Capella Education Company Reports Fourth Quarter and Full Year 2013 Results

“We continued to make steady progress in 2013, delivering annual new
enrollment growth and operating earnings improvements in a challenging
market environment,” said Kevin Gilligan, chairman and chief executive
officer. “We are confident that our strategic focus on learner success,
innovation and relationship-based marketing is positioning Capella for
long term, sustainable growth.”

For the three months ended Dec. 31, 2013:

  • Revenues were $106.0 million, compared to $107.0 million in the fourth
    quarter of 2012, a decrease of 0.9 percent.
  • Capella University total enrollment decreased 2.5 percent to 35,432
    and new enrollment decreased by 6.8 percent from fourth quarter 2012.
  • Operating income was $16.7 million, compared to $15.1 million for the
    same period in 2012. Operating margin was 15.8 percent, compared to
    14.1 percent for the fourth quarter 2012.
  • Net income attributable to Capella Education Company for the fourth
    quarter of 2013 was $10.0 million, compared to $8.6 million for the
    same period in 2012.
  • Net income per diluted share was $0.79, compared to $0.68 for the same
    period in 2012.

For the fiscal year ended Dec. 31, 2013:

  • Revenues decreased by 1.5 percent to $415.6 million, compared to
    $421.9 million for the same period in 2012.
  • Operating income for 2013 was $59.9 million, or 14.4 percent of
    revenue, compared to $59.4 million, or 14.1 percent of revenue during
    2012.
  • Net income attributable to Capella Education Company was $35.2
    million, or $2.80 per diluted share, compared to $36.5 million, or
    $2.76 per diluted share for 2012.
  • Capella University average quarterly total enrollment growth decreased
    by 2.0 percent compared to 2012.
  • Total Capella University new enrollment for 2013 increased 2 percent
    from 2012.

Balance Sheet and Cash Flow

As of Dec. 31, 2013, the Company had cash and marketable securities of
$160.2 million, compared to $115.5 million at Dec. 31, 2012, and no debt
for the same periods.

Cash flow from operating activities for 2013 was $69.3 million compared
to $64.8 million in 2012.

Dividend and Share Repurchase

A quarterly cash dividend of $0.35 per outstanding share of common stock
was initiated during the fourth quarter of 2013. The dividend was paid
on Jan. 10, 2014.

The Company repurchased approximately 170,000 shares of Capella stock
for total consideration of $9.0 million in fiscal year 2013. In the
fourth quarter 2013, the Company repurchased approximately 64,000 shares
of Capella stock for total consideration of $4.2 million. The remaining
authorization as of the end of the fourth quarter was $49.3 million.

Outlook

For the first quarter ending March 31, 2014, Capella University new
enrollment growth is expected to be slightly positive compared to the
first quarter 2013. Total enrollment is expected to decline
approximately 1.5 to 2.5 percent and consolidated revenue is expected to
be about flat to down 1.0 percent year-over-year compared to first
quarter 2013.

The consolidated operating margin is anticipated to be approximately 14
to 15 percent of total revenue for the first quarter of 2014.

“Performance trends stabilized in 2013,” said Steve Polacek, senior vice
president and chief financial officer. “While the timing of our return
to total enrollment growth has likely shifted to the latter part of
2014, we believe moderate annual new enrollment growth and operating
margin improvements are achievable in 2014.”

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 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 fourth quarter 2013 results and outlook during
a conference call scheduled today, Feb. 18, 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# 34581024. 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 Feb. 18, 2014,
through Feb. 25, 2014, at 855.859.2056 (domestic) or 404.537.3406
(international), conference ID# 34581024. 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, homeland security, 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 43 graduate
and undergraduate degree programs with 143 specializations, including
two new direct assessment degree delivery programs. As of Dec. 31, 2013,
approximately 35,000 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.

 

 

CAPELLA EDUCATION COMPANY

Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

As of

 

 

As of

December 31, 2013

December 31, 2012

ASSETS

(Unaudited)

Current assets:

Cash and cash equivalents

$

124,097

$

93,220

Marketable securities, current

18,342

22,279

Accounts receivable, net of allowance of $7,091 at December 31, 2013
and $6,231 at December 31, 2012

16,919

15,900

Prepaid expenses and other current assets

10,548

11,124

Deferred income taxes

 

2,846

 

3,481

Total current assets

172,752

146,004

Marketable securities, non-current

17,740

Property and equipment, net

39,993

45,240

Goodwill

16,969

16,970

Intangibles, net

 

2,795

 

4,674

Total assets

$

250,249

$

212,888

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

7,939

$

5,798

Accrued liabilities

33,164

26,392

Dividends payable

4,346

Deferred revenue

 

10,736

 

9,651

Total current liabilities

56,185

41,841

Deferred rent

3,221

4,150

Other liabilities

2,541

6,425

Deferred income taxes

 

6,283

 

