Strategic Education, Inc. [STRA] Filings

10-Q 1 stra-20230930.htm 10-Q stra-20230930

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023

☐ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 0-21039

Strategic Education, Inc.

(Exact name of registrant as specified in this charter)


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

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

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

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

STRA

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of October 20, 2023, there were outstanding 24,415,845 shares of Common Stock, par value $0.01 per share, of the Registrant.

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STRATEGIC EDUCATION, INC.

INDEX

FORM 10-Q



PART I — FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Unaudited Condensed Consolidated Balance Sheets at December 31, 2022 and September 30, 2023	3

		Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2023	4

		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2023	4

		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2023	5

		Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2023	7

		Notes to Unaudited Condensed Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	Item 4.	Controls and Procedures	38

PART II — OTHER INFORMATION

	Item 1.	Legal Proceedings	39

	Item 1A.	Risk Factors	39

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

	Item 3.	Defaults Upon Senior Securities	41

	Item 4.	Mine Safety Disclosures	41

	Item 5.	Other Information	41

	Item 6.	Exhibits	41

SIGNATURES			42

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	December 31, 2022		September 30, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	213,667	$	167,707
Marketable securities	9,156		28,960
Tuition receivable, net	62,953		97,429

Income taxes receivable	—		7,850
Other current assets	43,285		48,689
Total current assets	329,061		350,635
Property and equipment, net	132,845		117,872
Right-of-use lease assets	125,248		110,789
Marketable securities, non-current	13,123		1,914
Intangible assets, net	260,541		249,514
Goodwill	1,251,277		1,228,431
Other assets	49,652		54,945
Total assets	$	2,161,747	$	2,114,100

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	90,588	$	102,122
Income taxes payable	6,989		—
Contract liabilities	88,488		140,248
Lease liabilities	23,879		23,121
Total current liabilities	209,944		265,491
Long-term debt	101,396		61,247
Deferred income tax liabilities	34,605		28,254
Lease liabilities, non-current	134,006		121,395
Other long-term liabilities	46,006		42,959
Total liabilities	525,957		519,346
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01; 32,000,000 shares authorized; 24,402,891 and 24,419,092 shares issued and outstanding at December 31, 2022 and September 30, 2023, respectively	244		244
Additional paid-in capital	1,510,924		1,513,023
Accumulated other comprehensive loss	(35,068)		(62,878)
Retained earnings	159,690		144,365
Total stockholders’ equity	1,635,790		1,594,754
Total liabilities and stockholders’ equity	$	2,161,747	$	2,114,100

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

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STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Revenues	$	263,123	$	285,936	$	795,542	$	830,222
Costs and expenses:
Instructional and support costs	153,162		155,735		445,154		470,152
General and administration	97,753		97,598		289,259		292,066
Amortization of intangible assets	3,522		3,382		10,954		10,364
Merger and integration costs	269		330		933		1,335
Restructuring costs	610		3,262		6,129		15,208
Total costs and expenses	255,316		260,307		752,429		789,125
Income from operations	7,807		25,629		43,113		41,097
Other income (expense)	(262)		842		(1,133)		4,411
Income before income taxes	7,545		26,471		41,980		45,508
Provision for income taxes	1,453		8,012		13,639		14,846
Net income	$	6,092	$	18,459	$	28,341	$	30,662
Earnings per share:
Basic	$	0.26	$	0.79	$	1.19	$	1.31
Diluted	$	0.25	$	0.77	$	1.18	$	1.28
Weighted average shares outstanding:
Basic	23,550		23,365		23,765		23,415
Diluted	23,902		23,870		24,026		23,952

STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Net income	$	6,092	$	18,459	$	28,341	$	30,662
Other comprehensive income (loss):
Foreign currency translation adjustment	(38,171)		(11,891)		(74,677)		(28,053)
Unrealized gains (losses) on marketable securities, net of tax	(189)		97		(895)		243
Comprehensive income (loss)	$	(32,268)	$	6,665	$	(47,231)	$	2,852

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

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STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)


	For the three months ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Par Value
Balance at June 30, 2022	24,637,268	$	246	$	1,513,509	$	166,175	$	(28,009)	$	1,651,921
Stock-based compensation	—	—		5,605		7		—		5,612
Issuance of restricted stock, net	(4,138)	1		(91)		—		—		(90)
Repurchase of common stock	(178,753)	(2)		(11,121)		(821)		—		(11,944)
Common stock dividends ($0.60 per share)	—	—		—		(14,749)		—		(14,749)
Foreign currency translation adjustment	—	—		—		—		(38,171)		(38,171)
Unrealized losses on marketable securities, net of tax	—	—		—		—		(189)		(189)
Net income	—	—		—		6,092		—		6,092
Balance at September 30, 2022	24,454,377	$	245	$	1,507,902	$	156,704	$	(66,369)	$	1,598,482


	For the three months ended September 30, 2023
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Par Value
Balance at June 30, 2023	24,465,671	$	245	$	1,509,077	$	140,368	$	(51,084)	$	1,598,606
Stock-based compensation	—	—		3,905		172		—		4,077
Exercise of stock options, net	1,382	—		71		—		—		71
Issuance of restricted stock, net	(47,961)	(1)		(30)		—		—		(31)
Common stock dividends ($0.60 per share)	—	—		—		(14,634)		—		(14,634)
Foreign currency translation adjustment	—	—		—		—		(11,891)		(11,891)
Unrealized gains on marketable securities, net of tax	—	—		—		—		97		97
Net income	—	—		—		18,459		—		18,459
Balance at September 30, 2023	24,419,092	$	244	$	1,513,023	$	144,365	$	(62,878)	$	1,594,754

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

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STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)


	For the nine months ended September 30, 2022
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Par Value
Balance at December 31, 2021	24,592,098	$	246	$	1,529,969	$	174,572	$	9,203	$	1,713,990
Stock-based compensation	—	—		16,202		7		—		16,209
Issuance of restricted stock, net	434,068	5		(2,873)		—		—		(2,868)
Repurchase of common stock	(571,789)	(6)		(35,396)		(1,514)		—		(36,916)
Common stock dividends ($1.80 per share)	—	—		—		(44,702)		—		(44,702)
Foreign currency translation adjustment	—	—		—		—		(74,677)		(74,677)
Unrealized losses on marketable securities, net of tax	—	—		—		—		(895)		(895)
Net income	—	—		—		28,341		—		28,341
Balance at September 30, 2022	24,454,377	$	245	$	1,507,902	$	156,704	$	(66,369)	$	1,598,482


	For the nine months ended September 30, 2023
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Par Value
Balance at December 31, 2022	24,402,891	$	244	$	1,510,924	$	159,690	$	(35,068)	$	1,635,790
Stock-based compensation	—	—		15,030		172		—		15,202
Exercise of stock options, net	2,704	—		126		—		—		126
Issuance of restricted stock, net	142,570	1		(5,051)		—		—		(5,050)
Repurchase of common stock	(129,073)	(1)		(8,006)		(2,006)		—		(10,013)
Common stock dividends ($1.80 per share)	—	—		—		(44,153)		—		(44,153)
Foreign currency translation adjustment	—	—		—		—		(28,053)		(28,053)
Unrealized gains on marketable securities, net of tax	—	—		—		—		243		243
Net income	—	—		—		30,662		—		30,662
Balance at September 30, 2023	24,419,092	$	244	$	1,513,023	$	144,365	$	(62,878)	$	1,594,754

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

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STRATEGIC EDUCATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the nine months ended September 30,
	2022		2023
Cash flows from operating activities:
Net income	$	28,341	$	30,662
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of property and equipment	—		(2,136)
Amortization of deferred financing costs	414		416
Amortization of investment discount/premium	29		(40)
Depreciation and amortization	49,193		44,881
Deferred income taxes	(9,213)		(5,947)
Stock-based compensation	16,209		15,202
Impairment of right-of-use lease assets	1,185		5,135
Changes in assets and liabilities:
Tuition receivable, net	(33,320)		(35,113)
Other assets	417		(12,456)
Accounts payable and accrued expenses	6,768		11,119
Income taxes payable and income taxes receivable	4,498		(14,669)
Contract liabilities	65,437		52,836
Other liabilities	(5,226)		(2,717)
Net cash provided by operating activities	124,732		87,173

