CPLA Capella Education Company (MM)

Capella Education Company (NASDAQ: CPLA), a provider of online post-secondary education, primarily through its wholly owned subsidiary Capella University, today announced financial results for the three months and year ended Dec. 31, 2014.

“2014 was a strong year for Capella,” said Kevin Gilligan, chairman and chief executive officer. “We achieved new enrollment growth and improved early cohort persistence in every quarter, and returned to annual total enrollment and revenue growth. We are entering 2015 with momentum and a great opportunity to begin a new period of sustained growth for Capella.”

For the three months ended Dec. 31, 2014:

• Revenues were $108.4 million, compared to $106.0 million in the fourth quarter of 2013, an increase of 2.3 percent.
• Capella University total active enrollment increased 2.5 percent to 36,309, new enrollment increased by 8.8 percent from fourth quarter 2013 and early cohort persistence improved by approximately 4 percent.
• Operating income was $20.3 million, compared to $16.7 million for the same period in 2013. Operating margin was 18.7 percent, compared to 15.8 percent for the fourth quarter 2013.
• Net income for the fourth quarter of 2014 was $12.3 million, compared to $10.0 million for the same period in 2013.
• Net income per diluted share was $0.99, compared to $0.79 for the same period in 2013.

For the fiscal year ended Dec. 31, 2014:

• Revenues increased by 1.5 percent to $422.0 million, compared to $415.6 million for the same period in 2013.
• Operating income for 2014 was $64.1 million, or 15.2 percent of revenue, including 2nd quarter 2014 lease amendment charges of approximately $2.7 million, compared to $59.9 million, or 14.4 percent of revenue during 2013.
• Net income was $37.9 million, or $3.03 per diluted share, compared to $35.2 million, or $2.80 per diluted share for 2013.
• Capella University average quarterly total enrollment growth increased by 0.6 percent compared to 2013.
• Total Capella University new enrollment for 2014 increased 8.7 percent from 2013.

Balance Sheet and Cash Flow

As of Dec. 31, 2014, the Company had cash and marketable securities of $167.1 million, compared to $160.2 million at Dec. 31, 2013, and no debt for the same periods.

Cash flow from operating activities for 2014 was $65.2 million compared to $69.3 million in 2013.

Dividend and Share Repurchases

The Company announced an increase in its quarterly cash dividend to $0.37 per outstanding share of common stock during the fourth quarter of 2014. The dividend was paid on Jan. 15, 2015.

The Company repurchased approximately 280,000 shares of Capella stock for total consideration of $17.3 million in fiscal year 2014. In the fourth quarter 2014, the Company repurchased approximately 45,000 shares of Capella stock for total consideration of $3.0 million. The remaining authorization as of the end of the fourth quarter was $32.0 million.

Outlook

For the first quarter ending March 31, 2015, Capella University new enrollment growth is expected to increase in the 13.0 to 15.0 percent range year-over-year. Total enrollment is expected to grow about 4.0 to 5.0 percent year-over-year, and consolidated revenue is expected to increase about 3.0 to 4.0 percent compared to first quarter 2014.

The consolidated operating margin is anticipated to be approximately 15.0 to 16.0 percent of total revenue for the first quarter of 2015.

“We believe we are in a good position to deliver performance improvements in 2015, including a few additional points of total enrollment and revenue growth as well as operating margin improvements,” said Steve Polacek, senior vice president and chief financial officer. “We will continue to invest in innovation and the future success of our learners as we further strengthen our position for long-term sustainable growth.”

Forward-Looking StatementsCertain 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 risks and uncertainties that could cause the company's actual results to differ materially from historical results and those 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 and gainful employment disclosures, 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; any governmental review of our business, marketing, or financial aid practices, including by any state attorneys general, the federal Consumer Financial Protection Bureau, the Minnesota Office of Higher Education or other state 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; 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 fourth quarter 2014 results and outlook during a conference call scheduled today, Feb. 12, 2015, 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# 62256896. 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 Feb. 12, 2015 through Feb. 19, 2015, at 855.859.2056 (domestic) or 404.537.3406 (international), conference ID# 62256896. It will also be archived at www.capellaeducation.com in the investor relations section.

About Capella Education Company

Founded in 1991, Capella Education Company (http://www.capellaeducation.com) is a leader in online education, primarily through our wholly owned subsidiary Capella University (http://www.capella.edu), a regionally accredited* online university with more than 36,000 learners as of Dec. 31, 2014. In addition, Capella Education Company offers online education through Resource Development International Ltd. (RDI) (http://www.rdi.co.uk), 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 is accredited by The Higher Learning Commission.

