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 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 through Capella'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.
2. 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. Arden operates on a fiscal year ending October 31, and prior to the date of sale, this was also the date used for consolidation. Refer to Footnote 4, Discontinued Operations, for further
information related to the divestiture of Arden University. During the second quarter of 2016, the Company acquired Hackbright and DevMountain. We accounted for these acquisitions as business combinations as of the close of each transaction. The assets acquired and liabilities assumed in conjunction with the acquisitions were recorded at fair value as of the respective acquisition dates, with the results of operations reflected in the Consolidated Statements of Income from the acquisition dates going forward. Refer to Footnote 13, Acquisitions, for further information related to these acquisitions.
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 Footnote 4, Discontinued Operations, for additional information.
Revenue Recognition
Beginning in fiscal year 2016, we began recording 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 that 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 during the
three and nine months ended
September 30, 2016
, and is not expected to have a material impact on revenues or results of operations in subsequent periods.
Share-Based Compensation
During the
nine months ended
September 30, 2016
, the Company granted performance-based restricted stock units (RSUs) to certain employees. The fair value of the performance-based restricted stock units is based upon the closing market price of the Company's common stock on the grant date. The performance-based RSUs will vest if, at the end of the performance period,
the Company has achieved certain revenue and operating income targets and the employee remains employed by the Company. At the grant date, the Company believed it was probable that the established targets would be met and thus compensation cost recognized over the service period. The number of performance-based RSUs issued to employees at the vesting date will vary based on actual revenue and operating income performance.
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, 2015
(
2015
Annual Report on Form 10-K).
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 2015 Annual Report on Form 10-K for a complete summary of the Company’s significant accounting policies.
3. 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 guidance will be effective for the Company's annual and interim reporting periods beginning January 1, 2018, and early adoption is 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 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 is evaluating the impact this standard will have on its business practices, financial condition, results of operations, and disclosures.
In March 2016, the FASB issued 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 additional paid-in capital (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 right-to-use assets and lease liabilities 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 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.
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 as of January 1, 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.
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.
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. On
August 18, 2016
, the Company completed the sale of
100 percent
of the share capital of Arden University for a sale price of
£15.0 million
, of which
£11.5 million
(
$13.9 million
, net of transaction-related fees) was paid in cash at closing, with an additional
£1.0 million
to be paid
November 15, 2016
, and the remaining amount of
£2.5 million
plus accrued interest at
7.5%
to be paid on
February 18, 2017
. The Company recorded a note receivable for the November and February payments, which is included in prepaid expenses and other current assets in our Consolidated Balance Sheets as of
September 30, 2016
.
As a result of the sale, the Company recorded a gain of
$4.3 million
during the third quarter of 2016. For tax purposes, the Company incurred a capital loss on the sale and recorded a full valuation allowance on the related deferred tax asset based on the Company's expectation that it will not generate capital gains prior to the expiration of the capital loss.
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
September 30, 2016
and
December 31, 2015
, are as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2016
|
|
As of December 31, 2015
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
1,923
|
|
|
Accounts receivable, net
|
—
|
|
|
2,055
|
|
|
Goodwill
|
—
|
|
|
16,862
|
|
|
Intangibles, net
|
—
|
|
|
1,389
|
|
|
Other assets
|
—
|
|
|
729
|
|
|
Assets of business held for sale
|
$
|
—
|
|
|
$
|
22,958
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
—
|
|
|
$
|
3,324
|
|
|
Deferred revenue
|
—
|
|
|
4,967
|
|
|
Liabilities of business held for sale
|
$
|
—
|
|
|
$
|
8,291
|
|
