PERDOCEO EDUCATION Corp: Form 10-Q for the period ended Sep 30, 2023

The discussion below and other items in this Quarterly Report on Form 10-Q contain “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “plan,” “may,” “should,” ”will,” “continue to,” “focused on” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those matters discussed in Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022 that could cause our actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Among the factors that could cause actual results to differ materially from those expressed in, or implied by, our forward-looking statements are the following:

• declines in enrollment or interest in our programs;
• our continued compliance with and eligibility to participate in Title IV Programs under the Higher Education Act of 1965, as amended, and the regulations thereunder (including the 90-10, financial responsibility and administrative capability standards prescribed by the U.S. Department of Education (the “Department”)), as well as applicable accreditation standards and state regulatory requirements;
• the impact of various versions of “borrower defense to repayment” regulations;
• the final outcome of various legal challenges to the Department's loan discharge and forgiveness efforts;
• rulemaking or changing interpretations of existing regulations, guidance or historical practices by the Department or any state or accreditor and increased focus by Congress and governmental agencies on, or increased negative publicity about, for-profit education institutions;
• the success of our initiatives to improve student experiences, retention and academic outcomes;
• our continued eligibility to participate in educational assistance programs for veterans and other military personnel;
• increased competition;
• our ability to pay dividends on our common stock and execute our stock repurchase program;
• the impact of management changes; and
• changes in the overall U.S. economy.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help investors understand the results of operations, financial condition and present business environment. The MD&A is organized as follows:

• Overview
• Consolidated Results of Operations
• Segment Results of Operations
• Summary of Critical Accounting Policies and Estimates
• Liquidity, Financial Position and Capital Resources

OVERVIEW

Our accredited academic institutions offer a quality postsecondary education primarily online to a diverse student population, along with campus-based and blended learning programs. The Company’s academic institutions – Colorado Technical University (“CTU”) and the American InterContinental University System (“AIUS” or “AIU System”) – provide degree programs from the associate through doctoral level as well as non-degree seeking and professional development programs. Our academic institutions offer students industry-relevant and career-focused academic programs that are designed to meet the educational needs of today’s busy adults. CTU and AIUS continue to show innovation in higher education, advancing personalized learning technologies like their intellipath® learning platform and using data analytics and technology to serve and educate students while enhancing overall learning and academic experiences. Perdoceo is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

Our reporting segments are determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 – Segment Reporting and are based upon how the Company analyzes performance and makes decisions. Each segment represents a postsecondary education provider that offers a variety of academic programs. We organize our business across two reporting segments: CTU and AIUS.

Regulatory Environment and Political Uncertainty

We operate in a highly regulated industry, which has significant impacts on our business and creates risks and uncertainties. In recent years, Congress, the Department, states, accrediting agencies, the Consumer Financial Protection Bureau, the Federal Trade Commission, state attorneys general and the media have all scrutinized the for-profit postsecondary education sector. Congressional hearings and roundtable discussions were held regarding various aspects of the education industry, including issues surrounding student debt as well as publicly reported student outcomes that may be used as part of an institution’s recruiting and admissions practices, and reports were issued that are highly critical of for-profit colleges and universities. A group of influential U.S. senators, consumer advocacy groups and some media outlets have strongly and repeatedly encouraged the Department, the Department of Defense and the Department of Veterans Affairs and its state approving agencies to take action to limit or terminate the participation of institutions such as ours in existing tuition assistance programs. In addition, targeted loan relief to student borrowers is a stated priority for the Department, and consumer advocacy groups and others are focusing their lobbying and other efforts relating to student debt forgiveness on for-profit colleges and universities, encouraging loan discharge applications and complaints by former students.

The current administration, as well as Congress, are pursuing significant legislative, regulatory and administrative actions affecting our business. A loss or material reduction in Title IV Programs or the amount of student financial aid for which our students are eligible would materially impact our student enrollments and profitability and could impact the continued viability of our business as currently conducted.

We encourage you to review Item 1, “Business,” and Item 1A, “Risk Factors,” in our Annual Report on Form 10-K to learn more about our highly regulated industry and related risks and uncertainties, in addition to the MD&A in our 2023 Quarterly Reports on Form 10-Q.

Note Regarding Non-GAAP measures

We believe it is useful to present non-GAAP financial measures which exclude certain significant and non-cash items as a means to understand the performance of our core business. As a general matter, we use non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of our core business, assist with preparing the annual operating plan, and measure performance for some forms of compensation. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and to provide estimates of future performance.

