FINANCIAL REPORT 2020, Exercises of Chemistry

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U N I V E R S I T Y O F S O U T H E R N C A L I F O R N I A

FINANCIAL REPORT

2 | F I N A N C I A L R E P O R T 2 0 2 0 University of Southern California

U N I V E R S I T Y O F S O U T H E R N C A L I F O R N I A

University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 | 3 This has been a challenging year for so many in our community and around the world. But we moved quickly to respond to the global pandemic, and strategically reorganized our financial priorities to support our community’s most important needs. Our solid fiscal foundation and thoughtful planning kept USC and its critical work moving forward. This report tells the story of our university’s financial health. The numbers also show how we stayed true to our mission. We always put students first, and looked for fresh ways to support the incredible work of our faculty and staff. Together, we worked to educate the next generation of leaders, pursue life- changing research, create inspiring art, provide quality health care and partner with our neighbors. All of this strengthened our ability to build a better future for everyone. As we take our next steps, we’re staying focused on our long-term priorities. We will continue to increase access and affordability, and we will continue to build a community rich in diversity. We will double down on our commitment to sustainability, forging an ethical—and practical—path forward for USC and for our planet. And together, we will secure our university’s future with sound and strategic financial leadership. Over the past year, our community has shown more strength and resilience than I could have imagined. It’s been so gratifying to see Trojans going above and beyond to help one another. It makes me grateful to work alongside such caring and compassionate faculty, staff and students every day, and it fills me with hope for the road ahead. Carol L. Folt President Message from the President

University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 | 5 Despite the pandemic, the University of Southern California’s financial performance for the year ended June 30, 2020, was stable, with operating revenues increasing moderately to $5.4 billion, a 4.1 percent increase compared to the previous year. The university generated a surplus of $26 million from operations and experienced growth in all revenue sources with the exception of auxiliary enterprises which includes athletics, student housing, hospitality services, and transportation, which declined as a result of the campus closure beginning in March 2020. However, USC quickly adjusted to the impact of the pandemic and aggressively implemented cost control measures to ensure proper stewardship of our assets. With a plan of cost containment in place, USC was able to dedicate resources to support our students, faculty, staff, patients and our neighboring community. Access and Affordability USC has one of the most generous financial aid pools in the U.S. In FY20, we extended our long-time commitment to need-based funding for students across the income spectrum, particularly those families who are finding it increasingly difficult to pay the rising costs of a college education. The university is committing over $35 million in additional aid annually, expanding USC’s current $638 million financial aid pool. This initiative begins with first-year students entering USC in the fall of 2020 and spring of 2021. Students and Faculty As a result of COVID-19, the university was forced to quickly transition to innovative formats of learning and to put a plan in place to protect our students, faculty and staff. The university deployed resources to help students safely depart campus and to care for those students who had to remain on campus. USC received $19 million in funds under the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide emergency grants to students for expenses related to the disruption of campus operations due to COVID-19. These expenses included food, housing, course materials, technology, health care and childcare. Investments were made in personal protective equipment, setting up testing and tracing facilities and developing tools and training for faculty and students that provided an enhanced and engaging way to teach and learn remotely. Helping our talented students meet their full potential continues to be our highest priority. Health Care Enterprise We are proud of the work and bravery of our frontline workers during the COVID-19 pandemic. They stood united in their focus on the health and safety of our students, faculty, staff, patients and the larger community. During FY20, for the second year, Keck Medical Center of USC, which includes Keck Hospital of USC and USC Norris Cancer Hospital, was recognized by the U.S. News and World Report 2019-20 Best Hospitals as a top 20 Honor Roll Hospital. The health care enterprise plays a central role in the life of the university. With more than 500, patient encounters, health care services revenue grew by 7.5 percent to $2.0 billion in fiscal year 2020. On March 27, 2020, the Federal Government passed the CARES Act (Coronavirus Aid, Relief, and Economic Stimulus Act), which allotted $175 billion dollars to healthcare providers and suppliers through Medicare Message from the Senior Vice President for Finance and Chief Financial Officer The COVID-19 pandemic has introduced unprecedented challenges and has impacted the traditional way the university delivers instruction, how the health care system provides treatment and how we interact with one another.

