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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) and Resource Development International Limited (RDI). 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 and is a member of the North Central Association of Colleges and Schools. In 2011, the Company acquired RDI, which is an independent provider of United Kingdom (UK) university distance learning qualifications and markets, develops and delivers programs worldwide via its offices and partners across Asia, North America, Africa and Europe. The Company is also the majority owner of the joint venture Sophia Learning, LLC (Sophia), formed in 2010. Sophia provides a social teaching and learning platform that integrates education with technology.
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2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company, the University, RDI and its subsidiaries, and Sophia, after elimination of intercompany accounts and transactions. RDI operates on a fiscal year ending October 31. RDI's financial results have been included in the Company's consolidated financial statements as of that date.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues consist of tuition, application and graduation fees and commissions we earn from bookstore and publication sales. Tuition revenue is deferred and recognized as revenue ratably over the period of instruction. If a learner withdraws or drops a course, the Company follows the University refund policy, which generally is: 100 percent refund through five days, 75 percent refund from six to twelve days, and zero percent refund for the remainder of the period. The refund policy varies slightly for learners within certain states due to state rules or regulations. The Company does not recognize revenue for learners who enroll but never engage in the courseroom. Refunds are recorded as a reduction of revenue in the period that the learner withdraws from a course. If a partial refund is given to a learner in accordance with the University refund policy, the portion of the revenue which has been earned by the Company is recognized over the remaining period of instruction.
Colloquia tuition revenue is recognized over the length of the colloquia, which ranges from three days to two weeks. Application fee revenue is deferred and recognized ratably over the average expected term of a learner at the University. Learners were previously billed a graduation fee upon applying for graduation for services provided in connection with evaluating compliance with graduation requirements. In July 2010, the Company eliminated graduation fees. The graduation fees collected prior to July 2010 have all been recognized during 2010 in accordance with our historical graduation revenue recognition policy. Historically, graduation fee revenue was deferred and recognized ratably over the expected application assessment period for learners not expected to attend commencement ceremonies or over the period prior to the next commencement ceremony to account for learners who attend the ceremony. Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in the accompanying consolidated financial statements. The Company also receives commissions from a third-party bookstore based on sales of textbooks and related school materials to the Company's learners. Commission revenue is recognized as it is earned in conjunction with sales of textbooks and related materials to the Company's learners.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of its learners to make required payments. The Company determines its allowance for doubtful accounts amount based on an analysis of the accounts receivable detail, historical write-off experience, and current economic conditions, recoveries and trends. Bad debt expense is recorded as a general and administrative expense in the consolidated statements of income. The Company generally writes off accounts receivable balances once the account is deemed to be uncollectible, which typically occurs after outside collection agencies have pursued collection efforts.
Cash and Cash Equivalents
The Company considers all highly liquid marketable securities with maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at fair value.
Marketable Securities
Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company's marketable securities are designated as available-for-sale as of December 31, 2011 and 2010.
Available-for-sale marketable securities are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized through accumulated comprehensive income within shareholders' equity. Management reviews the fair value of the portfolio at least monthly, and evaluates individual securities with fair value below amortized cost at the balance sheet date. In order to determine whether impairment is other than temporary, management must conclude whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis.
If management intends to sell an impaired debt security or it is more likely than not the Company will be required to sell the security prior to recovering its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of an other-than-temporary impairment related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as other comprehensive income within shareholders' equity.
The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in investment income. The contractual maturity date of available-for-sale securities is based on the days remaining to the effective maturity. Certain reclassifications have been made to the contractual maturities as of December 31, 2010 in Note 3 to align with current reporting methods. The Company classifies all marketable securities as current assets because the assets are available to fund current operations.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:
| • |
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets; |
| • |
Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and |
| • |
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities. |
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to credit risk, consist primarily of cash equivalents, marketable securities and accounts receivable.
Management believes the credit risk related to cash equivalents and marketable securities is limited due to the adherence to an investment policy that requires marketable securities to have a minimum Standard & Poor's rating of A minus (or equivalent) at the time of purchase. All of the Company's cash equivalents and marketable securities as of December 31, 2011 and 2010 consist of investments rated A minus or higher by at least one rating agency, further limiting the Company's credit risk. In addition, the Company utilizes money managers who conduct initial and ongoing credit analysis on our investment portfolio to monitor and minimize the potential impact of market risk associated with our cash equivalents and marketable securities.
Management believes that the credit risk related to accounts receivable is limited due to the large number and diversity of learners that principally comprise the Company's customer base. The Company's credit risk with respect to these accounts receivable is mitigated through the participation of a majority of the learners in federally funded financial aid programs.
Approximately 79%, 78%, and 78% of the Company's revenues (calculated on a cash basis) were collected from funds distributed under Title IV Programs of the Higher Education Act (Title IV Programs) for the years ended December 31, 2011, 2010, and 2009, respectively. The financial aid and assistance programs are subject to political and budgetary considerations. There is no assurance that such funding will be maintained at current levels.
Extensive and complex regulations govern the financial assistance programs in which the Company's learners participate. The Company's administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potential adverse actions, including a suspension, limitation, or termination proceeding, which could have a material adverse effect on the Company.
If the University were to lose its eligibility to participate in federal student financial aid programs, the learners at the University would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. See Note 16 for further information on the regulatory environment in which the Company operates.
Property and Equipment
Property and equipment are stated at cost. Computer software is included in property and equipment and consists of purchased software, capitalized web site development costs and internally developed software. Capitalized web site development costs consist mainly of salaries and outside development fees directly related to web sites and various databases. Web site content development is expensed as incurred. Internally developed software represents qualifying salary and consulting costs for time spent on developing internal use software. The Company capitalizes certain costs associated with internally developed software, primarily consisting of the direct labor associated with creating the internally developed software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred), and the post-implementation/operation stage (all costs are expensed as incurred). The costs capitalized in the application development stage include the costs of designing the application, coding, installation of hardware, and testing. The capitalization of software requires judgment in determining when a project has reached the development stage and the period over which the Company expects to benefit from the use of that software.
Depreciation is calculated using the straight-line method, over the following estimated useful lives:
|
Computer equipment |
3 to 7 years | |||
|
Furniture and office equipment |
5 to 7 years | |||
|
Computer software |
3 to 7 years |
Leasehold improvements are amortized on a straight-line basis over the related lease term or estimated useful life, whichever is shorter.
Income Taxes
The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.
The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating tax positions. Step one, recognition, occurs when the Company concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Step two, measurement, is only addressed if the position is more likely than not to be sustained. Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Contingencies
The Company accrues for costs associated with contingencies including, but not limited to, regulatory compliance and legal matters when such costs are probable and reasonably estimable. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management's estimate of such costs, which may vary from the ultimate cost and expenses associated with any such contingency.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company recorded impairment charges of $35 thousand, $19 thousand, and $52 thousand during 2011, 2010, 2009, respectively.
The impairment charges primarily consist of course retirements and the write-off of previously capitalized internal software development costs related to abandoned software projects. These charges are recorded in general and administrative expenses in the consolidated statements of income.
Finite-lived intangible assets that are acquired in business combinations are recorded at fair market value on their acquisition date and are amortized on a straight-line basis to reflect the economic useful life of the asset.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to the underlying assets acquired and assumed liabilities. At the time of an acquisition, the Company allocates the goodwill and related assets and liabilities to its respective reporting unit. The Company identifies its reporting unit by assessing whether the components of its operating segment constitutes businesses for which discrete financial information is available and management regularly reviews the operating results of those components. The Company assesses goodwill for impairment at least annually in the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount.
The Company tests for goodwill impairment at the reporting unit level by applying a two-step test. In the first step, the Company compares the fair value of the reporting unit to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, the Company performs a second step to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. An impairment loss is recognized to the extent the implied fair value of the goodwill is less than the carrying amount of the goodwill.
Foreign Currency Translation
The United States (U.S.) dollar is the functional currency of the Company's entities operating in the U.S. The functional currency of the Company's entities operating outside the U.S. is the currency of the primary economic environment in which the entity primarily generates and expends cash, which is generally the local currency. The assets and liabilities of these operations are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. The resulting translation adjustments and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are included in shareholders' equity as a component of accumulated other comprehensive income (loss). Income and expense items are translated monthly at the average exchange rate for that period. The Company reports gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency denominated transactions, in the Consolidated Statements of Income.
