~~STRAYER EDUCATION, INC.~~

~~INDEX~~

~~FORM 10-Q~~




PART I — FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Unaudited Condensed Consolidated Balance Sheets at December 31, ~~2017~~2018 and March 31, ~~2018~~2019	3 3

		Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, ~~2017~~2018 and ~~2018~~2019	4 4

		Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2019	4

		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, ~~2017~~2018 and ~~2018~~2019	5 5

		Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2017~~2018 and ~~2018~~2019	6 6

		Notes to Unaudited Condensed Consolidated Financial Statements	7 7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29 22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36 30

	Item 4.	Controls and Procedures	36 30

PART II — OTHER INFORMATION

	Item 1.	Legal Proceedings	38 31

	Item 1A.	Risk Factors	38 31

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38 31

	Item 3.	Defaults Upon Senior Securities	38 31

	Item 4.	Mine Safety Disclosures	38 31

	Item 5.	Other Information	38 31

	Item 6.	Exhibits	38 32

SIGNATURES			39 33

CERTIFICATIONS

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 31, 2017

March 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

$
155,933

$
165,867

Tuition receivable, net

23,122

24,997

Other current assets

11,293

10,558

Total current assets

190,348

201,422

Property and equipment, net

73,763

73,686

Deferred income taxes

24,452

23,803

Goodwill

20,744

20,744

Other assets

11,971

12,155

Total assets

$
321,278

$
331,810

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$
46,177

$
45,806

Income taxes payable

1,038

2,541

Contract liabilities

21,851

23,931

Total current liabilities

69,066

72,278

Other long-term liabilities

43,015

41,240

Total liabilities

112,081

113,518

Commitments and contingencies

Stockholders’ equity:

Common stock, par value $0.01; 20,000,000 shares authorized; 11,167,425 and 11,300,671 shares issued and outstanding at December 31, 2017 and March 31, 2018, respectively

112

113

Additional paid-in capital

47,079

49,766

Retained earnings

162,006

168,413

Total stockholders’ equity

209,197

218,292

Total liabilities and stockholders’ equity

$
321,278

$
331,810



	December 31, 2018		March 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	311,732	$	352,387
Marketable securities, current	37,121		36,486
Tuition receivable, net	55,694		50,842
Other current assets	15,814		16,874
Total current assets	420,361		456,589
Property and equipment, net	122,677		119,040
Right-of-use lease assets	—		101,533
Marketable securities, non-current	37,678		31,866
Intangible assets, net	328,344		314,511
Goodwill	732,540		732,799
Other assets	19,429		19,052
Total assets	$	1,661,029	$	1,775,390

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	85,979	$	80,085
Income taxes payable	419		6,144
Contract liabilities	38,733		40,826
Lease liabilities, current	—		26,462
Total current liabilities	125,131		153,517
Deferred income tax liabilities	59,358		70,298
Lease liabilities, non-current	—		90,501
Other long-term liabilities	51,316		37,636
Total liabilities	235,805		351,952
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01; 32,000,000 shares authorized; 21,743,498 and 21,923,800 shares issued and outstanding at December 31, 2018 and March 31, 2019, respectively	217		219
Additional paid-in capital	1,306,653		1,304,170
Accumulated other comprehensive income	32		266
Retained earnings	118,322		118,783
Total stockholders’ equity	1,425,224		1,423,438
Total liabilities and stockholders’ equity	$	1,661,029	$	1,775,390

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

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

March 31,


2017

2018

Revenues

$
114,912

$
116,469

Costs and expenses:

Instruction and educational support

61,416

63,776

Marketing

18,718

20,124

Admissions advisory

4,716

4,676

General and administration

11,619

11,218

Merger costs

—

5,347

Total costs and expenses

96,469

105,141

Income from operations

18,443

11,328

Investment income

181

448

Interest expense

159

159

Income before income taxes

18,465

11,617

Provision for income taxes

7,887

2,150

Net income

$
10,578

$
9,467

Earnings per share:

Basic

$
1.00

$
0.88

Diluted

$
0.95

$
0.84

Weighted average shares outstanding:

Basic

10,630

10,745

Diluted

11,121

11,311



	For the three months ended March 31,
	2018		2019
Revenues	$	116,469	$	246,508
Costs and expenses:
Instructional and support costs	68,452		134,050
General and administration	31,342		64,139
Amortization of intangible assets	—		15,417
Merger and integration costs	5,347		7,179
Total costs and expenses	105,141		220,785
Income from operations	11,328		25,723
Other income	289		3,327
Income before income taxes	11,617		29,050
Provision for income taxes	2,150		17,550
Net income	$	9,467	$	11,500
Earnings per share:
Basic	$	0.88	$	0.53
Diluted	$	0.84	$	0.52
Weighted average shares outstanding:
Basic	10,745		21,499
Diluted	11,311		22,050
Cash dividend declared per share	$	0.25	$	0.50

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



	For the three months ended March 31,
	2018		2019
Net income	$	9,467	$	11,500
Other comprehensive income:
Unrealized gain on marketable securities, net of tax	—		234
Comprehensive income	$	9,467	$	11,734

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

~~Table of Contents~~

~~STRAYER~~STRATEGIC 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, 2016

11,093,489

$
111

$
35,453

$
152,810

$
188,374

Restricted stock grants, net of forfeitures

66,395

1

(1)

—

—

Stock-based compensation

—

—

2,427

—

2,427

Common stock dividends

—

—

—

(2,853)

(2,853)

Net income

—

—

—

10,578

10,578

Balance at March 31, 2017

11,159,884

$
112

$
37,879

$
160,535

$
198,526

Additional

Common Stock

Paid-in

Retained

Shares

Par Value

Capital

Earnings

Total

Balance at December 31, 2017

11,167,425

$
112

$
47,079

$
162,006

$
209,197

Impact of adoption of new accounting standard

—

—

—

(171)

(171)

Restricted stock grants, net of forfeitures

133,246

1

(1)

—

—

Stock-based compensation

—

—

2,688

—

2,688

Common stock dividends

—

—

—

(2,889)

(2,889)

Net income

—

—

—

9,467

9,467

Balance at March 31, 2018

11,300,671

$
113

$
49,766

$
168,413

$
218,292



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance at December 31, 2017	11,167,425	$	112	$	47,079		$	162,006		$	—	$	209,197
Impact of adoption of new accounting standard	—	—		—			(171		)	—		(171		)
Stock-based compensation	—	—		2,688			—			—		2,688
Restricted stock grants, net of forfeitures	133,246	1		(1		)	—			—		—
Common stock dividends	—	—		—			(2,889		)	—		(2,889		)
Net income	—	—		—			9,467			—		9,467
Balance at March 31, 2018	11,300,671	$	113	$	49,766		$	168,413		$	—	$	218,292



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Shares	Par Value		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance at December 31, 2018	21,743,498	$	217	$	1,306,653		$	118,322		$	32	$	1,425,224
Stock-based compensation	—	—		2,772			82			—		2,854
Exercise of stock options, net	51,889	1		(1,700		)	—			—		(1,699		)
Restricted stock grants, net of forfeitures	121,714	1		(1		)	—			—		—
Issuance of restricted stock, net	6,699	—		(3,554		)	—			—		(3,554		)
Common stock dividends	—	—		—			(11,121		)	—		(11,121		)
Unrealized gains on marketable securities, net of tax	—	—		—			—			234		234
Net income	—	—		—			11,500			—		11,500
Balance at March 31, 2019	21,923,800	$	219	$	1,304,170		$	118,783		$	266	$	1,423,438

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

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the Three Months Ended

March 31,


2017

2018

Cash flows from operating activities:

Net income

$
10,578

$
9,467

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

Amortization of gain on sale of assets

(71)

—

Amortization of deferred rent

(477)

(417)

Amortization of deferred financing costs

66

66

Depreciation and amortization

4,370

5,035

Deferred income taxes

762

(1,842)

Stock-based compensation

2,427

2,688

Changes in assets and liabilities:

Tuition receivable, net

19

(2,249)

Other current assets

616

931

Other assets

397

115

Accounts payable and accrued expenses

(2,836)

(867)

Income taxes payable and income taxes receivable

7,089

3,995

Contract liabilities

2,441

1,192

Other long-term liabilities

(846)

(1,065)

Net cash provided by operating activities

24,535

17,049

Cash flows from investing activities:

Purchases of property and equipment

(3,841)

(4,233)

Net cash used in investing activities

(3,841)

(4,233)

Cash flows from financing activities:

Common dividends paid

(2,853)

(2,889)

Net cash used in financing activities

(2,853)

(2,889)

Net increase in cash, cash equivalents, and restricted cash

17,841

9,927

Cash, cash equivalents, and restricted cash — beginning of period

129,758

156,448

Cash, cash equivalents, and restricted cash — end of period

$
147,599

$
166,375

Noncash transactions:

Purchases of property and equipment included in accounts payable

$
571

$
2,385



	For the three months ended March 31,
	2018			2019
Cash flows from operating activities:
Net income	$	9,467		$	11,500
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs	66			83
Amortization of investment discount/premium	—			127
Depreciation and amortization	5,035			25,983
Deferred income taxes	(1,842		)	10,834
Stock-based compensation	2,688			3,010
Changes in assets and liabilities:
Tuition receivable, net	(2,249		)	4,847
Other current assets	931			(1,060		)
Other assets	115			325
Accounts payable and accrued expenses	(867		)	(3,537		)
Income taxes payable and income taxes receivable	3,995			6,031
Contract liabilities	1,192			1,702
Other long-term liabilities	(1,482		)	(1,187		)
Net cash provided by operating activities	17,049			58,658

Cash flows from investing activities:
Purchases of property and equipment	(4,233		)	(8,756		)
Purchases of marketable securities	—			(6,249		)
Maturities of marketable securities	—			12,910
Other investments	—			(374		)
Net cash used in investing activities	(4,233		)	(2,469		)