A reconciliation of the line items comprising the results of operations of the Arden University business to the income (loss) from discontinued operations through the date of sale presented in the Consolidated Statements of Income for the
three and nine months ended
September 30, 2016
and
2015
, in thousands, is included in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Revenues
|
$
|
2,070
|
|
|
$
|
3,577
|
|
|
$
|
8,765
|
|
|
$
|
10,373
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
1,034
|
|
|
1,682
|
|
|
4,345
|
|
|
5,343
|
|
|
Marketing and promotional
|
972
|
|
|
1,256
|
|
|
3,527
|
|
|
3,500
|
|
|
Admissions advisory
|
185
|
|
|
249
|
|
|
698
|
|
|
737
|
|
|
General and administrative
|
885
|
|
|
1,053
|
|
|
3,808
|
|
|
3,230
|
|
|
Total costs and expenses
|
3,076
|
|
|
4,240
|
|
|
12,378
|
|
|
12,810
|
|
|
Operating loss
|
(1,006
|
)
|
|
(663
|
)
|
|
(3,613
|
)
|
|
(2,437
|
)
|
|
Gain on sale of Arden
|
4,285
|
|
|
—
|
|
|
4,285
|
|
|
—
|
|
|
Other income (expense), net
|
(254
|
)
|
|
29
|
|
|
(288
|
)
|
|
(40
|
)
|
|
Income (loss) before income taxes
|
3,025
|
|
|
(634
|
)
|
|
384
|
|
|
(2,477
|
)
|
|
Income tax expense (benefit)
|
62
|
|
|
(4
|
)
|
|
(222
|
)
|
|
(80
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
2,963
|
|
|
$
|
(630
|
)
|
|
$
|
606
|
|
|
$
|
(2,397
|
)
|
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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
9,587
|
|
|
$
|
8,802
|
|
|
$
|
30,937
|
|
|
$
|
30,937
|
|
|
Income (loss) from discontinued operations, net of tax
|
2,963
|
|
|
(630
|
)
|
|
606
|
|
|
(2,397
|
)
|
|
Net income
|
$
|
12,550
|
|
|
$
|
8,172
|
|
|
$
|
31,543
|
|
|
$
|
28,540
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share— weighted average shares outstanding
|
11,538
|
|
|
12,027
|
|
|
11,647
|
|
|
12,146
|
|
|
Effect of dilutive stock options, restricted stock, and market stock units
|
252
|
|
|
210
|
|
|
225
|
|
|
227
|
|
|
Denominator for diluted net income per common share— weighted average shares outstanding
|
11,790
|
|
|
12,237
|
|
|
11,872
|
|
|
12,373
|
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.83
|
|
|
$
|
0.73
|
|
|
$
|
2.66
|
|
|
$
|
2.55
|
|
|
Discontinued operations
|
0.26
|
|
|
(0.05
|
)
|
|
0.05
|
|
|
(0.20
|
)
|
|
Basic net income per common share
|
$
|
1.09
|
|
|
$
|
0.68
|
|
|
$
|
2.71
|
|
|
$
|
2.35
|
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.81
|
|
|
$
|
0.72
|
|
|
$
|
2.61
|
|
|
$
|
2.50
|
|
|
Discontinued operations
|
0.25
|
|
|
(0.05
|
)
|
|
0.05
|
|
|
(0.19
|
)
|
|
Diluted net income per common share
|
$
|
1.06
|
|
|
$
|
0.67
|
|
|
$
|
2.66
|
|
|
$
|
2.31
|
|
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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Anti-dilutive securities excluded from diluted earnings per share calculation, for both continuing and discontinued operations
|
258
|
|
|
307
|
|
|
387
|
|
|
283
|
|
6. Marketable Securities
The following is a summary of available-for-sale securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
|
Tax-exempt municipal securities
|
$
|
62,022
|
|
|
$
|
10
|
|
|
$
|
(64
|
)
|
|
$
|
61,968
|
|
|
Corporate debt securities
|
5,805
|
|
|
25
|
|
|
(6
|
)
|
|
5,824
|
|
|
Total
|
$
|
67,827
|
|
|
$
|
35
|
|
|
$
|
(70
|
)
|
|
$
|
67,792
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 2016
and
December 31, 2015
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
September 30, 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 and nine
months ended
September 30, 2016
and
2015
.
The following table summarizes the remaining contractual maturities of the Company’s marketable securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2016
|
|
As of December 31, 2015
|
|
Due within one year
|
$
|
44,758
|
|
|
$
|
27,522
|
|
|
Due after one year through five years
|
23,034
|
|
|
45,679
|
|
|
Total
|
$
|
67,792
|
|
|
$
|
73,201
|
|
The following table summarizes the proceeds from the maturities of available-for-sale securities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Maturities of marketable securities
|
$
|
12,135
|
|
|
$
|
7,695
|
|
|
$
|
25,635
|
|
|
$
|
24,180
|
|
|
Total
|
$
|
12,135
|
|
|
$
|
7,695
|
|
|
$
|
25,635
|
|
|
$
|
24,180
|
|
The Company did not record any gross realized gains or gross realized losses in net income during the
three and nine
months ended
September 30, 2016
and
2015
. Additionally, there were no proceeds from sales of marketable securities prior to maturity during the
three and nine
months ended
September 30, 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 September 30, 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
|
|
$
|
20,447
|
|
|
$
|
20,447
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Money market
|
|
70,591
|
|
|
70,591
|
|
|
—
|
|
|
—
|
|
|
Variable rate demand notes
|
|
4,675
|
|
|
4,675
|
|
|
—
|
|
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Tax-exempt municipal securities
|
|
61,968
|
|
|
—
|
|
|
61,968
|
|
|
—
|
|
|
Corporate debt securities
|
|
5,824
|
|
|
—
|
|
|
5,824
|
|
|
—
|
|
|
Total assets at fair value on a recurring basis
|
|
$
|
163,505
|
|
|
$
|
95,713
|
|
|
$
|
67,792
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 nine
months ended
September 30, 2016
and
2015
.
