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Strayer Education, Inc. Closes Merger with Capella Education Company

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Forms New Leader in Education Innovation: Strategic Education, Inc.

Strayer Education, Inc. and Capella Education Company Report Second
Quarter 2018 Results; Strong Enrollment Growth

Strategic
Education, Inc. (SEI)
(NASDAQ:STRA) today announced it completed
the merger of Strayer Education, Inc. (NASDAQ:STRA) and Capella
Education Company (NASDAQ:CPLA) to create SEI, a national leader in
education innovation. SEI also announced financial results for the
period ended June 30, 2018 for both Strayer Education, Inc. and Capella
Education Company, their last full quarter as separate entities.

SEI will continue to operate both Strayer University and Capella
University as independent and separately accredited institutions of
higher learning, together serving approximately 85,000 students across
all 50 states. The combination will enable each university to accelerate
innovations that improve affordability and enhance academic and career
outcomes for students. SEI will continue to operate a number of
non-degree programs.

Robert Silberman, Executive Chairman of SEI said, "We are delighted to
announce the completion of a merger that brings together two
best-in-class academic institutions. Capella's expertise in online
advanced degree programs, combined with Strayer's 125-year heritage,
uniquely positions us to provide first-rate educational experiences to
working adults."

Karl McDonnell, Chief Executive Officer of SEI said, "Over the last few
months, my appreciation has deepened for the powerful ways Strayer
University and Capella University complement each other, and the shared
culture across the entire organization that values integrity and
innovation. The strong second quarter 2018 performance for both Strayer
Education, Inc. and Capella Education Company demonstrates our
organizations' ability to execute, and positions us for continued future
success."

TRANSACTION DETAILS

Pursuant to the terms of the merger agreement, Strayer Education, Inc.
and Capella Education Company combined in an all-stock merger of equals
with Capella shareholders receiving 0.875 SEI shares for each Capella
share they own. For more details on the share exchange, please visit www.strategiceducation.com
in the Investor Relations, Merger Share Information section.

STRAYER EDUCATION, INC. RESULTS

Three Months Ended June 30

  • For the second quarter, student enrollment at Strayer Education,
    Inc.'s main operating unit, Strayer University, increased 8.0% to
    46,868 compared to 43,411 for the same period in 2017. New student
    enrollment for the period increased 7.0% and continuing student
    enrollment for the period increased 8.2%.
  • Revenue increased 1.7% to $114.7 million compared to $112.7 million
    for the same period in 2017, as higher spring term enrollment was
    offset by lower revenue-per-student due to the continuing effect of
    scholarships issued in the fall 2017 term and growth in corporate
    sponsored students who pay lower tuition.
  • Income from operations decreased to $4.2 million from $13.9 million
    for the same period in 2017. Income from operations in 2018 includes a
    $6.2 million noncash charge resulting from the impairment of
    intangible assets associated with The New York Code + Design Academy,
    and $2.8 million in costs associated with the merger with Capella
    Education Company. Income from operations in 2017 included a $2.3
    million noncash benefit associated with the reduction in value of
    contingent consideration payable to the sellers of The New York Code +
    Design Academy, and a $0.3 million charge due to an increase in the
    fair value of the Company's reserve for leases on facilities no longer
    in use. Adjusted income from operations, which is a non-GAAP financial
    measure, was $13.2 million in 2018 compared to $11.9 million in the
    same period in 2017. For more details on non-GAAP financial measures,
    refer to the information on pages 14 through 18. The operating income
    margin was 3.6%, compared to 12.3% for the same period in 2017. The
    adjusted operating income margin was 11.5% compared to 10.5% for the
    same period in 2017.
  • Net income, which includes the adjustments described above and certain
    tax benefits, including the effects of the new lower federal income
    tax rate, was $5.2 million in 2018 compared to net income of $10.3
    million in 2017, a decrease of 49.6%. Adjusted net income was $9.9
    million, an increase of 36.7%, compared to adjusted net income of $7.2
    million in the same period in 2017.
  • Earnings before interest, taxes, depreciation, and amortization
    (EBITDA) was $9.1 million compared to $18.5 million in 2017. Adjusted
    EBITDA was $21.7 million compared to $20.2 million in the same period
    in 2017.
  • Diluted earnings per share was $0.46 compared to $0.92 for the same
    period in 2017. Adjusted diluted earnings per share grew 33.8% to
    $0.87 from $0.65 for the same period in 2017. Diluted weighted average
    shares outstanding increased 1.7% to 11,380,000 from 11,190,000 for
    the same period in 2017.