8,370

Total liabilities

68,230

60,786

 

Shareholders’ equity:

Common stock, $0.01 par value:

Authorized shares — 100,000, issued and outstanding shares — 12,361
at December 31, 2013 and 12,393 at December 31, 2012

124

124

Additional paid-in capital

104,546

97,716

Accumulated other comprehensive loss

(114)

(22)

Retained earnings

 

77,463

 

54,284

Total shareholders’ equity

 

182,019

 

152,102

Total liabilities and shareholders’ equity

$

250,249

$

212,888

 

 

CAPELLA EDUCATION COMPANY

Consolidated Statements of Income

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Twelve Months Ended

December 31,

December 31,

2013

 

 

2012

2013

 

 

2012

(Unaudited)

Revenues

$

105,985

$

107,001

$

415,623

$

421,890

Costs and expenses:

Instructional costs and services

45,906

49,388

183,757

191,947

Marketing and promotional

26,107

24,276

102,198

100,809

Admissions advisory

6,809

7,493

27,103

30,151

General and administrative

 

10,436

 

10,737

 

 

42,688

 

 

39,600

 

Total costs and expenses

 

89,258

 

91,894

 

 

355,746

 

 

362,507

 

Operating income

16,727

15,107

59,877

59,383

Other income (expense), net

 

284

 

(41

)

 

(179

)

 

(45

)

Income before income taxes

17,011

15,066

59,698

59,338

Income tax expense

 

6,995

 

6,417

 

 

24,495

 

 

23,047

 

Net income

10,016

8,649

35,203

36,291

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

186

 

Net income attributable to Capella Education Company

$

10,016

$

8,649

 

$

35,203

 

$

36,477

 

 

Net income attributable to Capella Education Company per common
share:

Basic

$

0.81

$

0.69

$

2.84

$

2.77

Diluted

$

0.79

$

0.68

$

2.80

$

2.76

 

Weighted average number of common shares outstanding:

Basic

12,383

12,575

12,391

13,156

Diluted

12,697

12,645

12,566

13,220

 

Cash dividend declared per common share

$

0.35

$

$

0.35

$

 

 

CAPELLA EDUCATION COMPANY

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Twelve Months Ended December 31,

2013

 

 

2012

(Unaudited)

Operating activities

Net income

$

35,203

$

36,291

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

Provision for bad debts

15,132

17,310

Depreciation and amortization

25,877

29,255

Amortization of investment discount/premium

768

692

Impairment of property and equipment

229

1,150

Loss on disposal of property and equipment

52

81

Share-based compensation

5,330

4,880

Excess tax benefits from share-based compensation

(310

)

(69

)

Deferred income taxes

(1,463

)

(3,584

)

Changes in operating assets and liabilities:

Accounts receivable

(16,141

)

(14,979

)

Prepaid expenses and other current assets

1,787

2,586

Accounts payable and accrued liabilities

4,578

(6,296

)

Income tax payable

(1,826

)

(4,306

)

Deferred rent

(929

)

(65

)

Deferred revenue

 

1,062

 

 

1,882

 

Net cash provided by operating activities

69,349

64,828

 

Investing activities

Capital expenditures

(18,728

)

(23,278

)

Proceeds from the sale of property and equipment

303

Acquisition of noncontrolling interest

(1,576

)

Purchases of marketable securities

(22,426

)

(13,887

)

Maturities of marketable securities

 

7,885

 

 

55,545

 

Net cash provided by (used in) investing activities

(33,269

)

17,107

 

Financing activities

Excess tax benefits from share-based compensation

310

69

Net proceeds from exercise of stock options

3,452

628

Repurchases of common stock

 

(8,965

)

 

(51,418

)

Net cash used in financing activities

(5,203

)

(50,721

)

 

Effect of foreign exchange rates on cash

 

 

 

29

 

 

Net increase in cash and cash equivalents

30,877

31,243

Cash and cash equivalents at beginning of year

 

93,220

 

 

61,977

 

Cash and cash equivalents at end of year

$

124,097

 

$

93,220

 

 

Supplemental disclosures of cash flow information

Income taxes paid

$

27,486

$

30,947

Noncash transactions:

Purchase of equipment included in accounts payable and accrued
liabilities

$

775

$

472

Declaration of cash dividend to be paid

$

4,383

$

 

 

CAPELLA UNIVERSITY

Other Information

 

 

 

 

 

December 31,

 

 

Enrollment by Degree (a):

  2013  

 

 

  2012  

% Change

PhD/Doctoral

10,700

11,023

(2.9

)%

Master’s

14,931

15,596

(4.3

)%

Bachelor’s

8,828

8,800

0.3

%

Other

973

910

6.9

%

Total

35,432

36,329

(2.5

)%

 

(a) Enrollment as of December 31, 2013 and 2012 is the enrollment as of
the last day of classes for the quarter ended December 31, 2013 and
2012, respectively.

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