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 (the University), Arden University, Ltd. (Arden University) - formerly known as Resource Development International Limited, or RDI, Sophia Learning, LLC (Sophia), and Capella Learning Solutions (CLS). 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.
In 2011, the Company acquired RDI, and in August 2015, RDI received confirmation that it met the criteria for university title in the United Kingdom (UK) and could begin operating as Arden University. Arden University is an independent provider of UK university qualifications that markets, develops and delivers programs worldwide via its offices and partners across Asia, North America, Africa and Europe. On February 8, 2016, the Company’s Board of Directors approved a plan to divest Arden University. We are actively marketing the Arden University business and believe it is probable that the business will be divested within a year. As such, the assets and liabilities of Arden University are considered to be held for sale, and Arden University is presented as discontinued operations within the financial statements and footnotes for all periods presented.
Sophia is an innovative learning platform leveraging 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 which are delivered through Capella's learning platform.
With the Company's focus on high-quality academic offerings provided in an online delivery format, it has
one
reporting segment.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company, the University, CLS, Arden University and its subsidiaries, and Sophia, after elimination of intercompany accounts and transactions. Arden University operates on a fiscal year ending October 31, which is also the date used for consolidation.
Reclassifications
We reclassified prior periods within our Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Cash Flows, as well as certain applicable footnotes to conform to our current presentation of Arden University as discontinued operations. Refer to Note 4, Discontinued Operations, for additional information.
Revenue Recognition
Beginning in fiscal year 2016, we record revenue for learners who drop all courses or withdraw from the University with an unpaid tuition balance at the time of cash collection. This change is consistent with the Company's belief that such unpaid balances do not meet the threshold of reasonable collectability which must be met in order to recognize revenue. During the period in which a learner drops all courses or withdraws from the University prior to finalizing coursework, no additional revenue will be recognized until payment is received from the learner. This change did not have a material impact on our revenues or results of operations in the current period, and is not expected to have a material impact on revenues or results of operations in subsequent periods.
Subsequent Events
On
April 22, 2016
, the Company acquired
100%
of the share capital of Sutter Studios, Inc. d/b/a Hackbright Academy (Hackbright) for approximately
$18.0 million
in cash, subject to customary adjustments for working capital, debt, and seller transaction expenses. Hackbright is a leading software engineering school for women, with a mission to increase female representation in the technology sector. Hackbright, headquartered in San Francisco, offers in-person, immersive 12-week full-
time educational programs in software engineering as well as part-time programs. Capella’s acquisition of Hackbright Academy will expand Capella’s existing business of providing innovative education offerings which provide a more direct path from learning to employment. Upon acquisition, the Company changed the official corporate name of Hackbright to Hackbright Academy, Inc.
Hackbright’s operating results will be included in the Company’s consolidated financial statements from the date of the acquisition, and are not expected to be material to our 2016 results of operations. The initial accounting for the Hackbright acquisition is incomplete at this time as the Company is in the process of determining the fair value of the assets acquired and liabilities assumed in accordance with ASC 805 Business Combinations.
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. Preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. 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, 2015
(
2015
Annual Report on Form 10-K).
Refer to the Company’s “Summary of Significant Accounting Policies” footnote included within the 2015 Annual Report on Form 10-K for a complete summary of the Company’s significant accounting policies.
3. Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which changes how companies will account for certain aspects of share-based payments to employees. As part of the new guidance, entities will be required to record the impact of income taxes arising from share-based compensation when awards vest or are settled within earnings as part of income tax expense rather than recorded as part of APIC and will eliminate the requirement that excess tax benefits be realized prior to recognition. Additionally,
the guidance requires entities to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity.
Furthermore, companies will be required to make an accounting policy election at the time of adoption of the new guidance to either account for forfeitures of share-based awards in a manner similar to today's requirements (i.e.,
estimating the number of awards expected to be forfeited at the grant date and adjusting the estimate when awards are actually forfeited), or recognizing forfeitures as they occur with no estimate of forfeitures determined at the grant date. Entities will apply the forfeiture election provision using a modified retrospective transition approach, with a cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Finally, the new guidance simplifies the minimum statutory tax withholding requirements for employers who withhold shares upon settlement of an award on behalf of an employee to cover tax obligations. Specifically, the new guidance
allows entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award.
The guidance will be effective for the Company's annual and interim reporting periods beginning January 1, 2017, with early adoption permitted. The Company is evaluating the impact this standard will have on its business practices, financial condition, results of operations, and disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, to require organizations that lease assets to recognize the rights and obligations associated with those leases on the consolidated balance sheets. The guidance will be effective for the Company's annual reporting period beginning January 1, 2019, with early adoption permitted. The Company is evaluating the impact this standard will have on its business practices, financial condition, results of operations, and disclosures.