Strayer University Summer Enrollment

Total enrollments at Strayer University for the third quarter of 2018
are anticipated to grow 9% to approximately 45,400 students from 41,679
students for the same period in 2017. New student enrollments are
expected to increase approximately 12%, and continuing student
enrollments are expected to increase approximately 8%.

New Campus Openings

In addition to the Strayer University Macon, GA campus, which opened in
the second quarter, the Company is on track to open two to three
additional new Strayer University campuses by the end of 2018. The
Company is also evaluating the opportunity to open Capella University
student support centers, pending regulatory notification and approval.

Balance Sheet and Cash Flow

At June 30, 2018, Strayer Education, Inc. had cash and cash equivalents
of $171.6 million and no debt. For the first six months of 2018, cash
flow from operations decreased to $30.0 million compared to $32.8
million during 2017, primarily due to cash payments of costs related to
the merger with Capella Education Company. Capital expenditures for the
first six months of 2018 were $8.6 million compared to $8.4 million for
the same period in 2017. For the second quarter of 2018, bad debt
expense as a percentage of revenue was 5.8% compared to 4.5% for the
same period in 2017.

CAPELLA EDUCATION COMPANY RESULTS

Three Months Ended June 30

  • Revenue increased 1.8% to $111.6 million compared to $109.6 million
    for the same period in 2017, primarily due to higher enrollment.
  • Operating income decreased to $15.1 million from $15.4 million for the
    same period in 2017. Operating income in 2018 includes an asset
    impairment in the Job-Ready Skills segment and costs associated with
    the merger with Strayer Education, Inc. Adjusted operating income,
    which is a non-GAAP financial measure, was $16.9 million in 2018
    compared to $15.4 million in the same period in 2017. For more details
    on non-GAAP financial measures, refer to the information on pages 14
    through 18. The operating income margin was 13.5%, compared to 14.0%
    for the same period in 2017. The adjusted operating income margin was
    15.1% compared to 14.1% for the same period in 2017.
  • Net income, which includes the adjustments described above and the
    effects of the new lower federal income tax rate for 2018, was $11.8
    million, compared to net income of $10.8 million in the same period in
    2017, an increase of 9.6%. Adjusted net income was $13.2 million, an
    increase of 22.2%, compared to adjusted net income of $10.8 million in
    the same period in 2017.
  • Earnings before interest, taxes, depreciation, and amortization
    (EBITDA) was $19.9 million compared to $20.4 million in 2017. Adjusted
    EBITDA was $24.5 million compared to $22.6 million in the same period
    in 2017.
  • Diluted earnings per share was $0.99 compared to $0.90 for the same
    period in 2017. Adjusted diluted earnings per share increased 22.2% to
    $1.10 from $0.90 for the same period in 2017. Diluted weighted average
    shares outstanding decreased 0.2% to 11,963,000 from 11,992,000 for
    the same period in 2017.

Post-Secondary Segment

  • For the second quarter, student enrollment at Capella Education
    Company's main operating unit, Capella University, increased 0.5% to
    37,786 compared to 37,588 for the same period in 2017. New student
    enrollment for the period increased 14.7%, driven by strong
    performance across all degree levels. Early cohort persistence
    remained stable.
  • FlexPath, Capella University's fastest-growing offerings, continued to
    positively impact new and total enrollment in the second quarter 2018,
    and is now 23% of Capella University's Bachelor's and Master's degrees
    total enrollment.
  • Second quarter 2018 revenues were $108.5 million, up 1.5% compared to
    $107.0 million in the same period in 2017.
  • Operating income was $18.0 million compared to operating income of
    $17.8 million for the same period in 2017. The operating margin was
    16.6% in the second quarter 2018 and 2017. Post-Secondary segment
    operating results are primarily attributable to Capella University.

