Grand Canyon Education, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Unless otherwise noted, dollar amounts below are in millions. Grand Canyon provides undergraduate and graduate programs online, at its Phoenix campus, and at employer locations. It had 46,278 students at quarter-end, up 8.9% year over year; 89.1% were online students.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Net revenue | $117.1 | $101.7 | Up 15.2% |
| Operating income | $24.2 | $16.2 | Operating margin 20.7%, versus 15.9% |
| Income before taxes | $24.0 | $16.1 | |
| Net income | $14.5 | $9.5 | Net margin 12.4%, versus 9.3% |
| Diluted EPS | $0.32 | $0.21 | |
| Operating cash flow | $45.2 | $23.4 | Included favorable working-capital movements, notably income taxes and deferred revenue |
| Capital expenditures | $16.9 | $14.7 | Primarily campus construction and equipment |
Instructional costs were $50.8 million, or 43.4% of revenue, versus $48.9 million, or 48.1%. Selling and promotional costs rose to $34.6 million from $29.8 million, and general and administrative costs rose to $7.5 million from $6.8 million. The effective tax rate was 39.7%, compared with 41.1%; management attributed the decrease to non-recurring tax items in both periods.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $56.7 million, compared with $21.2 million at December 31, 2011. Restricted cash and cash equivalents were $50.5 million, plus $0.6 million of noncurrent restricted cash; much of the restricted balance relates to student financial-aid funds and is not freely available.
- Total current assets were $130.3 million and current liabilities were $136.1 million. Accounts for student deposits and deferred revenue are significant components of current liabilities.
- Notes payable totaled $21.2 million, including $1.7 million current; capital lease obligations totaled approximately $0.7 million. The $50 million revolving credit line was undrawn at quarter-end.
- Management stated that operating cash flow and available liquidity were expected to cover operations, planned capital expenditures, and working-capital needs for at least 24 months.
- Contractual obligations totaled $124.8 million, including $54.3 million of operating leases and $48.6 million of purchase obligations.
Material changes, outlook, and risks
- Revenue growth reflected higher enrollment and, to a lesser extent, tuition increases, partially offset by higher institutional scholarships. Enrollment increased 31.1% in ground programs and 6.7% online. Ground tuition was unchanged; online and professional studies tuition increases for the 2011–12 academic year varied by program, with an estimated blended increase of 3.2%.
- Net revenue was reduced by scholarships of approximately $23.9 million, versus $19.8 million. Bad-debt expense declined to $4.1 million from $10.0 million; management cited improved collections and fewer receivables associated with the transition to a borrower-based aid system. This reduction was a key contributor to improved instructional-cost margins.
- Marketing costs rose with advertising, a southwest-region branding campaign, enrollment-counselor hiring, and a new related-party marketing arrangement. Spending under agreements with Mind Streams and Lifetime Learning was $0.45 million in Q1 2012, versus $0.40 million a year earlier.
- The company was investing in campus capacity, including dormitories, an Arts and Science classroom building, and a parking garage. Management expects seasonal operating-margin pressure in summer quarters, potentially more pronounced as ground enrollment and related staffing increase. Management also anticipated pressure on online enrollment from economic challenges, regulation, and competition. The filing provides no specific earnings or revenue guidance.
- Regulatory contingency: The Department of Education’s ongoing Title IV program review identified five preliminary findings, including enrollment-counselor compensation, gainful employment eligibility, and procedures for students with non-passing grades. The University disputed or was responding to several findings and agreed to review student files. No penalties were specified and no amount was accrued; an adverse final determination could require repayment of aid, fines, or other sanctions and could materially harm the business. The University’s Title IV participation was provisionally certified through 2013.
- Federal student-aid rulemaking and budget decisions were identified as uncertainties that could affect eligibility, funding, enrollment, cash flow, and results. Other disclosed risks include student retention and enrollment growth, competition, staffing, and compliance obligations.
- No shares were repurchased during the quarter; $26.1 million remained under the repurchase authorization, which expires September 30, 2012. The company reported no material changes to its previously disclosed risk factors and no off-balance-sheet arrangements with material effects.
Important facts for investors to verify
- Progress and final resolution of the Department of Education program review, including any required aid repayments, penalties, or sanctions.
- Whether the sharp year-over-year decline in bad-debt expense and higher operating margins are sustainable.
- Cash-flow quality: the extent to which Q1 operating cash flow depended on tax-related and deferred-revenue working-capital movements.
- Campus expansion spending, purchase commitments, seasonal summer performance, and the effect of ground-student growth on costs and utilization.
- Enrollment trends, particularly online enrollment, and the impact of tuition, scholarships, competition, and regulatory changes.