Capella Education Company Reports First Quarter 2014 Results

“This quarter, we achieved an important milestone by growing new
enrollments against positive new enrollment growth in the prior year
first quarter,” said Kevin Gilligan, chairman and chief executive
officer. “While the market environment remains challenging, we remain
confident in our ability to execute and innovate to drive long-term
sustainable growth and shareholder value creation.”

For the three months ended March 31, 2014:

  • Revenues were $105.6 million, compared to $105.2 million in the first
    quarter of 2013, an increase of 0.3 percent.
  • Capella University total active enrollment decreased 1.4 percent to
    35,889, new enrollment increased by 2.6 percent from first quarter
    2013 and early cohort persistence improved by 4 percent.
  • Operating income was $15.1 million, compared to $15.2 million for the
    same period in 2013. Operating margin was 14.3 percent, compared to
    14.4 percent for the first quarter 2013.
  • Net income for the first quarter of 2014 was $8.8 million, compared to
    $8.8 million for the same period in 2013.
  • Net income per diluted share was $0.70, compared to $0.70 for the same
    period in 2013.

Balance Sheet and Cash Flow

As of March 31, 2014, the Company had cash and marketable securities of
$161.3 million, compared to $160.2 million at Dec. 31, 2013, and no debt
for the same periods.

Cash flow from operating activities for the three months ended March 31,
2014 was $15.5 million compared to $18.1 million in the same period a
year ago.

Dividend and Share Repurchase

A quarterly cash dividend of $0.35 per outstanding share of common stock
was declared during the first quarter of 2014. The dividend was paid on
April 10, 2014.

In the first quarter 2014, the Company repurchased approximately 56,000
shares of Capella stock for total consideration of $3.5 million. The
remaining authorization as of the end of the first quarter was $45.8
million.

Outlook

For the second quarter ending June 30, 2014, Capella University new
enrollment growth is expected to be up in the mid-single digit
percentage range compared to the second quarter 2013. Total enrollment
is expected to decline by about 1.0 to 2.0 percent and consolidated
revenue is expected to be flat to up 1 percent compared to second
quarter 2013.

The consolidated operating margin is anticipated to be approximately
14.0 to 15.0 percent of total revenue for the second quarter of 2014.
This includes a charge of approximately $2.5 million related to a lease
amendment detailed in our April 3, 2014 8-K filing, impacting operating
margins by approximately 2.5 percentage points.

“The strong execution in the first quarter and expected first half 2014
performance position us well to achieve total enrollment growth and
operating performance improvements in 2014,” said Steve Polacek, senior
vice president and chief financial officer.

Forward-Looking Statements

Certain information in this news release does not relate to historical
financial information, including statements relating to our future
prospects and our expectations regarding our revenues, enrollment, and
operating performance, and may be deemed to constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The company cautions investors not to place undue
reliance on any such forward-looking statements, which are based on
information available at the time those statements are made or
management’s good faith belief as of that time with regard to future
events, and should not be read as a guarantee of future performance or
results. Such statements are subject to certain risks and uncertainties
that could cause the company’s actual results in the future to differ
materially from its historical results and those presently anticipated
or projected. The company undertakes no obligation to update its
forward-looking statements to reflect events or circumstances arising
after such date.

Among these risks and uncertainties are any failure to materially comply
with the extensive regulatory framework applicable to us, including
compliance with Title IV of the Higher Education Act and the regulations
thereunder; complying with U.S. Department of Education rules, including
those regarding incentive compensation; maintaining our business in
accordance with regional and specialized accreditation standards and
state regulatory and program approval requirements; changes in the
administration, funding and availability for Title IV programs;
responding to any state attorneys general and/or federal Consumer
Financial Protection Bureau review of our activities; attracting and
retaining high quality, academically prepared learners; updating and
expanding the content of existing programs and developing new programs;
the review of our business, marketing and financial aid practices by
governmental authorities, including changes in applicable federal and
state laws and regulations and accrediting agency policies; responding
to requests for information and complaints from the Minnesota Office of
Higher Education and other states; maintaining and expanding existing
commercial relationships with employers and developing new such
relationships; successfully offering our FlexPath programs; effectively
leveraging our brand driven marketing strategy; improving our conversion
rates; keeping up with advances in technology important to the online
learner experience; improving our learner persistence and cohort
retention rate; successfully managing our PhD completion efforts;
successfully identifying and managing business partnership
opportunities; complying with regulations applicable to our
international operations; managing financial performance and operational
challenges with acquired entities; using business technology to
accurately store, process and report relevant data; effectively managing
costs inherent in our business; and managing risks associated with the
overall competitive environment and general economic conditions.

