. The staff report proposed a one-year prohibition on HLC accrediting new institutions and a required compliance report on HLC’s remedial actions. NACIQI voted 9-2 to reject the staff report’s proposed sanctions, but NACIQI’s recommendation was non-binding. On October 26, 2020, a Senior Department Official ("SDO") found HLC non-compliant, in part. While the SDO required that HLC submit periodic reporting for twelve months, the SDO did not restrict HLC's scope of accreditation or ability to accredit new institutions. HLC did not appeal the Secretary's decision.

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each gainful employment program, occupations thatDistance Education and Innovation

On August 24, 2020, the program prepares studentsDepartment of Education published final rules related to enter, total costdistance education and innovation to amend the sections of the institutional eligibility regulations issued under the HEA regarding establishing eligibility, maintaining eligibility, and losing eligibility. Among other changes, the final rules establish an updated definition of distance education; amend the existing definition of the credit hour; create a definition of academic engagement; and update eligibility and program on-time graduation rate, job placement rate, if applicable,design, for programs offered through the direct assessment of learning. The final rules also make operational changes to several financial aid awarding, disbursing and the median loan debt of program completers for the most recently completed award year.refunding rules, including how aid can be delivered to students enrolled in subscription period programs, such as Capella’s FlexPath offerings. The regulations thatfinal rule became effective July 1, 2015 expanded upon those existing disclosure requirements, and institutions were expected to update their disclosure templates to comply by January 1, 2017. However,2021.
Title IX
On May 6, 2020, the Department delayedof Education published final rules related to implementation of Title IX of the requirements until April 3, 2017Education Amendments of 1972 (“Title IX”), which prohibits discrimination on the basis of sex in education programs that receive funding from the federal government. The final rules define what constitutes sexual harassment for purposes of Title IX in the administrative enforcement context, describe what actions trigger an institution’s obligation to respond to incidents of alleged sexual harassment, and then until July 1, 2017.specify how an institution must respond to allegations of sexual harassment. Among other things, the new rules include a requirement for live hearings on Title IX sexual harassment claims, which includes direct and cross-examination of parties, university-provided advisors (in the event a student or party does not provide an advisor), rulings on questions of relevance by decision-makers, and the creation and maintenance of a record of the live hearing proceedings. The final rule became effective August 14, 2020.
On March 8, 2021, President Biden signed an executive order that requires the Secretary of Education and the Attorney General to review the previous administration’s rulemakings and guidance documents related to Title IX. In June 2021, the Department of Education held virtual public hearings to gather information for providing enforcement of Title IX, as part of the Office for Civil Rights’ comprehensive review of the regulation. After the public hearings, the Department of Education indicated that it plans to introduce proposed rule changes for Title IX in May 2022. On June 30, 2017,16, 2021, the Office for Civil Rights issued a notice of interpretation clarifying that the Department further delayed, until July 1, 2018,interprets Title IX and its enforcement authority under the requirements that an institutionregulation to include the disclosure template, orprohibition of sex discrimination based on sexual orientation and gender identity. On July 20, 2021, the Department of Education released a link thereto, inQuestions and Answers document outlining the Office for Civil Rights’ interpretation of the Title IX regulations related to sexual harassment.
Current Negotiated Rulemaking
On May 26, 2021, the Department announced its gainful employment program promotional materials and directly distribute the disclosure templatesintention to prospective students. The Department did not change the July 1, 2017 effective dateestablish negotiated rulemaking committees to prepare proposed regulations for the requirement to provide an updated disclosure template, or a link thereto, on gainful employment program web pages. The University is in compliance with that requirement.

In addition, the gainful employment regulations require institutions to certify, among other things, that each eligible gainful employment program is programmatically accredited if required by a federal governmental entity or a state governmental entity of a state in which it is located or is otherwise required to obtain state approval. Institutions also must certify that each eligible program satisfies the applicable educational prerequisites for professional licensure or certification requirements in each state in which it is located or is otherwise required to obtain state approval, so that a student who completes the program and seeks employment in that state qualifies to take any licensure or certification exam that is needed for the student to practice or find employment in an occupation that the program prepares students to enter. The University has timely made the required certification.

Under the gainful employment regulations, an institution may establish a new program’sprograms authorized under Title IV eligibility by updating the list of the institution’s programs maintained by the Department. However, an institution may not update its list of eligible programs to include a failing or zone program that the institution voluntarily discontinued or that became ineligible, or a gainful employment program that is substantially similar to such a program, until three years after the loss of eligibility or discontinuance.

The requirements associated with the gainful employment regulations may substantially increase the Company’s administrative burdens and could affect the University’s program offerings, student enrollment, persistence, and retention. Further, although the regulations provide opportunities for an institution to correct any potential deficiencies in a program prior to the loss of Title IV eligibility, the continuing eligibility of the University’s academic programs will be affected by factors beyond management’s control such as changes in the University’s graduates’ income levels, changes in student borrowing levels, increases in interest rates, changes in the percentage of former students who are current in the repayment of their student loans, and various other factors. Even if the University were able to correct any deficiency in the gainful employment metrics in a timely manner, the disclosure requirements associated with a program’s failure to meet at least one metric may adversely affect student enrollments in that program and may adversely affect the reputation of the University.

Borrower Defenses to Repayment

Pursuant to the Higher Education Act and following negotiated rulemaking, on November 1, 2016,of 1965, as amended. As part of the notice, the Department published final regulations that, inter alia, would have specifiedsuggested the acts or omissionsfollowing topics for regulation: change of an institution that a borrower may assert as a defense to repaymentownership and change in control of a loan madeinstitutions of higher education under the Direct Loan Program. Although the regulations were scheduled to become effective on July 1, 2017, on June 16, 2017, the Department delayed indefinitely the effective date of selected provisions of the regulations and announced its intention to conduct negotiated rulemaking proceedings to revise the regulations. Those proceedings are expected to begin in November 2017. On October 24, 2017, the Department published an interim final rule to delay until July 1, 2018 the effective date of the selected provisions. On October 24, 2017, the Department also published a notice of proposed rulemaking to delay until July 1, 2019 the effective date of the selected provisions.

The Clery Act

The University must comply with the campus safety and security reporting requirements as well as other requirements in the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (the “Clery Act”) including changes made to the Clery Act by the Violence Against Women Reauthorization Act of 2013. On October 20, 2014, the Department promulgated regulations, effective July 1, 2015, implementing amendments to the Clery Act. In addition, the Department has interpreted Title IX to categorize sexual violence as a form of prohibited sex discrimination and to require institutions to follow certain disciplinary34 CFR 600.31; certification procedures with respect to such offenses. On September 22, 2017, the Department withdrew the statements of policy and guidance reflected in two guidance documents issued under the Obama administration and issued interim guidance about campus sexual misconduct. In the interim guidance, the Department announced that it intends to conduct negotiated rulemaking proceedings to revise its regulations related to institutions’ Title IX responsibilities. Failure by the University to comply with the Clery Act or Title IX requirements or regulations thereunder could result in action by the Department fining the University or limiting or

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suspending itsfor participation in Title IV, HEA programs under 34 CFR 668.13; standards of administrative capability under 34 CFR 668.16; ability to benefit under 34 CFR 668.156; borrower defense to repayment under 34 CFR 682.410, 668.411, 685.206, and 685.222; discharges for borrowers with a total and permanent disability under 34 CFR 674.61, 682.402, and 685.213; closed school discharges under 34 CFR 685.214 and 682.402; discharges for false certification of student eligibility under 34 CFR 685.215(a)(1) and 682.402; loan repayment plans under 34 CFR 682.209, 682.215, 685.208, and 685.209; the Public Service Loan Forgiveness program under 34 CFR 685.219; mandatory pre-dispute arbitration and prohibition of class action lawsuits provisions in institutions’ enrollment agreements (formerly under 34 CFR 685.300) and associated counseling about such arrangements under 34 CFR 685.304; financial responsibility for participating institutions of higher education under 34 CFR subpart L, such as events that indicate heightened financial risk; gainful employment (formerly located in 34 CFR subpart Q); and Pell Grant eligibility for prison education programs under 34 CFR part 690. Additionally, the Department invited public input on how it could leadaddress, through regulations, gaps in postsecondary outcomes such as retention, completion, loan repayment, and student loan default by race, ethnicity, gender, and other key student characteristics. To support this work, the Department held a series of virtual public hearings in June 2021, as well as accepted written comments. At the virtual public hearings and via written comments, members of the public discussed proposed changes for all of the issues noted above, as well as comments addressing data transparency, including disclosures of outcomes for veteran students. The Department has indicated its intention to litigation, and could harmconvene multiple committees, with a call for negotiator nominations planned for late summer 2021. We cannot predict the University’s reputation. The Company believes thatoutcome of the University is in compliance with these requirements.

negotiated rulemaking process.

Compliance Reviews

The

Strayer University isand Capella University are subject to announced and unannounced compliance reviews and audits by various external agencies, including the Department, its Office of Inspector General, state licensing agencies, guaranty agencies, and accrediting agencies.
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In 2014,June 2019, the Department conducted four campus-basedan announced, on-site program reviews ofreview at Capella University, locations in three statesfocused on Capella University’s FlexPath program. The review covered the 2017-2018 and the District of Columbia. The reviews covered2018-2019 federal student financial aid years 2012-2013years. The Department issued its preliminary report on November 13, 2020, and 2013-2014, and two ofCapella University responded to the reviews also covered compliance with the Clery Act, the Drug-Free Schools and Communities Act, and regulations related thereto. For three of the program reviews, thereport. On February 9, 2021, Capella University received correspondence from the Department in 2015 closing the program reviews with no further action required by the University. For the other program review, in 2016, the University received aDepartment’s Final Program Review Determination, Letter identifying a paymentwhich closed the Program Review without further action required on the part of less than $500 due toCapella University.
On March 17, 2021, the Department based oninformed Strayer University that it planned to conduct an underpayment on a return to Title IV calculation, and otherwise closing theannounced, remote program review. The University remitted payment,review commenced on April 19, 2021 and received a letter fromcovers the 2019-2020 and 2020-2021 federal student financial aid years. In general, after the Department indicating that no further action was requiredconducts its site visit and thatreviews data supplied by a university, it sends the matter was closed. 

university a program review report. The university has the opportunity to respond to any findings in the report. The Department of Education then issues a final program review determination letter, which identifies any liabilities. The institution may appeal any monetary liabilities specified in the final program review determination letter. Strayer University has not yet received the Department’s report on the April 2021 program review.