Cash flows from investing activities:
Purchases of property and equipment	(32,508)		(27,318)
Purchases of marketable securities	—		(16,904)
Proceeds from marketable securities	2,600		8,175
Proceeds from sale of property and equipment	—		5,890
Proceeds from other investments	—		457
Other investments	(223)		(314)
Cash paid for acquisition, net of cash acquired	(193)		(448)
Net cash used in investing activities	(30,324)		(30,462)

Cash flows from financing activities:
Common dividends paid	(44,600)		(44,139)
Payments on long-term debt	—		(40,000)
Net payments for stock awards	(2,973)		(4,925)
Repurchase of common stock	(36,916)		(9,999)
Net cash used in financing activities	(84,489)		(99,063)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(10,729)		(3,657)
Net decrease in cash, cash equivalents, and restricted cash	(810)		(46,009)
Cash, cash equivalents, and restricted cash — beginning of period	279,212		227,454
Cash, cash equivalents, and restricted cash — end of period	$	278,402	$	181,445
Non-cash transactions:
Non-cash additions to property and equipment	$	1,910	$	2,110
Right-of-use lease assets obtained in exchange for operating lease liabilities	$	4,278	$	8,329

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

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STRATEGIC EDUCATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of Operations

Strategic Education, Inc. (“Strategic Education” or the “Company”), a Maryland corporation, is an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment.

The accompanying condensed consolidated financial statements and footnotes include the results of the Company’s three reportable segments: (1) U.S. Higher Education (“USHE”), which is primarily comprised of Strayer University and Capella University and is focused on providing flexible and affordable certificate and degree programs to working adults; (2) Education Technology Services, which is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs; and (3) Australia/New Zealand, which through Torrens University and associated assets, provides certificate and degree programs in Australia and New Zealand. The Company’s reportable segments are discussed further in 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.

All information as of September 30, 2022 and 2023, and for the three and nine months ended September 30, 2022 and 2023 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. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements at that date. Certain year-to-date amounts 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 accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. 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, 2022. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full fiscal year.

Below is a description of the nature of the costs included in the Company’s operating expense categories.

Instructional and support costs generally contain items of expense directly attributable to activities that support students. This expense category includes salaries and benefits of faculty and academic administrators, as well as admissions and administrative personnel who support and serve student interests. Instructional and support costs also include course development costs and costs associated with delivering course content, including educational supplies, facilities, 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 instructional and support costs.

General and administration expenses include salaries and benefits of management and employees engaged in finance, human resources, legal, regulatory compliance, marketing and other corporate functions. Also included are the costs of advertising and production of marketing materials. General and administration expense also includes the facilities occupancy and other related costs attributable to such functions.

Amortization of intangible assets consists of amortization and depreciation expense related to intangible assets and software assets acquired through the Company’s acquisition of Torrens University and associated assets in Australia and New Zealand (“ANZ”).

Merger and integration costs include integration expenses associated with the Company’s merger with Capella Education Company and the Company’s acquisition of ANZ.

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Restructuring costs include severance and other personnel-related expenses from voluntary and involuntary employee terminations, right-of-use lease and fixed asset impairment charges, gains on sale of real estate and early termination of leased facilities, and other costs associated with the Company’s restructuring activities. See Note 4 for additional information.

Foreign Currency Translation and Transaction Gains and Losses

The United States Dollar (“USD”) is the functional currency of the Company and its subsidiaries operating in the United States. The financial statements of its foreign subsidiaries are maintained in their functional currencies. The functional currency of each of the foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Financial statements of foreign subsidiaries are translated into USD using the exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the weighted-average exchange rates in effect during the period. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) within shareholders’ equity.

For any transaction that is in a currency different from the entity’s functional currency, the Company records a net gain or loss based on the difference between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled), in the unaudited condensed consolidated statements of income.

Restricted Cash

In the United States, 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 a U.S. higher education institution during the academic term. The Company had approximately $1.4 million and $2.1 million of these unpaid obligations as of December 31, 2022 and September 30, 2023, respectively. In Australia and New Zealand, advance tuition payments from international students are required to be restricted until a student commences his or her course. In addition, a portion of tuition prepayments from students enrolled in a vocational education and training program are held in trust by a third party law firm to adhere to tuition protection requirements. As of December 31, 2022 and September 30, 2023, the Company had approximately $11.9 million and $11.2 million, respectively, of restricted cash related to these requirements in Australia and New Zealand. These balances are recorded as restricted cash and included in other current assets in the unaudited condensed consolidated balance sheets.

As part of conducting operations in Pennsylvania, 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 September 30, 2022 and 2023 (in thousands):


	As of September 30,
	2022		2023
Cash and cash equivalents	$	262,757	$	167,707
Restricted cash included in other current assets	15,145		13,238
Restricted cash included in other assets	500		500
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	278,402	$	181,445

Marketable Securities

Investments in marketable securities are carried at either amortized cost or fair value. Investments in marketable securities that the Company has the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity. Investments in marketable securities that are not classified as held-to-maturity are carried at fair value and classified as either trading or available-for-sale. Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company’s marketable securities are designated as either held-to-maturity or available-for-sale.

The Company’s available-for-sale marketable securities consist of tax-exempt municipal securities and corporate debt securities, which are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized as a component of accumulated

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other comprehensive income (loss) within shareholders’ equity. Management reviews the fair value of the portfolio at least quarterly, and evaluates individual securities with fair value below amortized cost at the balance sheet date for impairment. In order to determine whether there is an impairment, management evaluates whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis.

If management intends to sell an impaired debt security, or it is more likely than not the Company will be required to sell the security prior to recovering its amortized cost basis, an impairment is deemed to have occurred. The amount of an impairment related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of accumulated other comprehensive income (loss) within shareholders’ equity.

The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in other income. The contractual maturity date of available-for-sale securities is based on the days remaining to the effective maturity. The Company classifies marketable securities as either current or non-current assets based on management’s intent with regard to usage of those funds, which is dependent upon the security’s maturity date and liquidity considerations based on current market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current.

Tuition Receivable and Allowance for Credit Losses

The Company records tuition receivable and contract liabilities for its students upon the start of the academic term or program. Tuition receivables are not collateralized; however, credit risk is minimized as a result of the diverse nature of the Company’s student bases and through the participation of the majority of the students in federally funded financial aid programs. An allowance for credit losses is established based upon historical collection rates by age of receivable and adjusted for reasonable expectations of future collection performance, net of estimated recoveries. These collection rates incorporate historical performance based on a student’s current enrollment status, likelihood of future enrollment, degree mix trends and changes in the overall economic environment. In the event that current collection trends differ from historical trends, an adjustment is made to the allowance for credit losses and bad debt expense.

The Company’s tuition receivable and allowance for credit losses were as follows as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022		September 30, 2023
Tuition receivable	$	110,066	$	145,775
Allowance for credit losses	(47,113)		(48,346)
Tuition receivable, net	$	62,953	$	97,429

Approximately $2.7 million and $2.6 million of tuition receivable, net, are included in other assets as of December 31, 2022 and September 30, 2023, respectively, because these amounts are expected to be collected after 12 months.

The following table illustrates changes in the Company’s allowance for credit losses for the three and nine months ended September 30, 2022 and 2023 (in thousands).


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Allowance for credit losses, beginning of period	$	43,507	$	45,877	$	48,783	$	47,113
Additions charged to expense	11,895		14,880		27,899		37,138
Write-offs, net of recoveries	(10,462)		(12,411)		(31,742)		(35,905)
Allowance for credit losses, end of period	$	44,940	$	48,346	$	44,940	$	48,346

Assets Held for Sale

The Company classifies assets and liabilities as held for sale (“disposal group”) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable to be completed within one year, and the disposal group is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the

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plan will be made or that the plan will be withdrawn. The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying amount or fair value less costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized until the date of sale. Assets are not depreciated or amortized while they are classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group as assets held for sale and liabilities held for sale in its unaudited condensed consolidated balance sheets.