Other factors that could cause the company’s results to differ
materially from those contained in its forward-looking statements are
included under, among others, the heading “Risk Factors” in our most
recent Form 10-K and Form 10-Qs on file with the Securities and Exchange
Commission and other documents filed by the company with the Securities
and Exchange Commission.

Conference Call

Capella will discuss its first quarter 2014 results and outlook during a
conference call scheduled today, April 29, 2014, at 9:00 a.m. Eastern
time (ET). To participate in the live call, investors should dial
866.385.4179 (domestic) or 702.928.7882 (international) at 8:50 a.m.
(ET), conference ID# 19387548. The webcast, including the accompanying
presentation, will be available on the Capella Education Company Web
site at www.capellaeducation.com.
A replay of the call will be available starting on April 29, 2014
through May 6, 2014, at 855.859.2056 (domestic) or 404.537.3406
(international), conference ID# 19387548. It will also be archived at www.capellaeducation.com
in the investor
relations
section for 60 days.

About Capella Education Company

Founded in 1991, Capella Education Company is a leader in online
education, primarily through our wholly owned subsidiary Capella
University, a regionally accredited* online university. In addition,
Capella Education Company offers online education through Resource
Development International Ltd. (RDI), an independent provider of United
Kingdom (UK) university distance learning qualifications. Capella
Education Company also owns an innovative startup company called Sophia (http://www.sophia.org)
– a social teaching and learning platform that integrates education with
technology.

Capella University offers online graduate degree programs in business,
counseling, education, health administration, human resource management,
human services, information technology, nonprofit management and
leadership, nursing, psychology, public administration, public health,
public safety, and social work, and bachelor’s degree programs in
business, information technology, nursing, psychology, and public
safety. These academic programs are designed to help working adults
advance in their careers, combining high quality, competency-based
curricula with the convenience and flexibility of an online learning
format. Currently, Capella University offers 42 graduate and
undergraduate degree programs with 141 specializations, including six
new direct assessment delivery programs**. As of March 31, 2014,
approximately 36,000 learners were enrolled with over 70 percent of
learners enrolled in graduate degree programs. For more information
about Capella Education Company, please visit http://www.capellaeducation.com.
For more information about Capella University, please visit http://www.capella.edu
or call 1.888.CAPELLA (227.3552).

Resource Development International Ltd. partners with a number of the
top 100 universities in the UK to develop, validate and deliver UK
higher education qualifications, predominantly through online courses.
For more information, visit http://www.rdi.co.uk.

Sophia is a first-of-its-kind social education platform that offers
students many ways to learn by making free, credible, academic content
available to anyone, anywhere, at anytime. The site offers tens of
thousands of tutorials created by hundreds of teachers and experts that
are taught in a variety of ways. The platform further enhances the
learning process by offering quizzes, assessing learning preferences and
providing learning paths. For more information, visit www.sophia.org.

*Capella University is accredited by The Higher Learning Commission and
is a member of the North Central Association of Colleges and Schools
(NCA), http://www.ncahlc.org.
Capella University, Capella Tower, 225 South Sixth Street, Ninth Floor,
Minneapolis, MN 55402, 1.888.CAPELLA (227.3552), http://www.capella.edu.

**In accordance with U.S. Department of Education (ED) direct assessment
approval requirements, a notification has been submitted to the ED so
that the IT and Psychology FlexPath programs may be eligible for federal
financial aid. These programs are currently not approved for federal
financial aid. Capella University will keep applicants and learners
interested in FlexPath fully informed of any decisions made by the ED.

 

CAPELLA EDUCATION COMPANY

Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

As of

 

 

As of

March 31, 2014

December 31, 2013

ASSETS

(Unaudited)

Current assets:

Cash and cash equivalents

$

93,555

$

124,097

Marketable securities, current

27,257

18,342

Accounts receivable, net of allowance of $6,155 at March 31, 2014
and $7,091 at December 31, 2013

15,494

16,919

Prepaid expenses and other current assets

8,744

10,548

Deferred income taxes

 

2,868

 

 

2,846

 

Total current assets

147,918

172,752

Marketable securities, non-current

40,476

17,740

Property and equipment, net

39,383

39,993

Goodwill

17,042

16,969

Intangibles, net

2,377

2,795

Other assets

 

1,063

 

 

 

Total assets

$

248,259

 

$

250,249

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

6,773

$

7,939

Accrued liabilities

29,465

33,164

Dividends payable

4,380

4,346

Deferred revenue

 