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. At the date of acquisition, the preliminary fair value of the contingent consideration was
$1.5 million
, which was determined using a discounted cash flow model encompassing significant unobservable inputs. During the third quarter of 2016, the Company recorded a measurement period adjustment to reduce the fair value of the contingent consideration to
zero
, based on our revised assessment of the timing of cashflows as of the acquisition date. The key assumptions and terms underlying the valuation include 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. Reasonable changes in the unobservable inputs do not result in a material change in the fair value.
The following table presents a reconciliation of the fair value of the DevMountain contingent consideration, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Balance, beginning of period
|
|
$
|
1,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Initial fair value of contingent consideration
|
|
—
|
|
|
—
|
|
|
1,500
|
|
|
—
|
|
|
Measurement period adjustment
|
|
(1,500
|
)
|
|
—
|
|
|
(1,500
|
)
|
|
—
|
|
|
Balance, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8. Accrued Liabilities
Accrued liabilities consist of the following, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
As of December 31, 2015
|
|
Accrued compensation and benefits
|
$
|
12,779
|
|
|
$
|
7,989
|
|
|
Accrued instructional
|
4,513
|
|
|
3,427
|
|
|
Accrued vacation
|
2,081
|
|
|
1,046
|
|
|
Accrued invoices
|
10,996
|
|
|
9,995
|
|
|
Other
(1)
|
2,180
|
|
|
1,201
|
|
|
Total
|
$
|
32,549
|
|
|
$
|
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. 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 include a reduction in the area of leased space occupied by the Company of approximately
64,000
square feet and provide for lease incentives of approximately
$13.6 million
. The lease incentives, which were paid in cash to the Company by the lessor, are included within deferred rent on the Consolidated Balance Sheet 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 for continuing operations as of
September 30, 2016
, in thousands:
|
|
|
|
|
|
|
|
2016
|
$
|
1,943
|
|
|
2017
|
7,330
|
|
|
2018
|
6,501
|
|
|
2019
|
5,606
|
|
|
2020
|
5,203
|
|
|
2021 and thereafter
|
37,393
|
|
|
Total
|
$
|
63,976
|
|
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 amendment date of the lease agreement 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
for the
three months ended
September 30, 2016
and
2015
and
$0.2 million
for the
nine months ended
September 30, 2016
and
2015
, recognized in other income (expense). 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
September 30, 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
September 30, 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
September 30, 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
|
302,117
|
|
|
Residual authorization
|
$
|
33,545
|
|
The following table summarizes shares repurchased, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Shares repurchased
|
438
|
|
|
330
|
|
|
Total consideration, excluding commissions
|
$
|
22,500
|
|
|
$
|
18,487
|
|
As of
September 30, 2016
, the Company had purchased an aggregate of
6.6 million
shares under the program’s outstanding authorizations at an average price per share of
$46.00
totaling
$302.1 million
, excluding commissions.
Dividends
During the
nine months ended
September 30, 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
|
|
|
May 3, 2016
|
|
May 25, 2016
|
|
July 15, 2016
|
|
$
|
0.39
|
|
|
$
|
4,609
|
|
|
August 4, 2016
|
|
August 26, 2016
|
|
October 14, 2016
|
|
$
|
0.39
|
|
|
$
|
4,554
|
|
Of the total dividend amount declared in the current quarter,
$4.5 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
September 30, 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
September 30, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Instructional costs and services
|
$
|
174
|
|
|
$
|
199
|
|
|
$
|
545
|
|
|
$
|
626
|
|
|
Marketing and promotional
|
173
|
|
|
154
|
|
|
562
|
|
|
423
|
|
|
Admissions advisory
|
14
|
|
|
11
|
|
|
41
|
|
|
29
|
|
|
General and administrative
|
641
|
|
|
1,207
|
|
|
4,286
|
|
|
4,387
|
|
|
Share-based compensation expense included in operating income
|
1,002
|
|
|
1,571
|
|
|
5,434
|
|
|
5,465
|
|
|
Tax benefit from share-based compensation expense
|
381
|
|
|
586
|
|
|
2,055
|
|
|
2,038
|
|
|
Share-based compensation expense, net of tax
|
$
|
621
|
|
|
$
|
985
|
|
|
$
|
3,379
|
|
|
$
|
3,427
|
|
12. Other Investments
At
September 30, 2016
, the Company held a
$2.8 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
$1.8 million
through February 2024. During the
nine months ended
September 30, 2016
, the Company made investments totaling
$0.5 million
in the partnership. 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
September 30, 2016
and
December 31, 2015
.