Job-Ready Skills Segment

  • Second quarter 2018 revenues were $3.0 million compared to $2.6
    million in the same period of 2017.
  • Operating loss was $2.1 million in the second quarter 2018 compared to
    a loss of $2.4 million in the second quarter of 2017. Job-Ready Skills
    segment operating results include an asset impairment of $0.9 million
    for the second quarter 2018.

Balance Sheet and Cash Flow

At June 30, 2018, Capella Education Company had cash and marketable
securities of $189.9 million and no debt. For the first six months of
2018, cash provided by operating activities from continuing operations
was $39.4 million compared to $36.2 million during 2017. Capital
expenditures for the first six months of 2018 were $9.1 million compared
to $12.1 million for the same period in 2017. For the second quarter of
2018, bad debt expense as a percentage of revenue was 2.9% compared to
2.6% for the same period in 2017.

AMENDED CREDIT FACILITY

On August 1, 2018, SEI amended its existing credit facility. The
amendment extends the maturity date of the revolving credit facility
from July 2, 2020, to August 1, 2023, and increases available borrowings
from $150 million to $250 million, with an option to increase the
commitments under the revolving facility by an additional $150 million.
Currently, there are no outstanding borrowings under the amended credit
facility. Additional information is available in the Company's current
report on Form 8-K filed with the SEC today.

COMMON STOCK CASH DIVIDEND

SEI announced today that it declared a regular, quarterly cash dividend
of $0.50 per share of common stock. This dividend will be paid on
September 7, 2018 to shareholders of record as of August 31, 2018.

CONFERENCE CALL WITH MANAGEMENT

SEI will host a conference call to discuss the second quarter 2018
earnings results of Strayer Education, Inc. and Capella Education
Company at 10:00 a.m. (ET) today. To participate in the live call,
investors should dial (877) 303-9047 ten minutes prior to the start
time. In addition, the call will be available via webcast. To access the
live webcast of the conference call, please go to www.strategiceducation.com
in the Investor Relations section 15 minutes prior to the start time of
the call to register. Following the call, the webcast will be archived
and available at www.strategiceducation.com
in the Investor Relations section.

About SEI

Strategic Education, Inc. (NASDAQ:STRA) (www.strategiceducation.com)
is dedicated to enabling economic mobility with education. We serve
working adult students through a range of educational opportunities that
include: Strayer University and Capella University (separate
institutions that are each regionally accredited), which collectively
offer flexible and affordable associate, bachelor's, master's, and
doctoral programs; a Top-25 Princeton Review-ranked online MBA program
through the Jack Welch Management Institute; self-paced courses for
college credit through Sophia; customized degrees for corporations
through Degrees@Work; and non-degree web and mobile application
development courses through DevMountain, Generation Code, Hackbright
Academy, and The New York Code + Design Academy. These programs help our
students prepare for success in today's jobs and find a path to
bettering their lives.

Forward Looking Statements

This communication contains certain forward-looking statements made
pursuant to the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such statements may be identified by the use of words
such as "expect," "estimate," "assume," "believe," "anticipate," "will,"
"forecast," "outlook," "plan," "project," or similar words and may
include statements with respect to, among other things, future events or
the future financial performance of SEI, the anticipated benefits of the
merger, including estimated synergies; SEI's plans, objectives and
expectations; future financial and operating results; and other
statements that are not historical facts. The statements are based on
SEI's current expectations and are subject to a number of assumptions,
uncertainties and risks. In connection with the safe-harbor provisions
of the Reform Act, SEI has identified important factors that could cause
SEI's actual results to differ materially from those expressed in or
implied by such statements. The assumptions, uncertainties and risks
include:

  • the risk that the benefits of the merger, including expected
    synergies, may not be fully realized or may take longer to realize
    than expected;
  • the risk that the merger may not advance the combined company's
    business strategy and growth strategy;
  • the risk that the combined company may experience difficulty
    integrating Strayer's and Capella's employees or operations;
  • the potential diversion of management's attention resulting from the
    merger;
  • the pace of growth of student enrollment;
  • our continued compliance with Title IV of the Higher Education Act,
    and the regulations thereunder, as well as regional accreditation
    standards and state regulatory requirements;
  • rulemaking by the Department of Education and increased focus by the
    U.S. Congress on for-profit education institutions;
  • competitive factors;
  • risks associated with the opening of new campuses;
  • risks associated with the offering of new educational programs and
    adapting to other changes;
  • risks relating to the timing of regulatory approvals;
  • our ability to implement our growth strategy;
  • risks associated with the ability of our students to finance their
    education in a timely manner; and
  • general economic and market conditions.

Many of these risks, uncertainties and assumptions are beyond SEI's
ability to control or predict. Because of these risks, uncertainties and
assumptions, you should not place undue reliance on these
forward-looking statements. Furthermore, these forward-looking
statements speak only as of the information currently available to SEI
on the date they are made, and SEI undertakes no obligation to update or
revise forward-looking statements. Actual results may differ materially
from those projected in the forward-looking statements.

 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
  For the Three Months Ended June 30,   For the Six Months Ended June 30,
2017   2018   2017   2018
Revenues $ 112,720   $ 114,668   $ 227,632   $ 231,137
Costs and expenses:      
Instruction and educational support 63,650 64,690 125,066 128,466
Marketing 19,226 21,113 37,944 41,237
Admissions advisory 4,779 4,609 9,495 9,285
General and administrative 13,205 11,063 24,824 22,281
Merger costs - 2,824 - 8,171
Fair value adjustments   (1,994)     6,185     (1,994)     6,185
Total costs and expenses   98,866     110,484     195,335     215,625
Income from operations 13,854 4,184 32,297 15,512
Investment income 253 608 434 1,056
Interest expense   160     161     319     320
Income before taxes 13,947 4,631 32,412 16,248
Provision (benefit) for income taxes   3,645     (557)     11,532     1,593
Net income $ 10,302   $ 5,188   $ 20,880   $ 14,655
 
Earnings per share:
Basic $ 0.96 $ 0.48 $ 1.96 $ 1.36
Diluted $ 0.92 $ 0.46 $ 1.87 $ 1.29
 
Weighted average shares outstanding:
Basic 10,680 10,879 10,655 10,812
Diluted 11,190 11,380 11,155 11,346
 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
   
December 31,
2017
June 30,
2018
ASSETS
Current assets:
Cash and cash equivalents $ 155,933 $ 171,600
Tuition receivable, net 23,122 25,595
Income taxes receivable - 5,592
Other current assets   11,293   11,385
Total current assets 190,348 214,172
Property and equipment, net 73,763 72,125
Deferred income taxes 24,452 22,851
Goodwill 20,744 17,919
Other assets   11,971   9,698
Total assets $ 321,278 $ 336,765
 
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 46,177 $ 46,657
Income taxes payable 1,038 -
Contract liabilities   21,851   22,547
Total current liabilities 69,066 69,204
Other long-term liabilities   43,015   43,721
Total liabilities   112,081   112,925
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share, 20,000 shares authorized,
11,167 and 11,307 issued and outstanding at December 31, 2017 and
June 30, 2018, respectively
112 113
Additional paid-in capital 47,079 53,015
Retained earnings   162,006   170,712
Total stockholders' equity   209,197   223,840
Total liabilities and stockholders' equity $ 321,278 $ 336,765
 
 
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
  For the Six Months Ended June 30,
2017   2018
Cash flows from operating activities:
Net income $ 20,880 $ 14,655

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

Amortization of gain on sale of assets (133) -
Amortization of deferred rent (859) (909)
Amortization of deferred financing costs 131 131
Depreciation and amortization 8,975 9,915
Deferred income taxes (1,560) (1,581)
Stock-based compensation 5,654 5,937
Fair value adjustments (1,994) 6,185
Changes in assets and liabilities:
Tuition receivable, net (137) (2,916)
Other current assets 411 96
Other assets 829 (824)
Accounts payable and accrued expenses 559 1,363
Income taxes payable (3,153) (3,447)
Contract liabilities 4,356 2,768
Other long-term liabilities   (1,193)   (1,347)
Net cash provided by operating activities   32,766   30,026
 
