Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Business
Capella Education Company (the Company) was incorporated on December 27, 1991, and is the parent company of its wholly owned subsidiaries, Capella University, Inc. (the University); Sophia Learning, LLC (Sophia); Capella Learning Solutions, LLC (CLS); Hackbright Academy, Inc. (Hackbright); and DevMountain, LLC (DevMountain). The University, founded in 1993, is an online postsecondary education services company offering a variety of bachelor's, master's and doctoral degree programs primarily delivered to working adults. The University is accredited by the Higher Learning Commission.
Sophia is an innovative learning company which leverages technology to support self-paced learning, including courses eligible for transfer into credit at over 2,000 colleges and universities. CLS provides online non-degree, high-demand, job-ready skills training solutions and services to individuals and corporate partners through Capella University's learning platform. Hackbright is a leading software engineering school for women with a mission to close the gender gap in the high-demand software engineering space. DevMountain is a leading software development school with a mission to be the most impactful coding school in the country by offering affordable, high-quality, leading-edge software coding education.
On February 8, 2016, the Company’s Board of Directors approved a plan to divest its wholly owned subsidiary, Arden University Limited (Arden University). On
August 18, 2016
, the Company completed the sale of
100%
of the share capital of Arden University. Beginning in the first quarter of 2016 and through the date of sale of the business, the assets and liabilities of Arden University were considered to be held for sale, and the Company presented Arden University as discontinued operations within the financial statements and footnotes. During the
three and six months ended
June 30, 2017
, the Company recorded a gain of $0.1 million related to the divestiture of Arden University.
2. Strayer Merger
On
October 29, 2017
, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Strayer Education, Inc. (“Strayer”) and Sarg Sub Inc. (“Merger Sub”). Strayer is the holding company of Strayer University, which is an institute of higher learning which offers undergraduate and graduate degree programs in business administration, accounting, information technology, education and public administration.
Pursuant to the terms of the Merger Agreement, which was unanimously approved by the boards of directors of both companies, Merger Sub will merge with and into the Company with the Company surviving as a wholly-owned subsidiary of Strayer (the “Merger”). Following the completion of the Merger, Strategic Education, Inc. will be the corporate entity under which both Capella University and Strayer University will continue to operate as independent and separately accredited institutions.
On November 22, 2017, the U.S. Federal Trade Commission granted early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In addition, on January 19, 2018, the Merger agreement was approved by the stockholders of the Company and Strayer. By letter dated February 26, 2018, the Department of Education issued the results of its preacquisition review of the proposed change in ownership of the Company. That letter confirms that, subject to submission of additional documents following the closing, Capella University will have uninterrupted participation in the Title IV Programs while the Department of Education completes its review of the relevant documentation. On July 6, 2018, the Company received notice that the Board of Trustees of the Higher Learning Commission, Capella's regional accreditor, voted to approve the application for a change in ownership of Capella University filed in connection with the Merger Agreement. The Merger is expected to close on August 1, 2018. At the effective time of the Merger, each share of the Company’s stock will be exchanged for
0.875
shares of Strayer common stock.
During the
three and six months ended
June 30, 2018
, the Company incurred
$0.9 million
and
$1.4 million
, respectively, in expenses primarily related to consulting, legal fees, and integration costs in connection with the proposed Merger Agreement. These costs are included in Merger-related costs within the Consolidated Statements of Income for the
three and six months ended
June 30, 2018
.
3. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company, the University, Sophia, CLS, Hackbright, DevMountain, and Arden University after elimination of intercompany accounts and transactions. Arden University was divested during the third quarter of 2016, and prior to the date of sale was presented as discontinued operations within the financial statements and corresponding footnotes.
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company's consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
(
2017
Annual Report on Form 10-K).
Reclassifications
During the year-ended December 31, 2017 the Company began presenting the cash outflows associated with taxes paid to taxing authorities on an employee's behalf for restricted stock unit award releases within financing activities in the Consolidated Statements of Cash Flows rather than within operating activities based on the guidance set forth within Accounting Standards Update (ASU) 2016-09. The Company has applied this provision of the new standard retrospectively, and as such has restated net cash provided by operating activities and net cash used in financing activities for the impact of taxes paid to taxing authorities on an employee's behalf for restricted stock unit award releases within the Consolidated Statements of Cash Flows for the prior periods presented.
Impairment of Property and Equipment
The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered not recoverable, a potential impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. The Company recorded impairment charges related to the impairment of assets classified as property and equipment of
$0.9 million
during the
three and six months ended
June 30, 2018
. During the
three and six months ended
June 30, 2017
, the Company recorded impairment charges of
$0.1 million
and
$0.4 million
, respectively. For the three and six month periods ended
June 30, 2018
, the impairment charges of
$0.9 million
primarily consist 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. These charges are recorded in the Consolidated Statements of Income and classified as instructional costs and services.
