Capella Education Company Reports Third Quarter 2012 Results

Capella Education Company Reports Third Quarter 2012 Results

MINNEAPOLIS--(BUSINESS WIRE)-- Capella Education Company (NAS: CPLA) , a provider of online post-secondary education, primarily through its wholly owned subsidiary Capella University, today announced financial results for the three months ended Sept. 30, 2012.

"We are pleased to report year-over-year new enrollment growth within a continued challenging overall market environment," said Kevin Gilligan, chairman and chief executive officer. "This performance is further indication that our business fundamentals are stabilizing. We continue to focus on innovation to further differentiate Capella's value proposition by improving the affordability of education and more tightly aligning our programs with the needs of employers."


For the three months ended Sept. 30, 2012:

  • Revenues were $99.3 million, compared to $102.3 million in the third quarter of 2011, a decrease of 2.9 percent.

  • Capella University total active enrollment decreased 2.1 percent to 34,989 and new enrollment increased by 10.5 percent from third quarter 2011.

  • Operating income was $8.3 million, compared to $14.9 million for the same period in 2011. Operating margin was 8.3 percent, compared to 14.5 percent for the third quarter 2011.

  • Net income attributable to Capella Education Company for the third quarter of 2012 was $5.1 million, compared to $9.9 million for the same period in 2011.

  • Diluted net income per share was $0.39, compared to $0.66 for the same period in 2011.

For the nine-month period ended Sept. 30, 2012:

  • Revenues decreased by 1.6 percent to $314.9 million, compared to $320.1 million for the same period in 2011.

  • Operating income for the nine-month period ended Sept. 30, 2012 was $44.3 million, or 14.1 percent of revenue, compared to $61.2 million, or 19.1 percent of revenue during the same period in 2011.

  • Net income was $27.8 million or $2.07 per diluted share outstanding, compared to $40.1 million or $2.56 per share for the same period in 2011.

Balance Sheet and Cash Flow

As of Sept. 30, 2012, the Company had cash, cash equivalents, and marketable securities of $117.4 million, compared to $127.0 million at Dec. 31, 2011, and no debt for the same periods.

Cash flow from operations for the nine months ended Sept. 30, 2012 was $48.7 million compared to $55.7 million in the same period a year ago.

Share Repurchase

The Company repurchased approximately 1.1 million shares of Capella stock for total consideration of $38.8 million during the nine-month period ended Sept. 30, 2012. In the third quarter 2012, the Company repurchased approximately 422,000 shares of Capella stock for total consideration of $13.3 million. The remaining authorization as of the end of the third quarter was $20.9 million.

Outlook

For the fourth quarter ending Dec. 31, 2012, Capella University new enrollment growth is expected to be approximately flat in a continuing soft demand environment, compared to fourth quarter 2011. Total enrollment is expected to decline by about 4.0 to 5.0 percent and consolidated revenue is expected to decline by about 3.5 to 4.5 percent compared to fourth quarter 2011.

The consolidated operating margin is anticipated to be approximately 13.5 to 14.5 percent of total revenue for the fourth quarter of 2012 compared to 17.2 percent in the same period last year. The year-over-year change is in part due to Capella University's lower revenue expectations related to lower enrollment and increases in spending related to our learner success initiatives.

"While we are encouraged that Capella's business is stabilizing, we expect continued quarter-to-quarter volatility," said Steve Polacek, senior vice president and chief financial officer. "We are confident in our strategies and are diligently managing costs as we position Capella for long-term sustainable growth and shareholder value creation."

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 additional governmental inquiries into our financial aid practices; 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 and financial aid practices by governmental authorities, including changes in applicable federal and state laws and regulations and accrediting agency policies, such as recently revised Higher Learning Commission accreditation standards, and requests for information from the Minnesota Office of Higher Education and other states; maintaining and expanding existing commercial relationships with employers and developing new such relationships; effectively instituting changes in our marketing and brand management approach and with the use of aggregators; improving our learner cohort retention rate; improving our conversion rates; keeping up with advances in technology important to the online learner experience; successfully identifying and integrating acquisitions; complying with regulations applicable to our international operations; managing operational challenges with acquired entities; using business technology to accurately store, process and report relevant data; effectively implementing cost reductions in our business; managing increases in our expenses; 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 third quarter 2012 results and outlook during a conference call scheduled today, Oct. 23, 2012, 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# 32477833. 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 Oct. 23, 2012 through Oct. 30, 2012, at 855.859.2056 (domestic) or 404.537.3406 (international), conference ID# 32477833. 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 meet the needs of working adults, combining high quality, competency-based curricula with the convenience and flexibility of an online learning format. Currently, Capella University offers 44 graduate and undergraduate degree programs with 149 specializations. Nearly 35,000 learners were enrolled as of Sept. 30, 2012, with about 75 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