At
September 30, 2016
, the Company held a
$3.1 million
investment in a limited partnership that invests in education and education-related technology companies, with a commitment to invest up to an additional
$1.7 million
through January 2025. During the
nine months ended
September 30, 2016
, the Company made investments totaling
$3.1 million
in the limited partnership. The Company's investment comprises less than
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
September 30, 2016
.
13. Acquisitions
On
April 22, 2016
, the Company acquired
100 percent
of the share capital of Sutter Studios, Inc. d/b/a Hackbright Academy, Inc. (Hackbright) for
$18.0 million
in cash paid at closing and subject to customary adjustments for working capital. 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 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.
On
May 4, 2016
, the Company acquired
100 percent
of the membership interests in DevMountain, LLC (DevMountain). 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. The purchase price of the DevMountain acquisition consisted of
$15.0 million
in cash paid at closing, and up to an additional
$5.0 million
in contingent consideration to be paid at the end of
three
successive, non-cumulative periods based upon the achievement of established revenue and operating performance targets. The liability associated with the expected payment of the contingent consideration obligation
was preliminarily valued at
$1.5 million
at the acquisition date. During the third quarter of 2016, the Company recorded a measurement period adjustment to reduce the fair value of the contingent consideration to
zero
based on our revised assessment of the timing of cash flows as of the acquisition date. This measurement period adjustment was reflected as a corresponding decrease to goodwill as of the acquisition date. The preliminary fair value of the contingent consideration liability was determined using a discounted cash flow valuation methodology utilizing significant unobservable inputs.
Hackbright and DevMountain's core competencies of providing the 21st Century workforce with job-ready skills in a highly competitive market are consistent with the Company's strategy to expand its addressable market and offer working adults the most direct path between learning and employment. The Company incurred approximately
$1.4 million
of transaction costs in connection with the acquisitions of Hackbright and DevMountain, and these costs are included in general and administrative expenses within the Consolidated Statements of Income for the
nine months ended
September 30, 2016
.
During the
three and nine months ended
September 30, 2016
, the operating income impact of purchase accounting adjustments was approximately
$0.2 million
and
$0.7 million
, respectively. Based on the preliminary purchase price allocation, the operating income impact of purchase accounting adjustments is expected to be approximately
$0.2 million
for the remainder of 2016.
The Company accounted for these acquisitions as business combinations, with the net assets acquired recognized at fair value at the date of acquisition. The results of operations of Hackbright and DevMountain are included in the Consolidated Statements of Income beginning on their respective dates of acquisition and within the Job-Ready Skills reportable segment for segment reporting purposes. The Company has not provided pro forma information or the revenues and operating results of the acquired entities because the revenues and results of operations are not material to the Company's consolidated revenues or consolidated results of operations.
The Company is in the process of finalizing the third party valuations of the intangible assets and contingent consideration values; thus, the preliminary measurements of intangible assets, goodwill, contingent consideration, and deferred income taxes are subject to change as we finalize the purchase accounting for these transactions.
A reconciliation of the assets acquired and liabilities assumed to the net cash paid to acquire Hackbright and DevMountain on the acquisition date is shown in the table below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hackbright
|
|
DevMountain
|
|
Cash and cash equivalents
|
$
|
499
|
|
|
$
|
336
|
|
|
Other assets
|
407
|
|
|
745
|
|
|
Intangibles:
|
|
|
|
|
Trade Name
|
4,500
|
|
|
2,700
|
|
|
Customer Relationships
|
800
|
|
|
—
|
|
|
Course Content
|
900
|
|
|
100
|
|
|
Goodwill
|
14,013
|
|
|
11,299
|
|
|
Deferred tax asset (liability)
|
(2,342
|
)
|
|
185
|
|
|
Liabilities assumed
|
(788
|
)
|
|
(418
|
)
|
|
Total assets acquired and liabilities assumed, net
|
17,989
|
|
|
14,947
|
|
|
Less: Fair value of contingent consideration
|
—
|
|
|
—
|
|
|
Less: Cash acquired
|
(499
|
)
|
|
(336
|
)
|
|
Cash paid for acquisition, net of cash acquired
|
$
|
17,490
|
|
|
$
|
14,611
|
|
We determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the assets and liabilities. The Company utilized the following assumptions, some of which include significant unobservable inputs which would qualify the valuations as Level 3 measurements, and valuation methodologies to determine fair value:
|
|
|
|
•
|
Intangible assets - The Company used income approaches to value the acquired intangibles. The trade names were valued using the relief-from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use. Course content was valued using the differential income method, and the customer relationships were valued using the excess earnings method.