Cash flows from investing activities:
Purchases of property and equipment   (8,435)   (8,596)
Net cash used in investing activities   (8,435)   (8,596)
 
Cash flows from financing activities:
Common dividends paid   (5,707)   (5,778)
Net cash used in financing activities   (5,707)   (5,778)
Net increase in cash, cash equivalents, and restricted cash 18,624 15,652
Cash, cash equivalents, and restricted cash - beginning of period   129,758   156,448
Cash, cash equivalents, and restricted cash - end of period $ 148,382 $ 172,100
 
 
CAPELLA EDUCATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
  For the Three Months Ended June 30,   For the Six Months Ended June 30,
2017   2018 2017   2018
Revenues $ 109,584 $ 111,563 $ 221,372 $ 223,530
Costs and expenses:
Instructional costs and services 48,369 49,350 96,781 97,782
Marketing and promotional 27,308 27,739 54,833 55,755
Admissions advisory 7,440 7,205 15,103 14,397
General and administrative 11,096 11,317 21,683 21,196
Merger-related costs     873     1,395
Total costs and expenses   94,213   96,484   188,400   190,525
Operating income 15,371 15,079 32,972 33,005
Other income, net   56   695   163   1,191

Income from continuing operations before income taxes

15,427 15,774 33,135 34,196
Income tax expense   4,672   3,984   11,209   8,559
Income from continuing operations 10,755 11,790 21,926 25,637

Income from discontinued operations, net of tax

      95  
Net income $ 10,755 $ 11,790 $ 22,021 $ 25,637
 
Basic net income per common share:
Continuing operations $ 0.92 $ 1.01 $ 1.89 $ 2.20
Discontinued operations       0.01  
Basic net income per common share $ 0.92 $ 1.01 $ 1.90 $ 2.20
Diluted net income per common share:
Continuing operations $ 0.90 $ 0.99 $ 1.83 $ 2.14
Discontinued operations       0.01  
Diluted net income per common share $ 0.90 $ 0.99 $ 1.84 $ 2.14
 
Weighted average number of common shares outstanding:
Basic 11,644 11,703 11,602 11,674
Diluted 11,992 11,963 11,965 11,957
Cash dividend declared per common share $ 0.41 $ 0.43 $ 0.82 $ 0.86
 
 
CAPELLA EDUCATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
 
 

December 31,
2017

 

June 30,
2018

 
ASSETS
Current assets:
Cash and cash equivalents $ 106,566 $ 117,885
Marketable securities, current 45,226 37,589

Accounts receivable, net of allowance of $7,979 at December 31,
2017 and $7,865 at June 30, 2018

22,733 24,229
Prepaid expenses and other current assets   9,523     10,027  
Total current assets 184,048 189,730
Marketable securities, non-current 29,570 34,386
Property and equipment, net 35,961 34,781
Goodwill 13,477 13,477
Intangibles, net 3,402 3,162
Deferred income taxes 2,839 871
Other assets   9,724     10,358  
Total assets $ 279,021   $ 286,765  
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,281 $ 1,254
Accrued liabilities 26,619 27,815
Dividends payable 5,228 328
Deferred revenue   13,849     15,635  
Total current liabilities 47,977 45,032
Deferred rent 12,365 11,890
Other liabilities   3,288     2,413  
Total liabilities 63,630 59,335
Shareholders' equity:
Common stock, par value $0.01 per share, 100,000 shares authorized,
11,635 and 11,730 issued and outstanding at December 31, 2017 and
June 30, 2018, respectively
116 117
Additional paid-in capital 127,804 124,431
Accumulated other comprehensive loss (110 ) (211 )
Retained earnings   87,581     103,093  
Total shareholders' equity   215,391     227,430  
Total liabilities and shareholders' equity $ 279,021   $ 286,765  
 