Advertising
The Company expenses advertising costs as incurred. Advertising costs for 2011, 2010, and 2009 were $80.7 million, $64.3 million, and $51.6 million, respectively.
Net Income Attributable to Capella Education Company per Common Share
Basic net income attributable to Capella Education Company 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 and the vesting of restricted stock.
The following table presents a reconciliation of the numerator and denominator in the basic and diluted net income attributable to Capella Education Company per common share calculation.
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
(in thousands, except per share data) |
||||||||||||
|
Numerator: |
||||||||||||
|
Net income attributable to Capella Education Company |
$ | 52,115 | $ | 61,270 | $ | 42,669 | ||||||
|
Denominator: |
||||||||||||
|
Denominator for basic net income attributable to Capella Education Company per common share—weighted average shares outstanding |
15,241 | 16,648 | 16,713 | |||||||||
|
Effect of dilutive stock options and restricted stock |
73 | 200 | 317 | |||||||||
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|
|
|
|
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|
Denominator for diluted net income attributable to Capella Education Company per common share—weighted average shares outstanding |
15,314 | 16,848 | 17,030 | |||||||||
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|
|
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|
|
|
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Basic net income attributable to Capella Education Company per common share |
$ | 3.42 | $ | 3.68 | $ | 2.55 | ||||||
|
Diluted net income attributable to Capella Education Company per common share |
$ | 3.40 | $ | 3.64 | $ | 2.51 | ||||||
Options to purchase 0.5 million, 0.1 million, and 0.2 million common shares, were outstanding but not included in the computation of diluted net income per common share in 2011, 2010, and 2009, respectively, because their effect would be antidilutive.
Comprehensive Income
Comprehensive income includes net income and all changes in the Company's equity during a period from non-owner sources, which for the Company consists of unrealized gains and losses on available-for-sale marketable securities and foreign currency translation losses, net of tax.
Share-Based Compensation
The Company measures and recognizes compensation expense for share-based payment awards made to employees and directors, including employee stock options and restricted stock, based on estimated fair values of the share award on the date of grant. The Company records compensation expense for all share-based awards over the service period, which is the vesting period.
To calculate the estimated fair value of stock options on the date of grant, the Company uses the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the Company to estimate key assumptions such as expected term, volatility, risk-free interest rates and dividend yield to determine the fair value of stock options, based on both historical information and management judgment regarding market factors and trends.
The Company amortizes share-based compensation expense over the period that the awards are expected to vest, net of estimated forfeiture rates. The Company estimates expected forfeitures of share-based awards at the grant date and recognizes compensation cost only for those awards expected to vest. In estimating expected forfeitures, the Company analyzes historical forfeiture and termination information and considers how future termination rates are expected to differ from historical termination rates. The Company ultimately adjusts this forfeiture assumption to actual forfeitures. Any changes in the forfeiture assumptions do not impact the total amount of expense ultimately recognized over the vesting period. Instead, different forfeiture assumptions only impact the timing of expense recognition over the vesting period. If the actual forfeitures differ from management estimates, additional adjustments to compensation expense are recorded.
Subsequent Events
The Company has reviewed and evaluated events and transactions that occurred subsequent to the balance sheet date. There have been no subsequent events that require recognition or disclosure in the financial statements.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2011-04, which is included in Accounting Standards Codification (ASC) 820, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS. This update defines fair value, clarifies a framework to measure fair value, and requires specific disclosures of fair value measurements. The guidance will be effective for the Company's interim and annual reporting periods beginning January 1, 2012, and applied prospectively. The Company does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income, which is included in ASC 220, Presentation of Comprehensive Income. This update improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The guidance requires all nonowner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected early adoption; therefore, the guidance will be effective for its interim and annual reporting periods beginning September 30, 2011, and applied retrospectively. The adoption of this guidance did not have a material impact on the Company's financial condition, results of operations, or disclosures.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which is included in ASC 350, Intangibles—Goodwill and Other. This update reduces the complexity, and potentially the cost, of testing goodwill for impairment. The guidance gives the Company the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and in some cases skip the two-step impairment test. The guidance will be effective for the Company's interim and annual reporting periods beginning January 1, 2012, and applied prospectively. The Company does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.
The Company has reviewed and considered all recent accounting pronouncements and believes there are none that could potentially have a material impact on its financial condition, results of operations, or disclosures.
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3. Marketable Securities
The following is a summary of available-for-sale securities:
| As of December 31, 2011 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Tax-exempt municipal securities |
$ | 64,613 | $ | 454 | $ | 0 | $ | 65,067 | ||||||||
|
|
|
|
|
|
|
|
|
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|
Total |
$ | 64,613 | $ | 454 | $ | 0 | $ | 65,067 | ||||||||
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|
|
|
|
|
|
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| As of December 31, 2010 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Tax-exempt municipal securities |
$ | 114,604 | $ | 1,277 | $ | (63 | ) | $ | 115,818 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 114,604 | $ | 1,277 | $ | (63 | ) | $ | 115,818 | |||||||
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The unrealized gains and losses on the Company's investments in municipal securities as of December 31, 2011 and 2010 were caused by changes in market values primarily due to interest rate changes. The Company did not have any securities in an unrealized loss position as of December 31, 2011. No other-than-temporary impairment charges were recorded for the years ended December 31, 2011 and 2010.
The following table summarizes the remaining contractual maturities of the Company's marketable securities:
| As of December 31, 2011 |
As of December 31, 2010 |
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| (in thousands) | ||||||||
|
Due within one year |
$ | 54,151 | $ | 58,998 | ||||
|
Due after one year through five years |
10,916 | 56,820 | ||||||
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|
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Total |
$ | 65,067 | $ | 115,818 | ||||
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The following table is a summary of the proceeds from the maturities of available-for-sale securities:
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Maturities of marketable securities |
$ | 51,442 | $ | 10,978 | $ | 23,360 | ||||||
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Total |
$ | 51,442 | $ | 10,978 | $ | 23,360 | ||||||
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The Company did not record any gross realized gains or gross realized losses in net income during the years-ended December 31, 2011, 2010, and 2009.
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4. Fair Value Measurements
The following tables summarize certain information for assets and liabilities measured at fair value on a recurring basis:
| Fair Value Measurements as of December 31, 2011 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: | (in thousands) | |||||||||||||||
|
Cash and cash equivalents: |
||||||||||||||||
|
Cash |
$ | 17,101 | $ | 17,101 | $ | 0 | $ | 0 | ||||||||
|
Money market funds |
27,551 | 27,551 | 0 | 0 | ||||||||||||
|
Variable rate demand notes |
17,325 | 17,325 | 0 | 0 | ||||||||||||
|
Marketable securities: |
||||||||||||||||
|
Tax-exempt municipal securities |
65,067 | 0 | 65,067 | 0 | ||||||||||||
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|
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|
Total assets at fair value on a recurring basis: |
$ | 127,044 | $ | 61,977 | $ | 65,067 | $ | 0 | ||||||||
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Liabilities: |
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|
Other liabilities: |
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|
RDI contingent consideration |
$ | 5,945 | $ | 0 | $ | 0 | $ | 5,945 | ||||||||
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Total liabilities at fair value on a recurring basis: |
$ | 5,945 | $ | 0 | $ | 0 | $ | 5,945 | ||||||||
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| Fair Value Measurements as of December 31, 2010 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: | (in thousands) | |||||||||||||||
|
Cash and cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | 43,141 | $ | 43,141 | $ | 0 | $ | 0 | ||||||||
|
Variable rate demand notes |
34,275 | 34,275 | 0 | 0 | ||||||||||||
|
Marketable securities: |
||||||||||||||||
|
Tax-exempt municipal securities |
115,818 | 0 | 115,818 | 0 | ||||||||||||
|
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|
|
|
|
|
|
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|
Total assets at fair value on a recurring basis: |
$ | 193,234 | $ | 77,416 | $ | 115,818 | $ | 0 | ||||||||
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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 variable rate demand notes contain a feature allowing the Company to require payment by the issuer on a daily or weekly basis. As a result, these securities are highly liquid and are classified as cash and cash equivalents. 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 year-ended December 31, 2011 and 2010.
