Market Overview

Capella Education Company Reports Third Quarter 2017 Results

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Capella
Education Company
(NASDAQ:CPLA), a leading educational services
company, today announced financial results for the three and nine months
ended Sept. 30, 2017. In a separate news release today, Strayer
Education, Inc. ("Strayer") (NASDAQ:STRA) and Capella Education Company
("Capella") announced that they have agreed to combine in an all-stock
merger of equals transaction creating a national leader in education
innovation. Please refer to that release for details on the merger. The
following commentary is just related to Capella's financial results.

"We stabilized new enrollment trends for Capella University in the third
quarter of 2017, and new enrollment growth trending into the fourth
quarter is positive," said Kevin Gilligan, chairman and chief executive
officer. "Our goal is to position Capella for long-term sustainable
growth by delivering the most direct path between learning and
employment, differentiate our offerings with learners and employers, and
create shareholder value."

Selected Financial Data for the Three Months Ended Sept. 30, 2017

Revenues were $107.0 million in the third quarter of 2017, up 1.0
percent compared to $105.9 million in the third quarter of 2016.
Operating income was $13.8 million, compared to $15.3 million for the
same period in 2016. The operating margin was 12.9 percent, compared to
14.5 percent for the third quarter 2016. Diluted net income per common
share from continuing operations was $0.73, compared to $0.81 for the
same period in 2016.

Operating and Segment Highlights

  • The "Post-Secondary" segment is comprised of Capella University and
    Sophia Learning; the "Job-Ready Skills" segment consists of Capella
    Learning Solutions, Hackbright Academy and DevMountain.
  • For the Post-Secondary segment, third quarter 2017 revenues were
    $104.4 million, up 0.9 percent compared to $103.5 million in the same
    period a year ago. The operating margin was 15.5 percent in the third
    quarter 2017, compared to 16.4 percent in the third quarter of 2016.
    Results are primarily attributable to Capella University.
  • Capella University total active enrollment decreased 1.3 percent to
    37,223 learners, new enrollment decreased by 2.1 percent compared to
    third quarter 2016, and early cohort persistence improved by
    approximately 2 percent.
  • Revenues for the Job-Ready Skills segment were $2.6 million in the
    third quarter of 2017 compared to $2.4 million in the same period of
    2016. The operating loss was $2.4 million in the third quarter 2017,
    compared to a loss of $1.6 million in the third quarter of 2016.

Balance Sheet and Cash Flow

At Sept. 30, 2017, Capella Education Company had cash and marketable
securities of $186.9 million, compared to $162.3 million at Dec. 31,
2016, and no debt as of these dates.

Cash provided by operating activities from continuing operations for the
nine months ended Sept. 30, 2017 was $56.3 million compared to $76.8
million in the same period a year ago.

Dividend

A quarterly cash dividend of $0.41 per outstanding share of common stock
was declared during the third quarter of 2017. The dividend was paid on
Oct. 13, 2017.

In the third quarter of 2017, Capella Education Company repurchased
approximately 37,000 shares of Capella stock for total consideration of
$2.5 million. The remaining authorization as of the end of the third
quarter was $27.9 million.

Outlook

Due to the pending merger transaction, the Company is not providing a
financial outlook at this time and has also suspended any prior guidance
provided.

Conference Call

In light of the pending merger announced today, Oct. 30, 2017, the
Company will not be discussing the third quarter 2017 financial results
in an investor conference call. A conference call to discuss the merger
announcement is scheduled for today, Oct. 30, 2017, at 8:00 a.m. Eastern
time (ET). To participate in the live call please dial 866.547.1509
(domestic) or 920.663.6208 (international) at 7:50 a.m. (ET), conference
ID# 6889128. The live webcast and replay, including the accompanying
presentation, will be available on the Capella Education Company Web
site at www.capellaeducation.com
in the investor
relations
section.

Forward-Looking Statements

Certain information in this news release does not relate to historical
financial information, including statements relating to future prospects
and expectations regarding our growth, revenues, enrollment, and
operating performance, and should be considered 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 risks and uncertainties which
could cause the company's actual results to differ materially from
historical results and from results presently anticipated or projected.
The company undertakes no obligation to update its forward-looking
statements.