 
CAPELLA EDUCATION COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
  For the Six Months Ended June 30,
2017   2018
Operating activities
Net income $ 22,021 $ 25,637
Income from discontinued operations, net of tax   95      
Income from continuing operations 21,926 25,637

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

Provision for bad debts 5,225 5,870
Depreciation and amortization 10,112 9,638
Amortization of investment discount/premium, net 855 537
Impairment of property and equipment 440 916
Loss on disposal of property and equipment 243 89
Share-based compensation 3,479 4,571
Deferred income taxes 2,443 2,000
Changes in operating assets and liabilities
Accounts receivable (5,194 ) (7,366 )
Prepaid expenses and other current assets 294 352
Accounts payable and accrued liabilities (8,565 ) (3,193 )
Income taxes payable 3,219 (1,076 )
Deferred rent (735 ) (475 )
Deferred revenue   2,413     1,866  
Net cash provided by operating activities - continuing operations 36,155 39,366
Net cash provided by operating activities - discontinued operations   95      
Net cash provided by operating activities   36,250     39,366  
Investing activities
Capital expenditures (12,116 ) (9,075 )
Investment in partnership interests (354 ) (784 )
Purchases of marketable securities (29,456 ) (33,702 )
Maturities of marketable securities   35,995     35,855  
Net cash used in investing activities - continuing operations (5,931 ) (7,706 )
Net cash provided by investing activities - discontinued operations   3,243      
Net cash used in investing activities   (2,688 )   (7,706 )
Financing activities
Net proceeds (payments) for exercise of stock options 1,273 (333 )
Taxes paid for restricted stock units (905 ) (4,949 )
Payment of dividends   (9,479 )   (15,057 )
Net cash used in financing activities - continuing operations   (9,111 )   (20,339 )
Effect of foreign exchange rates on cash   2     (2 )
Net increase in cash and cash equivalents 24,453 11,319
Cash and cash equivalents at beginning of period   93,570     106,566  
Cash and cash equivalents at end of period $ 118,023   $ 117,885  
 
 
CAPELLA EDUCATION COMPANY
UNAUDITED SEGMENT REPORTING
(In thousands)
 
 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

2017   2018 2017   2018
Revenues
Post-Secondary $ 106,974 $ 108,538 $ 216,455 $ 217,723
Job-Ready Skills   2,610     3,025     4,917     5,807  
Consolidated Revenues $ 109,584   $ 111,563   $ 221,372   $ 223,530  
Operating income (loss)
Post-Secondary $ 17,754 $ 18,029 $ 38,005 $ 37,473
Job-Ready Skills (2,383 ) (2,077 ) (5,033 ) (3,073 )
Merger-related costs       (873 )       (1,395 )
Consolidated operating income 15,371 15,079 32,972 33,005
Other income, net   56     695     163     1,191  
Income from continuing operations before income taxes $ 15,427   $ 15,774   $ 33,135   $ 34,196  
 
 
CAPELLA UNIVERSITY
OTHER INFORMATION
 
  June 30,  
Capella University Enrollment by Degree (a): 2017   2018 % Change
Doctoral 9,052 9,129 0.9 %
Master's 17,714 17,540 (1.0) %
Bachelor's 9,760 10,066 3.1 %
Other 1,062 1,051 (1.0) %
Total 37,588 37,786 0.5 %
 
(a)   Enrollment in the table above includes learners who are actively
enrolled during the last month of the quarters ended June 30, 2017
and 2018, respectively.
 

Non-GAAP Financial Measures

In our press release and schedules, and on the related conference call,
we report certain financial measures that are not required by, or
presented in accordance with, accounting principles generally accepted
in the United States of America ("GAAP"). We discuss management's
reasons for reporting these non-GAAP measures below, and the press
release schedules that follow reconcile the most directly comparable
GAAP measure to each non-GAAP measure that we reference. Although
management evaluates and presents these non-GAAP measures for the
reasons described below, please be aware that these non-GAAP measures
have limitations and should not be considered in isolation or as a
substitute for income from operations, net income, earnings per share or
any other comparable financial measure prescribed by GAAP. In addition,
we may calculate and/or present these non-GAAP financial measures
differently than measures with the same or similar names that other
companies report, and as a result, the non-GAAP measures we report may
not be comparable to those reported by others.