The Company classified the RDI contingent consideration liability within Level 3 and was valued using a discounted cash flow model encompassing significant unobservable inputs such as timing and cash flow estimates. Refer to Note 15 for additional details regarding the RDI contingent consideration liability. The Company did not have any liabilities requiring fair value measurement as of December 31, 2010.
Unobservable inputs are employed in determining the fair value of the redeemable noncontrolling interest and as such it is considered a Level 3 fair value measurement. Refer to Note 13 for additional details regarding the redeemable noncontrolling interest fair value measurement.
|
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5. Property and Equipment
Property and equipment consist of the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Computer software |
$ | 100,257 | $ | 80,612 | ||||
|
Computer equipment |
35,883 | 26,516 | ||||||
|
Furniture and office equipment |
13,206 | 12,847 | ||||||
|
Leasehold improvements |
1,310 | 860 | ||||||
|
|
|
|
|
|||||
| 150,656 | 120,835 | |||||||
|
Less accumulated depreciation and amortization |
(99,943 | ) | (75,925 | ) | ||||
|
|
|
|
|
|||||
|
Property and equipment, net |
$ | 50,713 | $ | 44,910 | ||||
|
|
|
|
|
|||||
Depreciation expense for the years ended December 31, 2011, 2010, and 2009 was $23.6 million, $18.5 million, and $14.5 million, respectively. Included in these amounts is amortization of capitalized internally developed software of $14.5 million, $10.8 million, and $7.8 million for the years ended December 31, 2011, 2010, and 2009, respectively.
Computer software includes approximately $31.3 million and $28.8 million as of December 31, 2011 and 2010, respectively, of unamortized internally developed software.
|
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6. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed. The carrying amount of goodwill as of December 31, 2011 was $17.0 million and recorded under the RDI reporting unit, as a result of the acquisition of RDI in July 2011. Refer to Note 15 for further information regarding the acquisition of RDI.
The Company will perform the annual goodwill impairment test annually in the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce RDI's fair value below its carrying value. The Company did not record any impairment charges for the year-ended December 31, 2011.
Finite-Lived Intangible Assets
Changes in the carrying amount of intangible assets are as follows:
| Gross Carrying Amount as of December 31, 2010 |
Acquisition of RDI |
Accumulated Amortization |
Net Carrying Amount as of December 31, 2011 |
|||||||||||||
| Intangible assets: | (in thousands) | |||||||||||||||
|
Student relationships |
$ | 0 | $ | 3,100 | $ | (362 | ) | $ | 2,738 | |||||||
|
Validation partner relationships |
0 | 2,300 | (96 | ) | 2,204 | |||||||||||
|
Trademark and trade name |
0 | 700 | (20 | ) | 680 | |||||||||||
|
Learning model |
0 | 700 | (41 | ) | 659 | |||||||||||
|
Internally developed software |
0 | 300 | (29 | ) | 271 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 0 | $ | 7,100 | $ | (548 | ) | $ | 6,552 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company amortizes its intangible assets on a straight-line basis. The weighted average useful life of the Company's finite-lived intangible assets that are not fully amortized as of December 31, 2011 is 5.0 years. Total amortization expense for the year ended December 31, 2011 was $0.5 million. Future amortization expense for intangible assets is presented in the following table:
| (in thousands) | ||||
|
2012 |
$ | 1,878 | ||
|
2013 |
1,878 | |||
|
2014 |
868 | |||
|
2015 |
539 | |||
|
2016 |
498 | |||
|
2017 and thereafter |
891 | |||
|
|
|
|||
|
Total |
$ | 6,552 | ||
|
|
|
|||
|
|||
7. Accrued Liabilities
Accrued liabilities consist of the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Accrued compensation and benefits |
$ | 8,978 | $ | 14,055 | ||||
|
Accrued instructional |
7,291 | 4,544 | ||||||
|
Accrued vacation |
994 | 1,867 | ||||||
|
Other |
12,043 | 9,496 | ||||||
|
|
|
|
|
|||||
|
Total accrued liabilities |
$ | 29,306 | $ | 29,962 | ||||
|
|
|
|
|
|||||
"Other" in the table above consists primarily of vendor invoices accrued in the normal course of business.
The Company recorded liabilities of approximately $1.9 million and $1.3 million relating to the strategic reductions in workforce in February and November 2011, respectively, and reduced by payments of approximately $2.2 million. As of December 31, 2011, there was approximately a $1.0 million liability remaining, which was recorded as a component of accrued liabilities.
|
|||
8. Commitments and Contingencies
Leasehold Agreements
The Company leases its office facilities and certain office equipment under various noncancelable operating leases and has contractual obligations related to certain software license agreements. Effective August 29, 2011, the Company entered into an amendment of its current 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 2018. Renewal terms under this lease allow the Company to extend the current lease for up to two additional five-year terms.
Future minimum lease commitments under the leases as of December 31, 2011, are as follows:
| Operating | ||||
| (in thousands) | ||||
|
2012 |
$ | 7,032 | ||
|
2013 |
6,658 | |||
|
2014 |
6,592 | |||
|
2015 |
6,546 | |||
|
2016 |
6,708 | |||
|
2017 and thereafter |
13,219 | |||
|
|
|
|||
|
Total |
$ | 46,755 | ||
|
|
|
|||
The Company recognizes rent expense on a straight-line basis over the term of the lease, although the lease may include escalation clauses providing for lower payments at the beginning of the lease term and higher payments at the end of the lease term. Cash or lease incentives received from lessors are recognized on a straight-line basis as a reduction to rent 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, in accrued liabilities or long-term liabilities, as appropriate.
Total rent expense and related taxes and operating expenses under operating leases for the years ended December 31, 2011, 2010, and 2009, was $11.0 million, $10.3 million, and $9.4 million, respectively.
Revolving Credit Facility
On September 30, 2011, the Company entered into an unsecured revolving credit agreement (the Credit Agreement) with Bank of America, N.A., and certain other lenders. The Credit Agreement provides $100.0 million of borrowing capacity (the credit facility), with an increase option of an additional $50.0 million. The Credit Agreement has a term of five years ending September 30, 2016.
Borrowings under the Credit Agreement bear interest at a rate equal to 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. Outstanding letters of credits are also charged a fee, based on the Company's consolidated leverage ratio. The Company capitalized approximately $0.5 million of debt issuance costs related to the credit facility, which will be amortized on a straight-line basis over a period of five years. Interest expense for amortization of debt issuance costs is recorded in other income, net.
The Credit Agreement contains certain covenants that, among other things, require maintenance of certain financial ratios, as defined in the Credit 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 December 31, 2011, there were no borrowings under the credit facility and the Company was in compliance with all debt covenants.
Line of Credit
The Company's previous $10.0 million line of credit facility with Wells Fargo Bank, set to expire July 31, 2012, was terminated upon entering into the Credit Agreement. On July 20, 2011, the Department of Education approved the cancellation and release of the $1.6 million letter of credit issued under the previous line of credit.
|
|||
9. Litigation
On November 5, 2010, a purported securities class action lawsuit captioned Police Pension Fund of Peoria, Individually, and on Behalf of All Others Similarly Situated v. Capella Education Company, J. Kevin Gilligan and Lois M. Martin, was filed in the U.S. District Court for the District of Minnesota. The complaint names the Company and certain senior executives as defendants, and alleges the Company and the named defendants made false or misleading public statements about our business and prospects during the time period from February 16, 2010 through August 13, 2010 in violation of federal securities laws, and that these statements artificially inflated the trading price of the Company's common stock to the detriment of shareholders who purchased shares during that time. The plaintiff seeks compensatory damages for the purported class. Since that time, substantially similar complaints making similar allegations against the same defendants for the same purported class period were filed with the federal court. Pursuant to the Private Securities Litigation Reform Act of 1995, on April 13, 2011, the Court appointed Oklahoma Firefighters Pension and Retirement System as lead plaintiff and Abraham, Fruchter and Twersley, LLP, as lead counsel. A consolidated amended complaint, captioned Oklahoma Firefighters Pension and Retirement System, Individually and on Behalf of All Others Similarly Situated, v. Capella Education Company, J. Kevin Gilligan, Lois M. Martin and Amy L. Ronneberg, was filed on June 27, 2011. The Company filed a motion to dismiss the plaintiff's complaint on September 2, 2011, and a hearing on that motion was held on December 21, 2011. The District Court will rule on the motion at some time in the future.