Program Participation Agreement

Each institution participating in Title IV programs must enter into a Program Participation Agreement with the Department. Under the agreement, the institution agrees to follow the Department’s rules and regulations governing Title IV programs. On October 13,11, 2017, the Department informed theand Strayer University that it was approved to participateexecuted a new Program Participation Agreement, approving Strayer University’s continued participation in Title IV programs with full certification through June 30, 2021.

NYCDA

NYCDA currently provides on-ground courses in New Jersey, New York, Pennsylvania, Utah, and Strayer University applied for recertification by March 31, 2021, as required by the District of Columbia, and in the Netherlands, but is not accredited, does not participate in state or federal student financial aid programs,Department, and is not subject toawaiting a new Program Participation Agreement. Per the regulatory requirements applicable to accredited schools and schools that participate in such financial aid programs such as those described above. Programs such as those offered by NYCDA are regulated by each individual state.

11.  Subsequent Event

On October 29, 2017, the Company, Sarg Sub Inc.,Department’s guidance, if a Minnesota corporation andschool submits a direct, wholly owned subsidiary of the Company (“Merger Sub”), and Capella Education Company, a Minnesota corporation (“Capella”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub will be merged with and into Capella (the “Merger”), with Capella surviving as a direct, wholly owned subsidiary of the Company.

At the effective time of the Merger (the “Effective Time”), each share of common stock of Capella (“Capella Common Stock”) issued and outstanding immediatelymaterially complete application no later than 90 calendar days prior to the Effective Time (other thanexpiration of the shares that are owned byProgram Participation Agreement, the agreement remains valid and the institution continues to be eligible to participate in Federal Student Aid programs, even if the Department has not completed its evaluation of the application before the expiration date.

As a result of the August 1, 2018 merger, Capella University experienced a change of ownership, with the Company Merger Subas its new owner. On January 18, 2019, consistent with standard procedure upon a Title IV institution’s change of ownership, the Department and Capella University executed a new Provisional Program Participation Agreement, approving Capella’s continued participation in Title IV programs with provisional certification through December 31, 2022. As is typical, the Provisional Program Participation Agreement subjects Capella University to certain requirements during the period of provisional certification, including that Capella must apply for and receive approval from the Department in connection with new locations or any wholly owned subsidiarythe addition of new Title IV-eligible educational programs. Capella the Company or Merger Sub) will be converted intorequired to apply for recertification by September 30, 2022.
Australian Regulation
The Company operates 2 post-secondary educational institutions in Australia, Torrens University Australia Limited (“Torrens”) and Think: Colleges Pty Ltd (“Think”). In Australia, a distinction is made between higher education and vocational education organizations.
Higher education providers consist of public and private universities, Australian branches of overseas universities and other higher education providers. Higher education qualifications consist of undergraduate awards (bachelor’s degrees, associate degrees and diplomas) and postgraduate awards (graduate certificates and diplomas, master’s degrees and doctoral degrees). The regulation of higher education providers is undertaken at a national level by the rightTertiary Education Quality and Standards Agency (“TEQSA”). All organizations that offer higher education qualifications in or from Australia must be registered by TEQSA. Higher education providers that have not been granted self-accrediting status must also have their courses of study accredited by TEQSA. Registration as a higher education provider is for a fixed period of up to receive 0.875seven years. TEQSA regularly reviews the conduct and operation of accredited higher education providers.
The vocational education and training (“VET”) sector consists of technical and further education institutes, agricultural colleges, adult and community education providers, community organizations, industry skill centers and private providers. VET qualifications include certificates, diplomas and advanced diplomas. The regulation of VET providers is undertaken at a newly issued share of common stock ofnational level by the Company (the “Company Common Stock”)Australian Skills Quality Authority (“Merger Consideration”ASQA”). No fractional sharesOrganizations providing VET courses in Australia must be registered by ASQA as a Registered Training Organisation (“RTO”). Courses offered by RTOs need to be accredited by ASQA. Registration as an RTO is for a fixed period of Company Common Stock will be issuedup to seven years. ASQA regularly reviews the conduct and operations of RTOs.
Torrens is one of 43 universities in the Merger,Australia. It is a for-profit entity and Capella shareholders will receive cash in lieuregistered as a university by TEQSA. As a self-accrediting university, it is not required to have its courses of fractional sharesstudy accredited by TEQSA. Torrens is also registered by ASQA as part of the Merger Consideration, as specified in the Merger Agreement.

The respective boards of directors of the Companyan RTO and Capella have unanimously approved the Merger Agreement,is thus entitled to offer vocational and the board of directors of Capella has agreed to recommend that Capella’s shareholders adopt the Merger Agreement. In addition, the board of directors of the Company has agreed to recommend that the Company’s stockholders approve the issuance of shares of Company Common Stock in the Merger and the amendment to the Company certificate of incorporation to, among other things (i) change the Company’s name to “Strategic Education, Inc.” and (ii) increase the number of shares of Company Common Stock that the Company is authorized to issue to 32,000,000 shares to, among other things, allow for the payment of the Merger Consideration.

The consummation of the Merger is subject to customary closing conditions, including, but not limited to, (i) the approval of Company stockholders and Capella stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and (iii) the receipt of certain regulatory approvals from educational agencies

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(including the DepartmentThink is one of Educationapproximately 5,000 RTOs in Australia and Capella University’s accreditor). in that capacity is regulated by ASQA. It is also registered as a higher education provider by TEQSA. Its higher education courses require, and have received, accreditation by TEQSA.

Australia also maintains a Commonwealth Register of Institutions and Courses for Overseas Students (“CRICOS”) for Australian education providers that recruit, enroll and teach overseas students. Registration in CRICOS allows providers to offer courses to overseas students studying on Australian student visas. Both Torrens and Think are so registered.
The parties expect the Merger will be completed in the third quarter of 2018.

The Merger Agreement provides for certain termination rights for both Capella and the Company. Upon termination of the Merger Agreement under certain specified circumstances (including to accept a superior proposal), the Company may be requiredCommonwealth government has established income-contingent loan schemes that assist eligible fee-paying students to pay Capella a termination feeall or part of $25,000,000,their tuition fees (separate schemes exist for higher education and upon terminationvocational courses). Under the schemes, the relevant fees are paid directly to the institutions. A corresponding obligation then exists from the participating student to the Commonwealth government. Neither Torrens nor Think have any responsibility in connection with the repayment of these loans by students and, generally, this assistance is not available to international students. Both Torrens and Think are registered for the Merger Agreement under certain specified circumstances (includingpurposes of these plans (a precondition to accept a superior proposal), Capella may be requiredtheir students being eligible to pay the Company a termination fee of $25,000,000. In addition, if the Merger Agreement is terminated by either party as a result of Capella’s failure to obtain stockholder approval, or is terminated by the Company due to Capella’s breach of its representations and covenants andreceive such breach would result in the closing conditions not being satisfied, then Capella may be required to reimburse transaction expenses up to $8,000,000. loans).

New Zealand Regulation
The Company may be requiredoperates a post-secondary educational institution in New Zealand, Media Design School Limited (“MDS”). MDS is a Private Training Establishment (“PTE”); a private organization offering education or training. It is a globally renowned and specialist provider of design and creative technology education with qualifications ranging from diplomas to reimburse transaction expenses uppostgraduate degrees. MDS also has access to $8,000,000New Zealand Government student finance where study loans are offered to students who are New Zealand citizens or ordinarily resident in reciprocal circumstances. 

New Zealand, subject to certain conditions.


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ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

Certain of the statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act”). Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” "may," “will,” “forecast,” “outlook,” “plan,” “project,” "potential" or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses, capital expenditures and capital expenditures.the ultimate effect of the COVID-19 pandemic on the Company's business and results. These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause the actual results to differ materially from those expressed in or implied by such statements. The assumptions, risks and uncertainties include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regionalother federal laws and regulations, institutional accreditation standards and state regulatory requirements, rulemaking by the Department of Education and increased focus by the U. S.U.S. Congress on for-profit education institutions, competitive factors, risks associated with the further spread of COVID-19, including the ultimate impact of COVID-19 on people and economies, the impact of regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions including the Company's acquisition of Torrens University and associated assets in Australia and New Zealand, the risk that the benefits of the acquisition may not be fully realized or may take longer to realize than expected, and the risk that the acquisition may not advance the Company’s business strategy and growth strategy, risks relating to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the combined company may experience difficulty integrating employees or operations, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K and itsin the Company’s other filings with the Securities and Exchange Commission, including in Part II, “Item 1A. Risk Factors” in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, and in this Quarterly Report on Form 10-Q.Commission. The Company undertakes no obligation to update or revise forward-looking statements.

statements, except as required by law.