6 | F I N A N C I A L R E P O R T 2 0 2 0 University of Southern California reimbursements, grants and other direct federal payments. As of June 30, 2020, the Health System received and recognized $90.8 million from the Department of Health & Human Services (“HHS”) Cares Act: Provider Relief Fund within “contracts and grants revenue” on the consolidated statements of activities. Research Research of the highest quality by university faculty members and students is fundamental to the university’s mission. Our researchers are hard at work in forming a multidisciplinary team to measure COVID-19 health safety in diverse communities, developing new technologies to recycle discarded food, turning it into valuable commodities and new food for society and our USC Norris Comprehensive Cancer Center’s research breakthroughs have led the way to a greater understanding of the underlying causes of cancer and new methods of prevention, detection and treatments, just to name a few of our life changing developments. Total annual research expenditures of the university of $699 million (including indirect cost recoveries) is at an all-time high. Current sponsored awards and executed grants for contracts for future periods are at an all-time high of $2.5 billion. USC faculty members are winning research grants even as research funding grows more competitive, particularly among federal government agencies. Technology USC continued to make major strategic investments in information technology services in fiscal year 2020, including continuing a multiyear transformational program to enhance USC’s cybersecurity and network capabilities to meet the institution’s ever-evolving needs as a world-class research university. The university continues their efforts in implementing a new enterprise-wide financial system. Operating Results, Insurance Recoveries and Litigation For the year ending June 30, 2020, USC experienced an operating deficit before insurance recoveries of $ million. This operating loss would have been far greater without the support of the university community and managing costs through cuts in discretionary spending, a pause in new hires and merit increases, reduced capital spending and by voluntary salary cuts by senior leadership. Operating expenses before insurance recoveries for the year ending June 30, 2020, were $5.5 billion. In addition, the university recognized $108.5 million in insurance recoveries for an increase in net assets from operating activities of $26 million. Despite the challenges related to COVID-19, the university had an increase in net assets for the year ending June 30, 2020 of $246 million, which is largely a result of the endowment performance and continued giving by our donors before and after the pandemic. Looking Forward Overall, the 2019-20 financial results for USC provided us with a reassuring foundation during an otherwise uncertain time. In the midst of the current challenges, we were inspired that Trojans continued to support each other, focusing on students, caring for patients and partnering with our neighboring community. Our university navigated many health, environmental, societal, racial and economic issues this year, while focusing on building a culture that instilled trust, reinforced values-based decision making and created a strong foundation for our future in advancing the university’s mission. Fight On! James Staten Senior Vice President, Finance and Chief Financial Officer Message from the Senior Vice President for Finance and Chief Financial Officer

8 | F I N A N C I A L R E P O R T 2 0 2 0 University of Southern California Fiscal Year 2020 Results Fiscal Year 2020 Results Revenue As shown in the chart below, the university derives its revenue from seven main sources: net student tuition and fees, health care services, contracts and grants, contributions, auxiliary enterprises, sales, services and other allocation of endowment spending. Net Student Tuition and Fees Net tuition, room and board increased 2.9% from $1,575 million in 2019 to $1,621 million in 2020. Student tuition totaled $2, million in 2020, an increase of 3.7% from $2,178 million in 2019. In accordance with generally accepted accounting principles, student tuition and fees are presented net of financial aid, which totaled $ million and $603 million for 2020 and 2019, respectively. Net student tuition and fees represented 30% for both years of the university’s operating revenues in 2020 and 2019, respectively. During the 2020 academic year, 46,000 students were enrolled at the university; 19,500 were undergraduate students and 26, were pursuing graduate studies. USC Operating Revenue As of June 30, 2020 37% 30% 13% 5% 5% 5% 5% Auxiliary Enterprises Contracts and Grants Sales, Services and Other Contributions Allocation of Endowment Spending Net Student Tuition and Fees Health Care Services