Share-Based Compensation
During the
six months ended
June 30, 2018
, the Company granted restricted stock unit awards to a limited number of employees which are required to be settled in cash upon vesting. The restricted stock unit awards to be settled in cash are classified as Accrued liabilities in the Consolidated Balance Sheet as of
June 30, 2018
. The value of these awards is marked to market each period based on the fair value of the Company's common stock at the end of the reporting period, and changes in fair value are recorded in earnings. Share-based compensation expense included in the Consolidated Statements of Income for restricted stock unit awards to be settled in cash was
$2.1 million
and
$2.8 million
during the
three and six months ended
June 30, 2018
, respectively. There were
no
cash payments for restricted stock awards to be settled in cash during the
three and six months ended
June 30, 2018
. As of
June 30, 2018
, there was
$0.9 million
of total unrecognized pre-tax compensation cost related to restricted stock awards to be settled in cash that is expected to be recognized over a weighted-average period of
1.5 years
.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make certain estimates, assumptions, and judgments that affect the reported amounts in the consolidated financial statements and accompanying footnotes. Actual results could differ from those estimates.
Refer to the Company’s “Summary of Significant Accounting Policies” footnote included within the
2017
Annual Report on Form 10-K for a complete summary of the Company’s significant accounting policies.
4. Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which is included in FASB Accounting Standards Codification (ASC) Topic 230,
Statement of Cash Flows
. The new guidance clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows, including contingent consideration payments made after a business acquisition. Specifically, cash payments to settle a contingent consideration liability which are not made soon after the acquisition date should be classified as cash used in financing activities up to the initial amount of contingent consideration recognized with the remaining amount classified as cash flows from operating activities. The Company adopted this guidance as of January 1, 2018, and it did not have an impact on its business practices, financial condition, results of operations, or disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses,
which is included in ASC Topic 326
, Measurement of Credit Losses on Financial Instruments
. The new guidance revises the accounting requirements related to the measurement of credit losses and will require organizations to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable and supportable forecasts about collectability. Assets must be presented in the financial statements at the net amount expected to be collected. The guidance will be effective for the Company's annual and interim reporting periods beginning January 1, 2020, with early adoption permitted. The Company does not expect
adoption of this guidance to have a material impact on its business practices, financial condition, results of operations, or
disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, to require organizations that lease assets to recognize right-to-use assets and lease liabilities for all leases with terms longer than 12 months on the balance sheet in addition to disclosing certain key information about leasing arrangements. The new standard requires a modified retrospective transition approach, meaning the guidance would be applied at the beginning of the earliest comparative period presented within the financial statements in the year of adoption. The guidance will be effective for the Company's annual reporting period beginning January 1, 2019, with early adoption permitted. The Company expects to adopt this standard at the beginning of fiscal year 2019, and all leases with terms longer than 12 months will be recorded as right-of-use assets and lease liabilities on our balance sheet upon adoption. The Company does not expect adoption of this guidance to have a material impact on its business practices, financial condition, results of operations, disclosures, liquidity, or debt-covenant compliance.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities
. The new guidance revises the accounting requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The update also changes certain disclosure requirements associated with the fair value of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity - including investments in partnerships, unincorporated joint ventures and limited liability companies that do not result in consolidation and are not accounted for under the equity method - and recognize the changes in fair value within net income. Entities that hold equity investments without readily determinable fair values will be able to elect to record those investments at cost less impairment with subsequent adjustments for any observable price changes recognized in earnings. The Company has provided the required disclosures related to investments in partnerships within Footnote 14,
Other Investments
. As these investments are not traded and the partnerships do not publish a fair value per share, the investments are deemed to be without readily determinable fair values, and the Company has elected the option to record the investments at cost less impairment and recognize subsequent adjustments for any observable price changes within earnings. The Company adopted this guidance as of January 1, 2018, and it did not have a material impact on its business practices, financial condition, results of operations, liquidity, or debt-covenant compliance.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
This ASU is a comprehensive new revenue recognition model that creates a single source of revenue guidance for all companies in all industries. The model is more principles-based than historical guidance, and is primarily based on recognizing revenue at an amount that reflects
consideration to which the entity expects to be entitled to in exchange for transferring goods or services to a customer. The standard allows the Company to transition to the new model using either a full or modified retrospective approach. Under the original ASU, the guidance was effective for the Company's interim and annual reporting periods beginning January 1, 2017, and early adoption was not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers, Deferral of the Effective Date
, which formally defers the effective date of the new revenue standard for public entities by one year. As a result, the updated revenue guidance is effective for the Company's interim and annual reporting periods beginning January 1, 2018, and early adoption is permitted as of the original effective date contained within ASU 2014-09. The Company adopted this guidance during the first quarter of 2018 utilizing the modified retrospective method of adoption, and the adoption of this guidance did not have a material impact on the Company's business practices, financial condition, or results of operations during the
three and six months ended
June 30, 2018
. The primary impact of adopting the new standard has been modifications to the timing of revenue recognition for certain revenue streams, and we recorded a net cumulative increase to retained earnings and a corresponding decrease to deferred revenue in the amount of
$0.1 million
as of January 1, 2018 as a result of the adoption of this guidance. The Company has provided expanded disclosures pertaining to revenue recognition within Footnote 5 -
Revenues
.
The Company has reviewed and considered all other recent accounting pronouncements and believes there are none that could potentially have a material impact on its business practices, financial condition, results of operations, or disclosures.