Discovery in this case has not yet begun. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to the Company at present, it does not believe loss from this action is probable and, accordingly, has not accrued any liability associated with this action.
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 the outcome of these matters will have a material adverse impact on its consolidated financial position or results of operations.
|
|||
12. Income Taxes
The components of income tax expense are as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Current income tax expense: |
||||||||||||
|
Federal |
$ | 26,232 | $ | 32,172 | $ | 20,435 | ||||||
|
State |
1,638 | 2,334 | 1,879 | |||||||||
|
Foreign |
6 | 0 | 0 | |||||||||
|
Deferred income tax expense: |
||||||||||||
|
Federal |
3,317 | 1,325 | 1,238 | |||||||||
|
State |
3 | 29 | 85 | |||||||||
|
Foreign |
(826 | ) | 0 | 0 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Income tax expense |
$ | 30,370 | $ | 35,860 | $ | 23,637 | ||||||
|
|
|
|
|
|
|
|||||||
The following presents a reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate:
| Year Ended December 31, |
||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes |
2.5 | 2.5 | 2.1 | |||||||||
|
Non-deductible expense related to incentive stock options |
0.0 | 0.0 | 0.2 | |||||||||
|
Tax-exempt interest |
(0.8 | ) | (0.8 | ) | (1.3 | ) | ||||||
|
Foreign taxes |
0.3 | 0.0 | 0.0 | |||||||||
|
Other |
0.1 | 0.3 | (0.4 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Effective income tax rate |
37.1 | % | 37.0 | % | 35.6 | % | ||||||
|
|
|
|
|
|
|
|||||||
Significant components of the Company's deferred income tax assets and liabilities as of December 31, 2011 and 2010, are as follows:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Deferred income tax assets: |
||||||||
|
Net operating loss carryforwards |
$ | 928 | $ | 66 | ||||
|
Allowance for doubtful accounts |
2,221 | 2,037 | ||||||
|
Accrued liabilities |
4,033 | 2,714 | ||||||
|
Share-based compensation |
3,642 | 2,585 | ||||||
|
Other |
34 | 245 | ||||||
|
|
|
|
|
|||||
|
Deferred income tax assets |
10,858 | 7,647 | ||||||
|
Deferred income tax liabilities: |
||||||||
|
Prepaid expenses |
(1,208 | ) | (1,125 | ) | ||||
|
Accumulated other comprehensive income |
(169 | ) | (456 | ) | ||||
|
Property and equipment |
(16,095 | ) | (11,460 | ) | ||||
|
Joint venture investment |
(863 | ) | 0 | |||||
|
Intangible assets |
(1,646 | ) | 0 | |||||
|
|
|
|
|
|||||
|
Deferred income tax liabilities |
(19,981 | ) | (13,041 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax liability |
$ | (9,123 | ) | $ | (5,394 | ) | ||
|
|
|
|
|
|||||
At December 31, 2011, the Company has net operating loss carryforwards of approximately $1.9 and $3.4 million for state and United Kingdom income tax purposes, respectively, that are available to offset future taxable income. The state net operating loss carryforwards expire at various dates through 2028, and the United Kingdom net operating loss carryforwards do not expire.
The Company has not recorded deferred taxes on unremitted earnings of its international subsidiaries that have been considered to be reinvested indefinitely. As of December 31, 2011, the Company does not believe there would be any incremental tax costs on unremitted earnings.
The Company is subject to U.S. federal income tax and multiple state jurisdictions, as well as United Kingdom corporation tax and Hong Kong profits tax.
During 2011, the Company completed income tax audits with the states of Minnesota and Oregon for the tax years 2006-2009 and the state of Illinois for the tax years 2008-2009. The state of New York has initiated an income tax audit for the years 2008-2010.
For U.S. federal and United Kingdom corporation tax purposes, the statute of limitations remains open on tax years from 2007. For Hong Kong, the statute of limitations is 6 years and for state purposes, the statute of limitations varies by jurisdiction, but is generally from 3 to 5 years. For Hong Kong and those states that generated net operating losses in earlier years, the statute of limitations begins to run in the year subsequent to the utilization of net operating losses.
As of December 31, 2011, the Company had $0.4 million of total gross unrecognized tax benefits. Of this total, $0.1 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect its effective income tax rate in future periods.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Year Ended December 31, |
||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Balance at January 1 |
$ | 727 | $ | 388 | $ | 382 | ||||||
|
Additions for tax positions of prior years |
0 | 565 | 122 | |||||||||
|
Reductions for tax positions of prior years |
(47 | ) | (92 | ) | 0 | |||||||
|
Settlements |
(207 | ) | 0 | (68 | ) | |||||||
|
Reductions due to lapse of the applicable statute of limitations |
(48 | ) | (134 | ) | (48 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at December 31 |
$ | 425 | $ | 727 | $ | 388 | ||||||
|
|
|
|
|
|
|
|||||||
The Company does not anticipate any significant increases or decreases in unrecognized tax benefits within the next twelve months. In October 2011, the statute of limitations expired on state issues related to tax year 2006 with no material impact on the unrecognized tax benefits. In September and October 2012, the statute of limitations will expire on approximately $0.4 million in unrecognized tax benefits related federal and state issues in tax year 2008.
The Company continues to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company recognized $27 thousand, $0.1 million, and $0.1 million in interest and penalties related to uncertain tax positions in income tax expense during the years ended December 31, 2011, 2010, and 2009, respectively.
|
|||
13. Noncontrolling Interest
Sophia became a majority owned subsidiary of the Company in 2010. The equity interest in Sophia not owned by the Company is reported as redeemable noncontrolling interest on the consolidated balance sheets. Losses incurred by Sophia are charged to the Company and to the noncontrolling interest holder based on ownership percentage.
There is a put option within the Sophia Learning, LLC agreement which permits the noncontrolling interest holder to put its shares to the Company within a specified time period. Since these shares are outside the control of the Company, the noncontrolling interest is considered contingently redeemable and thus is presented in mezzanine equity in the consolidated balance sheet. Pursuant to authoritative guidance, if the carrying value of the contingently redeemable noncontrolling interest is less than the fair market value, and it is probable the contingency related to the put option will be met, then the carrying value of the contingently redeemable noncontrolling interest must be adjusted to fair market value through a charge directly to retained earnings. As the Company has determined that it is probable that the put option will be exercised based upon the passage of time, the Company performed a valuation of the contingently redeemable noncontrolling interest to determine fair market value. As a result of this valuation, the redeemable noncontrolling interest reported on the consolidated balance sheet was increased by approximately $0.7 million during the fourth quarter of 2011. Unobservable inputs are employed in determining the fair value of the redeemable noncontrolling interest and as such it is considered a Level 3 fair value measurement.
|
|||
14. Accumulated Other Comprehensive Income
The following table summarizes the components of accumulated other comprehensive income at December 31:
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Foreign currency translation |
$ | 22 | $ | 0 | $ | 0 | ||||||
|
Unrealized gains on marketable securities |
285 | 758 | 1,333 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Accumulated other comprehensive income(1) |
$ | 307 | $ | 758 | $ | 1,333 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | Accumulated other comprehensive income is net of $0.2 million, $0.5 million and $0.8 million of taxes as of December 31, 2011, 2010 and 2009, respectively. The tax effect on each component of other comprehensive income during fiscal years 2011, 2010, and 2009 is not significant. The decrease in unrealized gains on marketable securities in 2011 compared to 2010 is primarily due to the decrease in Company's average balance of marketable securities in 2011. |
|
|||
15. Acquisition of RDI
On July 15, 2011, the Company acquired 100% of the share capital of RDI for £7.9 million (approximately $12.6 million), net of cash acquired. RDI is an independent provider of UK university distance learning qualifications and markets, develops and delivers these programs worldwide via its offices and partners across Asia, North America, Africa and Europe. RDI's online distance learning offerings span from degree-entry programs to doctoral level programs and are offered in a variety of disciplines, including business, management, psychology, law, and computing.