We believe certain non-GAAP measures allow us to compare our current operating results with respective historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance. We believe the items we are adjusting for are not normal operating expenses necessary to run our business. In evaluating the use of non-GAAP measures, investors should be aware that in the future we may incur expenses similar to the adjustments presented below. Our presentation of non-GAAP measures should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. A non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income, operating income, earnings per diluted share, or any other performance measure derived in accordance with and reported under GAAP or as an alternative to cash flow from operating activities or as a measure of our liquidity.

Non-GAAP financial measures, when viewed in a reconciliation to respective GAAP financial measures, provide an additional way of viewing the Company's results of operations and the factors and trends affecting the Company's business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the respective financial results presented in accordance with GAAP.

2023 Third Quarter Overview

During the quarter ended September 30, 2023 ("current quarter"), we continued to execute on our operational priorities and remained focused on improving student experiences and academic outcomes. Additionally, we experienced continued improvement in student retention and engagement at both of our academic institutions supported by the various operating changes and student initiatives that we have undertaken over the past several years.

Total student enrollments decreased 12.7% at September 30, 2023 as compared to September 30, 2022, primarily driven by a decrease at AIUS of 34.2% while total student enrollments remained relatively flat at CTU. The decrease in total student enrollments for AIUS was driven by certain operational changes made during the current year within admissions, outreach and enrollment processes for prospective students. These changes were made to ensure compliance with any anticipated or final regulatory changes by the Department. We made these changes only for the short term and have begun to revert to normalized levels of operations within our admissions and enrollment processes during the fourth quarter. At CTU, improved student retention and student enrollment growth in corporate partnerships for the current quarter end as compared to the prior year quarter end were offset with a negative timing impact from the academic calendar redesign.

We believe that student retention and engagement have improved, in part, due to an increased focus on enrolling students who we believe will be more likely to succeed at one of our institutions as well as changes we have made to better serve and onboard new learners in a more efficient and effective manner. Additionally, federal aid initiatives implemented by the current administration simplified processes for students to receive the financial support needed to continue their education, thus leading to improved retention and engagement. As a result, we expect full year revenue to be higher as compared to 2022, resulting from recent acquisitions, the academic calendar redesign at CTU and underlying organic improvements in student retention and engagement. However, total student enrollments at the end of 2023 are expected to be lower as compared to year end 2022, due to the operational changes that were undertaken at AIUS to ensure compliance with any anticipated or final regulatory changes.

We believe investments in technology positively impact student experiences and academic outcomes and we remain committed to investing in and upgrading technology to further enhance academic experiences for our students. Additionally, we are exploring various ways we can apply generative artificial intelligence (“AI”) to administrative processes as well as student support processes and the online classroom. We view technology as a catalyst and differentiator for us and we will continue to further invest in this area to provide our students with a more relevant and meaningful experience.

Financial Highlights

Revenue for the quarter ended September 30, 2023 increased by 6.8% or $11.5 million as compared to the prior year quarter, driven by an increase in revenue at CTU. The improvement in revenue at CTU for the current quarter was driven by a positive timing impact from the academic calendar and the 2022 acquisition that was not in the comparable prior year period, as well as an increase in organic total student enrollments. CTU's academic calendar redesign may impact the comparability of revenue-earning days and enrollment results in any given quarter, with the impact on revenue and total student enrollments not necessarily having the same magnitude or directional impact. Revenue declined at AIUS for the current quarter as compared to the prior year quarter driven primarily by the decrease in total student enrollments discussed above.

Operating income for the current quarter increased by 46.9% to $43.1 million as compared to operating income of $29.3 million in the prior year quarter. The increase in operating income for the current quarter was primarily due to the increase in revenue as well as decreased advertising and admissions expenses.

The Company believes it is useful to present non-GAAP financial measures, which exclude certain significant and non-cash items, as a means to understand the performance of its operations. (See tables below for a GAAP to non-GAAP reconciliation.) Adjusted operating income was $47.2 million for the current quarter as compared to $38.7 million for the prior year quarter.

Adjusted operating income and adjusted earnings per diluted share for the quarters and years to date ended September 30, 2023 and 2022 is presented below (dollars in thousands, unless otherwise noted):

(1) Amortization relates to definite-lived intangible assets associated with acquisitions.

(2) Legal fee expense associated with (i) responses to the Department of Education (the "Department") relating to borrower defense to repayment applications from former students, and (ii) acquisition efforts.

(3) Non-cash gain associated with the sale of the LCB tradename in exchange for outstanding shares of Perdoceo's stock.

(4) The tax effect of adjustments was calculated by multiplying the pre-tax adjustments with a tax rate of 25%. This tax rate is intended to reflect federal and state taxable jurisdictions as well as the nature of the adjustments.