Over the last several years, the Company has been evaluating its owned and leased real estate portfolio to identify underutilized facilities to either downsize or exit. One facility identified to be marketed for sale was an owned U.S. Higher Education campus consisting of land, buildings, and building improvements. The Company determined that it met all of the criteria to classify these assets as held for sale as of March 31, 2023. No loss was recorded as the carrying amount of the net assets was less than the fair value less costs to sell. Fair value was determined based upon the anticipated sales price of these assets.

During the second quarter of 2023, the Company sold the long-lived assets related to the owned U.S. Higher Education campus noted above and recognized a $2.1 million gain on sale, which is included in Restructuring costs on the unaudited condensed consolidated statements of income.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed in a business combination. Indefinite-lived intangible assets, which include trade names, are recorded at fair 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 on the first day of 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. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available, and management regularly reviews the operating results of those components.

Finite-lived intangible assets that are acquired in business combinations are recorded at fair value on their acquisition dates and are amortized on a straight-line basis over the estimated useful life of the asset. Finite-lived intangible assets consist of student relationships.

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

Authorized Stock

The Company has authorized 32,000,000 shares of common stock, par value $0.01, of which 24,402,891 and 24,419,092 shares were issued and outstanding as of December 31, 2022 and September 30, 2023, 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 July 2023, the Company’s Board of Directors declared a regular, quarterly cash dividend of $0.60 per share of common stock. The dividend was paid on September 11, 2023.

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 (“stock awards”). 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 awards are excluded from the computation of diluted earnings per share when their effect would be anti-dilutive.

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Set forth below is a reconciliation of shares used to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2023 (in thousands):


	For the three months ended September 30,		For the nine months ended September 30,
	2022	2023	2022	2023
Weighted average shares outstanding used to compute basic earnings per share	23,550	23,365	23,765	23,415
Incremental shares issuable upon the assumed exercise of stock options	3	3	3	4
Unvested restricted stock and restricted stock units	349	502	258	533
Shares used to compute diluted earnings per share	23,902	23,870	24,026	23,952

Anti-dilutive shares excluded from the diluted earnings per share calculation	11	276	149	219

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income and all changes in the Company’s equity during a period from non-owner sources, which for the Company consists of unrealized gains and losses on available-for-sale marketable securities, net of tax, and foreign currency translation adjustments. As of December 31, 2022 and September 30, 2023, the balance of accumulated other comprehensive loss was $35.1 million, net of tax of $0.1 million, and $62.9 million, net of tax of $0.1 million, respectively. There were no reclassifications out of accumulated other comprehensive income (loss) to net income for the three and nine months ended September 30, 2022 and 2023.

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 credit losses, useful lives of property and equipment and intangible assets, incremental borrowing rates, potential sublease income and vacancy periods, accrued expenses, forfeiture rates and the likelihood of achieving performance criteria for stock-based awards, value of free courses earned by students that will be redeemed in the future, valuation of goodwill and intangible assets, and the provision for income taxes. Actual results could differ from those estimates.

Recently Issued Accounting Standards Not Yet Adopted

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

3. Revenue Recognition

The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of classroom instruction and online courses. Tuition revenue is deferred and recognized ratably over the period of instruction, which varies depending on the course format and chosen program of study. Strayer University’s educational programs and Capella University’s GuidedPath classes typically are offered on a quarterly basis, and such periods coincide with the Company’s quarterly financial reporting periods, while Capella University’s FlexPath courses are delivered over a twelve-week subscription period. Torrens University offers the majority of its education programs on a trimester system having three primary academic terms, which all occur within the calendar year.

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The following table presents the Company’s revenues from contracts with customers disaggregated by material revenue category for the three and nine months ended September 30, 2022 and 2023 (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
U.S. Higher Education Segment
Tuition, net of discounts, grants and scholarships	$	177,678	$	192,850	$	546,407	$	575,725
Other(1)	7,821		8,978		24,884		25,677
Total U.S. Higher Education Segment	185,499		201,828		571,291		601,402
Australia/New Zealand Segment
Tuition, net of discounts, grants and scholarships	60,238		61,667		173,621		165,855
Other(1)	939		1,597		3,611		4,384
Total Australia/New Zealand Segment	61,177		63,264		177,232		170,239
Education Technology Services Segment(2)	16,447		20,844		47,019		58,581
Consolidated revenue	$	263,123	$	285,936	$	795,542	$	830,222

_________________________________________

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

(2)Education Technology Services revenue is primarily derived from tuition revenue.

Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods and services. The Company applies the five-step revenue model under ASC 606 to determine when revenue is earned and recognized.

Arrangements with students may have multiple performance obligations. For such arrangements, the Company allocates net tuition revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers and observable market prices. The standalone selling price of material rights to receive free classes or scholarships in the future is estimated based on class tuition prices or amounts of scholarships, and likelihood of redemption based on historical student attendance and completion behavior.

At the start of each academic term or program, a contract liability is recorded for academic services to be provided, and a tuition receivable is recorded for the portion of the tuition not paid in advance. Any cash received prior to the start of an academic term or program is recorded as a contract liability. Some students may be eligible for scholarship awards, the estimated value of which will be realized in the future and is deducted from revenue when earned, based on historical student attendance and completion behavior. Contract liabilities are recorded as a current or long-term liability in the unaudited condensed consolidated balance sheets based on when the benefit is expected to be realized.

Course materials are available to enable students to access electronically all required materials for courses in which they enroll during the quarter. Revenue derived from course materials is recognized ratably over the duration of the course as the Company provides the student with continuous access to these materials during the term. For sales of certain other course materials, the Company is considered the agent in the transaction, and as such, the Company recognizes revenue net of amounts owed to the vendor at the time of sale. Revenues also include certain academic fees recognized within the quarter of instruction, and certificate revenue and licensing revenue, which are recognized as the services are provided.

Contract Liabilities – Graduation Fund

Strayer University offers the Graduation Fund, which allows undergraduate students to earn tuition credits that are redeemable in the final year of a student’s course of study if he or she successfully remains in the program. Students registering in credit-bearing courses in any undergraduate degree program receive one free course for every three courses that the student successfully completes. To be eligible, students must meet all of Strayer University’s admission requirements and must be enrolled in a bachelor’s 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 Strayer University in the future.

Revenue from students participating in the Graduation Fund is recorded in accordance with ASC 606. The Company defers the value of the related performance obligation associated with the credits estimated to be redeemed in the future based on the underlying revenue transactions that result in progress by the student toward earning the benefit. The Company’s estimate of the benefits that will be redeemed in the future is based on its historical experience of student persistence toward completion of a course of study within this program and similar programs. Each quarter, the Company assesses its assumptions underlying these

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estimates, and to date, any adjustments to the estimates have not been material. The amount estimated to be redeemed in the next 12 months is $19.4 million and is included as a current contract liability in the unaudited condensed consolidated balance sheets. The remainder is expected to be redeemed within two to four years.

The table below presents activity in the contract liability related to the Graduation Fund (in thousands):


	For the nine months ended September 30,
	2022		2023
Balance at beginning of period	$	52,024	$	46,842
Revenue deferred	12,647		14,543
Benefit redeemed	(16,295)		(16,931)
Balance at end of period	$	48,376	$	44,454

Unbilled Receivables – Student Tuition

Academic materials may be shipped to certain new undergraduate students in advance of the term of enrollment. Under ASC 606, the materials represent a performance obligation to which the Company allocates revenue based on the fair value of the materials relative to the total fair value of all performance obligations in the arrangement with the student. When control of the materials passes to the student in advance of the term of enrollment, an unbilled receivable and related revenue are recorded.

Costs to Obtain a Contract

Certain commissions earned by third party international agents are considered incremental and recoverable costs of obtaining a contract with customers in the Australia/New Zealand segment. These costs are deferred and then amortized over the period of benefit which ranges from one year to two years.

4. Restructuring and Related Charges

In the third quarter of 2020, the Company began implementing a restructuring plan in an effort to reduce the ongoing operating costs of the Company to align with changes in enrollment following the COVID-19 pandemic. Under this plan, the Company incurred severance and other employee separation costs related to voluntary and involuntary employee terminations.