Cash flows from financing activities:
Common dividends paid	(2,889		)	(11,091		)
Taxes paid for stock awards	—			(4,443		)
Net cash used in financing activities	(2,889		)	(15,534		)
Net increase in cash, cash equivalents, and restricted cash	9,927			40,655
Cash, cash equivalents, and restricted cash — beginning of period	156,448			312,237
Cash, cash equivalents, and restricted cash — end of period	$	166,375		$	352,892
Noncash transactions:
Purchases of property and equipment included in accounts payable	$	2,385		$	634

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

~~Table of Contents~~

~~STRAYER~~STRATEGIC EDUCATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~(UNAUDITED)~~

~~1. Nature of Operations~~

~~Strayer~~


1.	Nature of Operations

Strategic Education, Inc. ~~(the~~(“Strategic Education” or the “Company”), a Maryland corporation ~~conducts its operations through its wholly-owned subsidiaries,~~formerly known as Strayer University (the “University”) and New York Code and Design Academy (“NYCDA”). The University is an accredited institution of higher education that provides undergraduate and graduate degrees in various fields of study online and through physical campuses, predominantly located in the eastern United States. NYCDAEducation, Inc., is a ~~New York City-based provider of web~~national leader in education innovation, dedicated to enabling economic mobility for working adults through education. As further discussed in Note 2 and application software development courses. NYCDA courses are delivered primarily on-ground to students seeking to further their career in software application development. The Company has only one reportable segment.

~~2. Merger with Capella Education Company~~

~~On October 29, 2017,~~Note 3, the Company ~~entered into a~~completed its merger ~~agreement~~ with Capella Education Company (“~~Capella”~~CEC”)~~. Capella provides post-secondary education~~ on August 1, 2018. The accompanying condensed consolidated financial statements and ~~job-skills programs primarily through its subsidiary Capella University. The merger was approved by~~footnotes include the Company’s stockholders and by Capella’s shareholders on January 19, 2018. Upon consummation of the merger, Capella will become a wholly-owned subsidiary of the Company and will continue to offer its education programs through Capella University.

~~Pursuant to the merger, the Company will issue 0.875 shares~~results of the Company’s ~~Common Stock for each issued~~three reportable segments: Strayer University, Capella University and outstanding share of Capella Common Stock. Outstanding equity awards held by current Capella employees and certain non-employee directors of Capella will be assumed by the Company and converted into comparable Company awards at the exchange ratio. Outstanding equity awards held by Capella non-employee directors who will not serve as directors of the Company after completion of the merger and by former Capella employees will be settled upon completion of the mergerNon-Degree Programs. The Company’s reportable segments are discussed further in exchange for cash payments as specified in the merger agreement. Following the merger, stockholders of the Company and Capella are expected to own approximately 52% and 48%, respectively, of the outstanding combined company shares on a fully diluted basis, based on the number of shares currently expected to be outstanding immediately prior to the effective time of the merger.

Also in connection with the completion of the merger, and as approved by the Company’s shareholders on January 19, 2018, the Company will change its name to Strategic Education, Inc. and increase the number of shares of authorized Common Stock to 32,000,000. The merger is anticipated to close in the third quarter of 2018, subject to the satisfaction of customary closing conditions, including the receipt of approvals by the Department of Education, state educational regulators, and relevant accreditation bodies.

During the three months ended March 31, 2018, the Company incurred $5.3 million of merger costs. These costs were primarily attributable to legal, accounting, and integration support services incurred by the Company in connection with the proposed merger, and are included in merger costs in the accompanying unaudited condensed consolidated statement of income for the three months ended March 31, 2018.

~~3. Significant Accounting Policies~~

Note 15.


2.	Significant Accounting Policies

Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

On August 1, 2018, the Company completed its merger with CEC, 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”). Therefore, Strayer Education, Inc. is considered Strategic Education’s predecessor, and its historical financial statements prior to the merger date are reflected in this Quarterly Report on Form 10-Q as the historical financial statements of the Company. Accordingly, the financial results of the Company as of and for any periods ended prior to August 1, 2018 do not include the financial results of CEC and therefore are not directly comparable.

All information as of December 31, ~~2017~~2018 and March 31, ~~2017~~2018 and ~~2018,~~2019, and for the three months ended March 31, ~~2017~~2018 and ~~2018~~2019 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 in the prior period financial statements have been reclassified to conform to the current period’s presentation. Certain~~ information and footnote disclosures normally included in financial statements prepared in accordance with ~~generally accepted accounting principles in the United States of America~~GAAP 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,

~~Table of Contents~~

~~2017.~~ 2018. The results of operations for the three months ended March 31, ~~2018~~2019 are not necessarily indicative of the results to be expected for the full fiscal year.

~~New accounting standard for revenue recognition~~

~~In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) which supersedes~~

Certain amounts in the prior ~~revenue recognition requirements in Topic 605,~~ ~~Revenue Recognition, and most industry-specific guidance. During 2016 and 2017,~~period financial statements have been reclassified to conform to the ~~FASB issued additional ASUs amending certain aspects~~current period's presentation. Effective during the first quarter of ~~ASU 2014-09. On January 1, 2018,~~2019, the Company ~~adopted~~made changes in its presentation of operating expenses and reclassified prior periods to conform to the ~~new accounting standard~~current presentation. The Company determined that these changes aligned with its organizational structure and will improve comparability with several of its peer companies. There were no changes to total operating expenses or operating income as a result of these reclassifications. Below is a description of the nature of the costs included in the Company’s operating expense categories.

Instruction and support costs ("I&SC") generally contain items of expense directly attributable to activities of Strayer University and Capella University (the "Universities") that support students and learners. 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 supplies, facilities, and all other physical plant and occupancy costs, with the ~~related amendments (“ASC 606”) using the modified retrospective method. The Company recognized the cumulative effect~~exception of ~~initially applying the new revenue standard as an adjustment~~costs attributable to the ~~opening balance~~corporate 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 ~~retained earnings.~~ 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.

The ~~comparative information has~~following table presents the Company's operating expenses as previously reported and as reclassified on its unaudited condensed consolidated statements of income for the three months ended (in thousands):



	New Classification
	March 31, 2018				June 30, 2018				September 30, 2018				December 31, 2018
Prior Classification	I&SC		G&A		I&SC		G&A		I&SC		G&A		I&SC		G&A
Instructional and educational support	$	63,776	$	—	$	64,690	$	—	$	93,290	$	—	$	118,320	$	—
Admissions advisory	4,676		—		4,609		—		9,789		—		12,392		—
Marketing	—		20,124		—		21,113		—		46,165		—		49,577
General and administration	—		11,218		—		11,063		—		15,811		—		18,964
Total reclassified costs and expenses⁽¹⁾	$	68,452	$	31,342	$	69,299	$	32,176	$	103,079	$	61,976	$	130,712	$	68,541

⁽¹⁾This amount excludes the amortization of intangible assets and merger and integration costs expense line items on the condensed consolidated statements of income as those expense line items were not ~~been restated and continues to be reported under~~impacted by the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard to be immaterial to the Company’s net income on an ongoing basis. Refer to Note 4 for further discussion.operating expense reclassification.

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 the ~~University~~Universities during the academic term. The Company had approximately ~~$15,000 and $8,000~~$5,000 of these unpaid obligations as of December 31, ~~2017~~2018 and March 31, ~~2018, respectively, of these unpaid obligations,~~2019, which 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 is required to maintain a “minimum protective endowment” of at least $0.5 million in an interest-bearing account 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 March 31, ~~2017~~2018 and ~~2018~~2019 (in thousands):

For the three months ended

March 31,

2017

2018
Cash and cash equivalents

$
147,099

$
165,867
Restricted cash included in other current assets

—

8
Restricted cash included in other long-term assets

500

500
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

$
147,599

$
166,375



	As of March 31,
	2018		2019
Cash and cash equivalents	$	165,867	$	352,387
Restricted cash included in other current assets	8		5
Restricted cash included in other long-term assets	500		500
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	166,375	$	352,892

Tuition Receivable and Allowance for Doubtful Accounts

The Company records tuition receivable and contract liabilities for its students upon the start of the academic term or program. Therefore, at the end of the quarter (and academic term), tuition receivable generally represents amounts due from students for educational services already provided and contract liabilities generally represents advance payments from students for academic services to be provided in the future. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the ~~University’s~~Universities' student ~~base.~~bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for doubtful accounts is established primarily based upon historical collection rates by group of receivable reflecting factors such as age of ~~receivable,~~the balance due, student academic status, and size of outstanding balance, net of estimated ~~recoveries.~~recoveries, and consideration of other relevant factors. These collection rates incorporate historical performance based on a student’s current enrollment status and likelihood of future enrollment. The Company periodically assesses its methodologies for estimating bad debts in consideration of actual experience.

~~Table of Contents~~

The Company’s tuition receivable and allowance for doubtful accounts were as follows as of December 31, ~~2017~~2018 and March 31, ~~2018~~2019 (in thousands):

December 31, 2017

March 31, 2018

Tuition receivable

$
35,809

$
38,772

Allowance for doubtful accounts

(12,687)

(13,775)

Tuition receivable, net

$
23,122

$
24,997



	December 31, 2018			March 31, 2019
Tuition receivable	$	84,151		$	80,229
Allowance for doubtful accounts	(28,457		)	(29,387		)
Tuition receivable, net	$	55,694		$	50,842

Approximately ~~$2.9~~$1.1 million and ~~$3.3~~$0.8 million of tuition receivable are included in other assets as of December 31, ~~2017~~2018 and March 31, ~~2018,~~2019, respectively, because these amounts are expected to be collected after 12 months.