As a result of years of investment in its academic infrastructure, RDI has applied to the British Government for Taught Degree Awarding Power (TDAP). If awarded, TDAP will enable RDI to independently validate its own degrees going forward under the auspices of the Quality Assurance Agency, a Government body that reviews the standards and quality of all UK universities. Under the terms of the agreement, the Company will make an additional payment of £4.0 million (approximately $6.4 million) if TDAP is granted to RDI. The Company also recorded a liability of $5.9 million for the fair value of the TDAP contingent consideration, which is included in other liabilities as of December 31, 2011
The Company finalized the purchase accounting in the fourth quarter and measured the fair value of the assets acquired and liabilities assumed in accordance with ASC 805 Business Combinations. The Company recorded goodwill of $17.0 million and capitalized $7.1 million of intangible assets consisting of partner and student relationships, trademark and trade name, learning model, and internally developed software. The estimated useful lives of the intangible assets range from two to ten years. The Company recorded the acquired deferred revenue at its fair value of $1.6 million as of the acquisition date, and assumed net liabilities of approximately $3.9 million in this transaction.
|
|||
16. Regulatory Supervision and Oversight
Capella University is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act (HEA) and the regulations promulgated thereunder by the U.S. Department of Education (DOE) subject the University to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy to participate in the various types of federal learner financial assistance under Title IV Programs.
To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the state in which it is located, accredited by an accrediting agency recognized by the DOE and certified as eligible by the DOE. The DOE will certify an institution to participate in the Title IV programs only after the institution has demonstrated compliance with the HEA and the DOE's extensive academic, administrative, and financial regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis. The University performs periodic reviews of its compliance with the various applicable regulatory requirements. The University has not been notified by any of the various regulatory agencies of any significant noncompliance matters that would adversely impact our ability to participate in Title IV programs, however, the Office of Inspector General (OIG) has conducted a compliance audit of the University. The audit commenced on April 10, 2006 and the University subsequently provided the OIG with periodic information, responded to follow up inquiries and facilitated site visits and access to its records. The OIG completed its fieldwork in January 2007 and the University received a draft audit report on August 23, 2007. The University provided written comments on the draft audit report to the OIG on September 25, 2007. On March 7, 2008, the OIG's final report was issued to the Acting Chief Operating Officer (COO) for Federal Student Aid (FSA), which is responsible for primary oversight of the Title IV funding programs. The University responded to the final report on April 8, 2008. The University provided FSA staff with certain additional requested information for financial aid years 2002-2003 through 2007-2008. The FSA will subsequently issue final findings and requirements for the University. The FSA may take certain actions, including requiring that the University refund certain federal student aid funds, modify the Title IV administration procedures, and/or requiring the University to pay fines or penalties.
Based on the draft audit report, the most significant potential financial exposure from the audit pertains to repayments to the Department of Education that could be required if the OIG concludes that the University did not properly calculate the amount of Title IV funds required to be returned for learners that withdrew without providing an official notification of such withdrawal and without engaging in academic activity prior to such withdrawal. If it is determined that the University improperly withheld any portion of these funds, the University would be required to return the improperly withheld funds. The University and the OIG have differing interpretations of the relevant regulations regarding what constitutes engagement in the unofficial withdrawal context. As the University interprets the engagement requirement, it currently estimates for the three year audit period, and for the 2005-2006, 2006-2007 and 2007-2008 financial aid years, the total amount of Title IV funds not returned for learners who withdrew without providing official notification was approximately $1.0 million, including interest, but not including fines and penalties. If this difference of interpretation is ultimately resolved in a manner adverse to the University, then the total amount of Title IV funds not returned for learners who withdrew without providing official notification would be greater than the amount the University has currently estimated.
Political and budgetary concerns significantly affect the Title IV Programs. Congress reauthorizes the 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 December 31, 2011, programs in which the University's learners participate are operative and sufficiently funded.
|
|||
17. Other Employee Benefit Plans
The Company sponsors an employee retirement savings plan, which qualifies under Section 401(k) of the Code. The plan provides eligible employees with an opportunity to make tax-deferred contributions into a long-term investment and savings program. All employees over the age of 18 are eligible to participate in the plan. The plan allows eligible employees to contribute up to 100% of their annual salary, subject to IRS annual limits. The plan allows the Company to consider making a discretionary contribution; however, there is no requirement that it do so. Effective July 1, 2006, the Company elected to match 100% on the first 2%, and 50% on the next 4%, of the employee contributions. Employer contributions and related expenses were $4.4 million, $4.8 million, and $2.9 million for the years ended December 31, 2011, 2010, and 2009, respectively.
In May 2005, the Company adopted the Capella Education Company Employee Stock Purchase Plan, referred to as the ESPP. The Company has reserved an aggregate of 0.5 million shares of its common stock for issuance under the ESPP. The ESPP permits eligible employees to utilize up to 10% of their salary to purchase the Company's common stock at price of no less than 85% of the fair market value per share of the Company's common stock at the beginning or the end of the relevant offering period, whichever is less. The compensation committee of the Board of Directors will administer the ESPP. The Company had not implemented this plan as of December 31, 2011.
|
|||
18. Quarterly Financial Summary (Unaudited)
The following unaudited consolidated interim financial information presented should be read in conjunction with other information included in the Company's consolidated financial statements. The following unaudited consolidated financial information reflects all adjustments necessary for the fair presentation of the results of interim periods. The following tables set forth selected unaudited quarterly financial information for each of the Company's last eight quarters:
| First | Second | Third | Fourth | Total | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
|
2011 |
||||||||||||||||||||
|
Revenues |
$ | 111,354 | $ | 106,400 | $ | 102,306 | $ | 109,983 | $ | 430,043 | ||||||||||
|
Operating Income |
22,467 | 23,903 | 14,857 | 18,875 | 80,102 | |||||||||||||||
|
Net income attributable to Capella Education Company |
14,609 | 15,515 | 9,934 | 12,057 | 52,115 | |||||||||||||||
|
Net income attributable to Capella Education Company per common share: |
||||||||||||||||||||
|
Basic |
$ | 0.90 | $ | 1.00 | $ | 0.66 | $ | 0.85 | $ | 3.42 | ||||||||||
|
Diluted |
$ | 0.90 | $ | 0.99 | $ | 0.66 | $ | 0.85 | $ | 3.40 | ||||||||||
|
2010 |
||||||||||||||||||||
|
Revenues |
$ | 101,233 | $ | 105,157 | $ | 105,010 | $ | 114,723 | $ | 426,123 | ||||||||||
|
Operating Income |
23,215 | 22,482 | 21,007 | 28,297 | 95,001 | |||||||||||||||
|
Net income attributable to Capella Education Company |
15,162 | 14,574 | 13,478 | 18,056 | 61,270 | |||||||||||||||
|
Net income attributable to Capella Education Company per common share: |
||||||||||||||||||||
|
Basic |
$ | 0.90 | $ | 0.87 | $ | 0.81 | $ | 1.10 | $ | 3.68 | ||||||||||
|
Diluted |
$ | 0.89 | $ | 0.86 | $ | 0.80 | $ | 1.09 | $ | 3.64 | ||||||||||
|
|||
CAPELLA EDUCATION COMPANY
Schedule II—Valuation and Qualifying Accounts
Fiscal Years 2011, 2010, and 2009
| Beginning Balance |
Acquisition | Additions Charged to Expense |
Deductions | Ending Balance |
||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Allowance accounts for the years ended: |
||||||||||||||||||||
|
December 31, 2011 Allowance for doubtful accounts |
$ | 3,783 | $ | 776 | $ | 10,565 | $ | (9,335 | )(a) | $ | 5,789 | |||||||||
|
December 31, 2010 Allowance for doubtful accounts |
$ | 2,362 | $ | 0 | $ | 8,744 | $ | (7,323 | )(a) | $ | 3,783 | |||||||||
|
December 31, 2009 Allowance for doubtful accounts |
$ | 1,419 | $ | 0 | $ | 6,972 | $ | (6,029 | )(a) | $ | 2,362 | |||||||||
| (a) | Write-off of accounts receivables. |
|
|||
Consolidation
The consolidated financial statements include the accounts of the Company, the University, RDI and its subsidiaries, and Sophia, after elimination of intercompany accounts and transactions. RDI operates on a fiscal year ending October 31. RDI's financial results have been included in the Company's consolidated financial statements as of that date.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues consist of tuition, application and graduation fees and commissions we earn from bookstore and publication sales. Tuition revenue is deferred and recognized as revenue ratably over the period of instruction. If a learner withdraws or drops a course, the Company follows the University refund policy, which generally is: 100 percent refund through five days, 75 percent refund from six to twelve days, and zero percent refund for the remainder of the period. The refund policy varies slightly for learners within certain states due to state rules or regulations. The Company does not recognize revenue for learners who enroll but never engage in the courseroom. Refunds are recorded as a reduction of revenue in the period that the learner withdraws from a course. If a partial refund is given to a learner in accordance with the University refund policy, the portion of the revenue which has been earned by the Company is recognized over the remaining period of instruction.