The following details the changes in the Company’s severance and other employee separation costs restructuring liabilities related to the 2020 restructuring plan during the nine months ended September 30, 2022 (in thousands):


	2020 Restructuring Plan
Balance at December 31, 2021	$	1,612
Restructuring and other charges	1,241
Payments	(2,853)
Balance at September 30, 2022	$	—

The final severance payments under the 2020 restructuring plan were made in the third quarter of 2022.

The Company also incurs severance and other employee separation costs related to voluntary and involuntary employee terminations that are not tied to a formal restructuring plan. During the three and nine months ended September 30, 2023, the Company incurred $2.9 million and $11.3 million of severance and other employee separation charges related to the elimination of certain positions. These severance and other employee separation charges are included in Restructuring costs on the unaudited condensed consolidated statements of income.

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The following details the changes in the Company's severance and other employee separation costs restructuring liabilities during the nine months ended September 30, 2023 (in thousands):


	Severance Restructuring Liability
Balance at December 31, 2022	$	—
Restructuring and other charges	11,256
Payments	(8,731)
Balance at September 30, 2023(1)	$	2,525

____________________________________

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

The Company has also been evaluating its owned and leased real estate portfolio, which has resulted in the consolidation and sale of underutilized facilities. The Company recorded approximately $0.1 million and $1.2 million of right-of-use lease asset charges during the three and nine months ended September 30, 2022, respectively, and approximately $5.1 million during the nine months ended September 30, 2023, related to facilities that were consolidated during the period. The Company also recorded fixed asset impairment charges of approximately $0.1 million and $2.5 million during the three and nine months ended September 30, 2022, respectively, and approximately $0.1 million and $0.4 million during the three and nine months ended September 30, 2023, respectively. During the nine months ended September 30, 2023, the Company recorded a $2.1 million gain from the sale of property and equipment of an owned campus that was previously closed. These right-of-use lease asset and fixed asset impairment charges and gains on the sale of property and equipment are included in Restructuring costs on the unaudited condensed consolidated statements of income.

5. Marketable Securities

The following is a summary of available-for-sale and held-to-maturity securities as of September 30, 2023 (in thousands):


	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)		Estimated Fair Value
Available-for-sale securities:
Tax-exempt municipal securities	$	11,654	$	1	$	(263)	$	11,392
Corporate debt securities	3,204		—		(122)		3,082
Total available-for sale securities	$	14,858	$	1	$	(385)	$	14,474

Held-to-maturity securities:
Term deposits	$	16,400	$	—	$	—	$	16,400

The following is a summary of available-for-sale securities as of December 31, 2022 (in thousands):


	Amortized Cost		Gross Unrealized Gain		Gross Unrealized (Losses)		Estimated Fair Value
Available-for-sale securities:
Tax-exempt municipal securities	$	15,852	$	2	$	(507)	$	15,347
Corporate debt securities	7,140		—		(208)		6,932
Total	$	22,992	$	2	$	(715)	$	22,279

The Company had no held-to-maturity securities as of December 31, 2022.

The unrealized gains and losses on the Company’s investments in corporate debt and municipal securities as of December 31, 2022 and September 30, 2023 were caused by changes in market values primarily due to interest rate changes. As of September 30, 2023, the fair value of the Company’s securities which were in an unrealized loss position for a period longer than twelve months was $13.5 million. The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity. As such, no impairment charges were recorded during the three and nine months ended September 30, 2022 and 2023. The Company has no allowance for credit losses related to its available-for-sale or held-to-maturity securities as all investments are in investment grade securities.

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The following table summarizes the maturities of the Company’s marketable securities as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022				September 30, 2023
	Available-for-sale securities		Held-to-maturity securities		Available-for-sale securities		Held-to-maturity securities
Due within one year	$	9,156	$	—	$	12,560	$	16,400
Due after one year through three years	13,123		—		1,914		—
Total	$	22,279	$	—	$	14,474	$	16,400

The following table summarizes the proceeds from the maturities and sales of available-for-sale securities for the three and nine months ended September 30, 2022 and 2023 (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Maturities of marketable securities	$	500	$	3,215	$	2,600	$	8,175
Sales of marketable securities	—		—		—		—
Total	$	500	$	3,215	$	2,600	$	8,175

The Company did not record any gross realized gains or losses in net income during the three and nine months ended September 30, 2022 and September 30, 2023.

6. Fair Value Measurement

Assets measured at fair value on a recurring basis consist of the following as of September 30, 2023 (in thousands):


			Fair Value Measurements at Reporting Date Using
	September 30, 2023		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	$	78,308	$	78,308	$	—	$	—
U.S. treasury bills	14,915		14,915		—		—
Available-for-sale securities:
Tax-exempt municipal securities	11,392		—		11,392		—
Corporate debt securities	3,082		—		3,082		—
Total assets at fair value on a recurring basis	$	107,697	$	93,223	$	14,474	$	—

Assets and liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2022 (in thousands):


			Fair Value Measurements at Reporting Date Using
	December 31, 2022		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	$	217	$	217	$	—	$	—
Available-for-sale securities:
Tax-exempt municipal securities	15,347		—		15,347		—
Corporate debt securities	6,932		—		6,932		—
Total assets at fair value on a recurring basis	$	22,496	$	217	$	22,279	$	—

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

•Money market funds and U.S. treasury bills – Classified in Level 1 is excess cash the Company holds in money market funds and U.S. treasury bills, which are included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets. The Company records any net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The Company’s cash and cash equivalents and held-to-maturity securities held at December 31, 2022 and September 30, 2023 approximate fair value and are not disclosed in the above tables because of the short-term nature of the financial instruments.

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

The Company did not change its valuation techniques associated with recurring fair value measurements from prior periods and did not transfer assets or liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2022 and 2023.

The Company acquired certain assets and entered into deferred payment arrangements with the sellers in transactions that occurred in 2011. The deferred payments were classified within Level 3 as there was no liquid market for similarly priced instruments and were valued using discounted cash flow models that encompassed significant unobservable inputs. The assumptions used to prepare the discounted cash flows included estimates for interest rates, enrollment growth, retention rates, and pricing strategies. The final payment related to the deferred payment arrangements was made in the first quarter of 2022.

Changes in the fair value of the Company’s Level 3 liabilities during the nine months ended September 30, 2022 are as follows (in thousands):


	As of September 30, 2022
Balance as of the beginning of period	$	658
Amounts paid	(658)
Other adjustments to fair value	—
Balance at end of period	$	—

7. Goodwill and Intangible Assets

Goodwill

The following table presents changes in the carrying value of goodwill by segment for the nine months ended September 30, 2023 (in thousands):


	U.S. Higher Education		Australia / New Zealand		Education Technology Services		Total
Balance as of December 31, 2022	$	632,075	$	519,202	$	100,000	$	1,251,277
Additions	—		—		—		—
Impairments	—		—		—		—
Currency translation adjustments	—		(22,846)		—		(22,846)
Adjustments to prior acquisitions	—		—		—		—
Balance as of September 30, 2023	$	632,075	$	496,356	$	100,000	$	1,228,431

The Company assesses goodwill at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount. No events or circumstances occurred in the three and nine months ended September 30, 2023 to indicate an impairment to goodwill at any of its segments. There were no impairment charges related to goodwill recorded during the three and nine months ended September 30, 2022 and 2023.

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Intangible Assets

The following table represents the balance of the Company’s intangible assets as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022						September 30, 2023
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Subject to amortization
Student relationships	$	200,185	$	(191,125)	$	9,060	$	200,095	$	(199,155)	$	940
Not subject to amortization
Trade names	251,481		—		251,481		248,574		—		248,574
Total	$	451,666	$	(191,125)	$	260,541	$	448,669	$	(199,155)	$	249,514

The Company’s finite-lived intangible assets are comprised of student relationships, which are being amortized on a straight-line basis over a three-year useful life. Straight-line amortization expense for finite-lived intangible assets reflects the pattern in which the economic benefits of the assets are consumed over their estimated useful lives. Amortization expense related to finite-lived intangible assets was $8.5 million and $8.0 million for the nine months ended September 30, 2022 and 2023, respectively.

Indefinite-lived intangible assets not subject to amortization consist of trade names. The Company assigned an indefinite useful life to its trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the useful life of the trade name intangibles.

