CAPELLA EDUCATION CO - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - July 26, 2016

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Exhibit 99.1
NEWS RELEASE

FOR IMMEDIATE RELEASE            

Investor Contact:
Heide Erickson
Capella Education Company
612.977.5172
Heide.Erickson@capella.edu

Media Contact:
Mike Buttry
Capella Education Company
612.977.5499
Mike.Buttry@capella.edu

Capella Education Company Reports Second Quarter 2016 Results

MINNEAPOLIS, July 26, 2016 - Capella Education Company (NASDAQ: CPLA), a leading educational services company, today announced financial results for the three and six months ended June 30, 2016.

“We delivered solid second quarter results for Capella Education Company as we continued to successfully execute our strategies in a changing market environment,” said Kevin Gilligan, chairman and chief executive officer. “We also made significant steps toward our goal of providing the most direct path between learning and employment in the job-ready skills market, positioning Capella for accelerated growth in 2017 and beyond.”  

Selected Financial Data for the Three Months Ended June 30, 2016

Results for the second quarter of 2016, and comparisons to previous periods, are for consolidated Capella Education Company continuing operations. Included in consolidated results are Hackbright Academy and DevMountain operations from their respective acquisition dates of April 22 and May 4, 2016. Results for Arden University are presented as discontinued operations.

•
Revenues were $106.7 million in the second quarter of 2016, up 2.0 percent compared to $104.6 million in the second quarter of 2015. Operating income from continuing operations was $18.1 million, unchanged from the same period in 2015. Included in operating income for the second quarter of 2016 are acquisition-related transaction costs and effects of purchase accounting of approximately $1.9 million. The operating margin was 16.9 percent, compared to 17.3 percent for the second quarter 2015.
•
Diluted net income per common share from continuing operations was $0.93, compared to $0.90 for the same period in 2015.

Operating and Segment Highlights





•
Starting in the second quarter 2016, Capella Education Company is providing additional financial details related to two segments: “Post-Secondary” consisting of Capella University and Sophia Learning; and “Job-Ready Skills” consisting of Capella Learning Solutions, Hackbright Academy and DevMountain.
•
For the Post-Secondary segment, revenues were $105.8 million, up 1.2 percent compared to $104.5 million in the second quarter of 2015. The operating margin was 20.4 percent, compared to 17.7 percent for the second quarter 2015. Results are primarily attributable to Capella University.
•
Capella University total active enrollment increased 2.4 percent to 38,231 learners, new enrollment increased by 2.5 percent compared to second quarter 2015, and early cohort persistence improved by approximately 4 percent.
•
Revenues for the Job-Ready Skills segment were $0.9 million compared to $0.1 million in the second quarter of 2015. The operating loss was $3.5 million, compared to $0.5 million for the second quarter 2015. Included in second quarter 2016 results are $1.9 million of transaction costs and effects of purchase accounting related to the acquisitions of Hackbright Academy and DevMountain.

Balance Sheet and Cash Flow

At June 30, 2016, Capella Education Company had cash and marketable securities of $132.8 million, compared to $159.3 million at Dec. 31, 2015, and no debt for the same periods.

Cash provided by operating activities from continuing operations for the six months ended June 30, 2016 was $42.8 million compared to $40.2 million in the same period a year ago.

Dividend and Share Repurchases

A quarterly cash dividend of $0.39 per outstanding share of common stock was declared during the second quarter of 2016. The dividend was paid on July 15, 2016.

In the second quarter of 2016, Capella Education Company repurchased approximately 143,000 shares of Capella stock for total consideration of $7.5 million. The remaining authorization as of the end of the second quarter was $41.0 million.

Outlook

For the third quarter ending Sept. 30, 2016, revenues from continuing operations for consolidated Capella Education Company are expected to be up 4.5 to 5.5 percent compared to third quarter 2015. Consolidated operating margin for continuing operations is anticipated to be approximately 10.5 to 11.5 percent of total revenue for the third quarter of 2016. Capella University new enrollment is expected to be slightly up year-over-year and total enrollment is expected to grow about 2.0 to 3.0 percent year-over-year.

For the fiscal year ending Dec. 31, 2016, revenues from continuing operations for consolidated Capella Education Company are expected to be $424 to $428 million and earnings per share is expected to be $3.30 to $3.40, including acquisition-related transaction costs and effects of purchase accounting.

“Capella University’s performance year-to-date and expectations for the third quarter position us for better annual performance in 2016 than we anticipated at the beginning of the year,” said Steve Polacek, senior vice president and chief financial officer. “We are in a strong financial position, diligently managing costs, and we believe we are well-positioned for long-term sustainable growth.”

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; successfully managing our PhD completion efforts; improving our conversion rate and effectively leveraging our brand-driven marketing strategy; keeping up with advances in technology important to the online learner experience; effectively managing data security risks; improving our learner persistence and cohort retention rate; successfully integrating acquisitions; successfully growing Capella Learning Solutions’ new business lines; 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 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 and other documents the company files with the SEC.      