The following table illustrates changes in the Company’s allowance for doubtful accounts for the three months ended March 31, ~~2017~~2018 and ~~2018~~2019 (in thousands):

For the three months ended


March 31,

2017

2018

Allowance for doubtful accounts, beginning of period

$
10,201

$
12,687

Additions charged to expense

4,382

6,391

Write-offs, net of recoveries

(3,763)

(5,303)

   Allowance for doubtful accounts, end of period

$
10,820

$
13,775

~~Fair Value~~

~~The Fair Value Measurement Topic, ASC 820-10 (“ASC 820-10”), establishes a framework for measuring fair value, establishes a fair value hierarchy based upon~~



	For the three months ended March 31,
	2018			2019
Allowance for doubtful accounts, beginning of period	$	12,687		$	28,457
Additions charged to expense	6,391			12,320
Write-offs, net of recoveries	(5,303		)	(11,390		)
Allowance for doubtful accounts, end of period	$	13,775		$	29,387

Leases

In February 2016, the ~~observability~~FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 is intended to improve financial reporting of ~~inputs used~~leasing transactions by requiring organizations that lease assets to ~~measure fair value, and expands disclosures about fair value measurements. Assets~~recognize assets and liabilities for the rights and obligations created by leases with a term longer than 12 months. ASU 2016-02 also requires additional quantitative and qualitative disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. During 2018 and 2019, the FASB issued additional ASUs amending certain aspects of ASU 2016-02. On January 1, 2019, the Company adopted the new accounting standard and all the related amendments ("ASC 842") using the modified retrospective method. The Company applied ASU 2016-02 to all leases that had commenced as of January 1, 2019. In addition, as permitted by ASU 2016-02, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under ASU 2016-02, which allowed the Company to not reassess prior conclusions regarding lease identification, lease classification, and initial direct costs under the new standard. As a result of adopting the new standard, the Company recognized a lease liability of $123 million and a right-of-use asset of $107 million on January 1, 2019. The standard did not materially impact the Company's condensed consolidated statements of income and cash flows.

The Company determines if an arrangement is a lease at inception. Leases with an initial term longer than 12 months are ~~classified~~included in ~~their entirety within~~right-of-use ("ROU") lease assets, short-term lease liabilities, and long-term lease liabilities on the ~~fair value hierarchy~~Company's condensed consolidated balance sheets. The Company combines lease and non-lease components for all leases.

ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU lease assets and lease liabilities are recognized at the commencement date based on the ~~lowest level input that is significant to the fair value measurement. Under ASC 820-10, fair~~present value of ~~an investment is~~lease payments over the ~~price that would be received to sell an asset or to transfer a liability to an entity in an orderly transaction between market participants at~~lease term. As 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 degree of judgment when measuring fair value, as follows:

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

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 one~~implicit interest rates for most of the ~~three levels above. Fair values are~~Company's leases cannot be readily determined, the Company uses its incremental borrowing rate based on ~~the inputs~~information available at the ~~measurement dates,~~commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term for operating leases.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company subleases certain building space to third parties and ~~may rely~~sublease income is recognized on ~~certain assumptions that may affect~~a straight-line basis over the ~~valuation of fair value~~lease term. See Note 7 for ~~certain assets or liabilities.~~

additional information.

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. No

The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances ~~occurred in~~indicate that the ~~three months ended March 31, 2018~~carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment loss is recognized to ~~indicate an impairment to goodwill or~~ the ~~indefinite-lived intangible~~extent the carrying amount of the assets exceeds the fair value of the assets.

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Authorized Stock

The Company has authorized ~~20,000,000~~32,000,000 shares of common stock, par value ~~$.01,~~$0.01, of which ~~11,167,425~~21,743,498 and ~~11,300,671~~21,923,800 shares were issued and outstanding as of December 31, ~~2017~~2018 and March 31, ~~2018,~~2019, respectively. The Company also has authorized 8,000,000 shares of preferred stock, none of which is issued or 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 ~~March 2018,~~February 2019, the Company’s Board of Directors declared a regular, quarterly cash dividend of ~~$0.25~~$0.50 per share of common stock. The dividend was paid on March ~~19, 2018.~~

~~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 condensed consolidated statements of income for each of the three months ended March 31, 2017 and 2018 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. See note 7 for additional information.

18, 2019.

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.

~~During the three months ended March 31, 2017 and 2018, the Company had no issued and outstanding stock options that were excluded from the calculation.~~

Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for the three months ended March 31, ~~2017~~2018 and ~~2018~~2019 (in thousands):

For the three months ended


March 31,


2017

2018

Weighted average shares outstanding used to compute basic earnings per share

10,630

10,745

Incremental shares issuable upon the assumed exercise of stock options

35

45

Unvested restricted stock and restricted stock units

456

521

    Shares used to compute diluted earnings per share

11,121

11,311

~~Income Taxes~~

~~The~~



	For the three months ended March 31,
	2018	2019
Weighted average shares outstanding used to compute basic earnings per share	10,745	21,499
Incremental shares issuable upon the assumed exercise of stock options	45	92
Unvested restricted stock and restricted stock units	521	459
Shares used to compute diluted earnings per share	11,311	22,050

During the three months ended March 31, 2019, the Company ~~provides for deferred~~had approximately 59,000 shares of restricted stock excluded from the diluted earnings per share calculation because the effect would have been antidilutive. During the three months ended March 31, 2018, the Company had no issued and outstanding awards that were excluded from the calculation.

Comprehensive Income

Comprehensive income ~~taxes based on temporary differences between financial statement~~includes net income and ~~income tax bases of assets and liabilities using enacted tax rates in effect~~all changes in the ~~year in~~Company’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 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

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~~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 since 2014 remain open~~ for ~~Federal tax examination and the tax years since 2013 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. As of December 31, 2018 and March 31, 2019, the balance of accumulated other comprehensive income was $32,000, net of tax of $10,000 and $266,000, net of tax of $116,000, respectively. There were no reclassifications out of accumulated other comprehensive income to net income for the three months ended March 31, 2019.

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, useful lives of property and equipment and intangible assets, fair value of future contractual operating lease obligations, 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. Actual results could differ from those estimates.

~~Recent~~

Recently Adopted Accounting Pronouncements

In ~~February 2016,~~June 2018, the FASB issued ASU No. ~~2016-02,~~2018-07, ~~Leases~~Compensation – Stock Compensation (Topic ~~842)~~718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU ~~2016-02”~~2018-07”)~~. The new~~, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. ASU 2018-07 aligns guidance ~~requires~~on share-based payments to nonemployees with the ~~recognition~~requirements for share-based payments granted to employees, including determination of ~~right-of-use assets~~the measurement date and ~~lease liabilities on the balance sheet~~accounting for ~~most leases. Under current guidance, operating leases are off-balance sheet. ASU 2016-02 also requires more extensive quantitative~~performance conditions and ~~qualitative disclosures about leasing arrangements. ASU 2016-02 applies to fiscal periods beginning~~for share-based payments after ~~December 15, 2018, using the modified retrospective method, with early adoption permitted.~~vesting. The Company ~~anticipates that the~~adopted this guidance as of January 1, 2019 with no material impact ~~of ASU 2016-02~~ on its unaudited condensed consolidated ~~balance sheet will be material as the Company will record significant asset and corresponding liability balances in connection with its leased properties.~~financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments -– Credit Losses (Topic 326)~~, 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 August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows~~ ~~(Topic 230):~~ ~~Classification of Certain Cash Receipts and Cash Payments~~ (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows by providing guidance on eight specific cash flow issues. The Company adopted the standard retrospectively on January 1, 2018 with no effect on its unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017.

~~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. On January 1, 2018, the Company adopted ASU 2016-18 with no material impact on its unaudited condensed consolidated statements of cash flows.

~~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 only in the event that an impairment is recognized. 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 adopted this guidance effective as of January 1, 2018 with no material impact on its unaudited condensed consolidated financial statements.

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


3.	Merger with Capella Education Company

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,” “will,” “forecast,” “outlook,” “plan,” “project,” or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses and capital expenditures. 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 regional 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, the pace of growth of student enrollment, competitive factors, 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, risks relating to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the benefits of the merger with Capella Education Company, including expected synergies, may not be fully realized or may take longer to realize than expected, 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 I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K and in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking ~~statements.~~

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 ~~owns~~seeks to provide the most direct path between learning and employment through campus-based and online post-secondary education offerings and through programs to develop job-ready skills for high-demand markets. We operate primarily through our wholly-owned subsidiaries Strayer University ~~(the “University”~~and Capella University, both accredited post-secondary institutions of higher education. Our operations also include certain non-degree programs, mainly focused on software and application development.

Acquisition of Capella Education Company

On August 1, 2018, we completed our merger with Capella Education Company (“CEC”) pursuant to a merger agreement dated October 29, 2017. The merger solidifies our position as a national leader in education innovation, and provides scale that will enable greater investment in improving student academic and career outcomes while maintaining our focus on affordability. The merger is also expected to create significant cost synergies for us.

Pursuant to the merger, we issued 0.875 shares of our common stock for each issued and outstanding share of CEC common stock. Outstanding equity awards held by CEC employees and certain nonemployee directors of CEC were assumed by us and converted into comparable SEI awards at the exchange ratio. Outstanding equity awards held by CEC nonemployee directors who did not serve as directors of ~~January 13, 2016,~~SEI after completion of the ~~New York Code~~merger, and ~~Design Academy (“NYCDA”). The~~awards held by former employees of CEC who left before completion of the merger were settled upon completion of the merger as specified in the merger agreement.

Our financial results for any periods ended prior to August 1, 2018 do not include the financial results of CEC, and are therefore not directly comparable. For the three months ended March 31, 2018, CEC’s revenues were $112.0 million, and its income from continuing operations was $18.4 million.

During the three months ended March 31, 2019, we incurred $7.2 million in expenses related to the merger, primarily attributable to legal fees, personnel, and other integration costs.