Regulatory Updates

Borrower Defense to Repayment and Closed School Regulations Update

On August 7, 2023, a three-judge Fifth Circuit Court of Appeals panel granted a motion for an injunction pending appeal in the lawsuit filed by the Career Colleges and Schools of Texas (“CCST”) in the U.S. District Court for the Northern District of Texas seeking to have the Borrower Defense to Repayment (“BDR”) Final Rule vacated and enjoined. The motion stayed the effective date of the borrower defense to repayment and closed school loan discharge provisions of the BDR Final Rule. The stay is in effect until at least November 6, 2023, when that same Fifth Circuit panel will hear the appeal.

See Item 1, “Business – Legislative Action and Recent Department Regulatory Initiatives” and “Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations” in our Annual Report on Form 10-K for the year ended December 31, 2022 for an overview of BDR.

See Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which We Operate – ‘Borrower defense to repayment' regulations, including closed school loan discharges, may subject us to significant repayment liability to the Department for discharged federal student loans and posting of substantial letters of credit that may limit our ability to make investments in our business which could negatively impact our future growth,’” in our Annual Report on Form 10-K for the year ended December 31, 2022 for more information about risks associated with the BDR and closed school loan discharge regulations.

Published Regulations

In addition to the information set forth below, see Item 1, “Business – Legislative Action and Recent Department Regulatory Initiatives” and “Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations” in our Annual Report on Form 10-K for the year ended December 31, 2022 for an overview of the previously adopted and rescinded gainful employment regulation and the current rules relating to financial responsibility, administrative capability and certification procedures.

See Item 1A, “Risk Factors – Risks Related to the Highly Regulated Field in Which We Operate – The extensive regulatory requirements applicable to our business may change, in particular as a result of the scrutiny of the for-profit postsecondary education sector and the efforts of the Biden administration, which could require us to make substantial changes to our business, reduce our profitability and make compliance more difficult,” in our Annual Report on Form 10-K for the year ended December 31, 2022 for information about the potential impact of new regulations on our business.

While we are still reviewing the new gainful employment rules and the revised financial responsibility, administrative capability and certification rules discussed below, they impose a broad range of additional requirements on our institutions and would increase the possibility that our schools could be subject to additional restrictions, financial protection, and reporting requirements, potential liabilities and sanctions, and potential loss of Title IV liability, which would have a material adverse effect on our business and results of operations.

Gainful Employment Rule

On October 10, 2023, the U.S. Department of Education (“Department”) published final regulations for the Gainful Employment (“GE”) Rule. The GE rule includes an eligibility framework that imposes additional requirements on for-profit sector programs, including our schools. The regulation uses two key metrics: Debt-to-Earnings (“D/E”) and Earnings Premium (“EP”) metrics to determine whether a program prepares students for gainful employment. The D/E metrics measure student debt at a program level against a measure of earnings. The EP metric measures student earnings at a program level against working individuals with only a high school diploma or equivalent. GE programs that fail either the D/E or the EP metric in two of three consecutive years will lose Title IV eligibility. Programs offered by both AIUS and CTU are subject to the GE Rule and could lose Title IV eligibility if their programs fail to pass the D/E rates and/or the EP measures. The rule also requires our institutions to warn current and prospective students if a program fails any metric in any year. The issuance of required GE warnings could deter prospective students from enrolling at our institutions and current students from continuing in their programs.

The GE Rule becomes effective on July 1, 2024. According to the Department's announcement, the first official GE rates will be published in early 2025, and programs may be deemed ineligible to participate in Title IV programs in 2026. A loss or material reduction in eligible Title IV programs due to the GE rule would materially impact our student enrollments and profitability and could impact the continued viability of our business as currently conducted. We are continuing to evaluate the regulation, but given the complexity of the rules and the lack of our access to and the lack of the Department providing transparency regarding the earnings data used to calculate the metrics, we are unable to determine the ultimate impact of the regulation on our business at this time.

Financial Responsibility

On October 31, 2023, the Department published new regulations on financial responsibility that become effective July 1, 2024. The Financial Responsibility regulations would, among other things, significantly modify and expand the mandatory and discretionary triggering events that require an institution to post a letter of credit or other form of financial protection with the Department. The rule also provides that a separate letter of credit of not less than 10% of the institution’s prior year Title IV receipts is required for each mandatory or discretionary triggering event, such that multiple triggering events could subject our institutions to substantial cumulative financial protection obligations.

