Business context and reporting period
Grand Canyon Education, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provides undergraduate and graduate education online, at its Phoenix campus, and at third-party sites. It reported 57,707 students at quarter-end, up 12.7% year over year; 91.8% were enrolled online.
Financial performance and liquidity
Amounts below are in millions, except per-share data. Comparisons are with the same 2013 period.
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $158.6; +12.1% | $326.0; +15.0% |
| Operating income | $37.9; +20.3% | $81.3; +24.9% |
| Operating margin | 23.9%, versus 22.3% | 24.9%, versus 23.0% |
| Net income | $23.1; +21.0% | $49.4; +23.4% |
| Diluted EPS | $0.49, versus $0.42 | $1.05, versus $0.88 |
For the first half, operating cash flow was $89.4 versus $44.0 million. Capital expenditures were $82.0 million, compared with $38.0 million; net cash used in investing was $130.1 million. Cash and cash equivalents were $20.2 million at June 30; unrestricted cash plus investments totaled $176.7 million, while restricted cash was $53.2 million. Current and long-term notes payable totaled approximately $89.8 million, with capital lease obligations of approximately $0.5 million. No borrowings were outstanding on the $50 million revolving credit line. Management said available liquidity and expected cash flows should fund operations, planned capital spending, and working capital for at least 24 months.
Material changes and management commentary
- Revenue growth was primarily attributed to enrollment gains, partly offset by higher institutional scholarships. Ground enrollment grew 38.7% and online enrollment 10.8%. Revenue per student was slightly lower in Q2, in part because campus semester timing shifted approximately $2.3 million of revenue into Q1.
- Operating leverage improved: instructional costs, advertising, and general and administrative expenses declined as a percentage of revenue. Lower bad-debt expense, attributed to improved retention and collections, contributed to the instructional-cost margin improvement.
- First-half capital spending supported Phoenix campus expansion, including classroom construction, land purchases, and residence halls designed to accommodate another 1,600 students. Property and equipment, net, rose to $416.2 million from $339.6 million at year-end.
- The company did not raise tuition for the 2013–2014 academic year and had not raised traditional ground tuition in four years. Management expects seasonal effects to persist and says the summer impact may become more pronounced as ground enrollment grows.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management’s stated liquidity outlook covers at least the next 24 months.
- Key risks include extensive Title IV and other education regulation, student access to federal aid and financing, enrollment growth and retention, competition, marketing effectiveness, staffing, campus expansion, and debt covenants and payments.
- The Department of Education’s 2012–2013 and 2013–2014 program review identified three student-specific information or reporting findings. The university reported correcting them to the Department’s satisfaction; the review was closed with no further action required. Management stated it believed the university was materially compliant with applicable regulations.
- The IRS began examining the company’s 2011 income tax return in Q2. The filing also reports approximately $0.7 million reserved for probable, estimable non-income-tax matters. Management said pending litigation losses generally could not be estimated with certainty and were not considered probable in most cases.
- A prepaid royalty impairment of $1.0 million was recorded in the first half; cash-flow adjustments also included $2.1 million for other items, including fixed-asset impairments. First-half interest and other income fell to $0.3 million from $2.3 million, largely because the 2013 period included a $2.2 million gain on a note receivable.
- A borrower appealed a ruling in the company’s favor on certain note-related late penalties; other disputed default interest and trustee-fee amounts remain gain contingencies and were not recognized. The filing says the appeal briefing was complete and oral argument was pending scheduling.
- The company had $25.9 million remaining under its $75 million share-repurchase authorization, which was scheduled to expire September 30, 2014. It repurchased 23,900 shares for $1.0 million during Q2.
Important facts for investors to verify
- Whether enrollment growth, particularly the substantial increase in ground students, continues and translates into revenue and margin growth.
- Whether campus construction and other elevated capital expenditures remain on plan, and how they affect operating cash flow and liquidity.
- Developments from the IRS examination, regulatory oversight, and any litigation or unresolved note-receivable appeal.
- Debt repayment, variable-rate exposure and the interest-rate corridor hedge, including compliance with credit-facility covenants.
- The timing and extent of future share repurchases and the effect of seasonality as ground enrollment expands.