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. The guidance will be effective for the Company's annual and interim reporting periods beginning January 1, 2018, and early adoption is generally not permitted for most provisions. The Company is evaluating the impact this standard will have on its business practices, financial condition, results of operations, and disclosures.
In February 2015, the FASB issued ASU No. 2015-02,
Amendments to the Consolidation Analysis
, which is included in FASB Accounting Standard Codification (ASC) Topic 810,
Consolidation
. This update changes the guidance with respect to the analyses that a reporting entity must perform to determine whether it should consolidate certain types of legal entities under the variable interest consolidation model. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. The Company adopted this guidance in the first quarter of 2016, and it did not have a material impact on its business practices, financial condition, results of operations, or disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern,
which is included in ASC 205,
Presentation of Financial Statements
. This update provides an explicit requirement for management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The guidance will be effective for the Company's annual reporting period beginning January 1, 2017, and applied prospectively; early adoption is also 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 May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers,
which is included in ASC Topic 606,
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 current 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 will be 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 is evaluating the impact this standard will have on its business practices, financial condition, results of operations, and disclosures.
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.
4. Discontinued Operations
On
February 8, 2016
, the Company’s Board of Directors approved a plan to divest Arden University. Arden University achieved the strategic milestones the Company pursued, including receiving University Title in 2015, and is well positioned in the UK market. The planned disposal of Arden University represents a strategic shift in the Company's business, and the Company believes that divesting and reallocating resources previously used to fund Arden University's operations to FlexPath and the non-degree market in the U.S. will create a higher return for our shareholders and better position the Company for strong growth in the future.
The Company is actively marketing the Arden University business and believes it is probable that the business will be divested within a year. As such, the assets and liabilities of Arden University are considered to be held for sale, and Arden University is presented as discontinued operations within the financial statements and footnotes for all periods presented.
The major components of Arden University's assets and liabilities, which are presented separately as held for sale within the Company's Consolidated Balance Sheets as of
March 31, 2016
and
December 31, 2015
, are as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
1,103
|
|
|
$
|
1,923
|
|
Accounts receivable, net
|
2,310
|
|
|
2,055
|
|
Goodwill
|
16,677
|
|
|
16,862
|
|
Intangibles, net
|
1,254
|
|
|
1,389
|
|
Other assets
|
652
|
|
|
729
|
|
Assets of business held for sale
|
$
|
21,996
|
|
|
$
|
22,958
|
|
Liabilities
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
3,585
|
|
|
$
|
3,324
|
|
Deferred revenue
|
4,564
|
|
|
4,967
|
|
Other liabilities
|
53
|
|
|
—
|
|
Liabilities of business held for sale
|
$
|
8,202
|
|
|
$
|
8,291
|
|
A reconciliation of the line items comprising the results of operations of the Arden University business to the loss from discontinued operations presented in the Consolidated Statements of Income for the
three months ended
March 31, 2016
and
2015
, in thousands, is included in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Revenues
|
$
|
3,270
|
|
|
$
|
3,373
|
|
Costs and expenses:
|
|
|
|
Instructional costs and services
|
1,660
|
|
|
1,819
|
|
Marketing and promotional
|
1,293
|
|
|
1,159
|
|
Admissions advisory
|
273
|
|
|
252
|
|
General and administrative
|
953
|
|
|
973
|
|
Total costs and expenses
|
4,179
|
|
|
4,203
|
|
Operating loss
|
(909
|
)
|
|
(830
|
)
|
Other expense, net
|
(69
|
)
|
|
(133
|
)
|
Loss before income taxes
|
(978
|
)
|
|
(963
|
)
|
Income tax benefit
|
—
|
|
|
(63
|
)
|
Loss from discontinued operations, net of tax
|
$
|
(978
|
)
|
|
$
|
(900
|
)
|
5. 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 March 31,
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
Income from continuing operations
|
$
|
10,276
|
|
|
$
|
10,937
|
|
Loss from discontinued operations, net of tax
|
(978
|
)
|
|
(900
|
)
|
Net income
|
$
|
9,298
|
|
|
$
|