September 30,

December 31,

2012

2011

ASSETS

(Unaudited)

Current assets:

Cash and cash equivalents

$

99,294

$

61,977

Marketable securities

18,093

65,067

Accounts receivable, net of allowance of $5,090 at September 30, 2012, and $5,789 at December 31, 2011

17,559

18,239

Prepaid expenses and other current assets

12,161

12,493

Deferred income taxes

3,101

3,452

Total current assets

150,208

161,228

Property and equipment, net

46,946

50,713

Goodwill

16,916

16,980

Intangibles, net

5,143

6,552

Total assets

$

219,213

$

235,473

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

8,951

$

8,977

Accrued liabilities

23,226

29,306

Income taxes payable

2,427

Deferred revenue

11,710

7,769

Total current liabilities

43,887

48,479

Deferred rent

4,149

4,215

Other liabilities

6,564

6,425

Deferred income taxes

10,521

12,575

Total liabilities

65,121

71,694

Redeemable noncontrolling interest

1,180

Shareholders' equity:

Common stock, $0.01 par value: Authorized shares — 100,000, Issued and Outstanding shares — 12,799 at September 30, 2012, and 13,882 at December 31, 2011

128

139

Additional paid-in capital

98,670

103,900

Accumulated other comprehensive income

86

307

Retained earnings

55,208

58,253

Total shareholders' equity

154,092

162,599

Total liabilities and shareholders' equity

$

219,213

$

235,473

CAPELLA EDUCATION COMPANY

Consolidated Statements of Income

(In thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2012

2011

2012

2011

(Unaudited)

Revenues

$

99,309

$

102,306

$

314,889

$

320,061

Costs and expenses:

Instructional costs and services

44,398

42,523

136,190

127,528

Marketing and promotional

32,964

33,673

98,537

99,812

General and administrative

13,664

11,253

35,886

29,631

Reduction of workforce

1,862

Total costs and expenses

91,026

87,449

270,613

258,833

Operating income

8,283

14,857

44,276

61,228

Other income (expense), net

(21

)

477

(4

)

1,474

Income before income taxes

8,262

15,334

44,272

62,702

Income tax expense

3,139

5,549

16,630

23,037

Net income

5,123

9,785

27,642

39,665

Net loss attributable to noncontrolling interest

149

186

394

Net income attributable to Capella Education Company

$

5,123

$

9,934

$

27,828

$

40,059

Net income attributable to Capella Education Company per common share:

Basic

$

0.39

$

0.66

$

2.08

$

2.57

Diluted

$

0.39

$

0.66

$

2.07

$

2.56

Weighted average number of common shares outstanding:

Basic

12,974

15,006

13,351

15,588

Diluted

13,033

15,062

13,412

15,668

CAPELLA EDUCATION COMPANY

Consolidated Statements of Cash Flows

(In thousands)

Nine Months Ended

September 30,

2012

2011

(Unaudited)

Operating activities

Net income

$

27,642

$

39,665

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

Provision for bad debts

11,997

6,744

Depreciation and amortization

21,721

17,369

Amortization of investment discount/premium

590

1,663

Impairment of property and equipment

1,150

35

Loss (gain) on disposal of property and equipment

78

(38

)

Share-based compensation

3,108

3,191

Excess tax benefits from share-based compensation

(64

)

(70

)

Deferred income taxes

(1,577

)

4,873

Changes in operating assets and liabilities:

Accounts receivable

(11,337

)

(9,453

)

Prepaid expenses and other current assets

2,329

(5,596

)

Accounts payable and accrued liabilities

(5,710

)

(3,569

)

Income tax payable

(5,164

)

(625

)

Deferred rent

(66

)

765

Deferred revenue

3,988

756

Net cash provided by operating activities

48,685

55,710

Investing activities

Capital expenditures

(17,964

)

(20,020

)

Proceeds from the sale of property and equipment

303

Payment for acquisition, net of cash acquired

(12,640

)

Redemption of noncontrolling interest

(1,576

)

Purchases of marketable securities

(653

)

(3,500

)

Sales and maturities of marketable securities

46,650

30,685

Net cash provided by (used in) investing activities

26,760

(5,475

)