Leases

9 Months Ended

Sep. 30, 2022

The Company’s principal leasing activities include facilities, classified as operating leases, and, as a result of the GSUSA Acquisition, copiers and printers, classified as finance leases.

Leases are classified as operating leases unless they meet any of the criteria below to be classified as a finance lease:

•the lease transfers ownership of the asset at the end of the lease;

•the lease grants an option to purchase the asset which the lessee is expected to exercise;

•the lease term reflects a major part of the asset’s economic life;

•the present value of the lease payments equals or exceeds the fair value of the asset; or

•the asset is specialized with no alternative use to the lessor at the end of the term.

Operating Leases

The Company has operating leases for office space and campus facilities. Some leases include options to terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised. The Company leases corporate office space in Maryland under an operating lease that expires in May 2023. The RU Segment leases administrative office space in suburban Chicago, Illinois, and Minneapolis, Minnesota, and leases 23 campuses located in six states under operating leases that expire through October 2033. The HCN Segment leases administrative office space in suburban Columbus, Ohio, and leases six campuses located in Ohio, one campus in Indianapolis, Indiana, and beginning in the fall of 2022, one campus in suburban Detroit, Michigan, under operating leases that expire through June 2029. GSUSA leases classroom and administrative office space in Washington, D.C. and Honolulu, Hawaii, under operating leases that expire through September 2036.

Operating lease assets are ROU assets, which represent the right to use the underlying assets for the lease term. Operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating leases are included in the operating lease assets, net, and lease liabilities, current and long-term, on the Consolidated Balance Sheets. These assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. When the lease does not provide an implicit interest rate, the Company uses an incremental borrowing rate based on information available at lease commencement to determine the present value of the lease payments. The ROU assets include all remaining lease payments and exclude lease incentives.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. There are no variable lease payments. Lease expense for the three and nine months ended September 30, 2022 was $5.0 million and $15.1 million, respectively, compared to $1.8 million and $3.4 million for the three and nine months ended September 30, 2021, respectively. These costs are primarily related to long-term operating leases, but also include amounts for short-term leases with terms greater than 30 days that are not material. Cash paid for amounts included in the present value of operating lease liabilities during the three and nine month periods ended September 30, 2022 was $4.8 million and $14.7 million, respectively, and is included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities during the three and nine months ended September 30, 2021 was $1.9 million and $3.4 million, respectively, and is included in operating cash flows.

Finance Leases

In connection with the GSUSA Acquisition, the Company acquired leases for copiers and printers that are classified as finance leases and expire on December 31, 2024. The Company pledged the assets financed to secure the outstanding leases. As of September 30, 2022, the total finance lease liability was $0.2 million with an average interest rate of 3.75%. The ROU assets are recorded within Property and equipment, net on the Consolidated Balance Sheets. Lease amortization expense associated with the Company’s finance leases was approximately $0.03 million and $0.08 million for the three and nine months ended September 30, 2022, respectively, and is recorded within Depreciation and amortization expense on the Consolidated Statements of Income.

The following tables present information about the amount and timing of cash flows arising from the Company’s finance and operating leases as of September 30, 2022 (dollars in thousands):


Maturity of Lease Liabilities (Unaudited)	Operating Leases		Finance Leases
2022 (remaining)	$	4,884	$	28
2023	18,128		114
2024	16,420		113
2025	14,734		—
2026	14,287		—
2027	14,081		—
2028 and beyond	62,681		—
Total future minimum lease payments	$	145,215	$	255
Less: imputed interest	(28,555)		(10)
Present value of operating lease liabilities	$	116,660	$	245
Less: lease liabilities, current	(14,231)		(107)
Lease liabilities, long-term	$	102,429	$	138


Balance Sheet Classification (Unaudited)
Current
Operating lease liabilities, current	$	14,231
Finance lease liabilities, current	107
Long-term
Operating lease liabilities, long-term	102,429
Finance lease liabilities, long-term	138
Total lease liabilities	$	116,905


Other Information (Unaudited)
Weighted average remaining lease term (in years)
Operating leases	9.21
Finance leases	2.25
Weighted average discount rate
Operating leases	4.1	%
Finance leases	3.8	%