Grand Canyon Education, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing.
Business context
Grand Canyon Education operates Grand Canyon University, offering more than 200 programs through online, campus-based and employer-site instruction. Enrollment was 81,908 at year-end, up 9.9% year over year; 78.9% of students were online. Ground enrollment grew 13.6% and online enrollment 9.0%.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net revenue | $873.3 million | $778.2 million | +12.2% |
| Operating income | $237.2 million | $210.4 million | +12.8% |
| Net income | $148.5 million | $131.4 million | +13.0% |
| Diluted EPS | $3.15 | $2.78 | +13.3% |
| Operating margin | 27.2% | 27.0% | +0.2 percentage points |
| Net margin | 17.0% | 16.9% | +0.1 percentage points |
Revenue growth primarily reflected higher online and ground enrollment, including related housing, dining and student fees; increased scholarships partly offset growth. Scholarships reduced 2016 revenue by $179.2 million, versus $163.9 million in 2015. The company did not raise tuition for the 2016–17 academic year.
Q4 comparison: Revenue was $244.7 million versus $216.0 million in Q4 2015; operating income was $76.7 million versus $63.1 million; net income was $48.0 million versus $38.1 million; diluted EPS was $1.01 versus $0.81.
- Operating cash flow was $218.3 million, compared with $173.9 million in 2015.
- Investing cash outflow was $216.0 million. The cash flow statement reports $178.3 million of capital expenditures and a separate $60.7 million for off-site development, principally a nearby student-services center and parking garage. The filing’s selected-data table groups capital expenditures differently and reports $239.0 million; investors should reconcile the presentation.
- Year-end unrestricted cash and investments totaled $108.6 million; restricted cash, cash equivalents and investments were $84.9 million.
- Notes payable totaled $98.3 million, including $25.0 million drawn on the $150 million revolving facility; $125 million remained available. The company reported compliance with debt covenants.
- Total assets were $1.09 billion and stockholders’ equity was $773.7 million. Management said operating cash flow and other liquidity sources should fund operations, planned capital spending and working capital for at least 24 months.
Changes, outlook and notable items
- Enrollment growth supported revenue and profit growth, while investment in campus facilities lifted property and equipment to $855.5 million from $667.5 million. Instructional expenses rose 13.2%, faster than revenue, and increased to 42.7% of revenue from 42.4%.
- Advertising expense increased 15.6% to $88.2 million, or 10.1% of revenue. Management planned further brand-advertising investment in 2017.
- The company recorded $3.5 million of lease termination costs after vacating leased office space. Adjusted EBITDA excluded these costs and other specified items; it was $304.1 million, up from $265.0 million in 2015. Adjusted EBITDA is non-GAAP and is not a substitute for GAAP income or operating cash flow.
- Management planned 34 new programs or emphases for 2017 and targeted 19,000 traditional ground students at the start of the 2017–18 academic year. No numerical revenue, earnings or cash-flow guidance is provided in the filing.
- Title IV funding represented 72.3% of regulatory 90/10 revenue, down from 74.8% in 2015. Management expected the proportion to remain stable or decline, but noted it may be affected by student circumstances and changes in aid rules.
- Draft gainful-employment rates indicated no programs failed, but four programs were in the “Zone”; the University was analyzing the data. The Department of Education’s full certification was valid through September 30, 2017, and management expected regional accreditation reaffirmation in spring 2017.
- Material risks include dependence on federal student aid, regulatory and accreditation requirements, competition, enrollment and retention, and execution of campus expansion. The filing describes a 2014 Department of Education program review whose three student-specific findings were corrected and closed with no further action. Management did not expect ordinary-course litigation to materially affect results.
Most important facts for investors to verify
- Progress on Department of Education recertification and Higher Learning Commission accreditation, and any effects of gainful-employment requirements on programs.
- Whether enrollment growth and planned campus expansion generate returns sufficient to support the increased operating and capital costs.
- Reconciliation of the filing’s capital-expenditure presentations, including the separately reported $60.7 million of off-site development.
- Trends in Title IV reliance, scholarships, student bad debt, and the ability of students to finance and complete their programs.
- Debt maturities, revolver use and covenant compliance as the company funds expansion and considers share repurchases.