11,614

 

 

10,736

 

Total current liabilities

52,232

56,185

Deferred rent

3,072

3,221

Other liabilities

2,703

2,541

Deferred income taxes

 

5,786

 

 

6,283

 

Total liabilities

63,793

68,230

 

Shareholders’ equity:

Common stock, $0.01 par value:

Authorized shares — 100,000, Issued and Outstanding shares — 12,315
at March 31, 2014 and 12,361 at December 31, 2013

123

124

Additional paid-in capital

105,907

104,546

Accumulated other comprehensive loss

(417

)

(114

)

Retained earnings

 

78,853

 

 

77,463

 

Total shareholders’ equity

 

184,466

 

 

182,019

 

Total liabilities and shareholders’ equity

$

248,259

 

$

250,249

 

 

 

CAPELLA EDUCATION COMPANY

Consolidated Statements of Income

(In thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

2014

 

 

2013

(Unaudited)

Revenues

$

105,596

$

105,242

Costs and expenses:

Instructional costs and services

47,300

46,967

Marketing and promotional

25,761

25,501

Admissions advisory

6,927

6,771

General and administrative

 

10,465

 

 

10,828

 

Total costs and expenses

 

90,453

 

 

90,067

 

Operating income

15,143

15,175

Other expense, net

 

(342

)

 

(200

)

Income before income taxes

14,801

14,975

Income tax expense

 

5,984

 

 

6,220

 

Net income

$

8,817

 

$

8,755

 

 

Net income per common share:

Basic

$

0.71

$

0.71

Diluted

$

0.70

$

0.70

 

Weighted average number of common shares outstanding:

Basic

12,342

12,393

Diluted

12,612

12,478

 

Cash dividend declared per common share

$

0.35

$

 

 

CAPELLA EDUCATION COMPANY

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Three Months Ended March 31,

2014

 

 

2013

(Unaudited)

Operating activities

Net income

$

8,817

$

8,755

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

Provision for bad debts

3,509

3,721

Depreciation and amortization

6,168

7,130

Amortization of investment discount/premium

328

116

Impairment of property and equipment

160

77

Loss on disposal of property and equipment

64

Share-based compensation

1,447

1,582

Excess tax benefits from share-based compensation

(74

)

(4

)

Deferred income taxes

(482

)

(440

)

Changes in operating assets and liabilities:

Accounts receivable

(2,049

)

(4,517

)

Prepaid expenses and other current assets

(358

)

1,860

Accounts payable and accrued liabilities

(4,025

)

(233

)

Income taxes payable

1,347

424

Deferred rent

(149

)

(589

)

Deferred revenue

 

781

 

 

261

 

Net cash provided by operating activities

15,484

18,143

 

Investing activities

Capital expenditures

(5,835

)

(5,600

)

Investment in partnership interest

(1,063

)

Purchases of marketable securities

(34,821

)

(6,582

)

Maturities of marketable securities

 

2,800

 

 

6,385

 

Net cash used in investing activities

(38,919

)

(5,797

)

 

Financing activities

Excess tax benefits from share-based compensation

74

4

Net proceeds from exercise of stock options

358

71

Payment of dividends

(4,326

)

Repurchases of common stock

 

(3,203

)

 

(132

)

Net cash used in financing activities

(7,097

)

(57

)

 

Effect of foreign exchange rates on cash

 

(10

)

 

(25

)

 

Net increase (decrease) in cash and cash equivalents

(30,542

)

12,264

Cash and cash equivalents at beginning of period

 

124,097

 

 

93,220

 

Cash and cash equivalents at end of period

$

93,555

 

$

105,484

 

 

Supplemental disclosures of cash flow information

Income taxes paid

$

5,342

$

6,243

Noncash transactions:

Purchase of equipment included in accounts payable and accrued
liabilities

$

311

$

210

Declaration of cash dividend to be paid

$

4,382

$

Repurchases of common stock included in accrued liabilities

$

318

$

 

 

CAPELLA UNIVERSITY

Other Information

 

 

 

March 31,

 

 

Enrollment by Degree (a):

  2014  

 

 

  2013  

% Change

PhD/Doctoral

10,743

11,153

(3.7

)%

Master’s

15,019

15,367

(2.3

)%

Bachelor’s

9,203

8,983

2.4

%

Other

924

902

2.4

%

Total

35,889

36,405

(1.4

)%

 

(a) Enrollment as of March 31, 2014 and 2013 is the enrollment as of the
last day of classes for the quarter ended March 31, 2014 and 2013,
respectively.

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