10,037
|
|
Denominator:
|
|
|
|
Denominator for basic net income per common share— weighted average shares outstanding
|
11,755
|
|
|
12,228
|
|
Effect of dilutive stock options, restricted stock, and market stock units
|
198
|
|
|
257
|
|
Denominator for diluted net income per common share— weighted average shares outstanding
|
11,953
|
|
|
12,485
|
|
Basic net income (loss) per common share:
|
|
|
|
Continuing operations
|
$
|
0.87
|
|
|
$
|
0.89
|
|
Discontinued operations
|
(0.08
|
)
|
|
(0.07
|
)
|
Basic net income per common share
|
$
|
0.79
|
|
|
$
|
0.82
|
|
Diluted net income (loss) per common share:
|
|
|
|
Continuing operations
|
$
|
0.86
|
|
|
$
|
0.88
|
|
Discontinued operations
|
(0.08
|
)
|
|
(0.08
|
)
|
Diluted net income per common share
|
$
|
0.78
|
|
|
$
|
0.80
|
|
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 March 31,
|
|
2016
|
|
2015
|
Anti-dilutive securities excluded from diluted earnings per share calculation, for both continuing and discontinued operations
|
487
|
|
|
232
|
|
6. Marketable Securities
The following is a summary of available-for-sale securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
Tax-exempt municipal securities
|
$
|
63,778
|
|
|
$
|
43
|
|
|
$
|
(8
|
)
|
|
$
|
63,813
|
|
Corporate debt securities
|
6,873
|
|
|
17
|
|
|
(17
|
)
|
|
6,873
|
|
Total
|
$
|
70,651
|
|
|
$
|
60
|
|
|
$
|
(25
|
)
|
|
$
|
70,686
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
Tax-exempt municipal securities
|
$
|
67,333
|
|
|
$
|
13
|
|
|
$
|
(53
|
)
|
|
$
|
67,293
|
|
Corporate debt securities
|
5,926
|
|
|
—
|
|
|
(18
|
)
|
|
5,908
|
|
Total
|
$
|
73,259
|
|
|
$
|
13
|
|
|
$
|
(71
|
)
|
|
$
|
73,201
|
|
The unrealized gains and losses on the Company’s investments in municipal and corporate debt securities as of
March 31, 2016
and
December 31, 2015
were caused by changes in market values primarily due to interest rate changes. All of the Company's securities which were in an unrealized loss position as of
March 31, 2016
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
months ended
March 31, 2016
and
2015
.
The following table summarizes the remaining contractual maturities of the Company’s marketable securities, in thousands:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
Due within one year
|
$
|
32,041
|
|
|
$
|
27,522
|
|
Due after one year through five years
|
38,645
|
|
|
45,679
|
|
Total
|
$
|
70,686
|
|
|
$
|
73,201
|
|
The following table summarizes the proceeds from the maturities of available-for-sale securities, in thousands:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Maturities of marketable securities
|
$
|
10,560
|
|
|
$
|
6,980
|
|
Total
|
$
|
10,560
|
|
|
$
|
6,980
|
|
The Company did not record any gross realized gains or gross realized losses in net income during the
three
months ended
March 31, 2016
and
2015
. Additionally, there were no proceeds from sales of marketable securities prior to maturity during the
three
months ended
March 31, 2016
and
2015
.
7. 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 March 31, 2016 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
|
|
$
|
45,862
|
|
|
$
|
45,862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market
|
|
46,657
|
|
|
46,657
|
|
|
—
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Tax-exempt municipal securities
|
|
63,813
|
|
|
—
|
|
|
63,813
|
|
|
—
|
|
Corporate debt securities
|
|
6,873
|
|
|
—
|
|
|
6,873
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
|
$
|
163,205
|
|
|
$
|
92,519
|
|
|
$
|
70,686
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2015 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
|
|
$
|
49,151
|
|
|
$
|
49,151
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market
|
|
36,953
|
|
|
36,953
|
|
|
—
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Tax-exempt municipal securities
|
|
67,293
|
|
|
—
|
|
|
67,293
|
|
|
—
|
|
Corporate debt securities
|
|
5,908
|
|
|
—
|
|
|
5,908
|
|
|
—
|
|
Total assets at fair value on a recurring basis
|
|
$
|
159,305
|
|
|
$
|
86,104
|
|
|
$
|
73,201
|
|
|
$
|
—
|
|
The Company measures cash and cash equivalents 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 market observable inputs. 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
months ended
March 31, 2016
and
2015
.
The Company did not have any liabilities requiring fair value measurement as of
March 31, 2016
.
8. Accrued Liabilities
Accrued liabilities consist of the following, in thousands:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
Accrued compensation and benefits
|
$
|
8,677
|
|
|
$
|
7,989
|
|
Accrued instructional
|
4,145
|
|
|
3,427
|
|
Accrued vacation
|
1,796
|
|
|
1,046
|
|
Accrued invoices
|
11,516
|
|
|
9,995
|
|
Other
(1)
|
1,302
|
|
|
1,201
|
|
Total
|
$
|
27,436
|
|
|
$
|
23,658
|
|
(1) "Other" consists primarily of the current portion of deferred rent, customer deposits, and other miscellaneous accruals.