Examples of mandatory triggering events in the rule include: lawsuits by federal or state authorities to impose an injunction, establish fines or penalties, or to obtain financial relief, or in a qui tam action in which the federal government has intervened, subject to certain timing requirements; an action by the Department to recover from the institution for adjudicated borrower defense to repayment claims where the potential amount of recovery would cause the institution’s recalculated composite score to drop below 1.0; the institution has received at least 50% of its Title IV funds in its most recently completed fiscal year programs that are failing the GE rule; the institution is required to submit a teach-out plan by a state or federal agency, an accrediting agency, or other oversight body for reasons related to financial concerns; for an institution owned at least 50% by a publicly traded entity, the entity is subject to certain actions or events specified in the rule initiated by the Securities and Exchange Commission; the institution fails the 90/10 rule for its most recently completed fiscal year; and, the institution is subject to a default or other adverse condition under a line of credit, loan agreement, security agreement or other financing arrangement due to an action by the Department.

Specified discretionary triggers would provide the Department flexibility on whether to require a letter of credit based on the financial impact the triggering event would have on the institution. Examples of discretionary triggers include: an accrediting agency or a federal, state, or other authority places the institution on probation, show cause, or comparable status; the institution is subject to a default or other specified adverse condition under a credit or financing arrangement (unless due to an action by the Department, which is a mandatory trigger); a “significant fluctuation” in Direct Loan or Pell Grant funds received by the institution over different award years that cannot be accounted for by changes in those programs; the institution has high annual dropout rates as calculated by the Department; the institution is under prior financial reporting obligations to the Department and has any of the following occurrences: negative cash flows, failure of other financial ratios, cash flows that significantly miss projections submitted to the Department, significant increases in withdrawal rates or other indicators of a significant change in the institution’s financial condition; pending group-process BDR claims; a discontinuation of programs that enroll more than 25% of the institution’s students who receive Title IV funds; a closure of locations that enroll more than 25% of its students who receive Title IV funds; a citation by a state licensing agency for failing to meet its requirements; the institution or a program loses eligibility to participate in another federal educational assistance program due to an administrative action; for an institution owned at least 50% by a publicly traded entity, a disclosure by the entity in a public filing that we are under investigation for possible violations of state, federal or foreign law; a citation and potential loss of education assistance funds from another federal agency if it does not comply with agency requirements; the institution is required to submit a teach-out plan or agreement, including programmatic teach-outs, by a state, the Department or another federal agency, an accrediting agency, or other oversight body; or any other event or condition that the Department learns about from the institution or other parties where the Department determines that the event or condition is likely to have a significant adverse effect on the financial condition of the institution.

The new rule also adds additional circumstances that would deem an institution to lack financial responsibility, such as: failing to make debt payments for more than 90 days; failing to meet payroll obligations; borrowing from employee retirement plans or restricted funds without authorization; failing to make timely refunds or returns of Title IV funds or pay Title IV credit balances; or failing to make repayments of any Title IV liabilities. Finally, the regulations establish new rules for evaluating financial responsibility during a change in ownership.

Administrative Capability

On October 31, 2023, the Department published new regulations on administrative capability that become effective July 1, 2024. The Administrative Capability regulations expand the requirements for institutions to demonstrate that they are administratively capable of providing the education they promise and of properly managing Title IV program funds, adding new standards related to financial counseling and career services, adequate clinical and externship opportunities, timely disbursement of Title IV funds, compliance with high school diploma verification requirements, aggressive and deceptive recruitment tactics or conduct, gainful employment requirements, and significant negative actions with a federal, state or accreditation agencies. The changes also provide the Department with increased and explicit authority to make an administrative capability finding based on a broader set of issues than it has used historically. Such findings could lead to fines, limitations, suspensions, terminations or other actions, including placing the institution on a provisional program participation agreement or heightened cash monitoring.

Certification

On October 31, 2023, the Department published new regulations on certification procedures that become effective July 1, 2024. The revised Certification rule provides a more rigorous process for certifying institutions to participate in the Title IV programs, both initially and on an ongoing basis. The changes increase the Department’s oversight of institutions at critical points of institutional review including initial certification, during provisional certification, after a change of ownership, at recertification, and when there is a risk of closure.

The rule adds additional events that lead to provisional certification, such as if an institution is required to post a letter of credit because of a mandatory or discretionary triggers in the financial responsibility regulations, the Department determines the institution is at risk of closure, or the institution fails the 90/10 rule. It establishes new supplementary performance measures the Department may consider in determining whether to certify or condition the participation of the institution, such as withdrawal rates, the amount of educational and pre-enrollment expenditures, and licensure pass rates where the institution is required by an accrediting agency or state to report licensure exam passage rates.

The rule also adds a provision to include all federal agencies and add state attorneys general to the list of entities that have the authority to share with each other and the Department any information pertaining to an institution’s eligibility for or participation in Title IV programs or any information on fraud, abuse, or other violations of law.