As of March 31, 2019, SEI had the following reportable segments:

Strayer University Segment

Strayer University is an institution of higher ~~education which~~learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice at 74 physical campuses, predominantly located in the eastern United States, and online. ~~NYCDA~~Strayer University is accredited by the Middle States Commission on Higher Education (hereinafter referred to as “Middle States” or “Middle States Commission”), one of the seven regional collegiate accrediting agencies recognized by the Department. By offering its programs both online and in physical classrooms, Strayer University provides ~~non-degree courses~~its working adult students flexibility and convenience.

The Jack Welch Management Institute (“JWMI”) offers an executive MBA online and is a Top 25 Princeton Review ranked online MBA program.

In the first quarter, Strayer University’s enrollment increased 11.5% to 51,479 compared to 46,184 for the same period in 2018. New student enrollment for the period increased 13.2% and continuing student enrollment for the period increased 11.1%.

Capella University Segment

Capella University is an online post-secondary education company that offers a variety of doctoral, master’s and bachelor’s degree programs, primarily for working adults, in the following primary disciplines: public service leadership, nursing and health sciences, social and behavioral sciences, business and technology, education, and undergraduate studies. Capella University focuses on master's and doctoral degrees, with 70% of its learners enrolled in a master’s or doctoral degree program. Capella University's academic offerings are built with competency-based curricula and are delivered in an online format that is convenient and flexible. Capella University designs its offerings to help working adult learners develop specific competencies they can apply in their workplace. Capella University is accredited by the Higher Learning Commission, one of the seven regional collegiate accrediting agencies recognized by the Department.

On April 19, 2019, the Higher Learning Commission ("HLC") issued formal notification that its Institutional Action Council affirmed the appropriateness of the Change of Control arising out of the merger and further affirmed Capella University’s continued adherence to HLC’s Eligibility Requirements and Criteria for Accreditation. In addition, HLC specifically confirmed Capella University’s shared service relationship with the Company satisfies HLC’s Core Components related to HLC’s Guidelines for Shared Services Arrangements.

In the first quarter, Capella University’s enrollment increased 2.9% to 39,271 compared to 38,181 for the same period in 2018. New student enrollment for the period increased 14.7%.

Non-Degree Programs Segment

DevMountain, LLC is a software development school offering affordable, high-quality, leading-edge software coding education at multiple campus locations and online.

Hackbright Academy, Inc. 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.

The New York Code and Design Academy, Inc. is a New York City-based provider of web and application software development ~~primarily~~courses.

Sophia Learning, LLC is an innovative learning company which leverages technology to support self-paced learning, including courses eligible for transfer into credit at ~~campuses~~over 2,000 colleges and universities.

We believe we have the right operating strategies in ~~New York City~~place to provide the most direct path between learning and ~~Philadelphia, PA. NYCDA’s results of operations are included~~employment for our students. We focus on innovation continually to differentiate ourselves in our ~~results from~~markets and drive growth by supporting student success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a broader set of our students’ professional needs, and establishing new growth platforms. Technology and the ~~acquisition date.~~

~~In October 2017, we entered into a merger agreement with Capella Education Company (“Capella”). Capella provides post-secondary~~talent of our faculty and employees enable these strategies. We believe these strategies and enablers will allow us to continue to deliver high quality, affordable education, and job-skills programs primarily through its subsidiary Capella University. Capella had approximately 37,500 students at December 31, 2017, its revenue for 2017 was $440.4 million, and its net income from continuing operationsresulting in ~~2017 was $23.4 million. The merger was approved by our stockholders and by Capella’s shareholders on January 19, 2018. Upon consummation of~~continued growth over the ~~merger, Capella will become our wholly-owned subsidiary and~~long-term. We will continue to ~~offer its education programs through Capella University.~~

~~Most~~invest in these enablers to strengthen the foundation and future of our business. We also believe our enhanced scale and capabilities allow us to continue to focus on innovative cost and revenue ~~comes from~~synergies, while improving the University, which derives approximately 96% of its revenue from tuition for educational programs, whether delivered online or delivered in person at a physical campus. The academic year of the University is divided into four quarters, each of which is within the four quarters of the calendar year. Students at the University and at NYCDA make payment arrangements for the tuition for each course at the time of enrollment. Tuition revenue is recognized ratably over the course of instruction. If a student withdraws from a course priorvalue provided 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 which is recognized upon sale, and certificate revenue, certain academic fees, licensing revenue, and other income, which are recognized when as the services are provided.

our students.

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Tuition receivable and contract liabilities for our students are recorded upon the start of the course, which 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 contract liabilities generally represent advance payments for academic services to be provided in the future. Based upon past experience and judgment, the University establishes an allowance for doubtful accounts with respect to accounts receivable. Any uncollected account more than one year past due is charged against the allowance. Accounts less than one year past due are reserved according 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 three months ended March 31, 2017 and 2018 was 3.8% and 5.5%, respectively.

~~Below is a description of the nature of the consolidated costs included 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 primarily of earnings and realized gains or losses on investments and interest expense consists of interest incurred on our outstanding borrowings, unused revolving credit facility fees, and amortization of deferred financing costs.

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; income tax provisions; the useful lives of property and ~~equipment;~~equipment and intangible assets; redemption rates for scholarship programs and valuation of contract liabilities; fair value of future contractual operating lease obligations for facilities that have been closed; incremental borrowing rates; valuation of deferred tax assets, goodwill, ~~contingent consideration,~~ 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, ~~the~~Strayer University ~~offers its~~and 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 over the length of a course. Beginning January 1, 2018, in accordance with our adoption of new revenue recognition standards under ASC 606, materials provided to students in connection with their enrollment in a

~~Table of Contents~~

~~course are recognized as revenue when control of those materials transfers to the student.~~ Approximately 96% of our revenues during the three months ended March 31, ~~2018~~2019 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 provides~~Universities 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 ~~University~~Universities also ~~derives~~derive 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. 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 liability (contract liability) is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability.

Students of the ~~University~~Universities finance their education in a variety of ways, and historically about three quarters of our students have participated in one or more financial aid programs 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.

A typical class is offered in weekly increments over a ~~ten-week~~six- 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, 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. Our specific refund policies vary across 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 learners attending Capella University, our refund policy varies based on course format. GuidedPath learners 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 learners 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. Refunds reduce the tuition revenue that otherwise would have ~~otherwise~~ been recognized for that student. Since the ~~University’s~~Universities’ 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, the Company estimates a refund rate and does not recognize the related revenue until the uncertainty related to the refund is resolved. The portion of tuition revenue refundable to students may vary based on the student’s state of residence.

For ~~undergraduate~~ students who withdraw from all their courses during the quarter 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 students who receive funding under Title IV and withdraw, funds are subject to return provisions as defined by the Department of Education. The University is responsible for returning Title IV funds to the Department ~~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 upon a student’s withdrawal from all of his or her classes in an academic ~~term.~~

term until cash is received and the term is complete.

New students at Strayer University registering in credit-bearing courses in any undergraduate program for the summer 2013 term (fiscal third quarter) and subsequent terms qualify for the Graduation Fund, whereby qualifying students earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. Students must meet all of the University’s admission requirements and not be eligible for any previously offered scholarship program. Our employees and their dependents are not eligible for the program. To maintain eligibility, students must be enrolled in a bachelor’s degree program. Students who have more than one consecutive term of non-attendance lose any Graduation Fund credits earned to date, but may earn and accumulate new credits if the student is reinstated or readmitted by the University in the future. In their final academic year, qualifying students will receive one free course for every three courses that were successfully ~~completed.~~completed in prior years. The performance obligation associated with free courses that may be redeemed in the future is valued based on a systematic and rational allocation of the cost of honoring the benefit earned to each of the underlying revenue transactions that result in progress by the student toward earning the benefit. The estimated value of awards under the Graduation Fund that will be recognized in the future is based on historical experience of students’ persistence in completing their course of study and earning a degree and the tuition rate in effect at the time it was associated with the transaction. Estimated redemption rates of eligible students vary based on their term of enrollment. As of March 31, ~~2018,~~2019, we had deferred ~~$38.3~~$44.5 million for estimated redemptions earned under the Graduation Fund, as compared to ~~$37.4~~$43.3 million at December 31, ~~2017.~~2018. Each quarter, we assess our methodologies and assumptions underlying our estimates for persistence and estimated redemptions based on actual experience. To date, any adjustments to our

~~Table of Contents~~

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 for tuition receivable from students primarily based on our historical collection rates by group of receivable reflecting factors such as age of ~~receivable,~~the balance due, student academic status, and size of outstanding balances, net of recoveries, and consideration of other relevant factors. Our experience is that payment of outstanding balances is influenced by whether the student returns to the institution, as we require students to make payment arrangements for their outstanding balances prior to enrollment. Therefore, we monitor outstanding tuition receivable balances through subsequent terms, increasing the reserve on such balances over time as the likelihood of returning to the institution diminishes and our historical experience indicates collection is less likely. We periodically assess our methodologies for estimating bad debts in consideration of actual experience. If the financial condition of our students were to deteriorate, resulting in evidence of impairment of their ability to make required payments for tuition payable to us, additional allowances or write-offs may be required. For the first quarter of ~~2018,~~2019, our bad debt expense was ~~5.5%~~5.0% of revenue, compared to ~~3.8%~~5.5% for the same period in 2017. Our bad debt has been negatively impacted by changes made by the U.S. Department of Education in the way it processes student financial aid, which increased the number of students subject to verification for loan eligibility under Title IV. This increase was not unique to Strayer, and affected many other institutions which receive funding through Title IV programs. The increased volume resulted in delays in processing financial aid for these students, largely causing the deterioration in our bad debt rate as compared to historical results. The Department of Education announced certain corrections to its processes which are scheduled to take effect in 2018 and are expected to reduce the volume of accounts selected for verification and improve the timeliness of the reviews.2018. A change in our allowance for doubtful accounts of 1% of gross tuition receivable as of March 31, ~~2018~~2019 would have changed our income from operations by approximately ~~$0.4~~$0.8 million.