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, gainful employment, return of
Title IV funds, borrower defenses to repayment, financial responsibility
standards, state authorization, certifications and program requirements;
maintaining our business in accordance with regional and specialized
accreditation standards and state regulatory and program approval
requirements; adapting to changes in the administration, funding and
availability for Title IV programs; successfully defending litigation
and other claims; any governmental action or review of our business,
marketing, or financial aid practices, including by any state attorneys
general, the federal Consumer Financial Protection Bureau, the Federal
Trade Commission, the Minnesota Office of Higher Education or other
state or federal regulatory bodies; successfully growing our FlexPath
programs; maintaining and expanding existing commercial relationships
with employers and developing new employer and business partner
relationships; improving our conversion rate and effectively optimizing
our marketing strategy and spend; successfully managing our learner
success, doctoral enrollment and degree completion efforts; keeping up
with advances in technology important to the online learner experience;
effectively managing data security risks; successfully integrating
acquisitions; successfully growing Capella Learning Solutions' new
business lines; and managing risks associated with the overall
competitive environment and general economic conditions. The company
also faces risks and uncertainties relating to the proposed merger
transaction with Strayer Education, Inc., including the ability to
satisfy the conditions to consummation of the merger; the risk that
required governmental and regulatory approvals may delay the merger
transaction or result in the imposition of conditions that could cause
the parties to abandon the merger transaction or materially impact the
financial benefits of the transaction; the risk that the businesses will
not be integrated successfully; the risk that the cost savings and
anticipated synergies from the merger transaction may not be fully
realized or may take longer to realize than expected; disruption from
the proposed merger transaction making it more difficult to maintain
relationships with learners, employers, employees or suppliers; the
diversion of management time on merger-related issues and the risk of
shareholder class action lawsuits against the company, its management
team and board of directors.

Other factors that could cause the company's results to differ
materially from those contained in its forward-looking statements
include those described in the "Risk Factors" section of our most recent
Annual Report on Form 10-K on file with the Securities and Exchange
Commission (SEC) and any updates or developments described in our
Quarterly Reports on Form 10-Q, or other documents the company files
with the SEC.

About Capella Education Company

Capella Education Company (http://www.capellaeducation.com)
is an educational services company that provides access to high-quality
education through online postsecondary degree programs and job-ready
skills offerings needed in today's market. Capella's portfolio of
companies is dedicated to closing the skills gap by providing the most
direct path between learning and employment.

 
CAPELLA EDUCATION COMPANY
 
Consolidated Balance Sheets
(In thousands, except par value)
 
    As of September 30, 2017   As of December 31, 2016
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 112,216 $ 93,570
Marketable securities, current 55,113 45,458

Accounts receivable, net of allowance of $7,507 at September 30,
2017 and
$6,682 at December 31, 2016

22,981 20,708
Prepaid expenses and other current assets 9,488   17,877  
Total current assets 199,798 177,613
Marketable securities, non-current 19,554 23,320
Property and equipment, net 36,510 34,121
Goodwill 23,331 23,310
Intangibles, net 8,665 9,221
Deferred income taxes 1,853
Other assets 8,853   7,875  
Total assets $ 296,711   $ 277,313  
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 682 $ 4,367
Accrued liabilities 30,323 31,302
Dividends payable 4,987 4,945
Deferred revenue 17,468   12,398  
Total current liabilities 53,460 53,012
Deferred rent 12,641 13,693
Deferred income taxes 721
Other liabilities 2,017   2,316  
Total liabilities 68,839 69,021
Shareholders' equity:

Common stock, $0.01 par value: Authorized shares — 100,000, Issued
and
Outstanding shares — 11,637 at September 30, 2017 and
11,545 at December 31, 2016

116 115
Additional paid-in capital 127,056 121,581
Accumulated other comprehensive loss (16 ) (93 )
Retained earnings 100,716   86,689  
Total shareholders' equity 227,872   208,292  
Total liabilities and shareholders' equity $ 296,711   $ 277,313  
 
 
CAPELLA EDUCATION COMPANY
 
Consolidated Statements of Income
(In thousands, except per share amounts)
 
    Three Months Ended September 30,   Nine Months Ended September 30,
2017   2016 2017   2016
(Unaudited)
Revenues $ 107,007 $ 105,909 $ 328,379 $ 318,082
Costs and expenses:
Instructional costs and services 49,621 47,656 146,402 138,469
Marketing and promotional 26,660 25,338 81,493 76,140
Admissions advisory 7,112 7,408 22,215 22,116
General and administrative 9,852   10,159   31,535   31,410
Total costs and expenses 93,245   90,561     281,645   268,135
Operating income 13,762 15,348 46,734 49,947
Other income, net 229   46     392   79
Income from continuing operations before income taxes 13,991 15,394 47,126 50,026
Income tax expense 5,237   5,807   16,446   19,089
Income from continuing operations 8,754 9,587 30,680 30,937
Income from discontinued operations, net of tax   2,963   95   606
Net income $ 8,754   $ 12,550   $ 30,775   $ 31,543
Basic net income per common share:
Continuing operations $ 0.75 $ 0.83 $ 2.64 $ 2.66
Discontinued operations   0.26   0.01   0.05
Basic net income per common share $ 0.75   $ 1.09   $ 2.65   $ 2.71
Diluted net income per common share:
Continuing operations $ 0.73 $ 0.81 $ 2.57 $ 2.61
Discontinued operations   0.25     0.05
Diluted net income per common share $ 0.73   $ 1.06   $ 2.57   $ 2.66
Weighted average number of common shares outstanding:
Basic 11,659 11,538 11,621 11,647
Diluted 11,936 11,790 11,955 11,872
Cash dividend declared per common share $ 0.41 $ 0.39 $ 1.23 $ 1.17
 