  CAPELLA EDUCATION COMPANY   Consolidated Balance Sheets (In thousands, except par value)         As of December 31, 2014 As of December 31, 2013 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 94,003 $ 124,097 Marketable securities, current 29,619 18,342 Accounts receivable, net of allowance of $6,558 at December 31, 2014 and $7,091 at December 31, 2013 17,902 16,919 Prepaid expenses and other current assets 9,007 10,548 Deferred income taxes 2,809   2,846   Total current assets 153,340 172,752 Marketable securities, non-current 43,430 17,740 Property and equipment, net 37,246 39,993 Goodwill 16,961 16,969 Intangibles, net 1,927 2,795 Other assets 1,453   —   Total assets $ 254,357   $ 250,249   LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,832 $ 7,939 Accrued liabilities 23,410 33,164 Dividends payable 4,622 4,346 Income taxes payable 709 — Deferred revenue 11,718   10,736   Total current liabilities 47,291 56,185 Deferred rent 2,440 3,221 Other liabilities 3,698 2,541 Deferred income taxes 5,894   6,283   Total liabilities 59,323 68,230   Shareholders’ equity: Common stock, $0.01 par value: Authorized shares — 100,000; Issued and Outstanding shares — 12,243 at December 31, 2014 and 12,361 at December 31, 2013 122 124 Additional paid-in capital 112,417 104,546 Accumulated other comprehensive loss (335 ) (114 ) Retained earnings 82,830   77,463   Total shareholders’ equity 195,034   182,019   Total liabilities and shareholders’ equity $ 254,357   $ 250,249       CAPELLA EDUCATION COMPANY   Consolidated Statements of Income (In thousands, except per share amounts)         Three Months Ended December 31, Twelve Months Ended December 31, 2014     2013 2014     2013 (Unaudited) Revenues $ 108,442 $ 105,985 $ 421,967 $ 415,623 Costs and expenses: Instructional costs and services 45,530 45,906 185,503 183,757 Marketing and promotional 25,407 26,107 99,790 102,198 Admissions advisory 6,950 6,809 28,042 27,103 General and administrative 10,243 10,436 41,847 42,688 Lease amendment charges —   —   2,690   —   Total costs and expenses 88,130   89,258   357,872   355,746   Operating income 20,312 16,727 64,095 59,877 Other income (expense), net (166 ) 284   (725 ) (179 ) Income before income taxes 20,146 17,011 63,370 59,698 Income tax expense 7,821   6,995   25,427   24,495   Net income $ 12,325   $ 10,016   $ 37,943   $ 35,203   Net income per common share: Basic $ 1.01 $ 0.81 $ 3.09 $ 2.84 Diluted $ 0.99 $ 0.79 $ 3.03 $ 2.80 Weighted average number of common shares outstanding: Basic 12,242 12,383 12,286 12,391 Diluted 12,508 12,697 12,535 12,566 Cash dividends declared per common share $ 0.37 $ 0.35 $ 1.42 $ 0.35     CAPELLA EDUCATION COMPANY   Consolidated Statements of Cash Flows (In thousands)     Twelve Months Ended December 31, 2014     2013 (Unaudited) Operating activities Net income $ 37,943 $ 35,203 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debts 14,848 15,132 Depreciation and amortization 23,798 25,877 Amortization of investment discount/premium 1,843 768 Impairment of property and equipment 277 229 Loss on disposal of property and equipment 69 52 Share-based compensation 5,129 5,330 Excess tax benefits from share-based compensation (547 ) (310 ) Deferred income taxes (317 ) (1,463 ) Payment of contingent consideration (906 ) — Changes in operating assets and liabilities Accounts receivable (15,843 ) (16,141 ) Prepaid expenses and other current assets (754 ) 1,787 Accounts payable and accrued liabilities (3,582 ) 4,578 Income tax payable 3,000 (1,826 ) Deferred rent (781 ) (929 ) Deferred revenue 1,011   1,062   Net cash provided by operating activities 65,188 69,349 Investing activities Capital expenditures (20,584 ) (18,728 ) Investment in partnership interest (1,453 ) — Purchases of marketable securities (64,308 ) (22,426 ) Maturities of marketable securities 25,415   7,885   Net cash used in investing activities (60,930 ) (33,269 ) Financing activities Excess tax benefits from share-based compensation 547 310 Net proceeds from exercise of stock options 5,599 3,452 Payment of dividends (17,256 ) — Repurchases of common stock (17,299 ) (8,965 ) Payment of contingent consideration (5,945 ) —   Net cash used in financing activities (34,354 ) (5,203 ) Effect of foreign exchange rates on cash 2   —   Net increase (decrease) in cash and cash equivalents (30,094 ) 30,877 Cash and cash equivalents at beginning of year 124,097   93,220   Cash and cash equivalents at end of year $ 94,003   $ 124,097   Supplemental disclosures of cash flow information Income taxes paid $ 23,061 $ 27,486 Non-cash investing and financing activities: Purchase of equipment included in accounts payable and accrued liabilities $ 863 $ 775 Declaration of cash dividend to be paid $ 4,587 $ 4,383     CAPELLA UNIVERSITY   Other Information         December 31 Enrollment by Degree (a): 2014     2013 % Change PhD/Doctoral 10,100 10,700 (5.6 )% Master's 15,700 14,931 5.2 % Bachelor's 9,500 8,828 7.6 % Other 1,009   973   3.7 % Total 36,309   35,432   2.5 %  

(a) Enrollment as of December 31, 2014 and 2013 is the enrollment as of the last day of classes for the quarter ended December 31, 2014 and 2013, respectively.

Capella Education CompanyInvestor Contact:Heide Erickson, 612-977-5172Heide.Erickson@capella.eduorMedia Contact:Mike Buttry, 612-977-5499Mike.Buttry@capella.edu