The Company assesses indefinite-lived intangible assets at least annually for impairment during the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective indefinite-lived intangible asset below its carrying amount. No events or circumstances occurred in the three and nine months ended September 30, 2023 to indicate an impairment to indefinite-lived intangible assets. There were no impairment charges related to indefinite-lived intangible assets recorded during the three and nine months ended September 30, 2022 and 2023.

8. Other Current Assets

Other current assets consist of the following as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022		September 30, 2023
Prepaid expenses	$	19,073	$	23,685
Restricted cash	13,287		13,238
Cloud computing arrangements	7,859		7,231
Other	3,066		4,535
Other current assets	$	43,285	$	48,689

9. Other Assets

Other assets consist of the following as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022		September 30, 2023
Prepaid expenses, net of current portion	$	18,192	$	17,321
Equity method investments	13,879		16,175
Cloud computing arrangements, net of current portion	7,507		12,021
Other investments	3,396		2,806
Tuition receivable, net, non-current	2,673		2,559
Other	4,005		4,063
Other assets	$	49,652	$	54,945

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Prepaid Expenses

Long-term prepaid expenses primarily relate to payments that have been made for future services to be provided after one year. In 2020, pursuant to the terms of the perpetual license agreement associated with the Jack Welch Management Institute, the Company made a final one-time cash payment of approximately $25.3 million for the right to continue to use the Jack Welch name and likeness. As of December 31, 2022 and September 30, 2023, $17.7 million and $16.5 million, respectively, of this payment is included in the prepaid expenses, net of current portion balance, as the payment is being amortized over an estimated useful life of 15 years.

Equity Method Investments

The Company holds investments in certain limited partnerships that invest in various innovative companies in the health care and education-related technology fields. The Company has commitments to invest up to an additional $2.4 million across these partnerships through 2031. The Company’s investments range from 3%-5% of any partnership’s interest and are accounted for under the equity method.

The following table illustrates changes in the Company’s limited partnership investments for the three and nine months ended September 30, 2022 and 2023 (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Limited partnership investments, beginning of period	$	14,011	$	17,205	$	15,582	$	13,879
Capital contributions	—		162		48		314
Pro-rata share in the net income (loss) of limited partnerships	(32)		(114)		32		3,060
Distributions	—		(1,078)		(1,683)		(1,078)
Limited partnership investments, end of period	$	13,979	$	16,175	$	13,979	$	16,175

Cloud Computing Arrangements

The Company defers implementation costs incurred in cloud computing arrangements and amortizes these costs over the term of the arrangement.

Other Investments

The Company holds investments in education technology start-ups focused on transformational technologies that improve student success. These investments are accounted for at cost less impairment as they do not have readily determinable fair value.

Tuition Receivable

Non-current tuition receivable, net, represents tuition that the Company expects to collect, but not within the next 12 months.

Other

Other is comprised primarily of deferred financing costs associated with the Company’s credit facility, deferred contract costs related to commissions paid in the Australia/New Zealand segment to third party international agents, and refundable security deposits associated with the Company’s leased campus and office space.

10. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022		September 30, 2023
Trade payables	$	45,826	$	54,856
Accrued compensation and benefits	32,608		36,767
Accrued student obligations and other	12,154		10,499
Accounts payable and accrued expenses	$	90,588	$	102,122

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11. Long-Term Debt

On November 3, 2020, the Company entered into an amended credit facility (“Amended Credit Facility”), which provides for a senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $350 million. The Amended Credit Facility provides the Company with an option, subject to obtaining additional loan commitments and satisfaction of certain conditions, to increase the commitments under the Revolving Credit Facility or establish one or more incremental term loans (each, an “Incremental Facility”) in the future in an aggregate amount of up to the sum of (x) the greater of (A) $300 million and (B) 100% of the Company’s consolidated EBITDA (earnings before interest, taxes, depreciation, amortization, and noncash charges, such as stock-based compensation) calculated on a trailing four-quarter basis and on a pro forma basis, and (y) if such Incremental Facility is incurred in connection with a permitted acquisition or other permitted investment, any amounts so long as the Company’s leverage ratio (calculated on a trailing four-quarter basis) on a pro forma basis will be no greater than 1.75:1.00. In addition, the Amended Credit Facility provides for a subfacility for borrowings in certain foreign currencies in an amount equal to the U.S. dollar equivalent of $150 million. The maturity date of the Amended Credit Facility is November 3, 2025. The Company paid approximately $1.9 million in debt financing costs associated with the Amended Credit Facility, and these costs are being amortized on a straight-line basis over the five-year term of the Amended Credit Facility.

On June 13, 2023, the Company amended its Revolving Credit Facility to replace references to LIBOR with alternative benchmark rates, including Term SOFR with respect to loans denominated in U.S. dollars, beginning on June 30, 2023. There were no other significant changes to the Revolving Credit Facility related to the amendment.

Borrowings under the Revolving Credit Facility bear interest at a per annum rate equal to Term SOFR or a base rate, plus a margin ranging from 1.50% to 2.00% depending on the Company’s leverage ratio. The Company also is subject to a quarterly unused commitment fee ranging from 0.20% to 0.30% per annum depending on the Company’s leverage ratio, times the daily unused amount under the Revolving Credit Facility.

The Amended Credit Facility is guaranteed by all domestic subsidiaries, subject to certain exceptions, and secured by substantially all of the assets of the Company and its subsidiary guarantors. The Amended Credit Facility contains customary affirmative and negative covenants, representations, warranties, events of default, and remedies upon default, including acceleration and rights to foreclose on the collateral securing the Amended Credit Facility. In addition, the Amended Credit Facility requires that the Company satisfy certain financial maintenance covenants, including:

•A leverage ratio of not greater than 2.00 to 1.00. Leverage ratio is defined as the ratio of total debt (net of unrestricted cash in an amount not to exceed $150 million) to trailing four-quarter EBITDA.

•A coverage ratio of not less than 1.75 to 1.00. Coverage ratio is defined as the ratio of trailing four-quarter EBITDA and rent expense to trailing four-quarter interest and rent expense.

•A U.S. Department of Education (the “Department” or “Department of Education”) Financial Responsibility Composite Score of not less than 1.0 for any fiscal year and not less than 1.5 for any two consecutive fiscal years.

The Company was in compliance with all the terms of the Amended Credit Facility as of September 30, 2023.

In September 2023, the Company repaid $40.0 million of the outstanding balance under the Revolving Credit Facility. As of December 31, 2022 and September 30, 2023, the Company had approximately $101.4 million and $61.2 million, respectively, outstanding under the Revolving Credit Facility. Approximately $3.4 million and $3.2 million was denominated in Australian dollars as of December 31, 2022 and September 30, 2023, respectively.

During the nine months ended September 30, 2022 and 2023, the Company paid $3.0 million and $5.4 million, respectively, of interest and unused commitment fees related to its Revolving Credit Facility.

12. Other Long-Term Liabilities

Other long-term liabilities consist of the following as of December 31, 2022 and September 30, 2023 (in thousands):


	December 31, 2022		September 30, 2023
Contract liabilities, net of current portion	$	36,540	$	34,738
Asset retirement obligations	6,283		5,273
Other	3,183		2,948
Other long-term liabilities	$	46,006	$	42,959

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Contract Liabilities

As discussed in Note 3, in connection with its student tuition contracts, the Company has an obligation to provide free classes in the future should certain eligibility conditions be maintained (the Graduation Fund). Long-term contract liabilities represent the amount of revenue under these arrangements that the Company expects will be realized after one year.

Asset Retirement Obligations

Certain of the Company’s lease agreements require the leased premises to be returned in a predetermined condition.

13. Equity Awards

The following table sets forth the amount of stock-based compensation expense recorded in each of the expense line items for the three and nine months ended September 30, 2022 and 2023 (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Instructional and support costs	$	1,802	$	597	$	5,190	$	4,128
General and administration	3,810		3,210		11,019		10,708
Restructuring costs	—		270		—		366
Stock-based compensation expense included in operating expense	5,612		4,077		16,209		15,202
Tax benefit	1,460		1,054		4,250		3,988
Stock-based compensation expense, net of tax	$	4,152	$	3,023	$	11,959	$	11,214

During the nine months ended September 30, 2022 and 2023, the Company recognized shortfall tax impacts of approximately $1.4 million related to share-based payment arrangements, which were adjustments to the provision for income taxes.