 
CAPELLA EDUCATION COMPANY
 
Consolidated Statements of Cash Flows
(In thousands)
 
    Nine Months Ended September 30,
2017   2016
(Unaudited)
Operating activities
Net income $ 30,775 $ 31,543
Income from discontinued operations, net of tax 95   606  
Income from continuing operations 30,680 30,937
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for bad debts 9,267 7,686
Depreciation and amortization 14,936 15,751
Amortization of investment discount/premium, net 1,133 1,608
Impairment of property and equipment 440 404
Loss on disposal of property and equipment 380 143
Share-based compensation 5,184 5,434
Excess tax benefits from stock-based compensation (378 )
Deferred income taxes 2,594 (5,016 )
Changes in operating assets and liabilities
Accounts receivable (11,541 ) (9,938 )
Prepaid expenses and other current assets 996 (1,603 )
Accounts payable and accrued liabilities (6,031 ) 7,863
Income taxes payable 4,280 4,058
Deferred rent (1,052 ) 12,193
Deferred revenue 5,069   7,692  
Net cash provided by operating activities - continuing operations 56,335 76,834
Net cash provided by (used in) operating activities - discontinued
operations
95   (2,831 )
Net cash provided by operating activities 56,430 74,003
Investing activities
Acquisitions, net of cash acquired (32,101 )
Capital expenditures (17,763 ) (14,703 )
Investment in partnership interests (868 ) (3,551 )
Purchases of marketable securities (55,437 ) (21,810 )
Maturities of marketable securities 48,535   25,635  
Net cash used in investing activities - continuing operations (25,533 ) (46,530 )
Net cash provided by investing activities - discontinued operations 3,243   13,792  
Net cash used in investing activities (22,290 ) (32,738 )
Financing activities
Excess tax benefits from share-based compensation 378
Net payments related to share-based award activities 1,273 2,339
Payment of dividends (14,293 ) (13,756 )
Repurchases of common stock (2,476 ) (22,517 )
Net cash used in financing activities - continuing operations (15,496 ) (33,556 )
Effect of foreign exchange rates on cash 2   (23 )
Net increase in cash and cash equivalents 18,646 7,686
Cash and cash equivalents and cash of business held for sale at
beginning of period
93,570   88,027  
Cash and cash equivalents at end of period $ 112,216   $ 95,713  
Supplemental disclosures of cash flow information
Income taxes paid $ 9,575 $ 20,044
Non-cash investing and financing activities:
Purchase of equipment included in accounts payable and accrued
liabilities
$ 609 $ 523
Declaration of cash dividend to be paid 4,847 4,554
Repurchases of common stock included in accrued liabilities 21
Receivable due from sale of business 4,539
 
 

CAPELLA EDUCATION COMPANY

 
Segment Reporting
(In thousands)
 
    Three Months Ended September 30,   Nine Months Ended September 30,
2017   2016 2017   2016
(Unaudited)
Revenues
Post-Secondary $ 104,373 $ 103,488 $ 320,828 $ 314,704
Job-Ready Skills 2,634   2,421   7,551   3,378  
Consolidated Revenues $ 107,007   $ 105,909   $ 328,379   $ 318,082  
Operating income (loss)
Post-Secondary $ 16,183 $ 16,970 $ 54,188 $ 56,254
Job-Ready Skills (2,421 ) (1,622 ) (7,454 ) (6,307 )
Consolidated operating income 13,762 15,348 46,734 49,947
Other income, net 229   46   392   79  
Income from continuing operations before income taxes $ 13,991   $ 15,394   $ 47,126   $ 50,026  
 
Note: The summary of financial information by reportable segment
above excludes the results of operations for Arden University, which
are presented as discontinued operations in our Consolidated
Statements of Income.
 
 
CAPELLA UNIVERSITY
 
Other Information
 
    September 30,  
Capella University Enrollment by Degree (a): 2017   2016 % Change
Doctoral 8,932 9,257 (3.5 )%
Master's 17,462 17,761 (1.7 )%
Bachelor's 9,752 9,644 1.1 %
Other 1,077   1,046   3.0 %
Total 37,223   37,708   (1.3 )%
 
(a) Enrollment in the table above includes learners who are actively
enrolled during the last month of the quarters ended September 30,
2017 and 2016, respectively.
 

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