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. Indefinite-lived intangible assets, which include trade names, are recorded at fair market value on their acquisition date. Goodwill and ~~the~~ indefinite-lived intangible assets are assessed at least annually for impairment. ~~In connection with the goodwill in~~Through our ~~JWMI reporting unit and the indefinite-lived intangible asset associated with the JWMI trade name, we utilized a qualitative assessment, consistent with ASC 350, to evaluate the recoverability~~acquisition of the related amounts. A qualitative assessment was performed based on the excess fair value noted in prior years. The qualitative factors considered included macroeconomic conditions, industry/market factors, cost considerations, and overall financial performance, among others. Based on our qualitative assessment, we concluded that it was not more likely than not that the fair value was less than the carrying value; as such, no impairments had been incurred.

In connection with the goodwill in our NYCDA reporting unit and the indefinite-lived intangible asset associated with the NYCDA tradename, we utilized a quantitative assessment consistent with ASC 350 during the period ended December 31, 2017. The valuation of the reporting unit considered both an income approach and a market approach, whereas the tradename valuation utilized a relief from royalty method. Key assumptions utilizedCEC in the ~~discounted cash flow~~third quarter of 2018, we had significant additions to goodwill and ~~relief from royalty models include revenue growth rates ranging from 5%~~tradename intangible assets. The acquired goodwill was allocated to ~~129% through 2024~~the Strayer University and ~~3% thereafter, operating margins ranging from -15% to 20% during the same period, and a discount rate~~Capella University reporting units. As of ~~17.5%. Management determined that no impairment had been incurred. During the three months ended~~ March 31, ~~2018, management~~2019, the Company performed a qualitative assessment, consistent with ASC 350, and concluded that there were no goodwill or indefinite-lived intangible asset impairment indicators. Accordingly, no impairment charges related to ~~evaluate~~goodwill or indefinite-lived intangible assets were recorded during the ~~recoverability~~three month period ended March 31, 2019.

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 ~~related amounts and determined~~asset. Finite-lived intangible assets consist of student relationships. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that nothe carrying amount of an asset may not be recoverable. If such assets are not recoverable, a potential impairment ~~had been incurred. The NYCDA business~~loss is still in its early stages and, as such, future operating performance is uncertain. Although we remain committed to this business and are optimistic about its future prospects, the rate of growth in the business has been slower than originally anticipated. Management will continue to monitor the business and update the operating plan, as necessary. Further downward adjustmentsrecognized to the ~~plan could result in impairments in future periods, which could be material.~~

~~Contingent Consideration~~ ~~— In connection with~~extent the ~~acquisition~~carrying amount of ~~NYCDA,~~ the ~~Company agreed that~~assets exceeds the purchase price would include contingent cash payments (contingent consideration) of up to $12.5 million payable based on NYCDA’s results of operations over a five-year period (the “Earnout”). Generally accepted accounting principles require that contingent consideration be recorded at its estimated fair value at the date of acquisition and then adjusted to fair value each period thereafter until it is settled.

~~The~~ fair value of the Earnout was originally measured by applying a probability weighted discounted cash flow model based on significant inputs not observable in the market. Based on its original projections, the Company expected the full amount of the Earnout would be paid and initially measured the liability at $9.0 million. Following its initial recognition, the Company reassessed and adjusted the carrying value of the Earnoutassets. No impairment charges related to fair value with fair value reflecting revisions to the business plan, expectations relative to achieving the performance targets over the earnout period, and the impact of the discount rate. As of March 31, 2018, the Company estimates that no amounts under the Earnout will be paid and the related liability has beenfinite-lived intangible assets were recorded ~~at zero. The Company will continue to update it forecasts each period and record any fair value adjustments, as necessary.~~

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~~Accrued lease and related costs~~ — We estimate potential sublease income and vacancy 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 rates that are substantially different than our current estimates, we will adjust our liability for lease and related costs. Duringduring the three ~~months~~month period ended March 31, ~~2018 and 2017, we had no reduction to our liability for leases.~~

2019.

Other estimates — We record estimates for contingent consideration, certain of our accrued expenses, and income tax liabilities. We estimate the useful lives of our property and equipment and intangible assets and periodically review our assumed forfeiture rates and ability to achieve performance targets for stock-based awards and adjust them as necessary. Should actual results differ from our estimates, revisions to our 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 merger with CEC on August 1, 2018. Our results of operations for the three months ended March 31, 2019 include the results of CEC, but the results of operations for the three months ended March 31, 2018 do not include the financial results of CEC. Accordingly, the financial results of each period presented are not directly comparable. This discussion will highlight changes largely in the Strayer University segment, as those results are included in full in each period.

In the first quarter of ~~2018,~~2019, we generated $246.5 million in revenue compared to $116.5 million in ~~revenue, a 1% increase compared to 2017, principally due to a 6% increase in total enrollment, partially offset by a 5% decline in revenue per student. Income~~2018. Our income from operations was ~~$11.3~~$25.7 million for the first quarter of ~~2018~~2019 compared to ~~$18.4~~$11.3 million ~~for~~in 2018 due primarily to the ~~first quarter~~inclusion of ~~2017.~~CEC's results in our consolidated results of operations. Net income in the first quarter of ~~2018~~2019 was ~~$9.5~~$11.5 million compared to ~~$10.6~~$9.5 million for the same period in ~~2017.~~2018. Diluted earnings per share was ~~$0.84~~$0.52 compared to ~~$0.95~~$0.84 for the same period in ~~2017.~~

2018.

In the accompanying analysis of financial information for 2019 and 2018, we use certain financial measures including Adjusted Income from Operations, 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 ~~charges associated with our previously announced~~the following:

amortization expense related to assets acquired through the Company’s merger with Capella Education ~~Company.~~ Company,

transaction and integration costs associated with the Company’s merger with Capella Education Company,

income from partnership investments that are not part of our core operations, and

discrete tax adjustments related to stock-based compensation and other adjustments.

When considered together with GAAP financial results, we believe these measures provide management and investors with an additional understanding of our business and operating results, including underlying ~~trends. For~~trends associated with the ~~three months ended March 31, 2017 there were no such charges and, accordingly, non-GAAP financial measures are not presented.~~

Company’s 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 ~~$16.7~~$48.3 million in the first quarter of ~~2018~~2019 compared to ~~$18.4~~$16.7 million in ~~2017.~~2018. Adjusted net income was ~~$13.9~~$36.7 million in the first quarter of ~~2018~~2019 compared to ~~$10.6~~$13.9 million in ~~2017,~~2018, and adjusted diluted earnings per share was ~~$1.23~~$1.66 in the first quarter of ~~2018~~2019 compared to ~~$0.95~~$1.23 in ~~2017. There were no differences between Net Income and Adjusted Net Income for the three months ended March 31, 2017.~~ 2018.

The ~~table~~tables below ~~reconciles~~reconcile our reported results of operations to adjusted results (amounts in thousands, except per share data):

Reconciliation of Reported to Adjusted Results of Operations for the three months ended March 31, ~~2018.~~

2019



			Non-GAAP Adjustments
	As Reported (GAAP)		Amortization of intangible assets⁽¹⁾		Merger and integration costs⁽²⁾		Income from partnership interests⁽³⁾			Tax adjustments⁽⁴⁾			As Adjusted (Non-GAAP)
Income from operations	$	25,723	$	15,417	$	7,179	$	—		$	—		$	48,319
Other income, net	3,327		—		—		(1,023		)	—			2,304
Income before income taxes	29,050		15,417		7,179		(1,023		)	—			50,623
Provision for income taxes	17,550		—		—		—			(3,629		)	13,921
Net income	$	11,500	$	15,417	$	7,179	$	(1,023	)	$	3,629		$	36,702
Earnings per share:
Basic	$	0.53											$	1.71
Diluted	$	0.52											$	1.66
Weighted average shares outstanding:
Basic	21,499												21,499
Diluted	22,050												22,050

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Reconciliation of Reported to Adjusted Results of Operations for the three months ended March 31, 2018

Non-GAAP Adjustment


As Reported (GAAP)

Merger Costs (1)

As Adjusted (Non-GAAP)

Income from operations

$
11,328

$
5,347

$
16,675

Investment income

448

—

448

Interest expense

159

—

159

    Income before income taxes

11,617

5,347

16,964

    Provision for income taxes

2,150

914

3,064

         Net income

$
9,467

$
4,433

$
13,900

Earnings per share:

Basic

$
0.88

$
0.41

$
1.29

Diluted

$
0.84

$
0.39

$
1.23

Weighted average shares outstanding:

Basic

10,745

—

10,745

Diluted

11,311

—

11,311



			Non-GAAP Adjustments
	As Reported (GAAP)		Amortization of intangible assets⁽¹⁾		Merger and integration costs⁽²⁾		Income from partnership interests⁽³⁾		Tax adjustments⁽⁴⁾			As Adjusted (Non-GAAP)
Income from operations	$	11,328	$	—	$	5,347	$	—	$	—		$	16,675
Other income, net	289		—		—		—		—			289
Income before income taxes	11,617		—		5,347		—		—			16,964
Provision for income taxes	2,150		—		—		—		914			3,064
Net income	$	9,467	$	—	$	5,347	$	—	$	(914	)	$	13,900
Earnings per share:
Basic	$	0.88										$	1.29
Diluted	$	0.84										$	1.23
Weighted average shares outstanding:
Basic	10,745											10,745
Diluted	11,311											11,311


(1)	Reflects amortization expense related to intangible assets associated with the Company’s merger with CEC.


(2)	Reflects transaction and integration charges associated with the ~~Company’s previously announced~~Company's merger with ~~Capella Education Company.~~ CEC.