5. Revenues
Impact of Adoption of ASC 606 - Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC Topic 606,
Revenue from Contracts with Customers
, following the modified retrospective adoption method. The new guidance was applied to all contracts that were not completed as of the adoption date. Revenues and operating results for the reporting period beginning
January 1, 2018
have been presented under the accounting guidance included within ASC Topic 606, while prior period amounts have not been restated to conform to the new guidance as permitted by the modified retrospective method of adoption.
As a result of the adoption of ASC Topic 606, the Company recorded a net cumulative increase to retained earnings of
$0.1 million
and a corresponding decrease to deferred revenue within the Consolidated Balance Sheet as of January 1, 2018. The impact of adoption was related to tuition revenues across both the Post-Secondary and Job-Ready Skills segments. For the
three and six months ended
June 30, 2018
, the net impact to revenues as a result of the adoption of ASC 606 was a reduction of revenues of
$10 thousand
and
$152 thousand
, respectively, with a corresponding increase to deferred revenue. The reduction to revenues as a result of adoption for the
six months ended
June 30, 2018
is related to tuition revenues across both the Post-Secondary and Job-Ready Skills segments.
The Company has elected, as practical expedients, to not disclose the value of unsatisfied performance obligations for contracts with customers that have an expected duration of one year or less and also will not adjust the transaction price for the impact of a significant financing component for contracts where the period of time between when the Company provides educational services and when the learner is expected to pay for those service is less than one year, as permitted by ASC Topic 606.
Revenue Recognition
The following table presents the Company's revenues from contracts with customers disaggregated by material revenue category, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Post-Secondary revenue
|
|
|
|
|
|
|
|
Tuition, net of discounts, grants, and scholarships
|
$
|
103,962
|
|
|
$
|
103,156
|
|
|
$
|
208,479
|
|
|
$
|
208,698
|
|
Other
1
|
4,576
|
|
|
3,818
|
|
|
9,244
|
|
|
7,757
|
|
Total Post-Secondary revenue
|
108,538
|
|
|
106,974
|
|
|
217,723
|
|
|
216,455
|
|
Job-Ready Skills revenue
2
|
3,025
|
|
|
2,610
|
|
|
5,807
|
|
|
4,917
|
|
Consolidated revenue
|
$
|
111,563
|
|
|
$
|
109,584
|
|
|
$
|
223,530
|
|
|
$
|
221,372
|
|
(1) Post-Secondary other revenue is primarily comprised of course materials and bookstore sales.
(2) Job-Ready Skills revenue is primarily comprised of tuition revenue and placement fee revenue.
The Company’s revenues primarily consist of tuition revenue arising from educational services provided in the form of online courses offered to Capella University FlexPath and GuidedPath learners as well as in-person residency events for certain doctoral learners enrolled in specific programs. Tuition revenue is deferred and recognized as revenue ratably over the period of instruction, which varies depending on the course format and chosen program of study. Tuition revenue is recognized over time as learners obtain control of the educational services provided by the Company subsequent to enrollment and on a ratable basis over the term of the course beginning on the course start date through the last day of classes or the end of the
twelve
week FlexPath subscription period. For GuidedPath (traditional credit-hour) learners who withdraw or drop a course, the Company follows the University refund policy, which generally is:
100%
refund through
five
days,
75%
refund from
six
to
twelve
days, and
zero
percent refund for the remainder of the period. The Company does not recognize revenue for GuidedPath learners who enroll but never engage in the courseroom. FlexPath learners receive a
100%
refund through calendar day
twelve
of the subscription period for their first billing session only and a
zero
percent refund after that date and for all subsequent billing sessions. Refunds are recorded as a reduction of revenue in the period that the learner withdraws from a course. A small number of FlexPath learners who participate in certain employer-sponsored tuition reimbursement programs with Capella University are eligible for a full refund of tuition if they do not successfully complete at least one FlexPath course they are enrolled in during a given subscription period. For these particular learners, revenue recognition is constrained to the extent that the Company expects to provide a full refund to eligible learners based on historical refund experience. Residency program revenue is recognized over the length of the residency, which generally ranges from
three
to
42
days. When the University is required to return funds distributed under Title IV Programs of the Higher Education Act (Title IV or Title IV Programs) to the Department of Education, the learner is not released from his or her payment obligation.
GuidedPath learners are eligible to receive Capella University-awarded grants and scholarships depending on their program eligibility and academic standing. These grants and scholarships vary in amount depending upon the program of study and are generally available to new GuidedPath learners who have successfully completed their first Capella course or a series of Capella courses over a specified period of time. Additionally, FlexPath learners who are employed by, or members of, Capella University's partner organizations may be eligible to receive Capella University-awarded grants or scholarships. The existence of grants and scholarships gives rise to variable consideration, and the recognition of revenue arising from eligible learners is constrained to the extent that management estimates such learners will be eligible to receive the benefits associated with a grant or scholarship.
For learners who drop all courses or withdraw from Capella University with an unpaid tuition balance, the Company records revenue at the time of cash collection, unless the learner re-enrolls in a course during the same time period in which the course was started. Based on the Company’s historical experience, it is not probable that the Company will collect substantially all of the consideration related to such unpaid tuition balances. Accordingly, during the period in which a learner drops all courses or withdraws from Capella University prior to finalizing coursework, no additional revenue is recognized until payment is received from the learner.