Additional Information

We maintain a website at http://www.strayereducation.com.www.strategiceducation.com. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Background and Overview

We are

Strategic Education, Inc. (“SEI,” “we”, “us” or “our”) is an education services holding company that ownsprovides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. We operate primarily through our wholly-owned subsidiaries Strayer University (the “University”) and Capella University, both accredited post-secondary institutions of higher education located in the United States, as of January 13, 2016, the New York Code and Design Academy (“NYCDA”). Thewell as Torrens University, is an accredited post-secondary institution of higher education located in Australia. Our operations emphasize relationships through our Alternative Learning segment with large employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs, and also include certain non-degree programs, mainly focused on software and application development, and other vocational and training programs in a variety of fields.
Company Response to COVID-19
The ongoing COVID-19 pandemic has caused significant volatility and disruption to the United States and international economies. SEI took early action to protect the health and well-being of our students and employees in accordance with government mandates and informed by guidance from the Centers for Disease Control and Prevention. Specifically, we instituted a work-from-home policy for the vast majority of our workforce, closed physical campus locations, moved our on-ground courses
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at Strayer University online, postponed large events such as graduation ceremonies, and prohibited non-essential employee travel. As guidance has evolved, we have begun to reopen some campus and office locations and permit business travel.
We have taken measures to provide financial relief to our students and employer partners negatively affected by the COVID-19 crisis, including payment flexibility, scholarship opportunities, and other pricing relief. We expect that these measures will enable more students to continue pursuing their education during and after the COVID-19 crisis. In the third quarter of 2020, we began implementing a restructuring plan that included both voluntary and involuntary employee terminations in an effort to reduce ongoing operating costs to align with changes in enrollment. These headcount reductions resulted in a 5% decrease to SEI's total workforce. During the first quarter of 2021, our restructuring efforts included the closure of underutilized campus and corporate office space in response to changes in enrollment trends and as a result of our work-from-home policies. Of the campus closures, the majority have an alternative location within relative proximity to support students as campus interactions are needed.
As the pandemic has continued, we have seen sustained weakness in demand, especially in the United States, where total enrollment in our U.S. Higher Education segment decreased 7% and 10% in the first and second quarters of 2021, respectively, compared to the same periods in 2020. Enrollment in ANZ also has been impacted by the pandemic and the related closure of international borders in Australia and New Zealand. Based on leading indicators for third quarter enrollments in our U.S. Higher Education segment, and the announcement of continued border closures in Australia and New Zealand, our full-year 2021 financial results could be at or below the low end of the previously provided full-year outlook.
We believe our current financial position and expected operating results, and ability to further control costs, are sufficient to support the ongoing operation of SEI in a manner that protects the health and well-being of our employees, students, and partners.
Acquisition of Torrens University and associated assets in Australia and New Zealand
On November 3, 2020, we completed the acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”), pursuant to the sale and purchase agreement dated July 29, 2020 (the "Purchase Agreement"). ANZ includes Torrens University Australia, Think Education, and Media Design School, which together provide diversified student curricula to approximately 19,000 students across five industry verticals, including business, hospitality, health, education, creative technology and design. We believe ANZ represents an attractive portfolio of institutions with a similar focus on innovation, academic outcomes, improved affordability and career advancement as us. We also believe that ANZ provides an attractive platform for future growth, driven by Australia’s status as an attractive destination for international students, as well as the potential to use ANZ as a platform for expansion across the ASEAN region.
Pursuant to the Purchase Agreement, the aggregate consideration paid was approximately $658.4 million in cash, which reflected the original agreed upon purchase price of $642.7 million, plus a $15.7 million adjustment reflecting an estimated $11.0 million of net cash at close, and an estimated $4.7 million related to higher net working capital. These estimated adjustments are subject to a final true-up of net cash and net working capital, based on the closing accounts to be finalized by both parties. The aggregate consideration paid in the transaction was funded using cash on hand and borrowings under our revolving credit facility.
Our financial results for any periods ended prior to November 3, 2020 do not include the financial results of ANZ and are therefore not directly comparable.
Company Overview
In the first quarter of 2021, we changed the way management reports financial information relied on by the Chief Operating Decision Maker ("CODM") to evaluate performance and allocate the resources of the Company. Our revised organizational structure includes the following three operating and reportable segments: (1) U.S. Higher Education (“USHE”), which is primarily comprised of SEI's previous Strayer University and Capella University segments and is focused on providing flexible and affordable certificate and degree programs to working adults; (2) Alternative Learning, a new segment that is primarily focused on developing and maintaining relationships with large employers to build employee education benefits programs; and (3) Australia/New Zealand, which provides certificate and degree programs in Australia and New Zealand. The Australia/New Zealand segment was not changed as a result of the reorganization. We began reporting under the new segment structure in the first quarter of 2021, and we have restated the results for the prior period to conform to the current period presentation.
U.S. Higher Education Segment
The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University. USHE also operates non-degree web and mobile application development courses through Hackbright Academy and DevMountain, the latter being a unit of Strayer University.
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Strayer University is accredited by the Middle States Commission on Higher Education and Capella University is accredited by the Higher Learning Commission, both institutional accrediting agencies recognized by the Department of Education. The USHE segment provides academic offerings both online and in physical classrooms, helping working adult students develop specific competencies they can apply in their workplace.
The Jack Welch Management Institute (“JWMI”) offers an executive MBA online and is a Top 25 Princeton Review ranked online MBA program.
DevMountain is a software development program offering affordable, high-quality, leading-edge software coding education at multiple campus locations and online.
Hackbright Academy is a software engineering school for women. Its primary offering is an intensive 12-week accelerated software development program, together with placement services and coaching.

In the second quarter, USHE enrollment decreased 10% to 83,923 compared to 93,123 for the same period in 2020.
Alternative Learning Segment
The Alternative Learning segment is primarily focused on developing and maintaining relationships with large employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. The employer relationships developed by the Alternative Learning division are an important source of student enrollment for Capella University and Strayer University, and the majority of the revenue attributed to the Alternative Learning division is driven by the volume of enrollment derived from these employer relationships. Enrollments attributed to the Alternative Learning segment are determined based on a student’s employment status and the existence of a corporate partnership arrangement with SEI. All enrollments attributed to the Alternative Learning division continue to be attributed to the division until the student graduates or withdraws, even if his or her employment status changes or if the partnership contract expires.
In the second quarter, employer affiliated enrollment as a percentage of USHE enrollment was 20.5% compared to 17.2% for the same period in 2020.
Sophia Learning provides low-cost online general education courses recommended by the American Council on Education for credit to other colleges and universities.
Workforce Edge is a platform which provides employers a full-service education benefits administration solution.
Digital Enablement Partnerships provide online course delivery and support capabilities related to online course delivery to other higher education institutions.
Australia/New Zealand Segment
Torrens University is the only investor-funded university in Australia. Torrens University offers undergraduate and graduate degree programscourses 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 physicalseveral campuses predominantly located in Sydney, Melbourne, Brisbane, and Adelaide as well as through online study. Think Education and its colleges are accredited in Australia by the eastern United States,TEQSA and online. NYCDA provides non-degreethe 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 web3D animation and application software development, primarily at campusesvisual effects, game art, game programming, graphic and motion design, digital media artificial intelligence, and creative advertising. Media Design School is accredited in New York City and Philadelphia, PA. NYCDA’s results of operations are included in our results fromZealand by the acquisition date.

Most of our revenue comes from the University, which derives approximately 96% of its revenue from tuition for educational programs, whether delivered in person at a physical campus or delivered online. The academic year of the University is divided into four quarters, which approximately coincide with the four quarters of the calendar year. Students at the University and at NYCDA make payment arrangementsNew Zealand Qualifications Authority, responsible for the tuition for each course atquality assurance of non-university tertiary training providers.

In the time of enrollment. Tuition revenue is recognized ratably over the course of instruction. If a student withdraws from a course priorsecond quarter, Australia/New Zealand enrollment increased 1% to completion, the University refunds a portion of the tuition depending on when the withdrawal occurs. Tuition revenue is shown net of any refunds, withdrawals, corporate discounts, employee tuition discounts and scholarships. The University also derives revenue from other sources such as textbook-related income, certificate revenue, certain academic fees, licensing revenue, and other income, which are all recognized when earned.

Tuition receivable and deferred revenue for our students are recorded upon the start of the course, which18,800 compared to 18,592 for the University is the start of the academic term. Because the University’s academic quarters coincide with the calendar quarters, at the end of the fiscal quarter (and academic term), tuition receivable generally represents amounts due from students for educational services already provided and deferred revenue generally represents advance payments for academic services to be providedsame period in the future. Based upon past experience and judgment, the University establishes an allowance for doubtful accounts with respect to accounts

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2020.

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receivable. Any uncollected account more than one year past due is charged againstWe believe we have the allowance. Accounts less than one year past dueright operating strategies in place to provide the most direct path between learning and employment for our students. We are reserved accordingconstantly innovating to the length of time the balance has been outstanding. In establishing reserve amounts, we also consider the status of students as to whether or not they are currently enrolled for the next term, as well as the likelihood of recovering balances that have previously been written off, based on historical experience. Bad debt expense as a percentage of revenues for the third quarter of 2016 and 2017 was 3.8% and 4.9%, respectively.

Below is a description of the nature of the consolidated costs includeddifferentiate ourselves in our operating expense categories:

·

Instruction and educational support expenses generally contain items of expense directly attributable to educational activities. This expense category includes salaries and benefits of faculty and academic administrators, as well as administrative personnel who support faculty and students. Instruction and educational support expenses also include costs of educational supplies and facilities, including rent for campus facilities, certain costs of establishing and maintaining computer laboratories and all other physical plant and occupancy costs, with the exception of costs attributable to the corporate offices. Bad debt expense incurred on delinquent student account balances is also included in instruction and educational support expenses.

·

Marketing expenses include the costs of advertising and production of marketing materials and related personnel costs.

·

Admissions advisory expenses include salaries, benefits and related costs of personnel engaged in admissions.

·

General and administration expenses include salaries and benefits of management and employees engaged in accounting, human resources, legal, regulatory compliance, and other corporate functions, along with the occupancy and other related costs attributable to such functions.