~~Key enrollment trends by quarter for the University were as follows:~~

~~Enrollment~~

~~% Change vs Prior Year~~

(3) Reflects income recognized from the Company's investments in partnership interests.
(4) Reflects discrete tax adjustments related to the vesting of stock awards and other adjustments, utilizing an adjusted effective tax rate of 18.1% and 27.5% for 2018 and 2019, respectively.

~~Since 2013, we have introduced a number of initiatives in response~~Three Months Ended March 31, 2019 Compared to the variability in demand for our programs. Recognizing that affordability is an important factor in a prospective student’s decision to seek a college degree, we reduced Strayer 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 redeemable in the student’s final academic year. In 2015, we increased our investment in resources focused on helping Fortune 1000 companies to structure customized education and training programs for their employees, often with significant discounts to our published tuition rates. In 2017, we introduced several new scholarship programs aimed at specific demographics, geographies, and student profiles. We also began testing significantly reduced tuition for select graduate degree programs. These initiatives have had a negative impact on Strayer University revenue per student, which declined 3% in 2017, and is expected to decrease in 2018 by 3% to 4%, not including any impact from our pending merger with Capella.

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As a result of these and other initiatives, average total enrollment grew approximately 6% in 2017. Should the 2017 full-year enrollment growth continue in 2018, we would expect revenue for the full year 2018 to increase at the rate of enrollment growth, less the decline in revenue per student, and would expect operating expenses in 2018 to increase slightly, not including any impact from our pending merger with Capella.

Three Months Ended March 31, 2018 ~~Compared~~

Revenues. The increase in consolidated revenues compared to ~~Three Months Ended~~the same period in the prior year was primarily related to the inclusion of CEC revenue. In the Strayer University segment for the three months ended March 31, ~~2017~~

~~Enrollment. Total enrollments at~~2019, enrollment grew 11.5% to 51,479 from 46,184 in the ~~University for the winter term 2018 increased~~prior year. Revenue grew 11.1% to ~~46,184 students, from 43,387 for the winter term 2017. New student enrollments and continuing student enrollments increased by 6% each.~~

~~Revenues. Revenues increased 1%~~$128.1 million compared to ~~$116.5~~$115.3 million in 2018 as a result of the ~~first quarter of 2018 from $114.9~~increase in enrollment. Capella University segment revenue was $114.7 million. Non-Degree Programs segment revenues were $3.8 million in the first quarter of 2017, principally due to total enrollment growth of 6%, partially offset by a decline in revenue per student of 5%. The decline in revenue per student is largely attributable to students continuing on scholarship programs offered in fall 2017 and growth in lower priced graduate degree programs. Revenues for undergraduate students increased 6% in the three months ended March 31, ~~2018, driven by an increase in total undergraduate enrollment of 10%, partially offset by a decline in revenue per student of 4%. We expect this decline in revenue per student~~2019, compared to continue at the undergraduate level as we enroll more new undergraduate students. For graduate students, revenues decreased 9% in 2018, driven by a decline in total graduate enrollment of 2% and a decline in revenue per student of 7%.

~~Instruction and educational support expenses.~~ ~~Instruction and educational support expenses increased $2.4 million, or 4%, to $63.8~~$1.2 million in the ~~first quarter~~three months ended March 31, 2018. The increase in revenues for the three month period was primarily attributable to incremental revenues generated from the operations of ~~2018 from $61.4~~Hackbright, DevMountain, and Sophia Learning, which were acquired in the CEC merger.

Instructional and support costs. Consolidated instructional and support costs increased to $134.1 million, compared to $68.5 million in the ~~first quarter of 2017,~~same period in the prior year, principally due to ~~increases in student materials~~the inclusion of instructional and support costs ~~depreciation expense following recent infrastructure investments,~~of CEC. Consolidated

instructional and ~~bad debt expense. Instruction and educational~~ support ~~expenses as a percentage of revenues increased to 54.8% in the first quarter of 2018 from 53.4% in the first quarter of 2017.~~

~~Marketing expenses~~. Marketing expenses increased $1.4 million, or 8%, to $20.1 million in the first quarter of 2018 from $18.7 million in the first quarter of 2017, principally due to increased investments in branding initiatives. Marketing expenses as a percentage of revenues increased to 17.3% in the first quarter of 2018 from 16.3% in the first quarter of 2017.

~~Admissions advisory expenses. Admissions advisory expenses remained unchanged at $4.7 million in the first quarter of 2018 and 2017. Admissions advisory expenses~~costs as a percentage of revenues decreased to ~~4.0%~~54.4% in the first quarter of ~~2018~~2019 from ~~4.1%~~58.8% in the first quarter of ~~2017.~~

2018.

General and administration expenses. ~~General~~Consolidated general and administration expenses ~~decreased $0.4 million~~increased to ~~$11.2~~$64.1 million in the first quarter of ~~2018 from $11.6~~2019 compared to $31.3 million in the ~~first quarter~~prior year, principally due to the inclusion of ~~2017. General~~general and administration expenses of CEC, as well as increased investments in branding initiatives and partnerships with brand ambassadors. Consolidated general and administration expenses as a percentage of revenues decreased to ~~9.6%~~26.0% in the first quarter of ~~2018~~2019 from ~~10.1%~~26.9% in the first quarter of ~~2017.~~2018.

Amortization of intangible assets. In the three months ended March 31, 2019, we recorded $15.4 million in amortization expense related to intangible assets acquired in the merger with CEC.

Merger and integration costs. Merger and integration costs were ~~$5.3~~$7.2 million in the first quarter of 2019 compared to $5.3 million in 2018, and reflect expenses for legal, accounting, ~~and~~ integration support services and severance costs incurred ~~by the Company~~ in connection with the ~~proposed~~ merger with ~~Capella. Merger costs as a percentage of revenues was 4.6% in the first quarter of 2018.~~ CEC.

Income from operations. Income from operations was $25.7 million in the first quarter of 2019 compared to income from operations of $11.3 million in the first quarter of 2018, ~~compared~~principally due to ~~$18.4~~the inclusion of CEC in our results from operations.

Other income. Other income increased to $3.3 million in the first quarter of ~~2017, primarily due~~2019 compared to ~~the merger costs incurred in the period.~~

~~Investment income and interest expense. Investment income increased to $0.4~~$0.3 million in the first quarter of 2018 ~~compared to $0.2 million in the first quarter of 2017~~ as a result of the inclusion of $1.0 million of investment income from partnership interests acquired in the CEC merger, higher yields on money markets and marketable securities, and an increase in our cash balances. ~~Interest~~Other income is net of interest expense, which was $0.2 million in the first quarter of both ~~2018~~2019 and ~~2017.~~2018. We ~~have $150.0~~had $250.0 million available under our amended revolving credit facility and no borrowings outstanding as of March 31, ~~2018.~~2019.

Provision for income taxes.Income tax expense was $17.6 million in the first quarter of 2019, compared to $2.2 million in the first quarter of ~~2018, compared to $7.9 million in the first quarter of 2017.~~2018. Our effective tax rate for the quarter was 60.4%, compared to 18.5% ~~and~~for the same period in 2018. The tax rate was ~~favorably~~unfavorably impacted by changes in previously deferred compensation arrangements. These changes resulted in a discrete charge of $11.5 million during the ~~lower federal income~~first quarter of 2019 as a result of reducing the Company's deferred tax rate in effect in 2018, and by tax benefits associated with the vesting of restricted stock. We expect our effective tax rate, excluding the effect of tax benefits associated with the vesting of restricted stock, the effect of certain nondeductible merger costs, and other discrete tax adjustments,asset related to ~~be between 27%-28% for 2018.~~these arrangements.

~~Table of Contents~~

Net income. Net income ~~decreased $1.1~~was $11.5 million in the first quarter of 2019 compared to $9.5 million in the first quarter of 2018 ~~from $10.6 million in the first quarter of 2017~~ due to the factors discussed above.

Liquidity and Capital Resources

At March 31, ~~2018,~~2019, we had cash, ~~and~~ cash equivalents, and marketable securities of ~~$165.9~~$420.7 million compared to ~~$155.9~~$386.5 million at December 31, ~~2017~~2018 and ~~$147.1~~$165.9 million at March 31, ~~2017.~~2018. At March 31, ~~2018,~~2019, most of our cash was held in demand deposit accounts at high credit quality financial institutions.

~~We are party to a~~

On August 1, 2018, the Company entered into an amended credit ~~agreement~~facility (the “Amended Credit Facility”), which amended the existing credit facility ("Prior Credit Facility"). The Amended Credit Facility provides for a ~~$150 million~~senior secured revolving credit facility ~~and~~(the “Revolver”) in an aggregate principal amount of up to $250 million. The Amended Credit Facility provides the Company with an option, under certain conditions, to increase the commitments under the Revolver or establish one or more incremental term loans ~~under certain conditions. The credit agreement has~~(each, an “Incremental Facility”) in an amount up to the sum of (x) $150 million and (y) if such Incremental Facility is incurred in connection with a ~~maturity date of July 2, 2020. We had~~permitted acquisition, any amount so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no ~~borrowings outstanding under the revolving credit facility during each of the three months ended March 31, 2017 and 2018.~~

greater than 1.75:1.00. Borrowings under the ~~revolving credit facility~~Amended 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. During the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, we paid unused commitment fees of $0.1 million and ~~$0.2~~$0.1 million, ~~respectively.~~respectively, under the Amended Credit Facility and the Prior Credit Facility. We were in compliance with all applicable covenants related to the ~~credit agreement~~Amended Credit Facility as of March 31, 2019. We had no borrowings outstanding under the Amended Credit Facility or Prior Credit Facility during each of the three months ended March 31, 2019 and March 31, 2018.

