Grand Canyon Education, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and reporting period
GCE sold Grand Canyon University (GCU) on July 1, 2018 and now provides education services to university partners. It receives service fees under long-term agreements, including 60% of GCU tuition and fee revenue. On January 22, 2019, GCE acquired Orbis Education, which supports healthcare education programs at 17 universities. Q1 2019 includes Orbis results from January 22 onward; Q1 2018 reflects GCE as the owner-operator of GCU. As a result, reported year-over-year figures are not directly comparable.
Partner-program enrollment was 101,679 at March 31, up 11.3% year over year: GCU enrollment grew 7.6% to 98,295, while Orbis-serviced enrollment was 3,384.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $197.3 service revenue | $275.7 university-related net revenue |
| Operating income | $72.4 | $90.1 |
| Net income | $73.2 | $73.7 |
| Diluted earnings per share | $1.52 | $1.52 |
| Cash from operating activities | $76.3 | $119.0 |
Management reported comparable service-fee revenue growth of 19.3% year over year. Its comparison adjusts Q1 2018 revenue to 60% of university-related revenue, or $165.4 million, to approximate the GCU services-agreement economics. Net income was broadly flat despite acquisition-related costs and higher interest expense.
Operating expenses included technology and academic services of $19.0 million, counseling and support of $53.1 million, marketing and communication of $35.5 million, general and administrative of $11.5 million, $1.7 million of acquired-intangible amortization, and $4.1 million of transaction costs. The filing presents expense ratios on an adjusted comparison basis: technology and academic services 9.7% versus 6.5%; counseling and support 26.9% versus 30.7%; marketing 18.0% versus 17.2%; and general and administrative 5.8% versus 4.5%.
Income before tax was $84.7 million; income tax expense was $11.5 million, reflecting a 13.5% effective tax rate versus 18.8%. A settlement with Arizona generated a $7.5 million tax-and-interest refund and a favorable $5.9 million tax impact, net of federal tax benefit. The filing also reports $13.7 million of interest income on GCU’s secured note and $2.6 million of interest expense.
At March 31, cash and cash equivalents were $88.5 million, investments $14.2 million, and restricted cash $0.3 million. Total current assets were $198.2 million and current liabilities $126.0 million. Notes payable totaled $248.4 million, including $48.4 million current; reported total liabilities were $346.6 million. The secured note receivable from GCU was $930.0 million, bears 6% interest, is secured by GCU assets, and matures June 30, 2025.
Investing cash outflow was $340.9 million, primarily reflecting the Orbis acquisition ($361.2 million net of acquired cash) and $29.9 million advanced to GCU for capital expenditures, partly offset by investment proceeds. Financing cash inflow was $171.3 million, including borrowings for the acquisition. Cash and restricted cash declined by $93.2 million during the quarter.
Material changes, outlook and risks
The Orbis acquisition was funded with $191.0 million from the new credit facility and operating cash on hand; GCE also drew $6.25 million on the revolving facility and repaid its prior $59.9 million term loan. The amended facility totals $325 million, has a five-year maturity, and bears interest at 30-day LIBOR plus 2% (4.49% at quarter-end). Term-loan principal amortization begins in Q2 2019. GCE reported compliance with debt covenants.
Orbis contributed $17.5 million of revenue and $0.4 million of net income after acquisition. Purchase accounting recorded $210.3 million of intangible assets, primarily partner relationships, and $148.3 million of goodwill; the allocation remained subject to adjustment. Pro forma results, as if acquired at the start of each period, were revenue of $200.5 million and net income of $62.0 million for Q1 2019, versus revenue of $289.3 million and net income of $58.7 million for Q1 2018; these figures are not necessarily indicative of actual results.
Management stated that cash flows, cash balances and available credit should fund operations, planned capital spending and working capital for at least 24 months. It expected to advance approximately $70 million to GCU for approved capital expenditures during the remaining nine months of 2019; none was then anticipated for 2020. No specific earnings or revenue guidance is provided in the filing. The company noted seasonal softness in summer quarters, partly because many GCU traditional ground students do not attend then.
Key risks include dependence on GCU and other university partners, partner enrollment and retention, termination of services agreements, education-sector regulation and Title IV requirements, competition, execution of acquisitions and growth, and variable-rate debt and covenant obligations. GCE identified no material change to previously disclosed risk factors. It reported no material off-balance-sheet arrangements and no legal proceeding believed likely to materially affect its financial condition, results or cash flows, while noting that outcomes in pending matters may be uncertain.
Important facts for investors to verify
- How comparable service-fee growth develops, given that reported Q1 revenue compares different business models and includes only part-quarter Orbis results.
- GCU’s capacity to service the $930.0 million secured note and fund the planned 2019 capital-expenditure advances.
- Orbis integration, enrollment growth, acquisition-related costs, and the final allocation and amortization of acquired assets.
- Debt repayment requirements, LIBOR exposure, covenant headroom, and liquidity after acquisition and planned GCU advances.
- Whether the $5.9 million favorable tax item and share-based compensation tax benefits affect comparisons with future effective tax rates.