9. Commitments and Contingencies
Operating Leases
The Company leases its office facilities and certain office equipment under various noncancelable operating leases. Effective
August 29, 2011
, 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, 2018
. Renewal terms under this lease allow 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
March 31, 2016
, in thousands:
|
|
|
|
|
2016
|
$
|
4,199
|
|
2017
|
5,729
|
|
2018
|
4,879
|
|
2019
|
11
|
|
2020
|
—
|
|
2021 and thereafter
|
—
|
|
Total
|
$
|
14,818
|
|
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 of rent expense from the date the Company takes possession of the property through the end of the lease term. The Company records the unamortized portion of the incentive as a component of deferred rent, within the accrued liabilities balance, or as part of long-term liabilities, as appropriate.
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 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
$0.1 million
in other income (expense), net, for the
three months ended
March 31, 2016
and
2015
, respectively. 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 our credit facility are included in other expense, 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
March 31, 2016
and
December 31, 2015
, there were
no
borrowings under the credit facility, and the Company was
in compliance
with all debt covenants.
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. While the outcome of these matters is uncertain, the Company does not believe there are any significant matters as of
March 31, 2016
that are probable or estimable, for which the outcome could have a material adverse impact on its consolidated financial position or results of operations.
10. 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
March 31, 2016
, 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
|
287,117
|
|
Residual authorization
|
$
|
48,545
|
|
The following table summarizes shares repurchased, in thousands:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Shares repurchased
|
165
|
|
|
58
|
|
Total consideration, excluding commissions
|
$
|
7,500
|
|
|
$
|
3,904
|
|
As of
March 31, 2016
, the Company had purchased an aggregate of
6.3 million
shares under the program’s outstanding authorizations at an average price per share of
$45.61
totaling
$287.1 million
, excluding commissions.
Dividends
During the
three months ended
March 31, 2016
, 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 18, 2016
|
|
March 10, 2016
|
|
April 15, 2016
|
|
$
|
0.39
|
|
|
$
|
4,638
|
|
Of the total dividend amount declared in the current quarter,
$4.6 million
is attributable to shares of common stock outstanding as of the record date and restricted stock units (RSUs) expected to vest in the next twelve months. This amount, along with the portion of dividends declared in prior quarters related to unvested RSUs, is included within dividends payable in the Company's consolidated balance sheet as of
March 31, 2016
. The remaining balance is attributable to dividends declared on restricted stock units expected to vest subsequent to the next twelve months and is classified as other liabilities in the Company's consolidated balance sheet as of
March 31, 2016
. 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.
11. 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 March 31,
|
|
2016
|
|
2015
|
Instructional costs and services
|
$
|
208
|
|
|
$
|
228
|
|
Marketing and promotional
|
183
|
|
|
137
|
|
Admissions advisory
|
13
|
|
|
7
|
|
General and administrative
|
2,409
|
|
|
1,365
|
|
Share-based compensation expense included in operating income
|
2,813
|
|
|
1,737
|
|
Tax benefit from share-based compensation expense
|
1,063
|
|
|
643
|
|
Share-based compensation expense, net of tax
|
$
|
1,750
|
|
|
$
|
1,094
|
|
12. Other Investments
At
March 31, 2016
, the Company held a
$2.5 million
investment in a limited partnership, with a commitment to invest up to an additional
$2.2 million
through February 2024. During the
three months ended
March 31, 2016
, the Company made investments totaling
$110 thousand
in the partnership. The partnership invests in innovative companies in the health care field. The Company's investment comprises less than
3%
of the total partnership interest; accordingly, the Company designated the investment as a cost method investment and classified it within other assets in the consolidated balance sheets as of
March 31, 2016
and
December 31, 2015
.
During the
three months ended
March 31, 2016
, the Company made an investment of
$2.1 million
in a limited partnership that invests in education and education-related technology companies with a commitment to invest up to an additional
$2.7 million
through January 2025. The Company's investment comprises approximately
5%
of the total partnership interest, and the Company designated the investment as a cost method investment and classified it within other assets in the consolidated balance sheet as of
March 31, 2016
.
13. Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Loss
|
|
Unrealized Gain (Loss) on Marketable Securities
|
|
Accumulated Other Comprehensive Loss
(1)
|
Beginning balance, December 31, 2015
|
$
|
(235
|
)
|
|
$
|
(37
|
)
|
|
$
|
(272
|
)
|
Other comprehensive income
|
129
|
|
|
58
|
|
|
187
|
|
Ending balance, March 31, 2016
|
$
|
(106
|
)
|
|
$
|
21
|
|
|
$
|
(85
|
)
|
|
|
(1)
|
Accumulated other comprehensive loss is presented net of tax of
$14 thousand
and
$21 thousand
as of
March 31, 2016
and
December 31, 2015
, respectively.
|
There were no reclassifications out of accumulated other comprehensive loss to net income for the
three
months ended
March 31, 2016
and
2015
.
14. 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
March 31, 2016
, Title IV programs in which the University's learners participate are operative and sufficiently funded.