University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 | 9 The total annual cost of attendance for 2019-2020 undergraduate students enrolled at USC was $77,459, which represents a 3.5% increase from the 2018-2019 annual undergraduate total cost of attendance of $74,825. The university maintains a policy of offering USC admission to qualified applicants without regard to family financial circumstances. This “need-blind” admission policy is supported with a commitment to meet in full the demonstrated financial need of all students throughout their undergraduate years. Approximately 21% and 20% of the 2020 and 2019, respectively, enter- ing first-year class received a merit-based scholarship from USC, and approximately two-thirds received some form of financial assistance. USC Financial Aid Health Care Services Revenue Health care services revenue totaled $2,032 million in fiscal year 2020, an increase of 7.5% from $1,890 million in 2019. Health care services revenue represents the largest revenue source for the university at 37% of total operating revenue. The largest portion of this revenue, $1,860 million, is derived from medical services provided by the combined operations of Keck Hospital of USC, USC Norris Cancer Hospital and USC Verdugo Hills Hospital. During FY20, for the second year, Keck Medical Center of USC, which includes Keck Hospital of USC and USC Norris Cancer Hospital, was recognized by the U.S. News and World Report 2019-20 Best Hospitals as a top 20 Honor Roll Hospital. According to Moody’s, “USC’s healthcare operations are critical to USC’s mission and strategic goals and currently accretive to credit quality.” The hospitals are among the nation’s leading medical centers, providing medical and health care services to inpatients and outpatients throughout Southern California. Keck Medical Center of USC includes the 401-licensed-bed Keck Hospital of USC, the 60-licensed-bed USC Norris Cancer Hospital and the 158-licensed- bed USC Verdugo Hills Hospital. It also includes more than 40 outpatient facilities, some at affiliated hospitals, in Los Angeles, Orange, Kern, Tulare and Ventura counties. The medical faculty physician group, USC Care Medical Group, practices at these facilities and at Children’s Hospital Los Angeles and Los Angeles County+USC Medical Center. As noted in the graph below, the USC health care enterprise has experienced steady revenue growth for the last five years, with noted increases in fiscal years 2019 and 2020. Several improvements were made during the course of the year, including a shorter turnaround for days in accounts receivable and improved cash collections. The hospitals have experienced increasing patient transfers and growing patient volumes. USC Health Care Services Revenue Contracts and Grants Revenue USC is one of a small number of premier research institutions on which the nation depends for a steady stream of new knowledge, innovations and discovery. USC is ranked second in the nation among all universities in the size of its federally funded computer science research program and has the largest graduate program in science, engineering and health of all private research universities. $4,000 M $1,000 M $2,000 M $3,000 M $5,000 M $6,000 MILLION 2016 2017 2018 2019 2020 Total Revenue Health Care Services Revenue $4,337 M $5,268 M $5,509 M $5,776 M $1,467 M $1,552 M^ $1,726 M $2,032 M $5,467 M $1,890 M $500 M $1,000 M $1,500 M $2,000 MILLION 2016 2017 2018 2019 2020 Student Tuition and Fees, Net Student Financial Aid $1,389 M $1,487 M $1,575 M $1,621 M $1,310 M $483 M $511 M^ $556 M^ $603 M $637 M