Investment income consists primarilymarkets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of earningsour students’ professional needs, and realized gains or losses on investmentsestablishing new growth platforms. The talent of our faculty and interest expense consistsemployees, supported by market leading technology, enable these strategies. We believe our strategy will allow us to continue to deliver high quality, affordable education, resulting in continued growth over the long-term. We will continue to invest in this strategy to strengthen the foundation and future of interest incurred on our outstanding borrowings, unused revolving credit facility fees, and amortization of deferred financing costs.

business.


Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments related to its allowance for doubtful accounts;credit losses; income tax provisions; the useful lives of property and equipment;equipment and intangible assets; redemption rates for scholarship programs;programs and valuation of contract liabilities; fair value of future contractual operatingright-of-use lease obligationsassets for facilities that have been closed;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, theStrayer University offers itsand Capella University offer educational programs primarily on a quarter system having four academic terms, which generally coincide with our quarterly financial reporting periods. NYCDA’s revenues are recognized as services are provided, generally ratably overTorrens University offers the lengthmajority of its education programs on a course.trimester system having three primary academic terms, which all occur within the calendar year. Approximately 96% of the University’sour revenues during the ninesix months ended SeptemberJune 30, 20172021 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 University providesuniversities and the schools offering non-degree programs provide academic services, in a given term, 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 Universityuniversities also derivesderive 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 (deferred revenue) is recorded for academic services to be provided, and a tuition receivable is recorded for

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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 deferred revenue.

a contract liability.

Students of theat 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 programsprogram 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 ten-weeksix- to twelve-week period, depending on the university and course type, and is followed by an exam. Students who withdraw from a course may be eligible for a refund of tuition charges based on the timing of the withdrawal. We use the student’s last date of attendance for this purpose. Student attendance is based on physical presence in class for on-ground classes. For online classes,
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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 otherwise been recognized for that student. Since the University’s academic terms coincide with our financial reporting periods for most programs, nearly all refunds are processed and recorded in the same quarter as the corresponding revenue. For certain programs where courses may overlap a quarter-end date, we estimate a refund or withdrawal rate and do not recognize the related revenue until the uncertainty related to the refund is resolved. The amountportion of tuition revenue refundable to students may vary based on the student’s state of residence.

For undergraduate students who withdraw from all their courses during the quarterperiod 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.

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 Universityuniversity is responsible for returning Title IV funds to the Department of Education and then may seek payment from the withdrawn student of prorated tuition or other amounts charged to him or her. Loss of financial aid eligibility during an academic term is rare and would normally coincide with the student’s withdrawal from the institution. As discussed above, we cease revenue recognition uponWhen a student’s withdrawalstudent withdraws from all of his or her classescourses, 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 an academic term.

New studentsa net amount being due to or from the government.

Students at Strayer University registering in credit-bearing courses in any undergraduate program forbeginning 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 theStrayer 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 theStrayer 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 werethe student successfully completed. Revenue and the value of the benefit earned by students participatingcompleted in prior years. Strayer University's performance obligation associated with free courses that may be redeemed in the Graduation Fundfuture is recognizedvalued 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.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 SeptemberJune 30, 2017,2021, we had deferred $34.4$53.6 million for estimated redemptions earned under the Graduation Fund, as compared to $29.5$53.3 million at December 31, 2016.2020. Each quarter, we assess our methodologies and assumptions underlying our estimates for persistence and estimated redemptions based on actual
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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 doubtful accounts forcredit 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, and consideration of other relevant factors.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

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methodologies for estimating bad debtscredit losses in consideration of actual experience. If the financial condition of our students were to deteriorate based on current or expected future events resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. For the thirdsecond quarter of 2017,2021, our bad debt expense was 4.9%3.3% of revenue, compared to 3.8%4.7% for the same period in 2016.2020. A change in our allowance for doubtful accountscredit losses of 1% of gross tuition receivable as of SeptemberJune 30, 20172021 would have changed our income from operations by approximately $0.4$1.3 million.

Accrued lease

Business combinations We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, the purchase price be allocated to all tangible assets and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. The determination of the fair value of assets acquired and liabilities assumed requires many estimates and assumption with respect to the timing and amounts of cash flow projections, revenue growth rates, earnings before interest and taxes margins, student attrition rates, royalty rates, discount rates, and useful lives. These estimates are based on assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with corresponding offsets to goodwill. We applied the acquisition method of accounting to our acquisition of ANZ in 2020. Refer to Note 3, Acquisition of Torrens University and Associated Assets in Australia and New Zealand, within the footnotes to the condensed consolidated financial statements for additional information.
Goodwill and intangible assets — Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. At the time of acquisition, goodwill and indefinite-lived intangible assets are allocated to reporting units. Management identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components. Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment. No events or circumstances occurred in the three and six months ended June 30, 2021 to indicate an impairment to goodwill or indefinite-lived intangible assets. Accordingly, no impairment charges related costs — We estimate potential sublease incometo goodwill or indefinite-lived intangible assets were recorded during the three and vacancysix month periods for space that is not in use, adjusting our estimates when circumstances change. If our estimates change or if we enter into subleases at ratesended June 30, 2021.
Finite-lived intangible assets that are substantially different thanacquired 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 current estimates, we will adjust our liabilityfinite-lived intangible assets for leaseimpairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. No impairment charges related to finite-lived intangible assets were recorded during the three and related costs. During the nine monthssix month periods ended SeptemberJune 30, 2017 and 2016, we reduced our liability for leases by approximately $0.3 million and $2.0 million, respectively.

2021.

Other estimates — We record estimates for contingent consideration, certain of our accrued expenses and for income tax liabilities. We estimate the useful lives of our property and equipment assess goodwill and intangible assets for impairment, 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 contingent consideration, 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 acquisition of ANZ on November 3, 2020. Our results of operations for the three and six months ended June 30, 2021 include the results of ANZ, but the results of operations for the three and six months ended June 30, 2020 do not include the financial results of ANZ. Accordingly, the financial results of each period presented are not directly comparable.
In the thirdsecond quarter of 2017,2021, we generated $108.5$299.2 million in revenue a 6% increase compared to 2016, principally$255.8 million in 2020. Our income from operations was $26.7 million for the second quarter of 2021 compared to $46.4 million in 2020 primarily due to a 7% increaselower earnings in total enrollment
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the USHE segment and restructuring costs incurred in the second quarter of 2021, partially offset by a 1% decline in revenue per student. Incomethe inclusion of ANZ's income from operations was $8.2 million for the third quarter of 2017. During the third quarter of 2017, we recorded approximately $2.1 million in net benefits related to a reduction in the value of contingent consideration payable under the NYCDA acquisition, partially offset by nonrecurring personnel costs associated with a one-time staff reduction program. Income from operations for the third quarter of 2016 was $4.8 million, which includes a $0.2 million noncash benefit to reduce our liability for leases on facilities no longer in use.operations. Net income in the thirdsecond quarter of 20172021 was $6.2$20.0 million including approximately $2.4 million in after-tax benefits from the nonrecurring adjustments described above, compared to $2.9$34.2 million for the same period in 2016, which reflected approximately $0.1 million in after-tax benefits from the nonrecurring adjustments described above.2020. Diluted earnings per share was $0.56$0.83 compared to $0.27$1.55 for the same period in 2016. Diluted2020. For the six months ended June 30, 2021, we generated $589.5 million in revenue, compared to $521.1 million for the same period in 2020. Our income from operations was $38.7 million for the six months ended June 30, 2021 compared to $90.4 million for the same period in 2020 primarily due to lower earnings in the USHE segment and restructuring costs incurred in the first six months of 2021, partially offset by the inclusion of ANZ's income from operations. Net income was $29.6 million for the six months ended June 30, 2021 compared to $69.4 million for the same period in 2020, and diluted earnings per share was $1.22 in the six months ended June 30, 2021 compared to $3.15 for the thirdsame period in 2020.
In the accompanying analysis of financial information for 2021 and 2020, we use certain financial measures including Adjusted Revenue, Adjusted Total Costs and Expenses, Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Income Before Income Taxes, Adjusted Net Income, and Adjusted Diluted Earnings per Share that are not required by or prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures, which are considered “non-GAAP financial measures” under SEC rules, are defined by us to exclude the following:
purchase accounting adjustments to record acquired contract liabilities at fair value as a result of our acquisition of Torrens University and associated assets in Australia and New Zealand and to record amortization and depreciation expense related to intangible assets and software assets acquired through our merger with Capella Education Company and our acquisition of Torrens University and associated assets in Australia and New Zealand;
transaction and integration expenses associated with our merger with Capella Education Company and our acquisition of Torrens University and associated assets in Australia and New Zealand;
severance costs and right-of-use lease asset impairment charges associated with our restructuring;
income from partnership and other investments that are not part of our core operations;
discrete tax adjustments related to stock-based compensation and other adjustments; and
foreign currency exchange impact related to translating foreign currency results at a constant exchange rate.
When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying trends associated with our ongoing operations.
Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures may be considered in addition to, but not as a substitute for or superior to, GAAP results. A reconciliation of these measures to the most directly comparable GAAP measures is provided below.
Adjusted income from operations was $53.7 million in the second quarter of 20172021 compared to $63.0 million in 2020. Adjusted net income was $37.5 million in the second quarter of 2021 compared to $45.4 million in 2020, and 2016 was $0.34 and $0.25adjusted diluted earnings per share respectively, afterwas $1.55 in the nonrecurring adjustments 

Key enrollment trends bysecond quarter of 2021 compared to $2.06 in 2020. Adjusted income from operations was $106.7 million for the University were as follows:

Enrollment

% Change vs Prior Year

Picture 1

six months ended June 30, 2021 compared to $126.1 million for the same period in 2020. Adjusted net income was $74.5 million for the six months ended June 30, 2021 compared to $91.9 million for the same period in 2020, and adjusted diluted earnings per share was $3.09 for the six months ended June 30, 2021 compared to $4.17 for the same period in 2020.