The new rule establishes a non-exhaustive list of conditions that the Department may apply to provisionally certified institutions, such as the submission of teach-out plans, the release of holds on student transcripts, restrictions or limitations on the addition of new programs or locations, restrictions on growth in enrollments or Title IV volume, restrictions on the ability to provide a teach-out on behalf of another institution, restrictions on the acquisition of other institutions, additional financial reporting requirements, and limitations on entering into written arrangements with other institutions for the provision of educational instruction.

The new rule requires provisionally certified schools that have major consumer protection issues to recertify after no more than three years. For institutions alleged or found to have engaged in misrepresentation, aggressive recruiting, or incentive compensation violations, the Department may require that the institution engage a monitor and submit marketing materials to the Department for its review and approval.

New Negotiated Rulemakings

On August 31, 2023, the Department issued a notice of its intent to establish a Student Loan Debt Relief negotiated rulemaking committee to prepare proposed regulations for the Federal Student Aid programs authorized under the HEA. As part of this rulemaking, the Department is considering revisions to its federal student loan compromise regulations, as well as adding regulations on the circumstances under which the Department may waive all or part of federal student loan debts. Negotiating sessions of Student Loan Debt Relief negotiated rulemaking committee are scheduled for October, November and December 2023. The Department has indicated its intent to complete this rulemaking “as quickly as possible.” We are closely monitoring the Department’s negotiated rulemaking process, but we are unable to determine the potential impact of any future final regulations on our business at this time.

CONSOLIDATED RESULTS OF OPERATIONS

The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the quarters and years to date ended September 30, 2023 and 2022 (dollars in thousands):

(1) Educational services and facilities expense includes costs attributable to the educational activities of our campuses, including: salaries and benefits of faculty, academic administrators and student support personnel, and costs of educational supplies and facilities, such as rents on leased facilities. Also included in educational services and facilities expense are rents on leased administrative facilities, such as our corporate headquarters, and costs of other goods and services provided by our campuses, including costs of textbooks and laptop computers.

(2) General and administrative expense includes operating expenses associated with, including salaries and benefits of personnel in, corporate and campus administration, marketing, admissions, information technology, financial aid, accounting, human resources, legal and compliance. Other expenses within this expense category include costs of advertising and production of marketing materials and bad debt expense.

Revenue

The current quarter and year to date revenue increased by 6.8% or $11.5 million and 8.3% or $43.0 million, respectively, as compared to the prior year periods, primarily driven by increased revenue at CTU. The improvement in revenue at CTU for the current quarter and current year to date was driven by a positive timing impact from the academic calendar and the 2022 acquisition that was not in the comparable prior year periods, as well as an increase in organic total student enrollments. Revenue declined at AIUS for the current quarter and year to date driven by the decline in total student enrollments as compared to the prior year period.

Educational Services and Facilities Expense (dollars in thousands)

The educational services and facilities expense for the current quarter and year to date increased by 11.1% or $3.4 million and 17.1% or $14.6 million, respectively, as compared to the prior year periods. Academics and student related costs increased by 20.7% or $5.3 million and 27.8% or $20.1 million for the current quarter and year to date, respectively, as compared to the prior year periods. The current quarter and year to date increases were impacted by a full period of expenses associated with the 2022 acquisitions as compared to a partial period of expenses in the comparative prior year periods. Partially offsetting the current quarter and year to date increase in academic and student related costs was a decrease in occupancy expense of 43.9% or $2.0 million and 41.5% or $5.5 million, respectively, as compared to the prior year periods.

General and Administrative Expense (dollars in thousands)

The general and administrative expense for the current quarter and year to date decreased by 11.4% or $11.8 million and 2.0% or $6.2 million, respectively, as compared to the prior year periods, primarily driven by decreases in advertising and marketing and bad debt expenses, as explained more fully below. Partially offsetting the current quarter and year to date decreases in these expenses were increased administrative costs as compared to the prior year periods.

Advertising and marketing expense for the current quarter and year to date decreased by 31.1% or $10.2 million and 17.0% or $16.3 million, respectively, as compared to the prior year periods, primarily driven by short-term operational changes made within AIUS during the current year.

Admissions expense for the current quarter decreased by 10.7% or $2.5 million and increased by 0.5% or $0.3 million for the current year to date, as compared to the prior year periods. The current quarter improvement was driven by decreased expenses within AIUS as a result of lower student enrollments and operational changes made during the current year. The year to date increase was primarily impacted by a full period of expense associated with the 2022 acquisitions as compared to less than a full comparable period of expense in the prior year period.

Administrative expense for the current quarter and year to date increased by 3.1% or $1.2 million and 13.8% or $15.6 million, respectively, as compared to the prior year periods. The current quarter increase was primarily due to the 2022 acquisitions, as mentioned above, and the current year to date increase was primarily driven by increased costs within Corporate and Other as well as the 2022 acquisitions as compared to the prior year to date.