Course materials enable learners to electronically access all required materials for courses they are enrolled in during the quarter, including access to e-books, articles, course packs, software, test kits, labs, and any other materials that would be required to successfully complete the course. Revenue derived from course materials is recognized in a manner consistent with tuition revenue as the Company provides the learner with continuous and uninterrupted access to these materials over the period of instruction beginning on the course start date and through the last day of the course.
For bookstore sales, the Company is considered to be the agent in the transaction because it does not control distribution to learners or bear the risk of loss of inventory in transit; as such, the Company only recognizes the mark-up on cost portion of the bookstore sale as revenue. Net bookstore revenue is recognized at the time of delivery of the textbook to the learner.
Deferred revenue in any period represents the excess of tuition and fees received as compared to tuition and fees recognized as revenue in the consolidated statements of income and is reflected as a current liability or within Other liabilities, as appropriate, within the Company's Consolidated Balance Sheets. The increase in deferred revenue as of
June 30, 2018
compared to
December 31, 2017
is primarily related to increased new and total enrollment growth in the current period and the timing of course start dates within the academic calendar for GuidedPath programs at Capella University. Additionally,
$0.8 million
and
$12.6 million
of revenue that was recognized during the
three and six months ended
June 30, 2018
, respectively, had been included in the deferred revenue balance within the Consolidated Balance Sheet at the beginning of the period.
The Company's general payment terms require that learners remit payment for tuition and other related charges prior to the beginning of the course start date in order to be eligible to participate in the course, with limited exceptions. Learners are permitted to carry only a small outstanding unpaid tuition balance that, if exceeded, would prevent the learner from enrolling in
future courses. For Capella University learners who are eligible to receive Federal Title IV loans to cover the cost of tuition, Title IV funds are remitted by the federal government to Capella University and are subsequently applied to a learner's account. Amounts received are included within the deferred revenue balance until the associated revenue is recognized in accordance with the Company's revenue recognition policy.
6. Net Income per Common Share
Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Dilutive shares are computed using the Treasury Stock method and include the incremental effect of shares that would be issued upon the assumed exercise of stock options, settlement of restricted stock, and satisfaction of service conditions for market stock units.
The following table presents a reconciliation of the numerator and denominator in the basic and diluted net income per common share calculation, in thousands, except per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
11,790
|
|
|
$
|
10,755
|
|
|
$
|
25,637
|
|
|
$
|
21,926
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Net income
|
$
|
11,790
|
|
|
$
|
10,755
|
|
|
$
|
25,637
|
|
|
$
|
22,021
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic net income per common share— weighted average shares outstanding
|
11,703
|
|
|
11,644
|
|
|
11,674
|
|
|
11,602
|
|
Effect of dilutive stock options, restricted stock, and market stock units
|
260
|
|
|
348
|
|
|
283
|
|
|
363
|
|
Denominator for diluted net income per common share— weighted average shares outstanding
|
11,963
|
|
|
11,992
|
|
|
11,957
|
|
|
11,965
|
|
Basic net income per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.01
|
|
|
$
|
0.92
|
|
|
$
|
2.20
|
|
|
$
|
1.89
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
Basic net income per common share
|
$
|
1.01
|
|
|
$
|
0.92
|
|
|
$
|
2.20
|
|
|
$
|
1.90
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.99
|
|
|
$
|
0.90
|
|
|
$
|
2.14
|
|
|
$
|
1.83
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
Diluted net income per common share
|
$
|
0.99
|
|
|
$
|
0.90
|
|
|
$
|
2.14
|
|
|
$
|
1.84
|
|
Options to purchase common shares were outstanding, but not included in the computation of diluted net income per common share on both a continuing and discontinued basis, because their effect would be anti-dilutive. The following table summarizes these securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Anti-dilutive securities excluded from diluted earnings per share calculation, for both continuing and discontinued operations
|
—
|
|
|
121
|
|
|
16
|
|
|
106
|
|
7. Marketable Securities
The following is a summary of available-for-sale securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
Tax-exempt municipal securities
|
$
|
26,248
|
|
|
$
|
4
|
|
|
$
|
(43
|
)
|
|
$
|
26,209
|
|
Corporate debt securities
|
36,478
|
|
|
11
|
|
|
(273
|
)
|
|
36,216
|
|
Variable rate demand notes
|
9,550
|
|
|
—
|
|
|
—
|
|
|
9,550
|
|
Total
|
$
|
72,276
|
|
|
$
|
15
|
|
|
$
|
(316
|
)
|
|
$
|
71,975
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
Tax-exempt municipal securities
|
$
|
35,070
|
|
|
$
|
—
|
|
|
$
|
(87
|
)
|
|
$
|
34,983
|
|
Corporate debt securities
|
16,102
|
|
|
8
|
|
|
(92
|
)
|
|
16,018
|
|
Variable rate demand notes
|
23,795
|
|
|
—
|
|
|
—
|
|
|
23,795
|
|
Total
|
$
|
74,967
|
|
|
$
|
8
|
|
|
$
|
(179
|
)
|
|
$
|
74,796
|
|
The unrealized gains and losses on the Company’s investments in municipal and corporate debt securities as of
June 30, 2018
and
December 31, 2017
were caused by changes in market values primarily due to interest rate changes. Substantially all of the Company's securities which were in an unrealized loss position as of
June 30, 2018
had been in an unrealized loss position for less than twelve months. The Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be at maturity.