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The tables below reconcile our reported results of operations to adjusted results (amounts in thousands, except per share data):
Reconciliation of Reported to Adjusted Results of Operations for the three months ended June 30, 2021
Non-GAAP Adjustments
As Reported
(GAAP)
Purchase accounting adjustments(1)
Merger and integration costs(2)
Restructuring costs(3)
Income from other investments(4)
Tax
adjustments(5)
Foreign exchange adjustments(6)
As Adjusted
(Non-GAAP)
Revenues$299,173 $1,423 $— $— $— $— $(2,534)$298,062 
Total costs and expenses$272,473 $(19,392)$(1,937)$(4,811)$— $— $(2,008)$244,325 
Income from operations$26,700 $20,815 $1,937 $4,811 $— $— $(526)$53,737 
Operating margin8.9%18.0%
Income before income taxes$27,457 $20,815 $1,937 $4,811 $(1,398)$— $(526)$53,096 
Net income$19,976 $20,815 $1,937 $4,811 $(1,398)$(8,164)$(526)$37,451 
Diluted earnings per share$0.83 $1.55 
Weighted average diluted shares outstanding24,12624,126
Reconciliation of Reported to Adjusted Results of Operations for the three months ended June 30, 2020
Non-GAAP Adjustments
As Reported
(GAAP)
Purchase accounting adjustments(1)
Merger and integration costs(2)
Restructuring costs(3)
Income from other investments(4)
Tax
adjustments(5)
Foreign exchange adjustments(6)
As Adjusted
(Non-GAAP)
Revenues$255,831 $— $— $— $— $— $— $255,831 
Total costs and expenses$209,436 $(15,417)$(1,174)$— $— $— $— $192,845 
Income from operations$46,395 $15,417 $1,174 $— $— $— $— $62,986 
Operating margin18.1%24.6%
Income before income taxes$48,034 $15,417 $1,174 $— $(1,135)$— $— $63,490 
Net income$34,152 $15,417 $1,174 $— $(1,135)$(4,213)$— $45,395 
Diluted earnings per share$1.55 $2.06 
Weighted average diluted shares outstanding22,01222,012
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Reconciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2021
Non-GAAP Adjustments
As Reported
(GAAP)
Purchase accounting adjustments(1)
Merger and integration costs(2)
Restructuring costs(3)
Income from other investments(4)
Tax
adjustments(5)
Foreign exchange adjustments(6)
As Adjusted
(Non-GAAP)
Revenues$589,509 $3,646 $— $— $— $— $(4,553)$588,602 
Total costs and expenses$550,809 $(38,799)$(2,949)$(23,078)$— $— $(4,049)$481,934 
Income from operations$38,700 $42,445 $2,949 $23,078 $— $— $(504)$106,668 
Operating margin6.6%18.1%
Income before income taxes$41,624 $42,445 $2,949 $23,078 $(4,181)$— $(504)$105,411 
Net income$29,553 $42,445 $2,949 $23,078 $(4,181)$(18,852)$(504)$74,488 
Diluted earnings per share$1.22 $3.09 
Weighted average diluted shares outstanding24,13924,139
Reconciliation of Reported to Adjusted Results of Operations for the six months ended June 30, 2020
Non-GAAP Adjustments
As Reported
(GAAP)
Purchase accounting adjustments(1)
Merger and integration costs(2)
Restructuring costs(3)
Income from other investments(4)
Tax
adjustments(5)
Foreign exchange adjustments(6)
As Adjusted
(Non-GAAP)
Revenues$521,133 $— $— $— $— $— $— $521,133 
Total costs and expenses$430,779 $(30,834)$(4,938)$— $— $— $— $395,007 
Income from operations$90,354 $30,834 $4,938 $— $— $— $— $126,126 
Operating margin17.3%24.2%
Income before income taxes$94,116 $30,834 $4,938 $— $(1,389)$— $— $128,499 
Net income$69,391 $30,834 $4,938 $— $(1,389)$(11,898)$— $91,876 
Diluted earnings per share$3.15 $4.17 
Weighted average diluted shares outstanding22,04122,041

Since 2013,

(1)Reflects a purchase accounting adjustment to record acquired contract liabilities at fair value as a result of the Company's acquisition of Torrens University and associated assets in Australia and New Zealand, and amortization and depreciation expense of intangible assets and software assets acquired through the Company’s merger with Capella Education Company and the Company's acquisition of Torrens University and associated assets in Australia and New Zealand.
(2)Reflects transaction and integration expenses associated with the Company's merger with Capella Education Company and the Company's acquisition of Torrens University and associated assets in Australia and New Zealand.
(3)Reflects severance costs and right-of-use lease asset impairment charges associated with the Company's restructuring.
(4)Reflects income recognized from the Company's investments in partnership interests and other investments.
(5)Reflects tax impacts of the adjustments described above and discrete tax adjustments related to stock-based compensation and other adjustments, utilizing an adjusted effective tax rate of 28.5% for the three and six months ended June 30, 2020 and an adjusted effective tax rate of 29.5% and 29.3% for the three and six months ended June 30, 2021, respectively.
(6)Reflects foreign currency exchange impact related to translating foreign currency results at a constant exchange rate of 0.743 Australian Dollars to U.S. Dollars, which is the 2021 budget rate.
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Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
Revenues. Consolidated revenue increased to $299.2 million, compared to $255.8 million in the same period in the prior year, primarily due to the inclusion of ANZ. In the USHE segment for the three months ended June 30, 2021, total enrollment decreased 10% to 83,923 from 93,123 for the same period in 2020. USHE segment revenue decreased 14.2% to $212.2 million compared to $247.4 million in 2020 as a result of declines in enrollment and revenue-per-student due to higher scholarships and discounts we have introduced a number of initiativesare offering in response to the variability in our enrollment. Recognizing that affordability is an important factor in a prospective student’s decision to seek a college degree, we reduced the University undergraduate tuition for new students by 20% beginning in our 2014 winter academic term. We also introduced the Graduation Fund in mid-2013, whereby qualifying students can receive one free course for every three courses successfully completed. The free courses are redeemableCOVID-19 pandemic. Near term revenue in the student’s final academic year. In 2015, we launched Strayer@Work, which works with Fortune 1000 companies to structure customized education and training programs for their employees, often with significant discounts to our published tuition rates. In January 2016, we acquired NYCDA, which charges variable tuition by program based on the number of hours of instruction. These initiatives had a net negative impact on revenue per student, which declined 1% in 2016, andUSHE segment is expected to decrease slightly in 2017,continue to be impacted negatively by approximately 2%.

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

Enrollment. Totalthe ongoing COVID-19 pandemic with weaker demand for enrollments atand higher scholarships and discounts. In the UniversityAlternative Learning segment, revenue for the summer term 2017three months ended June 30, 2021 increased 52.2% to $12.9 million compared to $8.5 million in 2020 as a result of rapid growth in Sophia Learning and increasing employer affiliated enrollment. Revenues for the Australia/New Zealand segment were $74.1 million and included a $1.4 million purchase accounting reduction related to contract liabilities acquired in the acquisition.

Instructional and support costs. Consolidated instructional and support costs increased to 41,679 students,$152.9 million, compared to $125.5 million in the same period in the prior year, principally due to the inclusion of $35.1 million of instructional and support costs related to ANZ, partially offset by cost savings implemented as a result of the impact of the COVID-19 pandemic, which included lower expenses associated with travel and facilities costs, as well as savings from 38,813 for the summer term 2016. New student enrollments increased by 7%, and continuing student enrollments increased by 8%.

Revenues. Revenues increased 6% to $108.5 millionemployee restructuring plan implemented in the third quarter of 2017 from $102.2 million in the third quarter of 2016, principally due to total enrollment growth of 7%, partially offset by a decline in revenue per student of 1%. The decline in revenue per student is largely attributable to a new pricing structure which was implemented for the first quarter of 2014 which reduced tuition for new undergraduate students by approximately 20%,2020. Consolidated instructional and gave eligible students access to the Graduation Fund. Revenues for undergraduate students increased 11% in the three months ended September 30, 2017, driven by an increase in total undergraduate enrollment of 13%, partially offset by a decline in revenue per student of 2%. We expect this decline in revenue per student to continue at the undergraduate level as we enroll more new undergraduate students. For graduate students, revenues decreased 5% in 2017, driven by a decline in total graduate enrollment of 6%.

Instruction and educational support expenses. Instruction and educational support expenses increased $0.7 million to $57.0 million in the third quarter of 2017 from $56.3 million in the third quarter of 2016, principally due to increases in bad debt expense and nonrecurring personnel costs associated with a one-time staff reduction program, offset by a noncash adjustment to reduce the value of contingent consideration related to our acquisition of NYCDA. Instruction and educational support expenses as a percentage of revenues decreased to 52.5% in the third quarter of 2017 from 55.1% in the third quarter of 2016.

Marketing expenses. Marketing expenses increased $1.4 million, or 6%, to $26.8 million in the third quarter of 2017 from $25.4 million in the third quarter of 2016, principally due to increased investments in branding initiatives. Marketing expenses as a percentage of revenues decreased to 24.7% in 2017 from 24.9% in 2016.

Admissions advisory expenses. Admissions advisory expenses increased $0.6 million, or 13%, to $5.3 million in the third quarter of 2017 from $4.7 million in the third quarter of 2016 due primarily to increased personnel costs. Admissions advisory expenses as a percentage of revenues increased to 4.9%51.1% in the thirdsecond quarter of 20172021 from 4.6%49.1% in the thirdsecond quarter of 2016.

2020.