Conference Call

Capella will discuss its second quarter 2016 results and outlook during a conference call scheduled today, July 26, 2016, at 9:00 a.m. Eastern time (ET). To participate in the live call, investors should dial 800.794.6623 (domestic) or 785.424.1227 (international) at 8:50 a.m. (ET), conference ID# 8176. The webcast, including the accompanying presentation, will be available on the Capella Education Company Web site at www.capellaeducation.com in the investor relations section. A replay of the call will be available starting on July 26 through Aug. 2, 2016, at 800.839.2670 (domestic) or 402.220.7230 (international), conference ID# 8176. It will also be archived at www.capellaeducation.com in the investor relations section.

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 placing adults on the most direct path between learning and employment. 


# # #





CAPELLA EDUCATION COMPANY
Consolidated Balance Sheets
(In thousands, except par value)
 
As of June 30, 2016
 
As of December 31, 2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
61,441

 
$
86,104

Marketable securities, current
44,840

 
27,522

Accounts receivable, net of allowance of $5,585 at June 30, 2016 and $6,340 at December 31, 2015
18,702

 
17,081

Prepaid expenses and other current assets
15,487

 
14,308

Currents assets of business held for sale
23,186

 
4,251

Total current assets
163,656

 
149,266

Marketable securities, non-current
26,512

 
45,679

Property and equipment, net
33,765

 
34,306

Goodwill
26,829

 
—

Intangibles, net
8,862

 
—

Other assets
7,480

 
2,397

Noncurrent assets of business held for sale

—

 
18,707

Total assets
$
267,104

 
$
250,355

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,245

 
$
1,470

Accrued liabilities
33,542

 
23,658

Dividends payable
4,697

 
4,824

Deferred revenue
13,099

 
7,796

Current liabilities of business held for sale
9,356

 
8,291

Total current liabilities
61,939

 
46,039

Deferred rent
1,402

 
1,874

Other liabilities
2,306

 
3,061

Deferred income taxes
3,364

 
1,502

Total liabilities
69,011

 
52,476

Shareholders’ equity:
 
 
 
Common stock, $0.01 par value: Authorized shares — 100,000; Issued and Outstanding shares — 11,607 at June 30, 2016 and 11,824 at December 31, 2015
116

 
118

Additional paid-in capital
117,149

 
114,849

Accumulated other comprehensive loss
(89
)
 
(272
)
Retained earnings
80,917

 
83,184

Total shareholders’ equity
198,093

 
197,879

Total liabilities and shareholders’ equity
$
267,104

 
$
250,355








CAPELLA EDUCATION COMPANY
Consolidated Statements of Income
(In thousands, except per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016

2015
 
2016
 
2015
 
(Unaudited)
Revenues
$
106,725


$
104,584

 
$
212,173

 
$
210,285

Costs and expenses:



 
 
 
 
Instructional costs and services
45,502


45,527

 
90,813

 
90,769

Marketing and promotional
24,922


24,713

 
50,802

 
51,054

Admissions advisory
7,285


7,117

 
14,708

 
14,069

General and administrative
10,944


9,168

 
21,251

 
18,724

Total costs and expenses
88,653


86,525

 
177,574

 
174,616

Operating income
18,072


18,059

 
34,599

 
35,669

Other income (expense), net
42


(10
)
 
33

 
(23
)
Income from continuing operations before income taxes
18,114


18,049

 
34,632

 
35,646

Income tax expense
7,040


6,851

 
13,282

 
13,511

Income from continuing operations
11,074


11,198

 
21,350

 
22,135

Loss from discontinued operations, net of tax
(1,379
)
 
(867
)
 
(2,357
)
 
(1,767
)
Net income
$
9,695

 
$
10,331

 
$
18,993

 
$
20,368

Basic net income (loss) per common share:



 
 
 
 
Continuing operations
0.95


0.92

 
1.82

 
1.81

Discontinued operations
(0.12
)

(0.07
)
 
(0.20
)
 
(0.14
)
Basic net income per common share
$
0.83

 
$
0.85

 
$
1.62

 
$
1.67

Diluted net income (loss) per common share
 
 
 
 
 
 
 
Continuing operations
0.93

 
0.90

 
1.79

 
1.78

Discontinued operations
(0.11
)
 
(0.07
)
 
(0.20
)
 
(0.14
)
Diluted net income per common share
$
0.82

 
$
0.83

 
$
1.59

 
$
1.64

Weighted average number of common shares outstanding:



 
 
 
 
Basic
11,648


12,187

 
11,701

 
12,207

Diluted
11,872


12,400

 
11,912

 
12,442

Cash dividends declared per common share
$
0.39


$
0.37

 
$
0.78

 
$
0.74








CAPELLA EDUCATION COMPANY
Consolidated Statements of Cash Flows
(In thousands)
 