No
other-than-temporary impairment charges were recorded during the
three and six months ended
June 30, 2018
and
2017
.
The following table summarizes the maturities of the Company’s marketable securities, in thousands:
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
As of December 31, 2017
|
Due within one year
|
$
|
37,589
|
|
|
$
|
45,226
|
|
Due after one year through five years
|
34,386
|
|
|
29,570
|
|
Total
|
$
|
71,975
|
|
|
$
|
74,796
|
|
Amounts due within one year in the table above included
$9.6 million
of variable rate demand notes, with contractual maturities ranging from
4 years
to
31 years
as of
June 30, 2018
. The variable rate demand notes are floating rate municipal bonds with embedded put options that allow the Company to sell the security at par plus accrued interest on a settlement basis ranging from
one day
to
seven days
. We have classified these securities based on their effective maturity date, which ranges from
one day
to
seven days
from the balance sheet date.
The following table summarizes the proceeds from the maturities of available-for-sale securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Maturities of marketable securities
|
$
|
24,055
|
|
|
$
|
25,455
|
|
|
$
|
35,855
|
|
|
$
|
35,995
|
|
Total
|
$
|
24,055
|
|
|
$
|
25,455
|
|
|
$
|
35,855
|
|
|
$
|
35,995
|
|
The Company did not record any gross realized gains or gross realized losses in net income during the
three and six months ended
June 30, 2018
and
2017
. Additionally, there were no proceeds from sales of marketable securities prior to maturity during the
three and six months ended
June 30, 2018
and
2017
.
8. Fair Value Measurements
The following tables summarize certain information for assets and liabilities measured at fair value on a recurring basis, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2018 Using
|
Description
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,059
|
|
|
$
|
8,059
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market
|
|
108,527
|
|
|
108,527
|
|
|
—
|
|
|
—
|
|
Commercial paper
|
|
1,299
|
|
|
—
|
|
|
1,299
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Tax-exempt municipal securities
|
|
26,209
|
|
|
—
|
|
|
26,209
|
|
|
—
|
|
Corporate debt securities
|
|
36,216
|
|
|
—
|
|
|
36,216
|
|
|
—
|
|
Variable rate demand notes
|
|
9,550
|
|
|
—
|
|
|
9,550
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
|
$
|
189,860
|
|
|
$
|
116,586
|
|
|
$
|
73,274
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2017 Using
|
Description
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,951
|
|
|
$
|
17,951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market
|
|
88,615
|
|
|
88,615
|
|
|
—
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Tax-exempt municipal securities
|
|
34,983
|
|
|
—
|
|
|
34,983
|
|
|
—
|
|
Corporate debt securities
|
|
16,018
|
|
|
—
|
|
|
16,018
|
|
|
—
|
|
Variable rate demand notes
|
|
23,795
|
|
|
—
|
|
|
23,795
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
|
$
|
181,362
|
|
|
$
|
106,566
|
|
|
$
|
74,796
|
|
|
$
|
—
|
|
The Company measures cash and money markets at fair value primarily using real-time quotes for transactions in active exchange markets involving identical assets. The Company’s marketable securities are classified within Level 2 and are valued using readily available pricing sources for comparable instruments utilizing observable inputs from active markets. The Company does not hold securities in inactive markets. The Company did not have any transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the
three and six months ended
June 30, 2018
and
2017
.
Level 3 Measurements
DevMountain Contingent Consideration
In connection with the acquisition of DevMountain, the Company agreed to pay the former owners of DevMountain up to an additional
$5.0 million
in contingent consideration pending the achievement of certain revenue and operating performance metrics. The fair value of the contingent consideration is determined using a discounted cash flow model encompassing significant unobservable inputs. The key assumptions and terms underlying the valuation included probability-weighted cash flows for the applicable performance periods, the discount rate, and a
three
-year measurement period, with potential cash payments taking place at the end of each annual period through 2018 based upon the achievement of established performance targets.
No
payments were made related to the 2016 or 2017 performance periods, and
no
amounts are accrued related to the 2018 performance period. Reasonable changes in the unobservable inputs do not result in a material change in the fair value.
The fair value of the contingent consideration was
zero
as of
June 30, 2018
and
December 31, 2017
.
9. Accrued Liabilities
Accrued liabilities consist of the following, in thousands:
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
As of December 31, 2017
|
Accrued compensation and benefits
|
$
|
10,836
|
|
|
$
|
9,151
|
|
Accrued instructional
|
3,588
|
|
|
3,662
|
|
Accrued vacation
|
1,493
|
|
|
1,122
|
|
Accrued invoices
|
9,820
|
|
|
10,683
|
|
Other
(1)
|
2,078
|
|
|
2,001
|
|
Total
|
$
|
27,815
|
|
|
$
|
26,619
|
|
(1) "Other" consists primarily of the current portion of deferred rent, customer deposits, and other miscellaneous accruals.