Bad debt expense incurred by each of our segments during the quarters and years to date ended September 30, 2023 and 2022 was as follows (dollars in thousands):

Bad debt expense improved by 4.0% or $0.3 million and 17.9% or $5.8 million for the current quarter and year to date, respectively, as compared to the prior year periods. AIUS' bad debt expense decreased by 27.5% or $1.2 million which more than offset CTU's increased bad debt expense of 23.1% or $0.9 million for the current quarter as compared to the prior year period. For the year to date both CTU and AIUS' bad debt expense improved by 3.7% or $ 0.6 million and 33.4% or $5.2 million, respectively, as compared to the prior year period.

Our student support teams have maintained their focus on financial aid documentation collection and are counseling students through the Title IV financial aid process so that they are better prepared to start school. Additionally, federal aid initiatives simplified processes for students to receive the financial support needed to continue their education. We have also focused on emphasizing employer-paid and other direct-pay education programs such as corporate partnerships as students within these programs typically have lower bad debt expense associated with them. We continue to expect quarterly fluctuations in bad debt expense. We regularly evaluate our reserve rates, which includes a quarterly update of our analysis of historical student receivable collectability based on the most recent data available and a review of current known factors which we believe could affect future collectability of our student receivables, such as the number of students that do not complete the financial aid process.

Operating Income

Operating income increased by 46.9% or $13.7 million and 25.7% or $27.5 million for the current quarter and year to date, respectively, as compared to the prior year periods. The current quarter and year to date improvement was primarily driven by the increased revenue along with lower advertising and bad debt expenses as compared to the prior year periods, partially offset with asset impairment charges of $7.4 million for the current quarter and $8.7 million for the current year to date.

Provision for Income Taxes

For the current quarter and year to date, we recorded a provision for income taxes of $6.8 million, reflecting an effective tax rate of 14.1% and $39.3 million, reflecting an effective tax rate of 23.1%, respectively, as compared to a provision for income taxes of $9.2 million, reflecting an effective tax rate of 29.5% and $29.9 million, reflecting an effective tax rate of 27.2% for the respective prior year periods.

The effective tax rate for the quarter and year to date ended September 30, 2023 was primarily impacted by a $4.5 million favorable discrete adjustment related to the recognition of the tax benefits associated with a previously disclosed prior year ordinary loss attributable to the stock of a worthless subsidiary, which decreased the effective tax rate for the quarter and year to date by 9.3% and 2.6%, respectively. The effective tax rate for the quarter and year to date ended September 30, 2023 reflects federal and state tax credits claimed for the 2022 tax return, which decreased the effective tax rate for the quarter and year to date by 0.6% and 0.2%, respectively. Additionally, the tax effect of stock-based compensation and the release of other previously recorded tax reserves reduced the effective tax rate for the quarter and year to date ended September 30, 2023 by 0.2% and 0.6%, respectively. The effective tax rate for the prior year quarter and year to date was impacted by the tax effect of a $1.4 million valuation allowance increase related to select combined state net operating losses which increased the effective tax rate for the quarter and year to date by 4.6% and 1.3%, respectively. The effective tax rate for the prior year quarter and year to date benefitted by the tax effect of federal and state tax credits claimed for the 2021 tax return, which decreased the effective tax rate by 0.3% and 0.1%, respectively. The tax effect of stock-based compensation and the release of previously recorded tax reserves for the 2022 year to date tax rate reflects 0.2% net benefit. For the full year 2023, we expect our effective tax rate to be between 22.5% to 23.5%.

SEGMENT RESULTS OF OPERATIONS

The following tables present unaudited segment results for the reported periods (dollars in thousands):

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(1) CTU’s results of operations include the Coding Dojo acquisition commencing on the December 1, 2022 date of acquisition.

(2) AIUS’ results of operations include the CalSouthern acquisition commencing on the July 1, 2022 date of acquisition.

Total student enrollments do not include learners participating in: a) non-degree seeking and professional development programs, and b) degree seeking, non-Title IV, self-paced programs at our universities. Total student enrollments represent students who are active as of the last day of the reporting period. Active students are defined as those students who are considered in attendance by participating in class related activities during the previous two weeks.

CTU. Current quarter and year to date revenue increased by 23.6% or $23.0 million and 17.1% or $53.2 million, respectively, as compared to the prior year periods. The increase in revenue was benefitted by a positive timing impact of the academic calendar and the 2022 acquisition which was not part of the comparative prior year periods, as well as underlying organic enrollment growth. Total student enrollments remained relatively flat at September 30, 2023 as compared September 30, 2022 due to a negative timing impact of the academic calendar redesign that offset underlying organic growth driven by improved student retention and growth in student enrollment from corporate partnerships. CTU’s academic calendar redesign may impact the comparability of revenue-earning days and enrollment results in any given quarter, with the impact on revenue and total student enrollments not necessarily having the same magnitude or directional impact.