Six Months Ended June 30,
 
2016
 
2015
 
(Unaudited)
Operating activities
 
 
 
Net income
$
18,993

 
$
20,368

Loss from discontinued operations, net of tax
(2,357
)
 
(1,767
)
Income from continuing operations
21,350

 
22,135

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for bad debts
4,814

 
6,205

Depreciation and amortization
10,349

 
10,850

Amortization of investment discount/premium, net
1,113

 
1,134

Loss on disposal of property and equipment
144

 
27

Share-based compensation
4,432

 
3,894

Excess tax benefits from share-based compensation
(348
)
 
(400
)
Deferred income taxes
(352
)
 
(455
)
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed from business acquisitions:

 
 
 
Accounts receivable
(5,713
)
 
(4,520
)
Prepaid expenses and other current assets
(4,522
)
 
(4,844
)
Accounts payable and accrued liabilities
6,492

 
8,027

Income taxes payable
929

 
(2,040
)
Deferred rent
(472
)
 
(357
)
Deferred revenue
4,603

 
558

Net cash provided by operating activities - continuing operations
42,819

 
40,214

Net cash (used in) provided by operating activities - discontinued operations
(476
)
 
703

Net cash provided by operating activities
42,343

 
40,917

Investing activities
 
 
 
Acquisitions, net of cash acquired
(32,118
)
 
—

Capital expenditures
(9,977
)
 
(12,139
)
Investment in partnership interest
(3,203
)
 
(57
)
Purchases of marketable securities
(12,737
)
 
(18,246
)
Maturities of marketable securities
13,625

 
16,485

Net cash used in investing activities - continuing operations
(44,410
)
 
(13,957
)
Net cash used in investing activities - discontinued operations
(74
)
 
(204
)
Net cash used in investing activities
(44,484
)
 
(14,161
)
Financing activities
 
 
 
Excess tax benefits from share-based compensation
348

 
400

Net proceeds from exercise of stock options
1,551

 
1,087

Payment of dividends
(9,214
)
 
(9,065
)
Repurchases of common stock
(15,012
)
 
(10,493
)
Net cash used in financing activities - continuing operations
(22,327
)
 
(18,071
)
Effect of foreign exchange rates on cash
(9
)
 
(34
)
Net increase (decrease) in cash and cash equivalents
(24,477
)
 
8,651

Cash and cash equivalents and cash of business held for sale at beginning of period
88,027

 
94,003

Cash and cash equivalents and cash of business held for sale at end of period
63,550

 
102,654

Less cash of business held for sale at end of period
(2,109
)
 
(2,230
)
Cash and cash equivalents at end of period
$
61,441

 
$
100,424

Supplemental disclosures of cash flow information
 
 
 
Income taxes paid
$
12,703

 
$
15,987

Non-cash investing and financing activities:
 
 
 
Purchase of equipment included in accounts payable and accrued liabilities
$
342

 
$
578

Declaration of cash dividend to be paid
4,609

 
4,561

Repurchases of common stock included in accrued liabilities
$
—

 
$
499






CAPELLA EDUCATION COMPANY
Segment Reporting
(In thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
     Post-Secondary
$
105,789

 
$
104,496

 
$
211,216

 
$
209,756

     Job-Ready Skills
936

 
88

 
957

 
529

Consolidated revenues
$
106,725

 
$
104,584

 
$
212,173

 
$
210,285

Operating income (loss)
 
 
 
 
 
 
 
     Post-Secondary
21,566

 
18,521

 
39,285

 
36,178

     Job-Ready Skills
(3,494
)
 
(462
)
 
(4,686
)
 
(509
)
Consolidated operating income
18,072

 
18,059

 
34,599

 
35,669

Other income (expense), net
42

 
(10
)
 
33

 
(23
)
Income from continuing operations before income taxes
$
18,114

 
$
18,049

 
$
34,632

 
$
35,646


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 Statement of Income.  

Quarterly revenues and operating income (loss) by reportable segment for 2015 and the first quarters of 2016 can be found at the Capella Education Company website at www.capellaeducation.com, under ‘Investor Relations’, within the ‘Financial Information’ section in the ‘Fiscal Year & Quarterly Results’ spreadsheet.





CAPELLA UNIVERSITY
Other Information
 
June 30,
 
 
Enrollment by Degree (a):
2016
 
2015
 
% Change
Doctoral
9,729

 
10,008

 
(2.8
)%
Master's
17,706

 
16,576

 
6.8
 %
Bachelor's
9,798

 
9,803

 
(0.1
)%
Other
998

 
959

 
4.1
 %
Total
38,231

 
37,346

 
2.4
 %

(a) Enrollment as of June 30, 2016 and 2015 is the enrollment as of the last day of classes for the quarter ended June 30, 2016 and 2015, respectively.


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