General and administration expenses. GeneralConsolidated general and administration expenses increased $0.2 million to $11.2$93.4 million in the thirdsecond quarter of 2017 from $11.02021 compared to $67.3 million in the third quarterprior year, principally due to the inclusion of 2016,  related primarily to increased personnel and corporate compliance costs.  General$23.4 million of general and administration expenses as a percentage of revenues decreased to 10.3% in the third quarter of 2017 from 10.7% in the third quarter of 2016.

Income from operations. Income from operations increased $3.4 million, or 70%, to $8.2 million in the third quarter of 2017 from $4.8 million in the third quarter of 2016.

Investment income and interest expense.  Investment income increased to $0.3 million in the third quarter of 2017 compared to $0.1 million in the third quarter of 2016 as a result of higher yields and an increase in our cash balances. Interest expense was $0.2 million in the third quarter of both 2017 and 2016. We have $150.0 million available under our revolving credit facility and no borrowings outstanding as of September 30, 2017.

Provision for income taxes.  Income tax expense was $2.1 million in the third quarter of 2017, compared to $1.9 million in the third quarter of 2016. Our effective tax rate for the quarter was 25.6% and was favorably impacted by the reduction in the value of contingent consideration related to the NYCDA acquisition, which is not subject to income tax. We expect our effective tax rate, including the effect of tax benefits associated with the vesting of restricted stock and the impacts of the contingent consideration adjustments referenced above, to be approximately 34.0% for 2017. 

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Net income. Net income increased  $3.3 million to $6.2 million in the third quarter of 2017 from $2.9 million in the third quarter of 2016 due to the factors discussed above.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Enrollment.  Average enrollments at the University increased 6% to 42,826 students for the nine months ended September 30, 2017 compared to 40,238 students for the same period in 2016.

Revenues. Revenues increased 4% to $336.1 million in the nine months ended September 30, 2017 from $321.8 million in the nine months ended September 30, 2016, principally due to total enrollment growth of 6%, partially offset by a decline in revenue per student of 2%. The decline in revenue per student is largely attributable to a new pricing structure which was implemented for the first quarter of 2014 which reduced tuition for new undergraduate students by approximately 20%, and gave eligible students access to the Graduation Fund. Revenues for undergraduate students increased 10% in the nine months ended September 30, 2017, driven by an increase in total undergraduate enrollment of 13%, partially offset by a decline in revenue per student of 3%. We expect this decline in revenue per student to continue at the undergraduate levelANZ, as we enroll more new undergraduate students. For graduate students, revenues decreased 7% in 2017, driven by a decline in total graduate enrollment of 8%, partially offset by an increase in revenue per student of 1%. The increase in graduate revenue per student was due primarily to increased average tuition per class compared to 2016.

Instruction and educational support expenses. Instruction and educational support expenses increased $3.9 million, or 2%, to $180.1 million in the nine months ended September 30, 2017 from $176.2 million in the nine months ended September 30, 2016. The increase primarily resulted from increases in personnel costs associated with a one-time staff reduction program and increased bad debt expense, offset by adjustments to reduce the value of contingent consideration related to our acquisition of NYCDA. Instruction and educational support expenseswell as a percentage of revenues decreased to 53.6% in the nine months ended September 30, 2017 from 54.7% in the nine months ended September 30, 2016.

Marketing expenses. Marketing expenses increased $3.3 million, or 5%, to $64.7 million in the nine months ended September 30, 2017 from $61.4 million in the nine months ended September 30, 2016, principally due to increased investments in branding initiatives. Marketing expenses as a percentage of revenues increased to 19.3% in the nine months ended September 30, 2017 from 19.1% in the nine months ended September 30, 2016.

Admissions advisory expenses. Admissions advisory expenses increased $1.6 million, or 12%, to $14.8 million in the nine months ended September 30, 2017 from $13.2 million in the nine months ended September 30, 2016, primarily due to increased personnel costs. Admissions advisory expenses as a percentage of revenues increased to 4.4% in the nine months ended September 30, 2017 from 4.1% in the nine months ended September 30, 2016.

Generalinitiatives and administration expenses. General and administration expenses increased $2.8 million to $36.0 million in the nine months ended September 30, 2017 from $33.2 million in the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we recorded a $2.0 million noncash benefit associatedpartnerships with adjustments to our reserve for leases on facilities no longer in use. Generalbrand ambassadors. Consolidated general and administration expenses as a percentage of revenues increased to 10.7%31.2% in the nine months ended September 30, 2017second quarter of 2021 from 10.3%26.3% in the nine months ended September 30, 2016.

Income from operationssecond quarter of 2020.

Amortization of intangible assets. Income from operationsAmortization of intangible assets increased $2.7 million, or 7%, to $40.5$19.4 million in the nine months ended September 30, 2017 from $37.8second quarter of 2021 compared to $15.4 million in 2020, due to the additional amortization expense of intangible assets acquired in the acquisition of ANZ in November 2020.
Merger and integration costs. Merger and integration costs increased to $1.9 million in the nine months ended September 30, 2016.

Investment income and interest expense. Investment income increased to $0.7 million in the nine months ended September 30, 2017second quarter of 2021 compared to $0.3$1.2 million for the same period in the nine months ended September 30, 2016,2020, as a result of higher yieldstransaction and integration expenses associated with the acquisition of ANZ.

Restructuring costs. Restructuring costs of $4.8 million in the second quarter of 2021 primarily include impairments of right-of-use lease assets associated with vacating leased space, as well as severance and other personnel-related expenses from employee terminations in connection with a restructuring plan implemented in 2020.

Income from operations. Consolidated income from operations decreased to $26.7 million in the second quarter of 2021 compared to $46.4 million in the second quarter of 2020, principally due to lower earnings in the USHE segment and restructuring costs incurred in the second quarter of 2021, partially offset by the inclusion of ANZ's income from operations. USHE segment income from operations decreased 45.4% to $32.1 million in the second quarter of 2021, compared to $58.8 million in the second quarter of 2020, primarily due to lower enrollments and increased scholarship offerings during the COVID-19 pandemic, as well as increased investments in marketing initiatives. In the Alternative Learning segment, income from operations for the three months ended June 30, 2021 increased 22.7% to $5.2 million compared to $4.2 million in 2020 as a result of rapid growth in Sophia Learning and an increase in our cash balances. Interest expenseemployer affiliated enrollment, partially offset by increased investment in outreach to corporate partners. Income from operations for the Australia/New Zealand segment was $0.5$15.6 million, which included a $1.4 million purchase accounting reduction related to contract liabilities acquired in the acquisition.
Other income. Other income decreased to $0.8 million in boththe second quarter of 2021 compared to $1.6 million in the nine months ended September 30, 2017 and 2016. We have $150.0second quarter of 2020, as a result of an increase in interest expense due to the $141.7 million available underbalance outstanding on our revolving credit facility and no borrowings outstanding aswhich was used to partially fund the ANZ acquisition in November 2020. We incurred $0.9 million of Septemberinterest expense in the three months ended June 30, 2017.

2021 compared to $0.2 million in 2020.

Provision for income taxes.Income tax expense decreased to $13.7was $7.5 million in the nine months ended September 30, 2017 from $14.6second quarter of 2021, compared to $13.9 million in the nine months ended September 30, 2016. This decrease reflects a tax surplus recorded in the current year associated with the vestingsecond quarter of certain shares of restricted stock. In addition, we recognized tax benefits resulting from the reduction in the value of contingent consideration related to the NYCDA acquisition. We expect our2020. Our effective tax rate includingfor the effect of tax benefits associated with the vesting of restricted stock and the impacts of the contingent consideration adjustments referenced above, to be approximately 34.0% for 2017quarter was 27.2%, compared to 39.3%28.9% for the same period in 2016.

2020.

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Net income. Net income increased  $4.0 milliondecreased to $27.1$20.0 million in the nine months ended September 30, 2017 from $23.1second quarter of 2021 compared to $34.2 million in the nine months ended September 30, 2016second quarter of 2020 due to the factors discussed above.

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Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
Revenues. Consolidated revenue increased to $589.5 million, compared to $521.1 million in the same period in the prior year, primarily due to the inclusion of ANZ. USHE segment revenue decreased 13% to $438.8 million compared to $502.9 million in 2020 as a result of declines in enrollment and revenue-per-student due to higher scholarships and discounts we are offering in response to the COVID-19 pandemic. Near term revenue in the USHE segment is expected to continue to be impacted negatively by the ongoing COVID-19 pandemic with weaker demand for enrollments and higher scholarships and discounts. In the Alternative Learning segment, revenue for the six months ended June 30, 2021 increased 39% to $25.4 million compared to $18.3 million in 2020 as a result of rapid growth in Sophia Learning, and increasing employer affiliated enrollment. Revenues for the Australia/New Zealand segment were $125.3 million and included a $3.6 million purchase accounting reduction related to contract liabilities acquired in the acquisition.
Instructional and support costs. Consolidated instructional and support costs increased to $305.7 million in the six months ended June 30, 2021 from $258.5 million in the six months ended June 30, 2020, principally due to the inclusion of $68.0 million of instructional and support costs related to ANZ, partially offset by cost savings implemented as a result of the impact of the COVID-19 pandemic, which included lower expenses associated with travel and facilities costs, as well as savings from the employee restructuring plan implemented in the third quarter of 2020. Consolidated instructional and support costs as a percentage of revenues increased to 51.9% in the six months ended June 30, 2021 from 49.6% in the six months ended June 30, 2020.
General and administration expenses. Consolidated general and administration expenses increased to $180.2 million in the six months ended June 30, 2021 from $136.5 million in the six months ended June 30, 2020, principally due to the inclusion of $44.7 million of general and administration expenses related to ANZ. Consolidated general and administration expenses as a percentage of revenues increased to 30.6% in the six months ended June 30, 2021 from 26.2% in the six months ended June 30, 2020.
Amortization of intangible assets. Amortization of intangible assets increased to $38.8 million in the six months ended June 30, 2021 from $30.8 million in the six months ended June 30, 2020, due to the additional amortization expense of intangible assets acquired in the acquisition of ANZ in November 2020.
Merger and integration costs. Merger and integration costs decreased to $2.9 million in the six months ended June 30, 2021 from $4.9 million in the six months ended June 30, 2020, as a result of lower expenses for integration support services and severance costs related to the merger with Capella Education Company, partially offset by transaction and integration expenses associated with the acquisition of ANZ.
Restructuring costs. Restructuring costs of $23.1 million in the six months ended June 30, 2021 primarily include impairments of right-of-use lease assets and fixed assets associated with vacating leased space based on an assessment of our real estate portfolio completed in the six months ended June 30, 2021, as well as severance and other personnel-related expenses from employee terminations in connection with a restructuring plan implemented in 2020.