Current quarter and year to date operating income for CTU increased by 9.5% or $3.0 million and 10.3% or $11.1 million, respectively, as compared to the prior year periods driven by the increase in revenue discussed above, partially offset with increased operating expenses, including asset impairment charges of $7.4 million during the current quarter.

AIUS. Current quarter and year to date revenue decreased by 16.1% or $11.4 million and 4.8% or $9.9 million, respectively, as compared to the prior year periods. The decrease was primarily driven by a decrease in total student enrollments of 34.2% at September 30, 2023 as compared to September 30, 2022. The decline in student enrollments was impacted by short-term operating changes made during the current year discussed above within "2023 Third Quarter Overview".

Current quarter and year to date operating income for AIUS increased by 62.7% or $6.0 million and 49.7% or $14.8 million, respectively, as compared to the prior year periods driven by lower advertising and marketing, admissions, occupancy and bad debt expenses as compared to the prior year periods, which more than offset the decrease in revenue.

Corporate and Other. This category includes unallocated costs that are incurred on behalf of the entire company. Total Corporate and Other operating loss for the current quarter and year to date decreased by 40.4% or $4.8 million and 5.3% or $1.6 million, respectively, as compared to the prior year periods, primarily driven by decreased legal fee expense.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of operations that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption “Summary of Critical Accounting Policies and Estimates” included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022. Note 2 “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022 also includes a discussion of these and other significant accounting policies.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of September 30, 2023, cash, cash equivalents, restricted cash and available-for-sale short-term investments (“cash balances”) totaled $603.7 million. Restricted cash as of September 30, 2023 was $8.5 million and relates to amounts held in escrow accounts to secure post-closing indemnification obligations of the sellers pursuant to recent acquisitions. Our cash flows from operating activities have historically been adequate to fulfill our liquidity requirements. We have historically financed our operating activities, organic growth and acquisitions primarily through cash generated from operations and existing cash balances. We expect to continue to generate cash during the remainder of 2023. We anticipate that we will be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures, lease commitments and quarterly dividends payments through at least the next 12 months primarily with cash generated by operations and existing cash balances.

We maintain a balanced capital allocation strategy that focuses on maintaining a strong balance sheet and adequate liquidity, while (i) investing in organic projects at our universities, in particular technology-related initiatives which are designed to benefit our students, and (ii) evaluating diverse strategies to enhance stockholder value, including acquisitions, share repurchases and quarterly dividend payments. Ultimately, our goal is to deploy resources in a way that drives long term stockholder value while supporting and enhancing the academic value of our institutions.

On January 27, 2022, the Board of Directors of the Company approved a stock repurchase program for up to $50.0 million which commenced March 1, 2022 and expires September 30, 2024. The timing of purchases and the number of shares repurchased under the program will be determined by the Company’s management and will depend on a variety of factors including stock price, trading volume and other general market and economic conditions, its assessment of alternative uses of capital, regulatory requirements and other factors. Share repurchases will remain a part of our capital allocation strategy. Since the March 1, 2022 inception date, the Company repurchased approximately 2.3 million shares for $25.9 million.

On September 8, 2021, the Company and the subsidiary guarantors thereunder entered into a credit agreement with Wintrust Bank N.A. (“Wintrust”), in its capacities as the sole lead arranger, sole bookrunner, administrative agent and letter of credit issuer for the lenders from time to time parties thereto. The credit agreement provides the Company with the benefit of a $125.0 million senior secured revolving credit facility. The $125.0 million revolving credit facility under the credit agreement is scheduled to mature on September 8, 2024. So long as no default has occurred and other conditions have been met, the Company may request an increase in the aggregate commitment in an amount not to exceed $50.0 million. The loans and letter of credit obligations under the credit agreement are secured by substantially all assets of the Company and the subsidiary guarantors.

The discussion above reflects management’s expectations regarding liquidity; however, as a result of the significance of the Title IV Program funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on timing or our ability to receive Title IV Program funds due to new or proposed regulations, or any requirement to post a significant letter of credit to the Department, may have a significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollments which could be impacted by external factors. See Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Sources and Uses of Cash

Operating Cash Flows

During the years to date ended September 30, 2023 and 2022, net cash flows provided by operating activities totaled $98.8 million and $107.6 million, respectively.

Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the ability to pay tuition costs through the use of a variety of funding sources, including, among others, federal loan and grant programs, state grant programs, private loans and grants, institutional payment plans, private and institutional scholarships and cash payments.

