Grand Canyon Education, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with the three months ended March 31, 2013, unless otherwise noted. The company provides postsecondary education online, on its Phoenix campus, and at other locations.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenue | $167.4 million | $142.0 million | +17.9% |
| Operating income | $43.4 million | $33.6 million | +29.2% |
| Operating margin | 25.9% | 23.7% | +2.2 percentage points |
| Net income | $26.3 million | $20.9 million | +25.5% |
| Net margin | 15.7% | 14.7% | +1.0 percentage point |
| Diluted EPS | $0.56 | $0.46 | +21.7% |
| Operating cash flow | $53.7 million | $31.7 million | +$22.0 million |
| Capital expenditures | $27.2 million | $14.7 million | +$12.5 million |
Instructional costs were $70.7 million, or 42.2% of revenue in both periods. Admissions and advertising costs declined as a share of revenue, while marketing and promotional costs rose modestly as a share. The effective tax rate was 38.9%, versus 40.4%.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $39.1 million, restricted cash was $50.8 million, and investments were $157.5 million. Management reported unrestricted cash and investments of $196.6 million.
- Total assets were $655.3 million and total liabilities were $274.4 million. Notes payable totaled approximately $91.4 million; capital lease obligations were $0.6 million.
- No borrowings were outstanding on the $50 million revolving credit line. Management said operating cash flow and other liquidity sources were expected to cover operations, planned capital spending, and working capital for at least 24 months.
- Operating cash flow rose to $53.7 million, helped by higher earnings and timing of tax-related payments and student deposits. Investing used $76.3 million, including $49.0 million net purchases of short-term investments and $27.2 million of capital expenditures. Financing provided $5.9 million; cash declined $16.7 million to $39.1 million.
Business trends and material changes
- Enrollment increased 15.0% to approximately 61,600 students. Ground enrollment rose 32.3% and online enrollment 12.3%; 84.3% of students were online, down from 86.4%.
- Revenue growth primarily reflected enrollment gains and, to a lesser extent, room, board, and other student fees; increased institutional scholarships partly offset growth. Scholarships reduced revenue by approximately $37.7 million, compared with $28.3 million a year earlier.
- Management attributed about $2.3 million of Q1 2014 revenue to a shift in the traditional campus spring-semester calendar; it would otherwise have been earned in Q2. This is a timing item, not identified as recurring growth.
- Operating margin improved as admissions, advertising, and general and administrative costs grew more slowly than revenue. Instructional costs rose with student and staffing growth, but bad-debt expense declined by $1.1 million.
- Interest and other income fell to $0.1 million from $2.2 million, principally because Q1 2013 included a $2.2 million gain on a note receivable settlement.
- Capital spending supported campus expansion, including a classroom building, residence halls planned for an additional 1,600 students, and arena expansion. The company repurchased 14,000 shares for $0.6 million during the quarter; $26.9 million remained under its authorization, which expires September 30, 2014.
Outlook, risks, and contingencies
- No specific numerical earnings or revenue guidance was provided. Management expects seasonal operating-result fluctuations to continue and said the summer-period effect may become more pronounced as traditional ground enrollment grows.
- On April 13, 2014, the Department of Education notified the company of an intended program review of Grand Canyon University, covering Title IV administration, Clery Act compliance, and Drug-Free Schools and Communities Act requirements for the 2012–2013 and 2013–2014 award years. The outcome and timing were not predictable; significant findings could materially adversely affect results, cash flows, or financial position. Management stated it believed the university had effective compliance policies and procedures.
- The company operates in a highly regulated industry and depends in part on federal student aid. Other stated risks include student enrollment and retention, competition, regulatory change, staffing, growth management, and debt covenants.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting that outcomes and potential losses for many matters could not be estimated. Non-income-tax reserves were approximately $0.7 million.
- Contractual obligations totaled $210.1 million, including $91.4 million of long-term notes payable, $83.3 million of purchase obligations, and $34.8 million of operating leases.
Important facts for investors to verify
- Track the Department of Education program review, any findings or sanctions, and continuing Title IV eligibility and compliance.
- Assess enrollment growth, retention, scholarship levels, and revenue per student, separating calendar timing effects from underlying trends.
- Monitor cash generation against campus expansion spending, contractual commitments, and debt repayment; distinguish unrestricted from restricted cash.
- Evaluate whether improved margins persist as ground enrollment expands and seasonal effects become more pronounced.
- Review the note-receivable dispute and other legal or tax contingencies for material developments; the filing does not provide a clear resolution for the remaining disputed note amounts.