Grand Canyon Education, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed October 29, 2013. Grand Canyon Education provides postsecondary degree programs online, at its Phoenix campus, and at employer and other leased locations. Financial statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $152.4m | $133.6m | $435.9m | $370.0m |
| Operating income | $37.3m | $31.2m | $102.4m | $80.8m |
| Operating margin | 24.5% | 23.4% | 23.5% | 21.8% |
| Net income | $22.5m | $18.5m | $62.6m | $48.5m |
| Diluted EPS | $0.49 | $0.41 | $1.36 | $1.07 |
- Q3 revenue grew 14.1% and net income 22.1% year over year; nine-month revenue grew 17.8% and net income 28.9%.
- Revenue growth reflected higher online and ground enrollment, improved retention and, for the nine-month period, selective 2012 tuition increases and higher student fees. Q3 ground enrollment growth contributed only about five weeks of revenue because much of the increase occurred in late August.
- Operating expenses rose 12.5% in Q3 and 15.3% over nine months, slower than revenue over both periods. Instructional costs and admissions expense declined as a share of revenue, while advertising expense increased as a share.
- Effective tax rates were 41.1% for Q3 and 40.2% for nine months, versus 40.5% and 39.6%, respectively. Management cited non-recurring tax items; Q3 tax expense was higher than anticipated.
- Enrollment at September 30 was approximately 59,900, up 14.7% year over year: ground enrollment rose 39.5% and online enrollment 10.6%. Online students were 82.8% of total enrollment. Graduate students represented 37.4%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $101.8m, down from $124.7m, primarily reflecting timing of income-tax and employee-related payments and student deposits.
- Investing cash outflow was $104.5m, including $59.2m of capital expenditures and net purchases of short-term investments of $63.5m; proceeds from the note receivable partly offset outflows. Financing cash inflow was $4.5m.
- At September 30, unrestricted cash and cash equivalents plus investments totaled $170.3m; restricted cash was $49.8m. The company reported no borrowings on its $50m revolving credit line and said available liquidity was adequate for operations, planned capital spending and working capital for at least 24 months.
- Notes payable totaled approximately $94.7m, including current and long-term portions; capital lease obligations totaled approximately $0.6m. Cash and cash equivalents were $106.8m at quarter-end, versus $105.1m at December 31, 2012.
- Capital expenditures included campus facilities and technology. The company also spent $11.2m to purchase and refurbish a building near campus after a preliminary sale agreement was not finalized.
- The company repurchased 333,087 shares for $8.0m during the first nine months; $27.8m remained available under its repurchase authorization at September 30.
Material developments, outlook and risks
- Federal student-aid review: On September 27, 2013, the Department of Education and the company resolved a program review covering 2008–2010 and closed it. The company recorded an additional $1.387m reserve in Q3; $2.528m was accrued for anticipated return-to-Title-IV payments, expected over six months. The company agreed not to seek reimbursement from affected students.
- Certification: The company received full Department of Education certification on October 28, 2013, after the quarter-end, allowing Title IV participation through September 30, 2017. Previously it had provisional certification through December 31, 2013.
- Note-receivable gain: The borrower paid principal and most interest in March 2013. A court ruling in Q3 led to recognition of $1.459m of other asset and interest/other income for late penalty and related default interest. Other disputed amounts, including $432,000 of default interest and a $139,000 trustee fee, remained subject to court resolution and were treated as gain contingencies.
- Management anticipated increased competitive pressure on online enrollment as traditional colleges expand alternative learning options. It also noted seasonal effects: ground enrollment and margins are typically lower in summer, and management expects this effect to become more pronounced as ground enrollment grows.
- Key risks include Title IV and other regulatory compliance, student access to financial aid and private financing, enrollment growth and retention, competition, execution of campus expansion, staffing, and compliance with debt covenants. The filing reported no material changes to the prior annual report’s risk factors.
- No quantitative earnings or revenue guidance was provided. Management’s stated liquidity outlook was adequate resources for at least the next 24 months.
Important facts for investors to verify
- Track enrollment growth, especially online enrollment, retention, and the conversion of ground-campus growth into recognized revenue.
- Review the timing and final amount of Title IV returns under the resolved program review, and any subsequent compliance developments.
- Assess earnings quality, including the note-receivable-related income and the non-recurring tax items affecting reported results.
- Monitor capital spending, campus project utilization, debt repayments, interest-rate exposure and compliance with credit-facility covenants.
- Consider the filing’s reclassification of operating expense categories beginning in 2013 when comparing expense lines with earlier reporting.