Colloquia tuition revenue is recognized over the length of the colloquia, which ranges from three days to two weeks. Application fee revenue is deferred and recognized ratably over the average expected term of a learner at the University. Learners were previously billed a graduation fee upon applying for graduation for services provided in connection with evaluating compliance with graduation requirements. In July 2010, the Company eliminated graduation fees. The graduation fees collected prior to July 2010 have all been recognized during 2010 in accordance with our historical graduation revenue recognition policy. Historically, graduation fee revenue was deferred and recognized ratably over the expected application assessment period for learners not expected to attend commencement ceremonies or over the period prior to the next commencement ceremony to account for learners who attend the ceremony. Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in the accompanying consolidated financial statements. The Company also receives commissions from a third-party bookstore based on sales of textbooks and related school materials to the Company's learners. Commission revenue is recognized as it is earned in conjunction with sales of textbooks and related materials to the Company's learners.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of its learners to make required payments. The Company determines its allowance for doubtful accounts amount based on an analysis of the accounts receivable detail, historical write-off experience, and current economic conditions, recoveries and trends. Bad debt expense is recorded as a general and administrative expense in the consolidated statements of income. The Company generally writes off accounts receivable balances once the account is deemed to be uncollectible, which typically occurs after outside collection agencies have pursued collection efforts.
Cash and Cash Equivalents
The Company considers all highly liquid marketable securities with maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at fair value.
Marketable Securities
Management determines the appropriate designation of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company's marketable securities are designated as available-for-sale as of December 31, 2011 and 2010.
Available-for-sale marketable securities are carried at fair value as determined by quoted market prices or other inputs either directly or indirectly observable in the marketplace for identical or similar assets, with unrealized gains and losses, net of tax, recognized through accumulated comprehensive income within shareholders' equity. Management reviews the fair value of the portfolio at least monthly, and evaluates individual securities with fair value below amortized cost at the balance sheet date. In order to determine whether impairment is other than temporary, management must conclude whether the Company intends to sell the impaired security and whether it is more likely than not that the Company will be required to sell the security before recovering its amortized cost basis.
If management intends to sell an impaired debt security or it is more likely than not the Company will be required to sell the security prior to recovering its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. The amount of an other-than-temporary impairment related to a credit loss, or securities that management intends to sell before recovery, is recognized in earnings. The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as other comprehensive income within shareholders' equity.
The cost of securities sold is based on the specific identification method. Amortization of premiums, accretion of discounts, interest, dividend income and realized gains and losses are included in investment income. The contractual maturity date of available-for-sale securities is based on the days remaining to the effective maturity. Certain reclassifications have been made to the contractual maturities as of December 31, 2010 in Note 3 to align with current reporting methods. The Company classifies all marketable securities as current assets because the assets are available to fund current operations.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:
| • |
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets; |
| • |
Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and |
| • |
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities. |
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to credit risk, consist primarily of cash equivalents, marketable securities and accounts receivable.
Management believes the credit risk related to cash equivalents and marketable securities is limited due to the adherence to an investment policy that requires marketable securities to have a minimum Standard & Poor's rating of A minus (or equivalent) at the time of purchase. All of the Company's cash equivalents and marketable securities as of December 31, 2011 and 2010 consist of investments rated A minus or higher by at least one rating agency, further limiting the Company's credit risk. In addition, the Company utilizes money managers who conduct initial and ongoing credit analysis on our investment portfolio to monitor and minimize the potential impact of market risk associated with our cash equivalents and marketable securities.
Management believes that the credit risk related to accounts receivable is limited due to the large number and diversity of learners that principally comprise the Company's customer base. The Company's credit risk with respect to these accounts receivable is mitigated through the participation of a majority of the learners in federally funded financial aid programs.
Approximately 79%, 78%, and 78% of the Company's revenues (calculated on a cash basis) were collected from funds distributed under Title IV Programs of the Higher Education Act (Title IV Programs) for the years ended December 31, 2011, 2010, and 2009, respectively. The financial aid and assistance programs are subject to political and budgetary considerations. There is no assurance that such funding will be maintained at current levels.
Extensive and complex regulations govern the financial assistance programs in which the Company's learners participate. The Company's administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potential adverse actions, including a suspension, limitation, or termination proceeding, which could have a material adverse effect on the Company.
If the University were to lose its eligibility to participate in federal student financial aid programs, the learners at the University would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. See Note 16 for further information on the regulatory environment in which the Company operates.
Property and Equipment
Property and equipment are stated at cost. Computer software is included in property and equipment and consists of purchased software, capitalized web site development costs and internally developed software. Capitalized web site development costs consist mainly of salaries and outside development fees directly related to web sites and various databases. Web site content development is expensed as incurred. Internally developed software represents qualifying salary and consulting costs for time spent on developing internal use software. The Company capitalizes certain costs associated with internally developed software, primarily consisting of the direct labor associated with creating the internally developed software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred), and the post-implementation/operation stage (all costs are expensed as incurred). The costs capitalized in the application development stage include the costs of designing the application, coding, installation of hardware, and testing. The capitalization of software requires judgment in determining when a project has reached the development stage and the period over which the Company expects to benefit from the use of that software.
Depreciation is calculated using the straight-line method, over the following estimated useful lives:
|
Computer equipment |
3 to 7 years | |||
|
Furniture and office equipment |
5 to 7 years | |||
|
Computer software |
3 to 7 years |
Leasehold improvements are amortized on a straight-line basis over the related lease term or estimated useful life, whichever is shorter.
Income Taxes
The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.
The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating tax positions. Step one, recognition, occurs when the Company concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Step two, measurement, is only addressed if the position is more likely than not to be sustained. Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Contingencies
The Company accrues for costs associated with contingencies including, but not limited to, regulatory compliance and legal matters when such costs are probable and reasonably estimable. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management's estimate of such costs, which may vary from the ultimate cost and expenses associated with any such contingency.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company recorded impairment charges of $35 thousand, $19 thousand, and $52 thousand during 2011, 2010, 2009, respectively.
The impairment charges primarily consist of course retirements and the write-off of previously capitalized internal software development costs related to abandoned software projects. These charges are recorded in general and administrative expenses in the consolidated statements of income.
Finite-lived intangible assets that are acquired in business combinations are recorded at fair market value on their acquisition date and are amortized on a straight-line basis to reflect the economic useful life of the asset.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to the underlying assets acquired and assumed liabilities. At the time of an acquisition, the Company allocates the goodwill and related assets and liabilities to its respective reporting unit. The Company identifies its reporting unit by assessing whether the components of its operating segment constitutes businesses for which discrete financial information is available and management regularly reviews the operating results of those components. The Company assesses goodwill for impairment at least annually in the fourth quarter, or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the respective reporting unit below its carrying amount.
The Company tests for goodwill impairment at the reporting unit level by applying a two-step test. In the first step, the Company compares the fair value of the reporting unit to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, the Company performs a second step to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. An impairment loss is recognized to the extent the implied fair value of the goodwill is less than the carrying amount of the goodwill.