For further discussion of Title IV Program funding and other funding sources for our students, see Item 1, “Business - Student Financial Aid and Related Federal Regulation,” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our employees for services, to vendors for products and services, to lessors for rents and operating costs related to leased facilities, to suppliers for textbooks and other institution supplies, and to federal, state and local governments for income and other taxes.

Investing Cash Flows

During the years to date ended September 30, 2023 and 2022, net cash flows used in investing activities totaled $31.2 million and $255.7 million, respectively.

Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a net cash outflow of $26.4 million and $207.6 million for the years to date ended September 30, 2023 and 2022, respectively.

Capital Expenditures. Capital expenditures decreased to $4.8 million for the year to date ended September 30, 2023 as compared to $9.1 million for the year to date ended September 30, 2022. Capital expenditures represented approximately 0.9% and 1.8% of total revenue for the years to date ended September 30, 2023 and 2022, respectively. For the full year 2023, we expect capital expenditures to be approximately 1.0% of revenue.

Financing Cash Flows

During the years to date ended September 30, 2023 and 2022, net cash flows used in financing activities totaled $12.4 million and $27.8 million, respectively. Payments to repurchase shares of our common stock were $2.7 million for the year to date ended

September 30, 2023 and $23.1 million for the year to date September 30, 2022. The current year to date included a $7.2 million dividend payment to Perdoceo shareholders.

Payments of employee tax associated with stock compensation. Payments of employee tax associated with stock compensation were $2.2 million and $1.6 million for the years to date ended September 30, 2023 and 2022, respectively.

Changes in Financial Position

Selected condensed consolidated balance sheet account changes from December 31, 2022 to September 30, 2023 were as follows (dollars in thousands):

Intangible assets, net of amortization: The decrease is primarily related to impairments associated with certain definite-lived intangible assets during the current quarter.

Goodwill: The decrease relates to opening balance sheet adjustments associated with the Coding Dojo acquisition.

Income taxes: The increase primarily relates to amounts owed with respect to estimated payments of federal and state income tax for 2023.

Deferred revenue: The decrease is primarily related to the timing impact of the academic terms within CTU and AIUS as well as the decrease in total student enrollments at AIUS.

We are exposed to financial market risks, primarily changes in interest rates. We use various techniques to manage our interest rate risk. We have no derivative financial instruments or derivative commodity instruments, and believe the risk related to cash equivalents and available for sale investments is limited due to the adherence to our investment policy, which focuses on capital preservation and liquidity. In addition, we use asset managers who conduct initial and ongoing credit analysis on our investment portfolio and monitor that investments are in compliance with our investment policy. Despite the investment risk mitigation strategies we employ, we may incur investment losses as a result of unusual and unpredictable market developments and may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline.

Interest Rate Exposure

Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell investments that have declined in market value due to changes in interest rates. At September 30, 2023, a 10% increase or decrease in interest rates applicable to our investments or borrowings would not have a material impact on our future earnings, fair values or cash flows.

Under the credit agreement, outstanding principal amounts bear annual interest at a fluctuating rate equal to 1.0% less than the administrative agent’s prime commercial rate, subject to a 3.0% minimum rate. A higher rate may apply to late payments or if any event of default exists. As of September 30, 2023, we had no outstanding borrowings under this facility.

Our financial instruments are recorded at their fair values as of September 30, 2023 and December 31, 2022. We believe that the exposure of our consolidated financial position and results of operations and cash flows to adverse changes in interest rates applicable to our investments or borrowings is not significant.

Evaluation of Disclosure Controls and Procedures

We completed an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q (“Report”) under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the rules and forms provided by the U.S. Securities and Exchange Commission (“SEC”), and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

In addition to the information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, Item 1A “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission on February 23, 2022.

Dividends on our common stock are only payable if declared by the Board of Directors of the Company and permitted by Delaware law.

We declared our first quarterly cash dividend in the third quarter of 2023. We may in the future pay cash dividends to our stockholders but our Board of Directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. Our declaration and payment of future cash dividends are subject to the final determination by our Board of Directors that (i) the dividend will be made in compliance with laws applicable to the declaration and payment of cash dividends, including Delaware law, and (ii) the payment of dividends remains in our best interests, which determination will be based on a number of factors, which may include the impact of changing laws and regulations, economic conditions, our results of operations and/or financial condition, including our earnings and cash flows, capital spending plans, the ability to satisfy financial covenants and other factors considered relevant by the Board of Directors. There can be no assurance our Board of Directors will approve the payment of cash dividends in the future. Any discontinuance of the payment of a dividend or changes to the amount of a dividend compared to prior dividends could cause our stock price to decline.