10. Commitments and Contingencies
Operating Leases
The Company leases its office facilities, data centers, and certain office equipment under various noncancelable operating leases. On
August 5, 2016
, the Company entered into an amendment of its lease with Minneapolis 225 Holdings, LLC pursuant to which the Company renewed and extended its existing lease for premises at 225 South Sixth Street in Minneapolis, Minnesota through
October 31, 2028
. Renewal terms under the amended lease agreement included a reduction in the area of leased space occupied by the Company of approximately
64,000
square feet and provided for lease incentives of approximately
$13.6 million
. The lease incentives, which were paid in cash to the Company by the lessor upon closing, are included within deferred rent and accrued liabilities within the Consolidated Balance Sheets and will be recognized ratably as a reduction of rent expense over the term of the lease. The agreement allows the Company to extend the lease for up to
two
additional
five
-year terms.
The following presents the Company's future minimum lease commitments as of
June 30, 2018
, in thousands:
|
|
|
|
|
2018
|
$
|
3,489
|
|
2019
|
5,782
|
|
2020
|
5,355
|
|
2021
|
4,742
|
|
2022
|
4,550
|
|
2023 and thereafter
|
28,305
|
|
Total
|
$
|
52,223
|
|
The Company recognizes rent expense on a straight-line basis over the term of the lease, although the lease may include escalation clauses providing for lower payments at the beginning of the lease term and higher payments at the end of the lease term. Cash or lease incentives received from lessors are recognized on a straight-line basis as a reduction to rent expense from the date the Company takes possession of the property through the end of the lease term. The Company includes the short-term and long-term components of the unamortized portion of the lease incentives within accrued liabilities and deferred rent, respectively, on the Consolidated Balance Sheets.
Revolving Credit Facility
On
December 18, 2015
, the Company entered into a secured revolving credit facility (the Facility) with Bank of America, N.A., and certain other lenders. The Facility provides the Company with a committed
$100.0 million
of borrowing capacity with an increase option of an additional
$50.0 million
. The Company's obligations under the Facility are guaranteed by all existing material domestic subsidiaries and secured by substantially all assets of the Company and such subsidiaries. The Facility expires by its terms on
December 18, 2020
.
Borrowings under the Credit Agreement bear interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus an applicable rate of
1.75%
to
2.25%
based on the Company’s consolidated leverage ratio or, at the Company’s option, an alternative base rate (defined as the higher of (a) the federal funds rate plus
0.5%
; (b) Bank of America’s prime rate; or (c) the one-month LIBOR plus
1.0%
) plus an applicable rate of
0.75%
to
1.25%
based on the Company’s consolidated leverage ratio.
The Credit Agreement requires payment of a commitment fee, based on the Company’s consolidated leverage ratio, charged on the unused credit facility. The Company recorded commitment fee expenses of
$0.1 million
and
$0.2 million
in other income, net, for the
three and six months ended
June 30, 2018
and
2017
. Outstanding letters of credit are also charged a fee, based on the Company’s consolidated leverage ratio. The Company capitalized approximately
$0.8 million
of debt issuance costs related to the
December 18, 2015
credit facility, and these costs are being amortized on a straight-line basis over a period of
five
years. Charges related to the Facility are included in other income, net.
The Credit Agreement contains certain covenants that, among other things, require maintenance of certain financial ratios, as defined in the agreement. Failure to comply with the covenants contained in the Credit Agreement will constitute an event of default and could result in termination of the agreement and require payment of all outstanding borrowings. As of
June 30, 2018
and
December 31, 2017
, there were
no
borrowings under the Facility, and the Company was
in compliance
with all debt covenants. The Company will terminate the Credit Agreement upon completion of the Merger with Strayer Education, Inc.
Litigation
In the ordinary conduct of business, the Company is subject to various lawsuits and claims covering a wide range of matters including, but not limited to, claims involving learners or graduates and routine employment matters. In addition, the Merger with Strayer Education, Inc. also may subject the Company to shareholder or other related litigation. While the outcome of these matters is uncertain, the Company does not believe there are any significant matters as of
June 30, 2018
that are probable and estimable, for which the outcome could have a material adverse impact on its consolidated financial position or results of operations.
11. Share Repurchase Program and Dividends
Share Repurchase Program
The Company announced its current share repurchase program in July 2008. The Board of Directors authorizes repurchases of outstanding shares of common stock from time to time depending on market conditions and other considerations. A summary of the Company’s comprehensive share repurchase activity from the program's commencement through
June 30, 2018
, all of which was part of its publicly announced program, is presented below, in thousands:
|
|
|
|
|
Board authorizations:
|
|
July 2008
|
$
|
60,000
|
|
August 2010
|
60,662
|
|
February 2011
|
65,000
|
|
December 2011
|
50,000
|
|
August 2013
|
50,000
|
|
December 2015
|
50,000
|
|
Total amount authorized
|
335,662
|
|
Total value of shares repurchased
|
308,702
|
|
Residual authorization
|
$
|
26,960
|
|
During the
three and six months ended
June 30, 2018
and
2017
, there were
no
share repurchases.