Our net cash ~~from~~provided by operating activities for the three months ended March 31, ~~2018 decreased~~2019 was $58.7 million, compared to $17.0 ~~million, as compared to $24.5~~ million for the same period in ~~2017.~~2018. The ~~decrease~~increase in net cash from operating activities was largely due to the increase in income from operations following the merger ~~costs incurred in~~with CEC, together with cash flow benefits from depreciation and amortization expense and the ~~period.~~

provision for income taxes.

Capital expenditures were ~~$4.2~~$8.8 million for the three months ended March 31, ~~2018,~~2019, compared to ~~$3.8~~$4.2 million for the same period in ~~2017.~~

2018.

The Board of Directors declared a regular, quarterly cash dividend of ~~$0.25~~$0.50 per share of common ~~share.~~stock. During the three months ended March 31, ~~2018,~~2019, we paid a total of ~~$2.9~~$11.1 million in cash dividends on our common stock. For the three months ended March 31, ~~2018,~~2019, we did not repurchase any shares of common stock and, at March 31, ~~2018,~~2019, had $70 million in repurchase authorization to use through December 31, ~~2018.~~

2019.

For the first quarter of ~~2018,~~2019, bad debt expense as a percentage of revenue was ~~5.5%~~5.0% compared to ~~3.8%~~5.5% for the first quarter of ~~2017.~~

2018.

We believe that existing cash and cash equivalents, cash generated from operating activities, and if necessary, cash borrowed under our revolving 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 March 31, ~~2018~~2019 and ~~2017.~~2018. We also hold marketable securities, which primarily include tax-exempt municipal securities and corporate debt securities. During the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, we earned interest income of $2.5 million and $0.4 million, ~~and $0.2 million,~~ respectively.

~~The table below sets forth our contractual commitments associated with operating leases, excluding subleases as of March 31, 2018 (in thousands):~~

Payments Due By Period




Less than 1

1-3

3-5

More than

Total

Year

Years

Years

5 Years

Operating leases

$
106,854

$
30,327

$
46,010

$
20,420

$
10,097

~~Table of Contents~~

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to the impact of interest rate changes and may be subject to changes in the market values of our future investments. We invest our excess cash in bank overnight deposits, money market funds and marketable securities. We have not used derivative financial instruments in our investment portfolio. Earnings from investments in bank overnight deposits, money market mutual funds, and marketable securities may be adversely affected in the future should interest rates decline, although such a decline may reduce the interest rate payable on any borrowings under our revolving credit facility. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. As of March 31, ~~2018,~~2019, a 1% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows related to investments in cash equivalents or interest earning marketable securities.

~~Changing interest rates could also have a negative impact on~~

On August 1, 2018, the ~~amount~~Company amended its Prior Credit Facility to extend the maturity date of interest expense we incur. On July 2, 2015, we used approximately $116 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 millionthe revolving credit facility from July 2, 2020 to August 1, 2023, and to increase available borrowings from $150 million to $250 million, with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the revolving facility or establish one or more incremental term loans ~~under certain conditions. The credit agreement has~~(each, an “Incremental Facility”) in an aggregate amount of up to the sum of (x) $150 million and (y) if such Incremental Facility is incurred in connection with a ~~maturity date of July 2, 2020.~~permitted acquisition, any amount 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. We had no borrowings outstanding under the ~~revolving credit facility after prepayment of the term loan facility, and~~Amended Credit Facility as of March 31, ~~2018.~~2019. Borrowings under the ~~revolving credit facility~~Amended 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~~$2.5 million in interest expense per year assuming the entire ~~$150~~$250 million revolving credit facility was utilized.

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 March 31, ~~2018.~~2019. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company had in place, as of March 31, ~~2018,~~2019, 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~~On August 1, 2018, the Company completed its acquisition of Capella Education Company. 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, 2018, management’s assessment of, and conclusion on, the effectiveness of internal control over financial reporting ~~during~~did not include the ~~quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect,~~internal controls of Capella Education Company. See Note 3, Merger with Capella Education Company in the ~~Company’s internal control over~~condensed consolidated financial ~~reporting.~~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 Capella Education Company’s 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. On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases, and implemented internal controls to enable the preparation of financial information as part of the adoption. Except as noted above, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Table of Contents~~

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in litigation and other legal proceedings arising out of the ordinary course of our business. There are no pending material legal proceedings to which we or our property are subject.

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, ~~2017,~~2018, 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 1A. Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. The risks described in our Annual Report on Form 10-K, 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.”

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

During the three months ended March 31, ~~2018,~~2019, we did not repurchase any shares of common stock under our repurchase program. The remaining authorization for our common stock repurchases was $70.0 million as of March 31, ~~2018,~~2019, and is available for use through December 31, ~~2018.~~

2019.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

~~None~~

None

~~Table of Contents~~

Item 6. Exhibits



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~~		Amended and Restated ~~Bylaws~~Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on ~~November 4, 2010)~~August 1, 2018).
~~3.3~~ 3.2		~~First Amendment to the~~ Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit ~~3.1~~3.2 of the Company’s Current Report on Form 8-K filed with the Commission on ~~April 17, 2017)~~August 1, 2018).
10.1* 31.1		~~Employment Agreement, dated as of February 28, 2018, between Strayer University, LLC and Brian W. Jones.~~
~~31.1~~		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.		INS XBRL Instance Document
101.		SCH XBRL Schema Document
101.		CAL XBRL Calculation Linkbase Document
101.		DEF XBRL Definition Linkbase Document
101.		LAB XBRL Label Linkbase Document
101.		PRE XBRL Presentation Linkbase Document

*Filed herewith.

SIGNATURES

~~Table of Contents~~

~~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.


	~~STRAYER~~
	STRATEGIC EDUCATION, INC.

	By:	/s/ Daniel W. Jackson
	Daniel W. Jackson
	Executive Vice President and Chief Financial Officer
	Date: May ~~3, 2018~~ 2, 2019


~~Maryland~~		~~52-1975978~~
Maryland		52-1975978
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2303 Dulles Station Boulevard Herndon, VA		20171
(Address of principal executive offices)		(Zip Code)



Large accelerated filer	☒		Accelerated filer	☐
Non-accelerated filer	☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐
Emerging growth company	☐



Common Stock, $0.01 par value	STRA	Nasdaq Global Select Market
(Title of each class)	(Trading symbol(s))	(Name of each exchange on which registered)



Fair value of Company common stock issued in exchange for CEC outstanding shares⁽¹⁾	$	1,209,483
Fair value of Company equity-based awards issued in exchange for CEC equity-based awards	27,478
Total fair value of consideration transferred	$	1,236,961



Cash and cash equivalents	$	167,859
Marketable securities, current	31,419
Tuition receivable	38,803
Income tax receivable	163
Other current assets	8,496
Marketable securities, non-current	34,700
Property and equipment, net	53,182
Other assets	14,556
Intangible assets	349,800
Goodwill	725,999
Total assets acquired	1,424,977
Accounts payable and accrued expenses	(46,735		)
Contract liabilities	(39,000		)
Deferred income taxes	(100,044		)
Other long term liabilities	(2,237		)
Total liabilities assumed	(188,016		)
Total consideration	$	1,236,961


	December 31, 2017		March 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	155,933	$	165,867
Tuition receivable, net		23,122		24,997
Other current assets		11,293		10,558
Total current assets		190,348		201,422
Property and equipment, net		73,763		73,686
Deferred income taxes		24,452		23,803
Goodwill		20,744		20,744
Other assets		11,971		12,155
Total assets	$	321,278	$	331,810

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	46,177	$	45,806
Income taxes payable		1,038		2,541
Contract liabilities		21,851		23,931
Total current liabilities		69,066		72,278
Other long-term liabilities		43,015		41,240
Total liabilities		112,081		113,518
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01; 20,000,000 shares authorized; 11,167,425 and 11,300,671 shares issued and outstanding at December 31, 2017 and March 31, 2018, respectively		112		113
Additional paid-in capital		47,079		49,766
Retained earnings		162,006		168,413
Total stockholders’ equity		209,197		218,292
Total liabilities and stockholders’ equity	$	321,278	$	331,810



	March 31,
	2017		2018
Revenues	$	114,912	$	116,469
Costs and expenses:
Instruction and educational support		61,416		63,776
Marketing		18,718		20,124
Admissions advisory		4,716		4,676
General and administration		11,619		11,218
Merger costs		—		5,347
Total costs and expenses		96,469		105,141
Income from operations		18,443		11,328
Investment income		181		448
Interest expense		159		159
Income before income taxes		18,465		11,617
Provision for income taxes		7,887		2,150
Net income	$	10,578	$	9,467
Earnings per share:
Basic	$	1.00	$	0.88
Diluted	$	0.95	$	0.84
Weighted average shares outstanding:
Basic		10,630		10,745
Diluted		11,121		11,311



				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	66,395		1		(1)		—		—
Stock-based compensation	—		—		2,427		—		2,427
Common stock dividends	—		—		—		(2,853)		(2,853)
Net income	—		—		—		10,578		10,578
Balance at March 31, 2017	11,159,884	$	112	$	37,879	$	160,535	$	198,526


				Additional
	Common Stock			Paid-in		Retained
	Shares	Par Value		Capital		Earnings		Total
Balance at December 31, 2017	11,167,425	$	112	$	47,079	$	162,006	$	209,197
Impact of adoption of new accounting standard	—		—		—		(171)		(171)
Restricted stock grants, net of forfeitures	133,246		1		(1)		—		—
Stock-based compensation	—		—		2,688		—		2,688
Common stock dividends	—		—		—		(2,889)		(2,889)
Net income	—		—		—		9,467		9,467
Balance at March 31, 2018	11,300,671	$	113	$	49,766	$	168,413	$	218,292


	For the Three Months Ended
	March 31,
	2017		2018
Cash flows from operating activities:
Net income	$	10,578	$	9,467
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of gain on sale of assets		(71)		—
Amortization of deferred rent		(477)		(417)
Amortization of deferred financing costs		66		66
Depreciation and amortization		4,370		5,035
Deferred income taxes		762		(1,842)
Stock-based compensation		2,427		2,688
Changes in assets and liabilities:
Tuition receivable, net		19		(2,249)
Other current assets		616		931
Other assets		397		115
Accounts payable and accrued expenses		(2,836)		(867)
Income taxes payable and income taxes receivable		7,089		3,995
Contract liabilities		2,441		1,192
Other long-term liabilities		(846)		(1,065)
Net cash provided by operating activities		24,535		17,049

Cash flows from investing activities:
Purchases of property and equipment		(3,841)		(4,233)
Net cash used in investing activities		(3,841)		(4,233)

Cash flows from financing activities:
Common dividends paid		(2,853)		(2,889)
Net cash used in financing activities		(2,853)		(2,889)
Net increase in cash, cash equivalents, and restricted cash		17,841		9,927
Cash, cash equivalents, and restricted cash — beginning of period		129,758		156,448
Cash, cash equivalents, and restricted cash — end of period	$	147,599	$	166,375
Noncash transactions:
Purchases of property and equipment included in accounts payable	$	571	$	2,385


⁽¹⁾	The Company issued 10,263,775 common shares at a market price of $117.84 in exchange for each issued and outstanding share of CEC common stock.