Income from operations. Consolidated income from operations decreased to $38.7 million in the six months ended June 30, 2021 from $90.4 million in the six months ended June 30, 2020, principally due to lower earnings in the USHE segment and restructuring costs incurred in 2021, partially offset by the inclusion of ANZ's income from operations. USHE segment income from operations decreased 31% to $79.8 million in the six months ended June 30, 2021 from $115.5 million in the six months ended June 30, 2020, primarily due to lower enrollments and increased scholarship offerings during the COVID-19 pandemic. Alternative Learning segment income from operations increased 4% to $11.1 million in the six months ended June 30, 2021 from $10.6 million in the six months ended June 30, 2020 as a result of rapid growth in Sophia Learning, partially offset by increased investment in outreach to corporate partners. Income from operations for the Australia/New Zealand segment was $12.7 million, which included a $3.6 million purchase accounting reduction related to contract liabilities acquired in the acquisition.
Other income. Other income decreased to $2.9 million in the six months ended June 30, 2021 from $3.8 million in the six months ended June 30, 2020, as a result of an increase in interest expense due to the $141.7 million balance outstanding on our revolving credit facility which was used to partially fund the ANZ acquisition in November 2020. We incurred $1.8 million of interest expense in the six months ended June 30, 2021 compared to $0.4 million in the six months ended June 30, 2020.
Provision for income taxes. Income tax expense was $12.1 million in the six months ended June 30, 2021, compared to $24.7 million in the six months ended June 30, 2021. Our effective tax rate for the quarter was 29.0%, compared to 26.3% in the six months ended June 30, 2020. The effective tax rate in 2020 includes higher windfall tax benefits recognized through share-based payment arrangements.
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Net income. Net income decreased to $29.6 million in the six months ended June 30, 2021 compared to $69.4 million in the six months ended June 30, 2021 due to the factors discussed above.
Liquidity and Capital Resources

At SeptemberJune 30, 2017,2021, we had cash, and cash equivalents, and marketable securities of $150.5$293.7 million compared to $129.2$225.3 million at December 31, 20162020 and $120.5$525.3 million at SeptemberJune 30, 2016.2020. At SeptemberJune 30, 2017,2021, most of our cash was held in demand deposit accounts at high credit quality financial institutions.


We are party to a credit agreementfacility (the “Amended Credit Facility”), which provides for a $150 millionsenior secured revolving credit facility and(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 under certain conditions. The credit agreement has a maturity date(each, an “Incremental Facility”) in an amount up to the sum of July 2, 2020. We had no borrowings outstanding under(x) the revolving credit facility during eachgreater of (A) $300 million and (B) 100% of the nine months ended September 30, 2016Company’s consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and 2017,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 September 30, 2017.

$150 million. Borrowings under the revolving credit facilityRevolving Credit Facility bear interest at a per annum rate equal to LIBOR or a base rate, plus a margin ranging from 1.75%1.50% to 2.25%2.00%, depending on our leverage ratio. An unused commitment fee ranging from 0.25%0.20% to 0.35%,0.30% per annum, depending on our leverage ratio, accrues on unused amounts under the revolving credit facility. During each of the nine months ended September 30, 2017 and 2016, we paid unused commitment fees of $0.3 million.amounts. We were in compliance with all applicable covenants related to the credit agreementAmended Credit Facility as of SeptemberJune 30, 2017.

2021. At June 30, 2021, we had $141.7 million outstanding on our Revolving Credit Facility. We had no borrowings outstanding as of June 30, 2020. During the six months ended June 30, 2021 and 2020, we paid $1.4 million and $0.3 million, respectively of interest and unused commitment fees related to our Revolving Credit Facility.


Our net cash fromprovided by operating activities for the ninesix months ended SeptemberJune 30, 2017 increased to $44.42021 was $125.8 million, as compared to $30.1$111.9 million for the same period in 2016.2020. The increase in net cash from operating activities was largely due todriven by the paymentinclusion of retention agreements in connection with the NYCDA acquisition in January 2016, cash provided by changes inANZ and timing of working capital andpayments, partially offset by lower earnings in the timing of income tax payments in 2017 compared to 2016.

USHE segment.


Capital expenditures were $14.6decreased to $23.1 million for the ninesix months ended SeptemberJune 30, 2017,2021, compared to $7.5$25.5 million for the same period in 2016.

2020, due to lower capital investments in new and closed campuses, partially offset by the inclusion of ANZ.


The Board of Directors declared an annuala regular, quarterly cash dividend of $1.00$0.60 per share of common share, payable quarterly.stock for each of the first two quarters of 2021. During the ninesix months ended SeptemberJune 30, 2017,2021, we have paid a total of $8.6$29.5 million in cash dividends on our common stock. ForDuring the ninesix months ended SeptemberJune 30, 2017,2021, we did notpaid $2.9 million to repurchase anycommon shares in the open market under our repurchase program. As of common stock and, at SeptemberJune 30, 2017,2021, we had $70$247.1 million inof share repurchase authorization remaining to use through December 31, 2017.

2021.

For the thirdsecond quarter of 2017,2021 and 2020, bad debt expense as a percentage of revenue was 4.9% compared to 3.8% for the third quarter of 2016.

3.3% and 4.7%, respectively.

We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under our revolving credit facility,Amended Credit Facility will be sufficient to meet our requirements for at least the next 12 months. Currently, we maintain our cash primarily in mostly demand deposit bank accounts and money market funds, which isare included in cash and cash equivalents at SeptemberJune 30, 20172021 and 2016.2020. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. During the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, we earned interest income of $0.7$0.6 million and $0.3$2.9 million, respectively.

The table below sets forth our contractual commitments associated with operating leases, excluding subleases as of September 30, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due By Period

 

 

    

 

    

Less than 1

    

1-3

    

3-5

    

More than

 

 

 

Total

 

Year

 

 Years

 

Years

 

5 Years

 

Operating leases

 

$

119,061

 

$

31,782

 

$

49,750

 

$

26,384

 

$

11,145

 

28


ITEM 3:   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.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 SeptemberJune 30, 2017,2021, a 1% increase or decrease in
42

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.

Changing interest rates could also have a negative impact on the amount of interest expense

At June 30, 2021, we incur. On July 2, 2015, we used approximately $116had $141.7 million of our existing cash and cash equivalents to prepay our term loan and terminate an interest rate swap as part of an amendment to our credit and term loan agreement. The credit agreement provides for a $150 million revolving credit facility and an option to establish incremental term loans under certain conditions. The credit agreement has a maturity date of July 2, 2020. We had no borrowings outstanding under the revolving credit facility after prepayment of the term loan facility, and as of September 30, 2017.our Amended Credit Facility. Borrowings under the revolving credit facilityAmended Credit Facility bear interest at LIBOR or a base rate, plus a margin ranging from 1.75%1.50% to 2.25%2.00%, depending on our leverage ratio. An unused commitment fee ranging from 0.25%0.20% to 0.35%0.30%, depending on our leverage ratio, accrues on unused amounts under the revolving credit facility.Amended Credit Facility. 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 $1.5$3.5 million in interest expense per year assuming the entire $150$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 21.3% of our consolidated revenues for the six months ended June 30, 2021. 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 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.

ITEM 4:   CONTROLS AND PROCEDURES

a)

Disclosure Controls and Procedures. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2017. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company had in place, as of September 30, 2017, effective disclosure controls and procedures designed to ensure that information required to be disclosed by the Company (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

b)

Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

a)Disclosure Controls and Procedures. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2021. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company had in place, as of June 30, 2021, effective disclosure controls and procedures designed to ensure that information required to be disclosed by the Company (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

29

b)Internal Control Over Financial Reporting. On November 3, 2020, the Company completed its acquisition of Torrens University and associated assets in Australia and New Zealand. As noted under Item 9A, Controls and Procedures, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, management's assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of Torrens University and associated assets in Australia and New Zealand. See Note 3, Acquisition of Torrens University and Associated Assets in Australia and New Zealand in the condensed consolidated financial statements appearing in Part I, Item 1 of this report for a discussion of the acquisition and related financial data. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting for a period of up to one year following an acquisition while integrating the acquired company. The Company is in the process of integrating Torrens University and associated assets in Australia and New Zealand and the Company's internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. Except as noted above, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Table of Contents

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

From time to time, we

We are involved in litigation and other legal proceedings arising out of the ordinary course of our business. ThereFrom time to time, certain matters may arise that are no pendingother than ordinary and routine. The outcome of such matters is uncertain, and we may incur costs in the future to defend, settle, or otherwise resolve them. We currently believe that the ultimate outcome of such matters will not, individually or in the aggregate, have a material legal proceedingsadverse effect on our consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.
On April 20, 2021, Capella University received a letter from the Department of Education referencing the Wright matter (described below), and indicating that the Department will require a fact-finding process pursuant to which we or our property are subject.

the borrower defense to repayment regulations to determine the validity of more than 1,000 borrower defense applications that have been submitted regarding Capella. According to the Department, some of the applications allege similar claims as in the
Wright matter concerning alleged misrepresentations of the length of time to complete doctoral programs. Capella has since received approximately 500 applications for borrower defense to repayment and is cooperating with the Department’s fact-finding process.
Wright, et al. v. Capella Education Co., et al. was filed several years ago in the United States District Court for the District of Minnesota. After the court granted Capella’s motion to dismiss in relation to all but one plaintiff, the plaintiff filed a motion for leave to file a second amended complaint on October 5, 2020, seeking to add six named plaintiffs as well as additional sub-classes and causes of action to the lawsuit. On April 2, 2021, the magistrate judge issued an order granting plaintiff’s motion to amend the complaint in part, allowing for the addition of six new plaintiffs as well as additional subclasses and causes of action. Capella intends to vigorously defend this case, including any request for class certification.