As of
June 30, 2018
, the Company had purchased an aggregate of
6.7 million
shares under the program’s outstanding authorizations at an average price per share of
$46.28
totaling
$308.7 million
, excluding commissions.
Dividends
During the
six months ended
June 30, 2018
, the Company declared the following cash dividends, in thousands except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend per Share
|
|
Total Dividend Amount
|
February 21, 2018
|
|
March 8, 2018
|
|
April 13, 2018
|
|
$
|
0.43
|
|
|
$
|
5,090
|
|
April 30, 2018
|
|
May 24, 2018
|
|
June 29, 2018
|
|
$
|
0.43
|
|
|
$
|
5,121
|
|
Dividends declared are attributable to shares of common stock outstanding as of the record date and restricted stock units (RSUs). Dividends declared on RSUs are forfeitable prior to vesting. All future dividends are subject to declaration by the
Company's Board of Directors and may be adjusted due to future business needs or other factors deemed relevant by the Board of Directors.
12. Share-Based Compensation
The table below reflects the Company’s share-based compensation expense recognized in the consolidated statements of income, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Instructional costs and services
|
$
|
185
|
|
|
$
|
240
|
|
|
$
|
370
|
|
|
$
|
428
|
|
Marketing and promotional
|
237
|
|
|
257
|
|
|
473
|
|
|
468
|
|
Admissions advisory
|
7
|
|
|
12
|
|
|
14
|
|
|
25
|
|
General and administrative
|
2,391
|
|
|
1,696
|
|
|
3,714
|
|
|
2,558
|
|
Share-based compensation expense included in operating income
|
2,820
|
|
|
2,205
|
|
|
4,571
|
|
|
3,479
|
|
Tax benefit from share-based compensation expense
|
676
|
|
|
864
|
|
|
1,096
|
|
|
1,350
|
|
Share-based compensation expense, net of tax
|
$
|
2,144
|
|
|
$
|
1,341
|
|
|
$
|
3,475
|
|
|
$
|
2,129
|
|
13. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform") was signed into law making significant changes to the Internal Revenue Code. Changes included, but are not limited to, a corporate tax rate decrease from
35%
to
21%
and modification of the employee compensation limit effective for tax years beginning after December 31, 2017. The Company has calculated its best estimate of the impact of the Act in its income tax provision in accordance with its understanding of Tax Reform and guidance available as of the date of this filing.
The Company recorded income tax expense of
$4.0 million
and
$8.6 million
for the
three and six months ended
June 30, 2018
, reflecting an effective tax rate of
25.3%
and
25.0%
, respectively. During the
three and six months ended
June 30, 2017
, the Company recorded income tax expense of
$4.7 million
and
$11.2 million
, reflecting an effective tax rate of
30.3%
and
33.8%
, respectively. The decrease in income tax expense is primarily attributable to the reduction in the federal corporate income tax rate under Tax Reform. The difference between the effective tax rates and the statutory tax rates for the
three and six months ended
June 30, 2018
primarily consists of state income taxes, employee compensation in excess of deductible limitations, nondeductible merger-related costs, and share-based compensation tax deductions. The difference between the effective tax rates and the statutory tax rates for the
three and six months ended
June 30, 2017
primarily consists of state income taxes, employee compensation in excess of deductible limitations, and share-based compensation tax deductions.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of Tax Reform. As of
June 30, 2018
,
no
significant measurement period adjustments have been made. Given the significant complexity of Tax Reform, additional work is necessary to perform a more detailed analysis of these items, and any subsequent adjustment to these amounts will be recorded in the period that the analysis is complete.
14. Other Investments
At
June 30, 2018
, the Company held a
$4.0 million
investment in a limited partnership that invests in innovative companies in the health care field, with a commitment to invest up to an additional
$0.4 million
through December 2022. At
December 31, 2017
, the Company's investment in the limited partnership was
$3.9 million
. During the
six months ended
June 30, 2018
and
2017
, the Company made investments totaling
$0.1 million
and
$0.4 million
, respectively, in the partnership. The Company's investment comprises less than
3%
of the total partnership interest.
At
June 30, 2018
, the Company held a
$4.0 million
investment in a limited partnership that invests in education and education-related technology companies, with a commitment to invest up to an additional
$0.7 million
through December 2025. At
December 31, 2017
, the Company's investment in the limited partnership was
$3.5 million
. During the
six months ended
June 30, 2018
, the Company made investments totaling
$0.5 million
in the partnership, and during the
six months ended
June 30, 2017
, the Company made
no
investments in the partnership. The Company's investment comprises less than
5%
of the total partnership interest.
At
June 30, 2018
, the Company held a
$0.6 million
investment in a limited partnership that invests in education and education-related technology companies, with a commitment to invest up to an additional
$2.1 million
through September 2027. At
December 31, 2017
, the Company's investment in the limited partnership was
$0.4 million
. During the
six months ended
June 30, 2018
, the Company made investments totaling
$0.2 million
in the partnership, and during the
six months ended
June 30, 2017
, the Company made
no
investments in the partnership. The Company's investment comprises less than
5%
of the total partnership interest.
