Business Context and Reporting Period
Company: Grand Canyon Education, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: A regionally accredited provider of postsecondary education offering graduate and undergraduate degrees in education, business, healthcare, and liberal arts. The company operates a traditional 100-acre campus in Phoenix, Arizona, and a significant online program. As of December 31, 2010, total enrollment was approximately 41,500 students, with 91.0% enrolled in online programs. The student body is primarily composed of working adults (92.2% of online students are age 25 or older).
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net Revenue | $385.8 million | $261.9 million | +47.3% |
| Operating Income | $73.5 million | $46.6 million | +57.9% |
| Net Income | $44.4 million | $27.3 million | +62.5% |
| Earnings Per Share (Diluted) | $0.96 | $0.60 | +60.0% |
| Adjusted EBITDA | $101.2 million | $65.1 million | +55.4% |
| Cash and Cash Equivalents (Unrestricted) | $33.6 million | $62.6 million | -46.3% |
| Restricted Cash and Investments | $52.9 million | $3.2 million | +1,553.1% |
| Total Debt (Notes Payable + Capital Leases) | $25.7 million | $27.7 million | -7.2% |
| Capital Expenditures | $62.6 million | $60.3 million | +3.8% |
Note: The significant increase in restricted cash is attributed to the transition to a "borrower-based, non-term" (BBAY) financial aid system, which requires funds to be held until courses begin.
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by a 10.0% increase in enrollment and higher revenue per student due to tuition increases (blended rate increase of 3.5% for online programs) and an increase in students taking four-credit courses.
- Expense Increases:
- Instructional Costs: Increased 59.9% to $140.0 million, driven by faculty compensation, system conversion costs ($4.0 million), and increased headcount.
- Selling and Promotional: Increased 31.7% to $112.5 million due to expanded marketing efforts and enrollment staffing.
- General and Administrative: Increased 40.3% to $50.0 million, largely due to a rise in bad debt expense ($23.4 million vs. $14.0 million in 2009) and increased legal/audit fees.
- One-Time Items:
- Contract Termination Fee: $9.2 million expense related to terminating a revenue-sharing agreement with a related party (Mind Streams) due to new Department of Education regulations.
- Litigation Loss: No expense in 2010; a $5.2 million accrual was recorded in 2009 for a qui tam lawsuit which was settled in December 2010.
- Financial Aid System Transition: The company completed the transition from a term-based to a BBAY financial aid system in April 2010. Management estimates this transition reduced net revenue by approximately $30 million to $37 million in the second half of 2010 due to students taking breaks between classes and reduced living expense eligibility.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Environment: The company faces significant regulatory scrutiny.
- Program Review: The U.S. Department of Education initiated a program review in July 2010 covering 2008-2010. Preliminary findings concern enrollment counselor compensation practices and the "gainful employment" status of certain Liberal Arts programs. The review remains open.
- 90/10 Rule: The company derived 84.9% of its revenue from Title IV funds in 2010. Exceeding 90% for two consecutive years would result in ineligibility for federal aid.
- Incentive Compensation: New rules effective July 1, 2011, eliminate "safe harbors" for incentive compensation, creating uncertainty regarding enrollment counselor pay structures.
- Legal Proceedings: A qui tam lawsuit regarding incentive compensation was settled in December 2010 for $5.2 million. The settlement was approved by the court, and the U.S. Department of Justice voluntarily dismissed its appeal in December 2010.
- Change in Control: In January 2011, voting agreements held by the Richardson Voting Group were terminated, triggering a change in control. The company filed for recertification with the Department of Education to maintain Title IV eligibility.
- Outlook: Management anticipates continued growth but notes headwinds from the economic environment, increased competition, and the impact of new regulations on enrollment and compensation practices.
Key Facts for Investor Verification
- Title IV Dependency: Verify the company's compliance with the "90/10 Rule" and the status of the ongoing Department of Education program review, as loss of Title IV eligibility would be catastrophic.
- Regulatory Impact on Compensation: Assess the financial impact of the new incentive compensation rules (effective July 2011) on the company's ability to recruit and retain enrollment counselors.
- Bad Debt Trends: Monitor the trend in bad debt expense, which rose to 6.0% of revenue in 2010, potentially indicating increased student financial distress or collection challenges under the new BBAY system.
- Capital Expenditure Commitments: Verify the funding sources for significant campus expansion projects (arena, dormitories) totaling over $60 million in 2010, given the shift of unrestricted cash to restricted cash.
- Change in Control Status: Confirm the final outcome of the Department of Education's review regarding the January 2011 change in control and any potential restrictions on operations or funding.