University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 | 1 1 liability will be covered by insurance, there can be no guarantee of the ultimate amount of coverage. Amounts of future insurance reimbursements are unknown as of June 30, 2020, and as a result, no insurance recovery accruals have been recorded in the 2019 and 2020 consolidated financial statements. The university recognizes that the ultimate outcome of these matters may be different than the estimates made in the consolidated financial statements as of and for the years ended June 30, 2019 and 2020, and those differences may be material to the university’s financial position. USC Expenses by Natural Classification For period ending June 30, 2020 During the 2020 fiscal year, USC employed more than 4,604 faculty members, 16,313 staff members (including hospital and academic staff members) and 7,956 student workers as full-time equivalents. Compensation costs of salaries and benefits were $3,313 million in 2020, a 7.6% increase compared to compensation costs in 2019 of $3,078 million. These costs include salary, pension, postretirement health and insurance plan costs in addition to Social Security and other housing, hospitality, bookstores and the USC Hotel. The decline in auxiliary enterprises revenue was a direct result of the limited campus activity due to COVID-19. Sales, Services and Other Revenue Sales and services revenue totaled $171 million in fiscal year 2020, an increase of 8.2% from 2019 revenue of $158 million, and represented 3.0% of the university’s 2020 operating revenue. Some of the major components of the sales and services category include revenue from USC Pharmacies and student clinics, and the Norris Dental Science Center clinics and Oral Health Center. Other operating revenue totaled $121 million in fiscal year 2020, a decrease of 13.6% from 2019 revenue of $140 million, and represented 2.0% of the university’s 2019 operating revenue. The other revenue category includes revenue from USC Ticket Office sales, USC Radio Group and the USC Marshall School of Business research centers. Allocation of Endowment Spending Each year, a portion of accumulated endowment investment returns is allocated to support operational activity. This important source of revenue totaled $262 million in fiscal year 2020, an increase of 6.5% from 2019 revenue of $246 million, and represented 5.0% of the university’s 2020 operating revenue. The level of spending is computed in accordance with an endowment spending policy that has the effect of smoothing year-to-year market swings. Additional information on the endowment spending policy is provided in the endowment section of the 2020 results. Expenses Expenses totaled $5,523 million for 2020, representing an 11.3% decrease from the 2019 operating expenses of $5,586 million. As noted in the “USC Expenses by Natural Classification” graphic, salaries and benefits are the largest component of operating expenses, at approximately 60% of total expenses. During the fiscal years ended June 30, 2019 and 2020, the university was named in civil lawsuits in state and federal court in connection with alleged misconduct by a physician who was previously employed by the university and practiced at the university student health center. As of June 30, 2020, $108.5 million has been recovered in indemnity payments from the university’s insurers in connection with this litigation. Although the university continues to expect that an additional portion of the settlement accrual and Salaries and Benefits Interest Depreciation Materials and Supplies Other Operating Expenditures 29% 5% 5%^ 1% 60%

1 2 | F I N A N C I A L R E P O R T 2 0 2 0 University of Southern California Physical Capital Capital spending on facilities and infrastructure in fiscal year 2020 totaled $428 million, which represents a decrease in spending of 4.5% compared to 2019 capital spending of $448 million. In 2020, investments were made to develop “Digital Campus” software tools and training for the Trojan community. The Digital Campus is a “one-stop shop” connecting students and faculty members with the tools and systems they need for instruction, learning, engagement, collaboration and support, whether they are learning on campus or from a distance. The university’s outstanding debt and notes payable is approximately $2,042 million, excluding capital leases. Both Moody’s and Standard & Poor’s have assigned USC strong credit ratings of “Aa1” and “AA,” respectively. One key credit strength noted by Moody’s is the close integration of the university’s operations and health care system. Refer to the graphic below for capital spending by year, dating back to fiscal year 2016. USC Capital Spending by Fiscal Year Fiscal Year 2020 Results statutory benefits. With respect to consolidated expenses, operating expenses decreased 14.6% as a result of USC realizing significant cost savings associated with the travel pause and working remotely. Depreciation increased 5.7% and interest expenses increased less than 1.0% compared to 2019. USC Expenses by Functional Classification For period ending June 30, 2020 In accordance with generally accepted accounting principles, USC reports its expenses by functional classification in the consolidated statement of activities. When reviewing the university expenses by functional classification as noted in the “USC Expenses by Functional Classification” graphic, the university spends 80% of its resources on academic, health care and student services. Academic and student services represents 55%, health care services represents 38% and sponsored research represents 7% of spending. Health care activities and sponsored research are integral to the academic and learning experiences at USC. $200M $400 M $600 M $800 M 2016 2017 2018 2019 2020 $660 M $691 M $421 M $448 M $428 M Support Services Academic, Health Care and Student Services Fundraising Activities 19% 1% 80%