Management uses certain non-GAAP measures to evaluate financial
performance because those non-GAAP measures allow for period-over-period
comparisons of its ongoing operations before the impact of certain items
described below. These measures are Adjusted Income from Operations,
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA),
Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings Per
Share (EPS). We define Adjusted Income from Operations, Adjusted Net
Income, and Adjusted EPS to exclude (1) fair value adjustments related
to Strayer Education, Inc.'s acquisition of The New York Code + Design
Academy and the related tax effects, and adjustments to Strayer
Education, Inc.'s reserve for leases on facilities no longer in use, (2)
the impairment of previously capitalized internal software development
costs related to software projects within Capella Education Company's
Job-Ready Skills segment, (3) charges associated with Strayer Education,
Inc.'s merger with Capella Education Company, and (4) discrete tax
adjustments utilizing annual effective income tax rates for Strayer
Education, Inc. of 39.5% for 2017 and 27.5% for 2018. We define EBITDA
as net income before provision (benefit) for income taxes, investment
income, interest expense, depreciation and amortization, and from this
amount in arriving at Adjusted EBITDA we also exclude the amounts in
(1), (2), and (3) above, and stock-based compensation expense. These
non-GAAP measures are reconciled to the most directly comparable GAAP
measures on pages 15 through 18. Non-GAAP measures should not be viewed
as substitutes for GAAP measures.

 
STRAYER EDUCATION, INC.
NON-GAAP UNAUDITED ADJUSTING STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
  For the Three Months Ended June 30, 2017
  Non-GAAP Adjustments  

As Reported
(GAAP)

  Merger
Costs (1)
  Fair Value
Adjustments (2)
  Other Tax
Adjustments (3)
  As Adjusted
(Non-GAAP)
Income from operations $ 13,854 $ -   $ (1,994)   $ - $ 11,860
Investment income 253 - - - 253
Interest expense   160     -     -     -     160
Income before taxes 13,947 - (1,994) - 11,953
Provision for income taxes   3,645     -     104     972     4,721
Net income $ 10,302   $ -   $ (2,098)   $ (972)   $ 7,232
 
Earnings per share:
Basic ** $ 0.96 $ - $ (0.20) $ (0.09) $ 0.68
Diluted ** $ 0.92 $ - $ (0.19) $ (0.09) $ 0.65
 
Weighted average shares outstanding:
Basic 10,680 10,680
Diluted 11,190 11,190
 
For the Three Months Ended June 30, 2018
Non-GAAP Adjustments
As Reported
(GAAP)
  Merger
Costs (1)
  Fair Value
Adjustments (2)
  Other Tax
Adjustments (3)
  As Adjusted
(Non-GAAP)
Income from operations $ 4,184 $ 2,824 $ 6,185 $ - $ 13,193
Investment income 608 - - - 608
Interest expense   161     -     -     -     161
Income before taxes 4,631 2,824 6,185 - 13,640
Provision (benefit) for income taxes   (557)     624     924     2,760     3,751
Net income $ 5,188   $ 2,200   $ 5,261   $ (2,760)   $ 9,889
 
Earnings per share:
Basic $ 0.48 $ 0.20 $ 0.48 $ (0.25) $ 0.91
Diluted $ 0.46 $ 0.19 $ 0.46 $ (0.24) $ 0.87
 
Weighted average shares outstanding:
Basic 10,879 10,879
Diluted 11,380 11,380
 

____________________

**

Earnings per share data may not foot due to rounding

   
(1) Reflects charges associated with the Company's previously announced
merger with Capella Education Company.
 
(2) Reflects adjustments to the value of contingent consideration, and
goodwill and intangible assets related to the Company's acquisition
of The New York Code + Design Academy and the related tax effects,
and adjustments to the Company's reserve for leases on facilities no
longer in use.
 