14. Income Taxes

During the nine months ended September 30, 2022 and 2023, the Company recorded income tax expense of $13.6 million and $14.8 million, reflecting an effective tax rate of 32.5% and 32.6%, respectively. Income tax expense for the nine months ended September 30, 2022 and 2023 include shortfall tax impacts of approximately $1.4 million related to share-based payment arrangements.

The Company had $0.9 million of unrecognized tax benefits as of December 31, 2022 and September 30, 2023. Interest and penalties, including those related to uncertain tax positions, are included in the provision for income taxes in the unaudited condensed consolidated statements of income.

The Company paid $20.2 million and $35.6 million in income taxes during the nine months ended September 30, 2022 and 2023, respectively.

The tax years since 2019 remain open for federal tax examination, the tax years since 2018 remain open to examination by certain states, and the tax years since 2017 remain open to examination by foreign taxing jurisdictions in which the Company is subject to taxation.

15. Segment Reporting

Strategic Education is an educational services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. Strategic Education’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment. The Company’s organizational structure includes three operating and reportable segments: U.S. Higher Education, Education Technology Services, and Australia/New Zealand.

The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University. USHE also operates non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University.

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The Education Technology Services segment is primarily focused on developing and maintaining relationships with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs. The employer relationships developed by the Education Technology Services division are an important source of student enrollment for Strayer University and Capella University, and the majority of the revenue attributed to the Education Technology Services division is driven by the volume of enrollment derived from these employer relationships. Education Technology Services also supports employer partners through Workforce Edge, a platform which provides employers a full-service education benefits administration solution, and Sophia Learning, which enables education benefits programs through the use of low-cost online general education-level courses recommended by the American Council on Education for credit at other colleges and universities.

The Australia/New Zealand segment is comprised of Torrens University, Think Education and Media Design School in Australia and New Zealand, which collectively offer certificate and degree programs in business, design, education, hospitality, healthcare, and technology through campuses in Australia, New Zealand, and online.

Revenue and operating expenses are generally directly attributable to the segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. The Company’s Chief Operating Decision Maker does not evaluate operating segments using asset information.

A summary of financial information by reportable segment for the three and nine months ended September 30, 2022 and 2023 is presented in the following table (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2023		2022		2023
Revenues
U.S. Higher Education	$	185,499	$	201,828	$	571,291	$	601,402
Australia/New Zealand	61,177		63,264		177,232		170,239
Education Technology Services	16,447		20,844		47,019		58,581
Consolidated revenues	$	263,123	$	285,936	$	795,542	$	830,222
Income (loss) from operations
U.S. Higher Education	$	(1,948)	$	10,412	$	25,386	$	26,742
Australia/New Zealand	8,934		13,875		20,506		20,984
Education Technology Services	5,222		8,316		15,237		20,278
Amortization of intangible assets	(3,522)		(3,382)		(10,954)		(10,364)
Merger and integration costs	(269)		(330)		(933)		(1,335)
Restructuring costs	(610)		(3,262)		(6,129)		(15,208)
Consolidated income from operations	$	7,807	$	25,629	$	43,113	$	41,097

16. Litigation

The Company is involved in litigation and other legal proceedings arising out of the ordinary course of its business. Certain of these matters are discussed below. From time to time, certain matters may arise that are other than ordinary and routine. The outcome of such matters is uncertain, and the Company may incur costs in the future to defend, settle, or otherwise resolve them. The Company accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it will incur these costs in the future and the costs are reasonably estimable. The Company currently believes that the ultimate outcome of such matters will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect future results of operations in a particular period.

On April 20, 2021, Capella University received a letter from the Department of Education referencing Wright, et al. v. Capella Education Co., et al. (subsequently captioned Ornelas, et al. v. Capella, et al.), United States District Court for the District of Minnesota, Case No. 18-cv-1062, and indicating that the Department would require a fact-finding process pursuant to the borrower defense to repayment regulations to determine the validity of more than 1,000 borrower defense applications that have been submitted regarding Capella University. According to the Department, some of the applications allege similar claims as in the Wright matter concerning alleged misrepresentations of the length of time to complete doctoral programs. Capella University subsequently received approximately 500 applications for borrower defense to repayment. Capella University contested each claim for defense to repayment in individualized responses with supporting evidence, the last of which was sent to the Department in August 2021. Since that time, Capella University has not received any communication from the Department related to the set of

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borrower defense claims received in 2021, nor has Capella University received indication that any of these claims has been evaluated on the facts presented and adjudicated on the merits.

On June 22, 2022, in litigation in which Capella University is not a party, Sweet, et al. v. Miguel Cardona and the United States Department of Education, United States District Court for the Northern District of California, Case No. 3:19-cv-03674-WHA, the Department joined a proposed class settlement agreement that would result in a blanket grant of automatic, presumptive relief for all borrower defense to repayment applications filed by students at any of approximately 150 different listed institutions, including Capella University, through June 22, 2022. The class settlement agreement would also provide certain expedited review of borrower defense claims related to schools excluded from the automatic relief list, as well as for borrowers who applied during the period after execution of the settlement and before final approval. The court granted final approval of the settlement on November 16, 2022. Intervenors, including multiple intervening higher education institutions and companies, appealed the court’s order and moved to stay the court’s final judgment approving the settlement pending resolution of the appeal. Intervenors’ attempts to stay the judgment pending full consideration of appeal have been denied, including by the U.S. Supreme Court on April 13, 2023.

In a July 25, 2022 filing in the same litigation, the Department stated that providing automatic relief to such borrowers “does not constitute the granting or adjudication of a borrower defense pursuant to the Borrower Defense Regulations, and therefore provides no basis to the Department for initiating a borrower defense recoupment proceeding against any institution identified” on the list. It is unclear whether the Department would attempt to seek recovery from Capella University for the amounts of discharged loans. The Department has indicated that any recoupment against institutions “could be imposed only after the Department initiated a separate, future proceeding, in accordance with regulations that require the Department to prove a sufficient basis for liability and provide schools with notice and an opportunity to be heard.” If the Department were to seek recovery for the amounts of discharged loans, Capella University would dispute and defend against such efforts. At this time, the Company is unable to predict the ultimate outcome of Capella-related borrower defense applications.

17. Regulation

Our higher education institutions are subject to uncertain and varying laws and regulations, and any changes to these laws or regulations or their application to us may materially adversely affect our business, financial condition, and results of operations. Other than as set forth below, there have been no material changes to the laws and regulations affecting our higher education institutions that are described in our Annual Report on Form 10-K for the year ended December 31, 2022.

United States Regulation

CARES Act

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Among other things, the CARES Act suspended payments and interest accrual on federal student loans until September 30, 2020, in addition to suspending involuntary collections such as wage garnishment, tax refund reductions, and reductions of federal benefits like Social Security benefits during the same timeframe. On March 30, 2021, the Secretary of Education also extended student loan relief to all Federal Family Education Loans (“FFEL”) not previously covered. In June 2023, the Department of Education announced that student loan interest would begin to accrue on September 1, 2023, and student loan repayment resumed in October 2023.

American Rescue Plan Act of 2021

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Among other things, the legislation amended the “90/10 Rule” to include “all federal education assistance” in the “90” side of the ratio calculation. See “Item 1. Business – Regulation – U.S. Regulatory Environment – The 90/10 Rule” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for a description of the 90/10 Rule. The legislation required the Department to conduct a negotiated rulemaking process to modify related Department regulations, which the Department began in January 2022. In March 2022, the Institutional and Programmatic Eligibility negotiated rulemaking committee reached consensus on changes to the 90/10 Rule. On October 27, 2022, the Department of Education released final 90/10 regulations, which are largely consistent with the consensus language. However, within the preamble of the regulation the Department indicated that non-Title IV eligible programs offered via distance education are not eligible to be counted in the “10” side of the ratio calculation. The final regulations also provided for an expanded definition of “federal education assistance” that will be periodically defined by the Secretary of Education. On December 20, 2022, the Department published guidance further indicating that non-Title IV eligible programs offered in part or in whole via distance education are not eligible to be counted in the “10” side of the ratio calculation, and has continued to issue guidance related to implementation of the new rule. On December 21, 2022, the Department released a non-exhaustive list of federal agencies and federal education assistance programs that must be included as federal revenue in the 90/10

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calculation. Such agencies include the U.S. Department of Defense (military tuition assistance) and the Department of Veterans Affairs (veterans education benefits), in addition to the Title IV programs already covered by the 90/10 Rule. The new 90/10 regulations are effective for fiscal years beginning on or after January 1, 2023.