1 4 | F I N A N C I A L R E P O R T 2 0 2 0 University of Southern California USC Endowment Pool Market Value and Allocation % as of June 30, 2020 USC’s global equity program includes investments in U.S., non-U.S. developed, and emerging market equities. The program performed well during this past fiscal year. The U.S. equity market returns contributed significantly to these results. The global equity program has returned 9.3% annualized over 10 years. The endowment’s global fixed-income program remains focused on corporate, high-yield, and emerging market bonds. The program contributed positively to the endowment’s fiscal year return. For the last 10 years, fixed income has generated a 5.4% return annually. USC’s absolute return program is expected to generate uncorrelated excess returns. The program has succeeded in generating a positive 3.6% annual return over 10 years while providing diversification to other investment programs. The venture capital program includes illiquid investments in newly formed companies, primarily in the technology sector. Venture capital contributed significantly to the endowment fiscal year return. The program remains the endowment’s best performing asset class, generating 20.4% annually over 10 years. The private equity program consists of illiquid buyout and distressed debt investments. These types of investments generally have seven- to 10-year investment horizons. The program’s 10-year annualized return is 12.4%. USC’s natural resources program includes investments in energy, power, and timber. Energy price volatility has contributed to the program’s mixed short-term results. In the 10 years ended June 30, 2020, the program returned 0.5% annualized. The real estate program focuses more on capital appreciation strategies rather than income-generating properties. Consistent with the other private market investments, long-term results are more indicative of the program’s success. Real estate generated a 10.6% annualized return over 10 years. Endowment Summary The endowment exists to support the academic mission of the university for current and future generations of Trojans. Because the endowment is expected to operate in perpetuity, the investment decisions will be long-term oriented. USC continues to focus on return generation and diversification. These principles continue to guide USC’s investment strategy. The endowment’s equity orientation and well-diversified portfolio should position the endowment for long-term investment success. Fiscal Year 2020 Results $1,000 M $500 M $2,000 M $2,500 M $1,500 M Global Equity Global Fixed Income Absolute Return Venture Capital Private Equity Natural Resources Real Estate Cash 9% 6% 6% 2% $3,000 M 7.1% 4.5% 5.7% 5.9% 44% 11% 12% 10% 44% 44% 9.5% 11.9% 11.4% Endowment Actual Allocation % Endowment Policy Allocation %

• University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 |
• University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 |

University of Southern California F I N A N C I A L R E P O R T 2 0 2 0 | 1 7 Report of Independent Auditors To the Board of Trustees of the University of Southern California We have audited the accompanying consolidated financial statements of the University of Southern California and its subsidiaries (collectively the “University”), which comprise the consolidated balance sheets as of June 30, 2020 and 2019, and the related consolidated statements of activities and of cash flows for the years then ended. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and per- form the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the University’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University of Southern California and its subsidiaries as of June 30, 2020 and 2019, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP Los Angeles, CA November 23, 2020

1 8 | F I N A N C I A L R E P O R T 2 0 2 0 University of Southern California Consolidated Balance Sheets

in thousands

Assets June 30, 2020 June 30, 2019 Cash and cash equivalents (^) $1,816,338 $1,042, Accounts receivable, net 482,155 471, Notes receivable, net 55,642 61, Pledges receivable, net 439,888 462, Investments 6,816,264 6,351, Inventories, prepaid expenses and other assets 355,247 386, Property, plant and equipment, net (^) 4,529,893 4,363, Total Assets (^) $14,495,427 $13,139, Liabilities Accounts payable $245,925 $285, Accrued liabilities 1,567,833 1,373, Refundable advances 22,786 21, Deposits and deferred revenue 301,165 257, Revolving line of credit 500, Actuarial liability for annuities payable 92,834 104, Federal student loan funds (^) 53,067 67, Asset retirement obligations (^) 139,227 132, Capital lease obligations (^) 77,545 75, Bonds and notes payable (^) 2,042,413 1,626, Other liabilities 18,330 6, Total Liabilities 5,061,125 3,951, Net Assets Without donor restrictions 4,360,865 4,279, With donor restrictions 5,073,437 4,909, Total Net Assets 9,434,302 9,188, Total Liabilities and Net Assets (^) $14,495,427 $13,139, The accompanying notes are an integral part of these statements. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24