CPLA Capella Education Company (MM)

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 andOutstanding 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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Investors:Capella Education CompanyHeide Erickson, 612-977-5172Heide.Erickson@capella.eduorMedia:Capella Education CompanyMike Buttry, 612-977-5499Mike.Buttry@capella.edu