Current Negotiated Rulemaking

Improving Institutional Quality and Accountability Committee

In January 2023, the Department indicated its intention to establish one or more rulemaking committees in 2023 to propose new regulations on distance education, improving the use of deferments and forbearances, third-party servicers and related issues, cash management, return of federal funds, state authorization, accreditation and related issues, and TRIO programs. The Department invited interested parties to comment on the topics suggested by the Department at public hearings held on April 11 and 12, 2023. The Department also accepted written comments through April 24, 2023.

Section 432(a) Committee

In June 2023, the Department indicated its intention to establish a rulemaking committee related to the modification, waiver or compromise of federal student loans, as permitted in HEA Section 432(a). The Department held a public hearing on July 18, and accepted written comments through July 20, 2023. In September 2023, the Department announced its selection of non-federal negotiators and the first round of rulemaking meetings were held on October 10 and 11, 2023. The rulemaking committee is also scheduled to meet in November and December 2023.

Following completion of negotiated rulemaking committee meetings, the Department of Education issues proposed rules for public comment. If the negotiated rulemaking committee reaches consensus on a topic, the Department of Education is bound to propose a rule consistent with the consensus. Following public comment, the Department issues final regulations, which, if published by November 1, would generally take effect July 1 of the following year.

Financial Value Transparency and Gainful Employment, Financial Responsibility, Administrative Capability, Certification Procedures, and Ability to Benefit

On May 17, 2023, the Department released proposed rules on financial value transparency and gainful employment, financial responsibility, administrative capability, certification procedures, and ability to benefit. On September 27, 2023, the Department released final regulations on financial value transparency and gainful employment, which are largely consistent with the proposed rule. The gainful employment final rule establishes two independent metrics, both of which must be passed by a gainful employment program subject to the rule in order to maintain Title IV eligibility. Any gainful employment program that fails either or both metrics in a single year would be required to provide a disclosure to current and prospective students, and any such program that fails the same metric in two out of three consecutive years for which the program’s metrics are calculated would lose its access to federal financial aid. The two metrics are 1) a debt-to-earnings ratio that compares the median earnings of graduates who received federal financial aid to the median annual payments on loan debt borrowed for the program, which must be less than or equal to 8% of annual earnings or 20% of discretionary earnings, and 2) an earnings premium test that measures whether the typical graduates from a program that received federal financial aid earn more than a typical high school graduate in their state (or, in some cases, nationally) and within a certain age range in the labor force. A program that fails in two out of three consecutive years, or is voluntarily discontinued by the institution, would not be eligible to have Title IV reinstated for the program or launch and receive Title IV for a “substantially similar program” (generally defined as a program with the same four-digit CIP code) for a minimum of three years. The final rule describes that the Department will now measure earnings six years after graduation (instead of the proposed rule’s three years after graduation) for certain qualifying graduate programs such as clinical psychology, marriage and family therapy, clinical social work, and clinical counseling. The final rule also includes the requirement that, beginning July 1, 2026, all schools provide a link to a Department of Education-hosted website that includes information on cost, earnings, and licensure information, and the gainful employment metrics. The final gainful employment regulations will take effect July 1, 2024. The Department has indicated that it will release metrics beginning in the 2025 financial aid award year. Beginning July 1, 2026, if a program fails a metric, an institution must provide warnings to students and prospective students meeting certain minimum requirements to be specified by the Department; programs that fail the same metric in the first two years the rates are issued will lose eligibility in 2026.

On October 23, 2023, the Department released final rules on financial responsibility, administrative capability, certification procedures, and ability to benefit. The Department’s final rules regarding financial responsibility establish new mandatory triggers—including but not limited to failing 90/10, receiving at least 50% of funds from programs that are failing gainful employment, or being subject to a Department action to recover losses from approved Borrower Defense to Repayment claims that would cause a recalculated composite score to fall below 1.0—that allow the Department to seek financial protection or recalculate the institution’s financial composite score to determine whether an institution’s financial condition has materially weakened. The

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rules also establish new discretionary triggers that will result in the Department conducting case-by-case analysis to see if additional protection is needed. In general, institutions will be required to report triggering events within 21 days of occurrence. According to the regulation, such triggering events may result in a financial protection requirement that would most likely take the form of a letter of credit or cash escrow and provisional certification to participate in Title IV.

Under the final administrative capability rule, institutions will be required to offer adequate services to students, including financial aid counseling and career services support. The final language also includes a new requirement that institutions provide students with geographically accessible clinical or externship opportunities as required for licensure.

In final rules regarding certification procedures, the Department indicates, among other things, that it will consider withdrawal rates, gainful employment rates, licensure passage rates, and instructional and advertising spend when making institutional eligibility determinations. The regulation also provides the Secretary authority to require institutions to submit all marketing materials in cases where the institution is provisionally certified and is found to have engaged in substantial misrepresentation, aggressive recruitment, or a failure to comply with incentive compensation rules. The final regulation also makes changes regarding licensure-track programs, including preventing an institution from offering Title IV aid to a student enrolled in a program that does not meet educational prerequisites for licensure in the state in which the student is located. The Department’s final regulation also requires institutions to comply with all State laws related to closure, including record retention, teach-out plans or agreements and tuition recovery funds or surety bonds for each state in which the institution is located and in each state in which students enrolled by the institution in distance education courses are located.

Borrower Defenses to Repayment

On March 16, 2022, Federal Student Aid (“FSA”) announced that it is monitoring complaints and borrower defense to repayment (“BDTR”) applications from veterans, service members and their family members who report claims of deceptive recruitment and enrollment practices, including misrepresentations related to cost, financing, and application of military and veteran benefits. The Department indicated that it will seek all appropriate corrective measures pursuant to the BDTR regulations if it finds that an institution has engaged in substantial misrepresentation or fraudulent conduct, and that it will share information and complaints with the Department of Defense and Department of Veterans Affairs.

On March 14, 2023, the Department of Education announced that the Office of Enforcement of FSA will use “secret shoppers” to monitor post-secondary institutions’ compliance with the laws and regulations governing participation in federal student aid programs. The Department indicated that secret shoppers will evaluate recruitment, enrollment, financial aid, and other practices of post-secondary institutions to help identify potentially deceptive or predatory practices used to recruit and enroll students. The Department noted that findings from secret shopping may serve as evidence in ongoing investigations and reviews or serve as the basis for opening new investigations and reviews. The Department further noted that, where appropriate and permissible, FSA may refer secret shopping findings to other offices within the Department, as well as other state and federal enforcement agencies.

The Department of Education’s final BDTR rules that took effect on July 1, 2023 are currently being challenged in litigation, to which we are not a party. The litigation alleges that the new rules are unconstitutional, arbitrary and capricious, and that the Department has exceeded its authority in adopting them. On August 7, 2023, the U.S. Court of Appeals for the Fifth Circuit granted a nationwide emergency injunction preventing the Department of Education’s enforcement of the final BDTR and closed school discharge rules. The matter will be heard by the Fifth Circuit panel during the sitting commencing November 6, 2023, and the previous versions of the BDTR and closed school discharge rules remain in effect until at least then. The Company is unable to predict the ultimate outcome of the litigation.

Accrediting Agencies and State Authorization

Capella University’s accreditor, Higher Learning Commission (“HLC”), and Strayer University’s accreditor, Middle States Commission on Higher Education (“Middle States”), must periodically be reviewed by the U.S. Secretary of Education in order to maintain recognition as an institutional accrediting agency. On May 31, 2023, the Department of Education, acting on the recommendation of the National Advisory Committee for Institutional Quality and Integrity, renewed its recognition of HLC for a period of five years and required it provide a monitoring report regarding one item of substantial compliance, and continued the current recognition of Middle States for one year, requiring a compliance report regarding one item of noncompliance.