Item 1A.   Risk Factors 

You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017,2020, which could materially affect our business, adversely affect the market price of our common stock and could cause you to suffer a partial or complete loss of your investment. There have been no material changes to the risk factors previously described in Part I, “Item"Item 1A. Risk Factors”Factors" included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016, and in our Quarterly Reports on Form 10-Q for2020, other than the quarters ended March 31, 2017 and June 30, 2017, except that we have updated two of therevised risk factors to reflect recent developments occurring after the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.factor included below. The risks described in our Annual Report on Form 10-K as updated by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, and this Quarterly Report on Form 10-Q, are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could materially adversely affect our business. See “Cautionary Notice Regarding Forward-Looking Statements.”

The following risk factors update and supersede the risk factors with the same captions in our Annual Report on Form 10-K for the year ended December 31, 2016, as updated by our Quarterly Reports  on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017.

We are subject to compliance reviews, which, if they resulted in a material finding of noncompliance,

Strayer University or Capella University could affect our abilitylose its eligibility to participate in federal student financial aid programs or be provisionally certified with respect to such participation if the percentage of its revenues derived from those programs were too high, or could be restricted from enrolling students in certain states if the percentage of the University’s revenues from federal or state programs were too high.
A proprietary institution may lose its eligibility to participate in the federal Title IV programs.

Because we operate instudent financial aid program if it derives more than 90% of its revenues, on a highly regulated industry, we are subject to compliance reviews and claims of noncompliance and related lawsuits by government agencies, accrediting agencies and third parties, including claims brought by third parties on behalf of the federal government. For example, the Department of Education regularly conducts program reviews of educational institutions that are participating incash basis, from Title IV programs andfor two consecutive fiscal years. A proprietary institution of higher education that violates the Office90/10 Rule for any fiscal year will be placed on provisional status for up to two fiscal years. Using the formula specified in the Higher Education Act, Strayer University derived approximately 82.95% of Inspector Generalits cash-basis revenues from these programs in 2020. Capella University derived approximately 71.98% of the Department of Education regularly conducts audits and investigations of such institutions. The Department of Education could limit, suspend, or terminate our participation in Title IV programs, place us on a more restrictive, slower payment method for receipt ofits cash-basis revenues from Title IV program funds or impose other penalties such as requiring usin 2020. On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which amends the “90/10 Rule” to make refunds, pay liabilities, or pay an administrative fine uponinclude “all federal education assistance” in the “90” side of the ratio calculation. The legislation requires the Department to conduct a material findingnegotiated rulemaking process to modify related Department regulations. This rulemaking process may result in a definition of noncompliance.

The“federal education assistance” that will include tuition assistance programs offered by the U.S. Department of Education conducted four campus-based program reviewsDefense and U.S. Department of Strayer University’s administration ofVeterans Affairs, in addition to the Title IV programs already covered by the 90/10 Rule. Under the legislation, these revisions to the 90/10 Rule would apply to institutional fiscal years beginning on or after January 1, 2023. Further legislation has been introduced in three states andboth chambers of Congress that seek to modify the District90/10 Rule further, including proposals to change the ratio requirement to 85/15 (federal to nonfederal revenue). We cannot predict whether Congress will pass any of Columbia, with one on-site review conducted August 18-20, 2014; one on-site review conducted September 8-11, 2014; and two on-site reviews conducted September 22-26, 2014. On October 21, 2014, the Department of Education issued an Expedited Final Program Review Determination Letter forthese legislative proposals. If one of the program reviews conductedUniversities were to violate the week90/10 Rule, the loss of September 22, 2014, closing the program review with no further action required by us. On November 17, 2014, we received a Program Review Report for the program review conducted in August 2014, and provided a response to the Department of Education on December 15, 2014. On January 7, 2015, we received a Final Program Review Determination letter from that August 2014 review, closing the program review with no further action required by us. On March 24, 2015, the Company received a Program Review Report for another program review, and provided a response to the Department on April 21, 2015. On April 29, 2015, the Company received a Final Program Review Determination Letter closing the review and identifying a payment of less than $500 due to the Department of Education based on an underpayment on a return to Title IV calculation. The Company remitted payment, and received a letter from the Department on May 26, 2015, indicating that no further action was required and that the matter was closed. On September 15, 2015, the Company received a Program Review Report for the final program review, and provided a response to the Department on October 5, 2015. On January 5, 2016, the Company received a Final Program Review Determination Letter for the final program review, indicating that this program review was closed and no further action was required.

30


If we fail to obtain recertification by the Department of Education when required, we would lose our abilityeligibility to participate in Title IV programs.

An institution generally must seek recertification from the Department of Education at least every six years and possibly more frequently depending on various factors, such as whether it is provisionally certified. The Department of Education may also review an institution’s continued eligibility and certification to participate in Title IVfederal student financial aid programs or scope of eligibility and certification, in the event the institution undergoes a change in ownership resulting in a change of control or expands its activities in certain ways, such as the addition of certain types of new programs, or, in certain cases, changes to the academic credentials that it offers. In certain circumstances, the Department of Education must provisionally certify an institution. The Department of Education may withdraw our certification if it determines that we are not fulfilling material requirements for continued participation in Title IV programs. If the Department of Education does not renew, or withdraws our certification to participate in Title IV programs, our students would no longer be able to receive Title IV program funds, which would have a material adverse effect on our business.

Each institution participating Certain states have also proposed legislation that would prohibit enrollment of their residents based on a state and federal funding threshold that is more restrictive than the federal 90/10 Rule. If such legislation were to be enacted, and the Universities were unable to meet the threshold, loss of eligibility to enroll students in Title IV programs must enter intocertain states would have a Program Participation Agreement with the Departmentmaterial adverse effect on our business.

44

Table of Education. Under the agreement, the institution agrees to follow the Department of Education’s rules and regulations governing Title IV programs. On October 13, 2017, the Department informed the University that it was approved to participate in Title IV programs with full certification through June 30, 2021.

Contents

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended SeptemberJune 30, 2017, we did not2021, the Company paid $2.9 million to repurchase any shares of common stock under ourits repurchase program. The Company's remaining authorization for our common stock repurchases was $70.0$247.1 million as of SeptemberJune 30, 2017,2021, and is available for use through December 31, 2017.2021. A summary of the Company's share repurchases during the quarter is set forth below:
Total number of shares purchased(1)
Average price paid per shareTotal number of shares purchased as part of publicly announced plans or programsApproximate dollar value of shares that may yet be purchased under the plans or programs ($ mil)
Beginning Balance (at 03/31/21)$250.0 
April— $— — 250.0 
May37,494 77.46 37,494 247.1 
June— — — 247.1 
Total (at 06/30/21)37,494 $77.46 37,494 $247.1 

(1)The Company's repurchase program was announced on November 3, 2003 for repurchases up to an aggregate amount of $15 million in value of common stock through December 31, 2004. The Board of Directors amended the program on various dates increasing the amount authorized and extending the authorization date. On November 3, 2020, the Board of Directors increased the amount authorized to $250.0 million for use through December 31, 2021.

Item 3.   Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable

Item 5.   Other Information

None

Departure of Director

31

On July 26, 2021, Mr. James Dallas resigned as a director of the Company for personal reasons. Mr. Dallas’s resignation from the Board of Directors did not result from any disagreement relating to the Company’s operations, policies or practices.
Amendments to Amended and Restated Bylaws
On July 27, 2021, the Board of Directors adopted amendments to the Company’s Amended and Restated Bylaws to, among other things, (i) conform the list of individuals permitted to call a special meeting of the Company’s stockholders with the Maryland General Corporation Law, (ii) remove certain provisions relating to certification of the Company’s beneficial owners and the process for the issuance of shares of common stock, with the result in each case that the provisions of the Maryland General Corporation Law will control going forward, (iii) permit meetings of the Company’s stockholders to occur outside of the United States, and (iv) increase the maximum number of directors on the Board of Directors from up to 12 members to up to 18 members, as determined from time to time by a majority of the entire Board of Directors. The foregoing summary of the provisions of the Amended and Restated Bylaws, as amended, does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended and Restated Bylaws, as amended, a copy of which is filed as Exhibit 3.2 to this this Quarterly Report on Form 10-Q.
45

Table of Contents

Item 6.   Exhibits

3.1

3.1

Amended Articles of Incorporation and Articles Supplementary of the Company (incorporated by reference to Exhibit 3.01 of the Company’s Annual Report on Form 10-K (File No. 000-21039) filed with the Commission on March 28, 2002).

3.2

3.3

3.2

31.1

31.2

32.1

32.2

101.

INS Inline XBRL Instance Document

101.

SCH Inline XBRL Schema Document

101.

CAL Inline XBRL Calculation Linkbase Document

101.

DEF Inline XBRL Definition Linkbase Document

101.

LAB Inline XBRL Label Linkbase Document

101.

PRE XBRL Presentation Linkbase Document

104.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

46

32


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STRAYERSTRATEGIC EDUCATION, INC.

By:

/s/ Daniel W. Jackson

Daniel W. Jackson

Executive Vice President and Chief Financial Officer

Date: October 30, 2017

July 29, 2021

33

47