The Company adopted ASU No. 2016-01,
Financial Instruments - Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities,
as of January 1, 2018. According to the guidance, entities that hold equity investments without readily determinable fair values will be able to elect to record those investments at cost less impairment with subsequent adjustments for any observable price changes recognized in earnings. As the other investments are not traded and the partnerships do not publish a fair value per share, these investments are deemed to be without readily determinable fair values, and the Company has elected the option to record other investments at cost less impairment and recognize subsequent adjustments for any observable price changes within earnings.
During the
six months ended
June 30, 2018
and
2017
,
no
events or changes in circumstances which could have a significant adverse impact on the fair value of the partnership investments were identified, and there were
no
observable price changes recognized in earnings with respect to these investments. Additionally, during the
six months ended
June 30, 2018
and
2017
,
no
impairment charges were recorded related to the partnership investments. As no impairment charges were recorded and because no observable price changes occurred during the period, the Company's other investments are reflected at cost within the other assets balance in the Consolidated Balance Sheets as of
June 30, 2018
and
December 31, 2017
. When measured on a nonrecurring basis, if changes in circumstances are identified, the Company’s partnership investments are considered to be Level 3 in the fair value hierarchy due to the use of unobservable inputs to measure fair value.
15. Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Loss
|
|
Unrealized Loss on Marketable Securities
|
|
Accumulated Other Comprehensive Loss
(1)
|
Beginning balance, December 31, 2017
|
$
|
(3
|
)
|
|
$
|
(107
|
)
|
|
$
|
(110
|
)
|
Other comprehensive income (loss)
|
(2
|
)
|
|
(99
|
)
|
|
(101
|
)
|
Ending balance, June 30, 2018
|
$
|
(5
|
)
|
|
$
|
(206
|
)
|
|
$
|
(211
|
)
|
|
|
(1)
|
Accumulated other comprehensive loss is presented net of tax of
$95 thousand
and
$64 thousand
as of
June 30, 2018
and
December 31, 2017
, respectively.
|
There were
no
reclassifications out of accumulated other comprehensive loss to net income for the
three and six months ended
June 30, 2018
and
2017
.
16. Segment Reporting
Capella Education Company is an educational services company that provides access to high-quality education through online postsecondary degree programs and job-ready skills offerings in high-demand markets. Capella’s portfolio of companies is dedicated to closing the skills gap by placing adults on the most direct path between learning and employment.
Our only operating segment that meets the quantitative thresholds to qualify as a reportable segment is the Post-Secondary segment, which consists of the Capella University and Sophia businesses. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these other operating segments are combined and presented below as Job-Ready Skills. The Job-Ready Skills reportable segment is comprised of the CLS, Hackbright, and DevMountain businesses.
Revenue and operating expenses are generally directly attributed to our segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. Our Chief Operating Decision Maker does not evaluate operating segments using asset information.
A summary of financial information by reportable segment (in thousands) for the
three and six months ended
June 30, 2018
and
2017
is presented in the following table. Beginning in the first quarter of 2016 through the date of the sale of the business, Arden University was considered to be held for sale, and because Arden's results of operations are presented as discontinued operations within our Consolidated Statements of Income, the summary of financial information by reportable segment below excludes the results of operations of Arden University for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
|
|
Post-Secondary
|
$
|
108,538
|
|
|
$
|
106,974
|
|
|
$
|
217,723
|
|
|
$
|
216,455
|
|
Job-Ready Skills
|
3,025
|
|
|
2,610
|
|
|
5,807
|
|
|
4,917
|
|
Consolidated Revenues
|
$
|
111,563
|
|
|
$
|
109,584
|
|
|
$
|
223,530
|
|
|
$
|
221,372
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
Post-Secondary
|
$
|
18,029
|
|
|
$
|
17,754
|
|
|
$
|
37,473
|
|
|
$
|
38,005
|
|
Job-Ready Skills
|
(2,077
|
)
|
|
(2,383
|
)
|
|
(3,073
|
)
|
|
(5,033
|
)
|
Merger-related costs
|
(873
|
)
|
|
—
|
|
|
(1,395
|
)
|
|
—
|
|
Consolidated operating income
|
15,079
|
|
|
15,371
|
|
|
33,005
|
|
|
32,972
|
|
Other income, net
|
695
|
|
|
56
|
|
|
1,191
|
|
|
163
|
|
Income from continuing operations before income taxes
|
$
|
15,774
|
|
|
$
|
15,427
|
|
|
$
|
34,196
|
|
|
$
|
33,135
|
|
17. Regulatory Supervision and Oversight
Political and budgetary concerns can significantly affect the Title IV Programs. Congress reauthorizes the
Higher Education Act (
HEA) and other laws governing Title IV Programs approximately every
five
to
eight
years. The last reauthorization of the HEA was completed in August 2008. Additionally, Congress reviews and determines appropriations for Title IV programs on an annual basis through the budget and appropriations processes. As of
June 30, 2018
, Title IV programs in which the University's learners participate are operative and sufficiently funded.