State Authorization Reciprocity Agreement (SARA)

Strayer University and Capella University participate in the State Authorization Reciprocity Agreement (“SARA”), which allows the Universities to enroll students in distance education programs in each SARA member state, including 49 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Each of the Universities applies separately to non-SARA member states (i.e., California) for authorization to enroll students, if such authorization is required by the state. On March 1, 2023, SARA’s

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coordinating entity, the National Council for State Authorization Reciprocity Agreements (“NC-SARA”), held its first of two public comment forums to seek input on potential changes to NC-SARA policies. The forum included a discussion of 63 proposed policy changes, some of which, if adopted, would have significantly altered the distance education reciprocity agreements, including a proposal that NC-SARA permit states to apply more stringent standards to for-profit institutions or to eliminate the ability of for-profit institutions to participate in the agreements altogether. In addition to the public comment forums, written comments were accepted through May 17, 2023. In September 2023, NC-SARA’s four regional compacts completed evaluation of the proposed policy changes and unanimously approved six proposed policy changes to be voted upon by the NC-SARA board of directors on October 24, 2023. The remaining proposed policy changes to be voted upon do not include the proposals to permit states to apply more stringent standards to for-profit institutions or exclude for-profit institutions from NC-SARA participation.

Title IX

On June 23, 2022, the Department of Education released proposed Title IX regulations for public comment. Among other changes, the proposed rule would address all forms of sex-based harassment (not only sexual harassment); clarify that Title IX’s prohibition against sex discrimination includes discrimination on the basis of sex stereotypes, sex characteristics, pregnancy or related conditions, sexual orientation, and gender identity; and eliminate the requirement for live hearings at the post-secondary level. The public comment period on the proposed rule ended on September 12, 2022, and the Department has indicated its intention to publish a final Title IX rule in October 2023. When the Department publishes the final Title IX rule, it will indicate an effective date.

Third-Party Servicers

Department of Education regulations permit an institution to enter into a written contract with a third-party servicer for the administration of any aspect of the institution’s participation in Title IV programs. The third-party servicer must, among other obligations, comply with Title IV requirements and be jointly and severally liable with the institution to the Secretary of Education for any violation by the servicer of any Title IV provision. An institution must report to the Department of Education new contracts or any significant modifications to contracts with third-party servicers as well as other matters related to third-party servicers. On February 15, 2023 the Department released a Dear Colleague Letter (“DCL”) (GEN 23-03) with updated guidance expanding the definition of third-party servicers and covered activities to include vendors providing student recruitment and retention services, software products and services related to Title IV administration activities, and educational content and instruction, initially requiring institutions to be in compliance with the new guidance by May 1, 2023. On February 28, 2023, the Department extended the effective date of the updated guidance and reporting requirements from May 1, 2023 to September 1, 2023. On April 11, 2023, the Department again delayed the effective date until six months after the Department publishes a new, revised final guidance letter on the topic, and on May 16, 2023, the Department formally rescinded its 2023 and prior guidance (DCL GEN-16-15 and the March 8, 2017 Electronic Announcement) prohibiting contracts between colleges and foreign-owned or operated servicers. Additionally, in March 2023, the Department indicated via Federal Register publication its intention to establish a negotiated rulemaking committee in 2023 to consider new proposed regulations on third-party servicers and related issues.

Program Participation Agreement

As a result of the August 1, 2018 merger, Capella University experienced a change of ownership, with the Company as its new owner. On January 18, 2019, consistent with standard procedure upon a Title IV institution’s change of ownership, the Department and Capella University executed a new Provisional Program Participation Agreement, approving Capella’s continued participation in Title IV programs with provisional certification through December 31, 2022. As is typical, the Provisional Program Participation Agreement subjected Capella University to certain requirements during the period of provisional certification, including that Capella University must apply for and receive approval from the Department in connection with new locations or the addition of new Title IV-eligible educational programs. Capella University filed its application for recertification in advance of the September 30, 2022 deadline, and on April 18, 2023, Capella University and the Department of Education executed a fully certified Program Participation Agreement, approving Capella University’s continued participation in Title IV programs through September 30, 2025.

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

The following discussion and analysis of our financial condition and results of operations is a supplement to and should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2022.

Cautionary Notice Regarding Forward-Looking Statements

Certain of the statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act”). Such statements may be identified by the use of words such as “expect,” “estimate,” “assume,” “believe,” “anticipate,” “may,” “will,” “forecast,” “outlook,” “plan,” “project,” “potential” or similar words, and include, without limitation, statements relating to future enrollment, revenues, revenues per student, earnings growth, operating expenses, 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 student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as other federal laws and regulations, institutional accreditation standards and state regulatory requirements, rulemaking and other action by the Department or other governmental entities, including without limitation action related to borrower defense to repayment applications, and increased focus by the U.S. Congress on for-profit education institutions, competitive factors, risks associated with the further spread of COVID-19, including the ultimate impact of COVID-19 on people and economies, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions including our acquisition of Torrens University and associated assets in Australia and New Zealand, the risk that the benefits of our acquisition of Torrens University and associated assets in Australia and New Zealand may not be fully realized or may take longer to realize than expected, the risk that our acquisition of Torrens University and associated assets in Australia and New Zealand may not advance our business strategy and growth strategy, risks related to the timing of regulatory approvals, our ability to implement our growth strategy, the risk that the combined company may experience difficulty integrating employees or operations, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. You should not put undue reliance on any forward-looking statements. Further information about these and other relevant risks and uncertainties may be found in Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, Part I, “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K and in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking statements, except as required by law.

Additional Information

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

Background

Strategic Education, Inc. (“SEI,” “we”, “us” or “our”) is an education services company that provides access to high-quality education through campus-based and online post-secondary education offerings, as well as through programs to develop job-ready skills for high-demand markets. We operate primarily through our wholly-owned subsidiaries Strayer University and Capella University, both accredited post-secondary institutions of higher education located in the United States, and Torrens University, an accredited post-secondary institution of higher education located in Australia. Our operations emphasize relationships through our Education Technology Services segment with employers to build employee education benefits programs that provide employees with access to affordable and industry relevant training, certificate, and degree programs.

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Segments Overview

As of September 30, 2023, we had the following reportable segments:

U.S. Higher Education (“USHE”) Segment

•The USHE segment provides flexible and affordable certificate and degree programs to working adults primarily through Strayer University and Capella University, including the Jack Welch Management Institute MBA, which is a unit of Strayer University. USHE also operates non-degree web and mobile application development courses through Hackbright Academy and Devmountain, which are units of Strayer University.

•Strayer University is accredited by the Middle States Commission on Higher Education and Capella University is accredited by the Higher Learning Commission, both higher education institutional accrediting agencies recognized by the Department of Education. The USHE segment provides academic offerings both online and in physical classrooms, helping working adult students develop specific competencies they can apply in their workplace.

•In the third quarter of 2023, USHE enrollment increased 9.9% to 82,548 compared to 75,144 for the same period in 2022.

•Trailing 4-quarter student persistence within USHE was 87.3% in the second quarter of 2023 compared to 87.3% for the same period in 2022. Student persistence is calculated as the rate of students continuing from one quarter to the next, adjusted for graduates, on a trailing 4-quarter basis. Student persistence is reported one quarter in arrears. The table below summarizes USHE trailing 4-quarter student persistence for the past 8 quarters.


Q3 2021		Q4 2021		Q1 2022		Q2 2022		Q3 2022		Q4 2022		Q1 2023		Q2 2023
86.9	%	86.8	%	87.1	%	87.3	%	87.7	%	87.4	%	87.4	%	87.3	%

•Trailing 4-quarter government provided grants and loans per credit earned within USHE decreased 7.4% as of the end of the second quarter of 2023. Government provided grants and loans per credit earned includes all Federal loans and grants for students (Title IV hereafter) in our USHE institutions, and is calculated on a trailing 4-quarter basis and reported one quarter in arrears. Title IV per credit earned has been declining as employer-affiliated enrollment has grown, and as more students earn credit through Sophia Learning and other affordable alternative pathways. The table below summarizes the percentage change in USHE trailing 4-quarter Title IV per credit earned for the past 8 quarters.