Foreign Currency Translation
The United States (U.S.) dollar is the functional currency of the Company's entities operating in the U.S. The functional currency of the Company's entities operating outside the U.S. is the currency of the primary economic environment in which the entity primarily generates and expends cash, which is generally the local currency. The assets and liabilities of these operations are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. The resulting translation adjustments and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are included in shareholders' equity as a component of accumulated other comprehensive income (loss). Income and expense items are translated monthly at the average exchange rate for that period. The Company reports gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency denominated transactions, in the Consolidated Statements of Income.
Advertising
The Company expenses advertising costs as incurred. Advertising costs for 2011, 2010, and 2009 were $80.7 million, $64.3 million, and $51.6 million, respectively.
Net Income Attributable to Capella Education Company per Common Share
Basic net income attributable to Capella Education Company 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 and the vesting of restricted stock.
The following table presents a reconciliation of the numerator and denominator in the basic and diluted net income attributable to Capella Education Company per common share calculation.
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
(in thousands, except per share data) |
||||||||||||
|
Numerator: |
||||||||||||
|
Net income attributable to Capella Education Company |
$ | 52,115 | $ | 61,270 | $ | 42,669 | ||||||
|
Denominator: |
||||||||||||
|
Denominator for basic net income attributable to Capella Education Company per common share—weighted average shares outstanding |
15,241 | 16,648 | 16,713 | |||||||||
|
Effect of dilutive stock options and restricted stock |
73 | 200 | 317 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Denominator for diluted net income attributable to Capella Education Company per common share—weighted average shares outstanding |
15,314 | 16,848 | 17,030 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Basic net income attributable to Capella Education Company per common share |
$ | 3.42 | $ | 3.68 | $ | 2.55 | ||||||
|
Diluted net income attributable to Capella Education Company per common share |
$ | 3.40 | $ | 3.64 | $ | 2.51 | ||||||
Options to purchase 0.5 million, 0.1 million, and 0.2 million common shares, were outstanding but not included in the computation of diluted net income per common share in 2011, 2010, and 2009, respectively, because their effect would be antidilutive.
Comprehensive Income
Comprehensive income includes net income and all changes in the Company's equity during a period from non-owner sources, which for the Company consists of unrealized gains and losses on available-for-sale marketable securities and foreign currency translation losses, net of tax.
Share-Based Compensation
The Company measures and recognizes compensation expense for share-based payment awards made to employees and directors, including employee stock options and restricted stock, based on estimated fair values of the share award on the date of grant. The Company records compensation expense for all share-based awards over the service period, which is the vesting period.
To calculate the estimated fair value of stock options on the date of grant, the Company uses the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the Company to estimate key assumptions such as expected term, volatility, risk-free interest rates and dividend yield to determine the fair value of stock options, based on both historical information and management judgment regarding market factors and trends.
The Company amortizes share-based compensation expense over the period that the awards are expected to vest, net of estimated forfeiture rates. The Company estimates expected forfeitures of share-based awards at the grant date and recognizes compensation cost only for those awards expected to vest. In estimating expected forfeitures, the Company analyzes historical forfeiture and termination information and considers how future termination rates are expected to differ from historical termination rates. The Company ultimately adjusts this forfeiture assumption to actual forfeitures. Any changes in the forfeiture assumptions do not impact the total amount of expense ultimately recognized over the vesting period. Instead, different forfeiture assumptions only impact the timing of expense recognition over the vesting period. If the actual forfeitures differ from management estimates, additional adjustments to compensation expense are recorded.
Subsequent Events
The Company has reviewed and evaluated events and transactions that occurred subsequent to the balance sheet date. There have been no subsequent events that require recognition or disclosure in the financial statements.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2011-04, which is included in Accounting Standards Codification (ASC) 820, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS. This update defines fair value, clarifies a framework to measure fair value, and requires specific disclosures of fair value measurements. The guidance will be effective for the Company's interim and annual reporting periods beginning January 1, 2012, and applied prospectively. The Company does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income, which is included in ASC 220, Presentation of Comprehensive Income. This update improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The guidance requires all nonowner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected early adoption; therefore, the guidance will be effective for its interim and annual reporting periods beginning September 30, 2011, and applied retrospectively. The adoption of this guidance did not have a material impact on the Company's financial condition, results of operations, or disclosures.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which is included in ASC 350, Intangibles—Goodwill and Other. This update reduces the complexity, and potentially the cost, of testing goodwill for impairment. The guidance gives the Company the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and in some cases skip the two-step impairment test. The guidance will be effective for the Company's interim and annual reporting periods beginning January 1, 2012, and applied prospectively. The Company does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.
The Company has reviewed and considered all recent accounting pronouncements and believes there are none that could potentially have a material impact on its financial condition, results of operations, or disclosures.
|
|||
|
Computer equipment |
3 to 7 years | |||
|
Furniture and office equipment |
5 to 7 years | |||
|
Computer software |
3 to 7 years |
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
(in thousands, except per share data) |
||||||||||||
|
Numerator: |
||||||||||||
|
Net income attributable to Capella Education Company |
$ | 52,115 | $ | 61,270 | $ | 42,669 | ||||||
|
Denominator: |
||||||||||||
|
Denominator for basic net income attributable to Capella Education Company per common share—weighted average shares outstanding |
15,241 | 16,648 | 16,713 | |||||||||
|
Effect of dilutive stock options and restricted stock |
73 | 200 | 317 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Denominator for diluted net income attributable to Capella Education Company per common share—weighted average shares outstanding |
15,314 | 16,848 | 17,030 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Basic net income attributable to Capella Education Company per common share |
$ | 3.42 | $ | 3.68 | $ | 2.55 | ||||||
|
Diluted net income attributable to Capella Education Company per common share |
$ | 3.40 | $ | 3.64 | $ | 2.51 | ||||||
|
|||
| As of December 31, 2011 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Tax-exempt municipal securities |
$ | 64,613 | $ | 454 | $ | 0 | $ | 65,067 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 64,613 | $ | 454 | $ | 0 | $ | 65,067 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| As of December 31, 2010 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Tax-exempt municipal securities |
$ | 114,604 | $ | 1,277 | $ | (63 | ) | $ | 115,818 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 114,604 | $ | 1,277 | $ | (63 | ) | $ | 115,818 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| As of December 31, 2011 |
As of December 31, 2010 |