|
|
|
|
|
•
|
Deferred revenue - The Company estimated the fair value of deferred revenue using the cost build-up method, which represents the cost to deliver the services, plus a normal profit margin. Deferred revenue is included in liabilities assumed within the schedule of assets acquired and liabilities assumed above.
|
|
|
|
|
•
|
Contingent consideration liability - The fair value of the contingent consideration was determined using a discounted cash flow model encompassing significant unobservable inputs, including the discount rate and probability weighted cash flows over the performance period.
|
|
|
|
|
•
|
Other current and noncurrent assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
|
The Company assigned an indefinite useful life to the trade name intangible assets, as it is believed these assets have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of the trade name intangibles. All acquired intangible assets other than trade names were determined to be finite-lived and are being amortized on a straight-line basis, which is consistent with the expected use of economic benefits associated with these assets. The weighted-average useful life of the acquired finite-lived intangible assets is
2.8
years.
Goodwill recorded in connection with the acquisitions is primarily attributable to the expected future earnings potential of the Company as a result of the enhanced opportunity to expand the Company's addressable market and drive enrollment growth. The goodwill recognized in connection with the acquisitions has been allocated to the Job-Ready Skills reportable segment and will be evaluated for impairment (along with the indefinite-lived trade names intangible assets) as of the first day of the fourth quarter of 2016 consistent with the Company's existing impairment policy. Goodwill recognized from the Hackbright acquisition is not expected to be deductible for tax purposes, and goodwill related to DevMountain is expected to be deductible for tax purposes.
14. 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
|
185
|
|
|
15
|
|
|
200
|
|
|
Amounts reclassified to net income
|
45
|
|
|
—
|
|
|
45
|
|
|
Ending balance, September 30, 2016
|
$
|
(5
|
)
|
|
$
|
(22
|
)
|
|
$
|
(27
|
)
|
|
|
|
|
(1)
|
Accumulated other comprehensive loss is presented net of tax of
$13 thousand
and
$21 thousand
as of
September 30, 2016
and
December 31, 2015
, respectively.
|
$45 thousand
was reclassified out of accumulated other comprehensive loss to income (loss) from discontinued operations net of tax for the
three and nine
months ended
September 30, 2016
related to foreign currency translation losses upon the sale of Arden University.
15. 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. During the
nine months ended
September 30, 2016
, the Company acquired Hackbright and DevMountain, which resulted in a revision to the way in which management reviews financial information and by which the Chief Operating Decision Maker (the Chief Executive Officer) evaluates performance and allocates the resources of the Company.
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 nine months ended
September 30, 2016
and
2015
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.
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Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Post-Secondary
|
$
|
103,488
|
|
|
$
|
100,100
|
|
|
$
|
314,704
|
|
|
$
|
309,856
|
|
|
Job-Ready Skills
|
2,421
|
|
|
34
|
|
|
3,378
|
|
|
563
|
|
|
Consolidated revenues
|
$
|
105,909
|
|
|
$
|
100,134
|
|
|
$
|
318,082
|
|
|
$
|
310,419
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Post-Secondary
|
$
|
16,970
|
|
|
$
|
14,781
|
|
|
$
|
56,254
|
|
|
$
|
50,958
|
|
|
Job-Ready Skills
|
(1,622
|
)
|
|
(650
|
)
|
|
(6,307
|
)
|
|
(1,159
|
)
|
|
Consolidated operating income
|
15,348
|
|
|
14,131
|
|
|
49,947
|
|
|
49,799
|
|
|
Other income (expense), net
|
46
|
|
|
(5
|
)
|
|
79
|
|
|
(28
|
)
|
|
Income from continuing operations before income taxes
|
$
|
15,394
|
|
|
$
|
14,126
|
|
|
$
|
50,026
|
|
|
$
|
49,771
|
|
16. 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
September 30, 2016
, Title IV programs in which the University's learners participate are operative and sufficiently funded.