	Fair Value		Weighted Average Useful Life in Years
Trade names	$	183,800	Indefinite
Student relationships	166,000		3
	$	349,800


	For the Period Ended March 31, 2018
	As Reported		Balances without Adoption of ASC 606		Effect of Change Higher/(Lower)
Income Statement
Revenues	$	116,469	$	116,338	$	131
Instruction and educational support expense		63,776		63,584		192
Provision for income taxes		2,150		2,167		(17)
Net income		9,467		9,511		(44)

	As of March 31, 2018
	As Reported		Balances without Adoption of ASC 606		Effect of Change Higher/(Lower)
Balance Sheet
Tuition receivable – net	$	24,997	$	23,769	$	1,228
Other current assets		10,558		12,084		(1,526)
Income taxes payable		2,541		2,624		(83)
Retained earnings		168,413		168,628		(215)



	For the three months ended March 31,
	2018		2019
Strayer University Segment
Tuition, net of discounts, grants and scholarships	$	110,960	$	123,515
Other⁽¹⁾	4,311		4,543
Total Strayer University Segment	115,271		128,058
Capella University Segment
Tuition, net of discounts, grants and scholarships	—		109,468
Other⁽¹⁾	—		5,230
Total Capella University Segment	—		114,698
Non-Degree Programs Segment⁽²⁾	1,198		3,752
Consolidated revenue	$	116,469	$	246,508


	2017		2018
Balance at beginning of period(1)	$	11,985	$	8,781
Adjustments(2)		57		41
Payments		(1,061)		(724)
Balance at end of period(1)	$	10,981	$	8,098



	Lease and Related Costs, Net			Severance and Other Employee Separation Costs			Total
Balance at December 31, 2017	$	8,781		$	—		$	8,781
Restructuring and other charges⁽¹⁾	—			—			—
Payments	(724		)	—			(724		)
Adjustments⁽²⁾	41			—			41
Balance at March 31, 2018	$	8,098		$	—		$	8,098

Balance at December 31, 2018⁽³⁾	$	6,540		$	14,347		$	20,887
Restructuring and other charges⁽¹⁾	—			1,913			1,913
Payments	—			(2,424		)	(2,424		)
Adjustments⁽²⁾	(6,540		)	—			(6,540		)
Balance at March 31, 2019⁽³⁾	$	—		$	13,836		$	13,836


4.	Revenue Recognition


⁽¹⁾	Restructuring and other charges of $1.9 million for the three months ended March 31, 2019 are included in Merger and integration costs on the unaudited condensed consolidated statements of income. There were no restructuring and other charges for the three months ended March 31, 2018.


⁽³⁾	The current portion of restructuring liabilities was ~~$3.1~~$9.8 million and ~~$3.0~~$8.4 million as of December 31, ~~2017~~2018 and March 31, ~~2018,~~2019, respectively, which are included in accounts payable and accrued expenses. The long-term portion is included in other long-term liabilities.



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)			Estimated Fair Value
Corporate debt securities	$	46,685	$	95	$	(89	)	$	46,691
Tax-exempt municipal securities	18,969		83		(9		)	19,043
Variable rate demand notes	1,600		—		—			1,600
Commercial paper	1,018		—		—			1,018
Total	$	68,272	$	178	$	(98	)	$	68,352



	December 31, 2018		March 31, 2019
Due within one year	$	37,121	$	36,486
Due after one year through five years	37,678		31,866
Total	$	74,799	$	68,352



	For the three months ended March 31,
	2019
Lease cost:
Operating lease cost	$	8,084
Short-term lease cost	233
Sublease income	(722		)
Total lease costs	$	7,595
Other information:
Cash paid for amounts included in the measurement of lease liabilities⁽¹⁾	$	8,552
Weighted-average remaining lease term (years)	5.8
Weighted-average discount rate	4.23		%



Year Ending March 31,
2020	$	30,724
2021	27,021
2022	21,035
2023	12,858
2024	10,326
Thereafter	30,942
Total lease payments⁽¹⁾	$	132,906
Less: interest	(15,943		)
Present value of lease liabilities	$	116,963



	Minimum rental commitments⁽¹⁾
2019	$	33,600
2020	28,399
2021	23,485
2022	13,770
2023	10,316
Thereafter	32,745
Total	$	142,315

	⁽²⁾
8.		~~Adjustments include accretion of interest on lease costs, partially offset by changes in the timing and expected income from sublease agreements~~. Fair Value Measurement


			Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	March 31,		Assets/Liabilities		Inputs		Inputs
	2018		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds	$	101	$	101	$	—	$	—

Liabilities:
Deferred payments	$	4,556	$	—	$	—	$	4,556



			Fair Value Measurements at Reporting Date Using
	March 31, 2019		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	9,441	$	9,441	$	—	$	—
Marketable securities:
Corporate debt securities	47,691		—		47,691		—
Tax-exempt municipal securities	19,043		—		19,043		—
Variable rate demand notes	1,600		—		1,600		—
Commercial paper	1,018		—		1,018		—
Total assets at fair value on a recurring basis	$	78,793	$	9,441	$	69,352	$	—

Liabilities:
Deferred payments	$	4,131	$	—	$	—	$	4,131



			Fair Value Measurements at Reporting Date Using
	December 31, 2018		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	1,791	$	1,791	$	—	$	—
Marketable securities:
Corporate debt securities	48,430		—		48,430		—
Tax-exempt municipal securities	22,869		—		22,869		—
Variable rate demand notes	4,000		—		4,000		—
Total assets at fair value on a recurring basis	77,090		1,791		75,299		—

Liabilities:
Deferred payments	$	4,120	$	—	$	—	$	4,120



	March 31, 2018
Balance as of the beginning of period	$	4,514
Amounts paid		(656)
Other adjustments to fair value		698
Balance at end of period	$	4,556



	Strayer University		Capella University		Non-Degree Programs		Total
Balance as of December 31, 2018	$	337,381	$	395,159	$	—	$	732,540
Additions	—		—		—		—
Impairments	—		—		—		—
Adjustments	—		259		—		259
Balance as of March 31, 2019	$	337,381	$	395,418	$	—	$	732,799



	December 31, 2018							March 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Subject to amortization
Student relationships	$	166,000	$	(23,056	)	$	142,944	$	166,000	$	(36,889	)	$	129,111
Not subject to amortization
Trade names	185,400		—			185,400		185,400		—			185,400
Total	$	351,400	$	(23,056	)	$	328,344	$	351,400	$	(36,889	)	$	314,511


	Number of shares or units	Weighted- average Grant price
Balance, December 31, 2017	716,128	$	99.65
Grants	144,577		90.99
Vested shares	(140,852)		58.99
Forfeitures	(11,331)		57.37
Balance, March 31, 2018	708,522	$	107.51


				Weighted-
				average
		Weighted-		remaining	Aggregate
	Number of	average		contractual	intrinsic value(1)
	shares	exercise price		life (years)	(in thousands)
Balance, December 31, 2017	100,000	$	51.95	3.1	$	3,763
Grants	—		—
Exercises	—		—
Forfeitures/Expirations	—		—
Balance, March 31, 2018	100,000	$	51.95	2.8	$	4,910
Exercisable, March 31, 2018	100,000	$	51.95	2.8	$	4,910


	December 31, 2017		March 31, 2018
Contract liabilities, net of current portion	$	21,033	$	20,315
Deferred rent and other facility costs		7,113		6,957
Deferred payments related to acquisitions		6,385		6,020
Loss on facilities not in use		5,652		5,091
Lease incentives		2,832		2,857
Other long-term liabilities	$	43,015	$	41,240


			Non-GAAP Adjustment
	As Reported (GAAP)		Merger Costs (1)		As Adjusted (Non-GAAP)
Income from operations	$	11,328	$	5,347	$	16,675
Investment income		448		—		448
Interest expense		159		—		159
Income before income taxes		11,617		5,347		16,964
Provision for income taxes		2,150		914		3,064
Net income	$	9,467	$	4,433	$	13,900
Earnings per share:
Basic	$	0.88	$	0.41	$	1.29
Diluted	$	0.84	$	0.39	$	1.23
Weighted average shares outstanding:
Basic		10,745		—		10,745
Diluted		11,311		—		11,311


(3)	Reflects income recognized from the Company's investments in partnership interests.


(4)	Reflects discrete tax adjustments related to the vesting of stock awards and other adjustments, utilizing an adjusted effective tax rate of 18.1% and 27.5% for 2018 and 2019, respectively.