(3) Reflects discrete tax adjustments related to the vesting of stock
awards and other adjustments, utilizing an annual effective tax rate
of 39.5% for 2017 and 27.5% for 2018.
 
 
STRAYER EDUCATION, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
ADJUSTED EBITDA
(Amounts in thousands)
 
  For the Three Months Ended June 30,
2017   2018
Net income $ 10,302 $ 5,188
Provision (benefit) for income taxes 3,645 (557)
Investment income (253) (608)
Interest expense 160 161
Depreciation and amortization   4,606   4,881
EBITDA (1) 18,460 9,065
Stock-based compensation 3,228 3,250
Merger costs (2) - 2,824
Fair value adjustments (3)   (1,526)   6,566
Adjusted EBITDA (1) $ 20,162 $ 21,705
 
(1)   Denotes non-GAAP financial measures. Please see page 14 for more
detail regarding these adjustments and management's reasons for
providing this information.
(2) Reflects charges associated with the Company's previously announced
merger with Capella Education Company.
(3)

Reflects adjustments to the value of contingent consideration, and
goodwill and intangible assets related to the Company's
acquisition of The New York Code + Design Academy, and adjustments
to the Company's reserve for leases on facilities no longer in use.

 
 
CAPELLA EDUCATION COMPANY
NON-GAAP UNAUDITED ADJUSTING STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
  For the Three Months Ended June 30, 2017
  Non-GAAP Adjustments  

As Reported
(GAAP)

Merger-Related
Costs

 

Impairment of
Property and
Equipment

As Adjusted
(Non-GAAP)

Operating income $ 15,371 $ - $ 73 $ 15,444
Other income, net   56   -   -   56
Income before income taxes 15,427 - 73 15,500
Income tax expense   4,672   -   27   4,699
Net income $ 10,755 $ - $ 46 $ 10,801
 
Earnings per share:
Basic $ 0.92 $ - $ 0.01 $ 0.93
Diluted $ 0.90 $ - $ - $ 0.90
 
Weighted average shares outstanding
Basic 11,644 11,644
Diluted 11,992 11,992
 
For the Three Months Ended June 30, 2018
Non-GAAP Adjustments

As Reported
(GAAP)

Merger-Related
Costs (1)

Impairment of
Property and
Equipment (2)

As Adjusted
(Non-GAAP)

Operating income $ 15,079 $ 873 $ 916 $ 16,868
Other income, net   695   -   -   695
Income before income taxes 15,774 873 916 17,563
Income tax expense   3,984   175   210   4,369
Net income $ 11,790 $ 698 $ 706 $ 13,194
 
Earnings per share:
Basic $ 1.01 $ 0.06 $ 0.06 $ 1.13
Diluted $ 0.99 $ 0.05 $ 0.06 $ 1.10
 
Weighted average shares outstanding
Basic 11,703 11,703
Diluted 11,963 11,963
 
(1)   Reflects charges associated with Capella Education Company's
previously announced merger with Strayer Education, Inc.
(2) The impairment of property and equipment primarily consists of the
write-off of previously capitalized internal software development
costs related to software projects within the Company's Job-Ready
Skills segment for which the expected future net cash flows may not
exceed the carrying value of the related assets.
 
 
CAPELLA EDUCATION COMPANY
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
ADJUSTED EBITDA
(In thousands)
 
  For the Three Months Ended June 30,
2017   2018
 
Net income $ 10,755 $ 11,790
Income tax expense 4,672 3,984
Other income, net (56) (695)
Depreciation and amortization   4,986   4,793
EBITDA (1) 20,357 19,872
Share-based compensation 2,205 2,820
Merger-related costs (2) - 873
Impairment of property and equipment   73   916
Adjusted EBITDA (1) $ 22,635 $ 24,481
 
(1)   Denotes non-GAAP financial measure. Please see page 14 for more
detail regarding the adjustments and management's reasons for
providing this information.
(2) Reflects charges associated with Capella Education Company's
previously announced merger with Strayer Education, Inc.
 

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