Grand Canyon Education, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report; it also provides unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
The company operated Grand Canyon University (GCU), a regionally accredited university offering more than 225 programs online, on its Phoenix campus, and at other locations. Enrollment at year-end was 90,297, up 10.2% year over year; 79.1% of students were online. The company remained substantially dependent on student aid, with 71.5% of net revenue, calculated under the Department of Education’s cash-basis formula, derived from Title IV programs.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net revenue | $974.1 million | $873.3 million | +11.5% |
| Operating income | $282.8 million | $237.2 million | +19.2% |
| Operating margin | 29.0% | 27.2% | +1.8 percentage points |
| Net income | $203.3 million | $148.5 million | +36.9% |
| Diluted EPS | $4.22 | $3.15 | +34.0% |
| Adjusted EBITDA (non-GAAP) | $354.6 million | $304.1 million | +16.6% |
| Operating cash flow | $304.9 million | $237.8 million | +$67.1 million |
| Capital expenditures | $124.0 million | $239.0 million | Lower year over year |
Revenue growth reflected higher online and ground enrollment and increased campus-related room, board, and other fees; scholarships, which reduce revenue, rose to $196.3 million from $179.2 million. Operating margin improved as several expense categories grew more slowly than revenue. Net income benefited from a lower reported effective tax rate of 28.3%, including $16.5 million of excess tax benefits on share-based awards and a $10.7 million benefit from revaluing deferred taxes after the Tax Cuts and Jobs Act. Management said the 2017 effective rate would have been 32.1% excluding the deferred-tax revaluation.
Fourth-quarter 2017 revenue was $271.4 million and net income was $68.3 million; fourth-quarter 2016 revenue was $244.7 million and net income was $48.0 million.
At December 31, 2017, cash and investments totaled $242.7 million, excluding $94.5 million of restricted cash. Total debt, including current maturities, was $66.6 million, down from $98.3 million; the $150 million revolving facility expired at year-end and was not renewed. Total assets were $1.304 billion and stockholders’ equity was $986.0 million. The company reported no material off-balance-sheet arrangements. Operating cash flow less capital expenditures was approximately $181 million.
Material changes and outlook
- Enrollment increased 10.2%; online enrollment grew 10.5% and ground enrollment 9.2%. Graduate and doctoral students represented a rising share of enrollment.
- Tuition was unchanged for the 2016–17 and 2017–18 academic years; traditional ground tuition had not increased in nine years. Management attributed revenue growth partly to more residential students and related ancillary revenue.
- Capital spending declined from the prior year’s construction-heavy level, but remained significant, supporting campus expansion and technology. Management expects continued campus investment.
- Management said cash flows and available liquidity should fund operations, planned capital expenditures, and working capital for at least 24 months. It targeted more than 20,500 ground students at the start of the 2018–19 academic year and planned to increase brand advertising in 2018. The filing provides no formal revenue or earnings guidance.
- Proposed nonprofit transaction: GCU had applied for approval to transfer academic and related assets to a nonprofit entity, which would operate the university; the public company would provide services under a long-term agreement and hold a long-term note for the asset sale. As of the filing, approvals were pending, definitive agreements were unsigned, and key financial terms—including asset value and revenue share—remained subject to appraisal and negotiation. If completed, the transaction would materially change the company’s business and trigger repayment of the $66.5 million credit facility balance.
- GCU received 10-year reaccreditation in 2017 without monitoring or interim-report requirements. Its Title IV participation agreement ran through December 31, 2020; the 90/10 ratio was 71.5% for 2017. Management reported compliance with applicable regulations in all material respects.
Risks, contingencies, and unusual items
- Major risks include regulatory or accreditation changes, restrictions on Title IV funding, state authorization requirements, competition, enrollment and retention performance, student financing, and the proposed transaction’s approval, terms, and execution. Title IV exposure makes regulatory changes particularly consequential.
- The proposed transaction could leave the company dependent initially on a single services customer and on New GCU’s enrollment, performance, and ability to repay the asset-sale note. Management also noted limited experience operating as a third-party services provider.
- Tax results were unusually favorable in 2017 because of share-based compensation tax benefits and deferred-tax remeasurement; share-based tax benefits may vary with stock price and award activity. The new 21% federal corporate rate took effect in 2018.
- The company reported ordinary-course legal matters and said their resolution was not expected to materially affect financial position, results, or cash flows; it cautioned that ultimate exposure in some matters could not be estimated with certainty. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the HLC, Department of Education, and other regulators approve the proposed transaction, and the final asset-sale valuation, note terms, and services revenue share.
- Whether enrollment and ground-campus growth meet management’s stated target, and how scholarships, marketing costs, and room-and-board revenue affect margins.
- The recurring earnings and cash-flow profile excluding the $16.5 million share-based tax benefit and $10.7 million deferred-tax revaluation benefit.
- Future Title IV revenue concentration, compliance status, and developments in federal and state education regulation.
- Campus investment requirements, debt repayment or refinancing needs, and the company’s liquidity after the revolving facility expired.