|||||||
| (in thousands) | ||||||||
|
Due within one year |
$ | 54,151 | $ | 58,998 | ||||
|
Due after one year through five years |
10,916 | 56,820 | ||||||
|
|
|
|
|
|||||
|
Total |
$ | 65,067 | $ | 115,818 | ||||
|
|
|
|
|
|||||
| Years Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Maturities of marketable securities |
$ | 51,442 | $ | 10,978 | $ | 23,360 | ||||||
|
|
|
|
|
|
|
|||||||
|
Total |
$ | 51,442 | $ | 10,978 | $ | 23,360 | ||||||
|
|
|
|
|
|
|
|||||||
|
|||
| Fair Value Measurements as of December 31, 2011 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: | (in thousands) | |||||||||||||||
|
Cash and cash equivalents: |
||||||||||||||||
|
Cash |
$ | 17,101 | $ | 17,101 | $ | 0 | $ | 0 | ||||||||
|
Money market funds |
27,551 | 27,551 | 0 | 0 | ||||||||||||
|
Variable rate demand notes |
17,325 | 17,325 | 0 | 0 | ||||||||||||
|
Marketable securities: |
||||||||||||||||
|
Tax-exempt municipal securities |
65,067 | 0 | 65,067 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total assets at fair value on a recurring basis: |
$ | 127,044 | $ | 61,977 | $ | 65,067 | $ | 0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Liabilities: |
||||||||||||||||
|
Other liabilities: |
||||||||||||||||
|
RDI contingent consideration |
$ | 5,945 | $ | 0 | $ | 0 | $ | 5,945 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total liabilities at fair value on a recurring basis: |
$ | 5,945 | $ | 0 | $ | 0 | $ | 5,945 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fair Value Measurements as of December 31, 2010 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: | (in thousands) | |||||||||||||||
|
Cash and cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | 43,141 | $ | 43,141 | $ | 0 | $ | 0 | ||||||||
|
Variable rate demand notes |
34,275 | 34,275 | 0 | 0 | ||||||||||||
|
Marketable securities: |
||||||||||||||||
|
Tax-exempt municipal securities |
115,818 | 0 | 115,818 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total assets at fair value on a recurring basis: |
$ | 193,234 | $ | 77,416 | $ | 115,818 | $ | 0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Computer software |
$ | 100,257 | $ | 80,612 | ||||
|
Computer equipment |
35,883 | 26,516 | ||||||
|
Furniture and office equipment |
13,206 | 12,847 | ||||||
|
Leasehold improvements |
1,310 | 860 | ||||||
|
|
|
|
|
|||||
| 150,656 | 120,835 | |||||||
|
Less accumulated depreciation and amortization |
(99,943 | ) | (75,925 | ) | ||||
|
|
|
|
|
|||||
|
Property and equipment, net |
$ | 50,713 | $ | 44,910 | ||||
|
|
|
|
|
|||||
|
|||
| Gross Carrying Amount as of December 31, 2010 |
Acquisition of RDI |
Accumulated Amortization |
Net Carrying Amount as of December 31, 2011 |
|||||||||||||
| Intangible assets: | (in thousands) | |||||||||||||||
|
Student relationships |
$ | 0 | $ | 3,100 | $ | (362 | ) | $ | 2,738 | |||||||
|
Validation partner relationships |
0 | 2,300 | (96 | ) | 2,204 | |||||||||||
|
Trademark and trade name |
0 | 700 | (20 | ) | 680 | |||||||||||
|
Learning model |
0 | 700 | (41 | ) | 659 | |||||||||||
|
Internally developed software |
0 | 300 | (29 | ) | 271 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 0 | $ | 7,100 | $ | (548 | ) | $ | 6,552 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (in thousands) | ||||
|
2012 |
$ | 1,878 | ||
|
2013 |
1,878 | |||
|
2014 |
868 | |||
|
2015 |
539 | |||
|
2016 |
498 | |||
|
2017 and thereafter |
891 | |||
|
|
|
|||
|
Total |
$ | 6,552 | ||
|
|
|
|||
|
|||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Accrued compensation and benefits |
$ | 8,978 | $ | 14,055 | ||||
|
Accrued instructional |
7,291 | 4,544 | ||||||
|
Accrued vacation |
994 | 1,867 | ||||||
|
Other |
12,043 | 9,496 | ||||||
|
|
|
|
|
|||||
|
Total accrued liabilities |
$ | 29,306 | $ | 29,962 | ||||
|
|
|
|
|
|||||
|
|||
| Operating | ||||
| (in thousands) | ||||
|
2012 |
$ | 7,032 | ||
|
2013 |
6,658 | |||
|
2014 |
6,592 | |||
|
2015 |
6,546 | |||
|
2016 |
6,708 | |||
|
2017 and thereafter |
13,219 | |||
|
|
|
|||
|
Total |
$ | 46,755 | ||
|
|
|
|||
|
|||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Current income tax expense: |
||||||||||||
|
Federal |
$ | 26,232 | $ | 32,172 | $ | 20,435 | ||||||
|
State |
1,638 | 2,334 | 1,879 | |||||||||
|
Foreign |
6 | 0 | 0 | |||||||||
|
Deferred income tax expense: |
||||||||||||
|
Federal |
3,317 | 1,325 | 1,238 | |||||||||
|
State |
3 | 29 | 85 | |||||||||
|
Foreign |
(826 | ) | 0 | 0 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Income tax expense |
$ | 30,370 | $ | 35,860 | $ | 23,637 | ||||||
|
|
|
|
|
|
|
|||||||
| Year Ended December 31, |
||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes |
2.5 | 2.5 | 2.1 | |||||||||
|
Non-deductible expense related to incentive stock options |
0.0 | 0.0 | 0.2 | |||||||||
|
Tax-exempt interest |
(0.8 | ) | (0.8 | ) | (1.3 | ) | ||||||
|
Foreign taxes |
0.3 | 0.0 | 0.0 | |||||||||
|
Other |
0.1 | 0.3 | (0.4 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
|
Effective income tax rate |
37.1 | % | 37.0 | % | 35.6 | % | ||||||
|
|
|
|
|
|
|
|||||||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Deferred income tax assets: |
||||||||
|
Net operating loss carryforwards |
$ | 928 | $ | 66 | ||||
|
Allowance for doubtful accounts |
2,221 | 2,037 | ||||||
|
Accrued liabilities |
4,033 | 2,714 | ||||||
|
Share-based compensation |
3,642 | 2,585 | ||||||
|
Other |
34 | 245 | ||||||
|
|
|
|
|
|||||
|
Deferred income tax assets |
10,858 | 7,647 | ||||||
|
Deferred income tax liabilities: |
||||||||
|
Prepaid expenses |
(1,208 | ) | (1,125 | ) | ||||
|
Accumulated other comprehensive income |
(169 | ) | (456 | ) | ||||
|
Property and equipment |
(16,095 | ) | (11,460 | ) | ||||
|
Joint venture investment |
(863 | ) | 0 | |||||
|
Intangible assets |
(1,646 | ) | 0 | |||||
|
|
|
|
|
|||||
|
Deferred income tax liabilities |
(19,981 | ) | (13,041 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax liability |
$ | (9,123 | ) | $ | (5,394 | ) | ||
|
|
|
|
|
|||||
| Year Ended December 31, |
||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Balance at January 1 |
$ | 727 | $ | 388 | $ | 382 | ||||||
|
Additions for tax positions of prior years |
0 | 565 | 122 | |||||||||
|
Reductions for tax positions of prior years |
(47 | ) | (92 | ) | 0 | |||||||
|
Settlements |
(207 | ) | 0 | (68 | ) | |||||||
|
Reductions due to lapse of the applicable statute of limitations |
(48 | ) | (134 | ) | (48 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at December 31 |
$ | 425 | $ | 727 | $ | 388 | ||||||
|
|
|
|
|
|
|
|||||||
|
|||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Foreign currency translation |
$ | 22 | $ | 0 | $ | 0 | ||||||
|
Unrealized gains on marketable securities |
285 | 758 | 1,333 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Accumulated other comprehensive income(1) |
$ | 307 | $ | 758 | $ | 1,333 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | Accumulated other comprehensive income is net of $0.2 million, $0.5 million and $0.8 million of taxes as of December 31, 2011, 2010 and 2009, respectively. The tax effect on each component of other comprehensive income during fiscal years 2011, 2010, and 2009 is not significant. The decrease in unrealized gains on marketable securities in 2011 compared to 2010 is primarily due to the decrease in Company's average balance of marketable securities in 2011. |
|
|||
| First | Second | Third | Fourth | Total | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
|
2011 |
||||||||||||||||||||
|
Revenues |
$ | 111,354 | $ | 106,400 | $ | 102,306 | $ | 109,983 | $ | 430,043 | ||||||||||
|
Operating Income |
22,467 | 23,903 | 14,857 | 18,875 | 80,102 | |||||||||||||||
|
Net income attributable to Capella Education Company |
14,609 | 15,515 | 9,934 | 12,057 | 52,115 | |||||||||||||||
|
Net income attributable to Capella Education Company per common share: |
||||||||||||||||||||
|
Basic |
$ | 0.90 | $ | 1.00 | $ | 0.66 | $ | 0.85 | $ | 3.42 | ||||||||||
|
Diluted |
$ | 0.90 | $ | 0.99 | $ | 0.66 | $ | 0.85 | $ | 3.40 | ||||||||||
|
2010 |
||||||||||||||||||||
|
Revenues |
$ | 101,233 | $ | 105,157 | $ | 105,010 | $ | 114,723 | $ | 426,123 | ||||||||||
|
Operating Income |
23,215 | 22,482 | 21,007 | 28,297 | 95,001 | |||||||||||||||
|
Net income attributable to Capella Education Company |
15,162 | 14,574 | 13,478 | 18,056 | 61,270 | |||||||||||||||
|
Net income attributable to Capella Education Company per common share: |
||||||||||||||||||||
|
Basic |
$ | 0.90 | $ | 0.87 | $ | 0.81 | $ | 1.10 | $ | 3.68 | ||||||||||
|
Diluted |
$ | 0.89 | $ | 0.86 | $ | 0.80 | $ | 1.09 | $ | 3.64 | ||||||||||
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