Grand Canyon Education, Inc. — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures are noted separately. Amounts are in U.S. dollars.
Business context
Grand Canyon Education operates Grand Canyon University, a regionally accredited, Christian-oriented university offering more than 160 programs online and at its Phoenix campus. Enrollment reached 67,806 at year-end, up 13.7%; 81.2% of students were online and 18.8% were in ground programs. Ground enrollment grew 26.5% and online enrollment 11.1% year over year.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net revenue | $691.1 million | $598.3 million | +15.5% |
| Operating income | $180.8 million | $143.3 million | +26.2% |
| Operating margin | 26.2% | 23.9% | +2.3 percentage points |
| Net income | $111.5 million | $88.7 million | +25.7% |
| Net margin | 16.1% | 14.8% | +1.3 percentage points |
| Diluted EPS | $2.37 | $1.92 | +23.4% |
| Adjusted EBITDA | $227.8 million | $185.1 million | +23.1% |
Adjusted EBITDA is a non-GAAP measure; the company cautions it is not a substitute for GAAP earnings or operating cash flow. Scholarships reduced revenue by approximately $140.0 million, up from $111.8 million in 2013. Tuition rates were unchanged for the 2013–14 and 2014–15 academic years.
Cash provided by operations was $167.0 million, versus $118.4 million in 2013. Capital expenditures were $168.6 million, up from $78.9 million; operating cash flow less capital expenditures was therefore approximately negative $1.7 million. Investing activities used $161.0 million, while financing activities provided $3.4 million.
At year-end, unrestricted cash, cash equivalents and investments totaled $166.0 million; restricted cash, cash equivalents and investments were $67.8 million. Notes payable were $86.5 million and capital lease obligations $0.5 million. The $50 million revolving facility was undrawn, and the company reported compliance with debt covenants. Total assets were $755.7 million and stockholders’ equity was $476.2 million.
Fourth quarter: Revenue was $190.0 million, operating income $53.5 million and net income $33.1 million, compared with $162.4 million, $40.9 million and $26.2 million, respectively, in Q4 2013.
Material changes and management commentary
- Revenue growth reflected higher online and ground enrollment and additional housing, food and other student fees, partly offset by larger scholarships. Revenue per student benefited from the growing share of traditional residential students, who generate room, board and other fees.
- Operating margin improved as instructional, admissions, advertising and general and administrative costs grew more slowly than revenue. Management cited operating leverage and lower bad-debt expense, partly offset by higher staffing, facilities and instructional costs.
- Ground-campus expansion drove a sharp increase in investment. The company reported $168.6 million of 2014 capital expenditures and expected approximately $195 million in 2015, including campus construction and technology investment.
- Management said existing cash and operating cash flow should fund operations, planned capital expenditures and working capital for at least 24 months. It targeted 17,500 traditional ground students at the start of the 2016–17 academic year. The filing does not provide formal earnings or revenue guidance.
Risks, contingencies and unusual items
- Federal Title IV funding is a major dependency: 76.5% of regulatory cash-basis revenue came from Title IV in 2014, down from 78.5% in 2013. The company’s 90/10 percentage remained below the 90% limit; changes in regulation or funding, or loss of eligibility, could materially affect enrollment and results.
- The Department of Education’s gainful-employment rule was scheduled to take effect July 1, 2015. Its program eligibility tests depend partly on graduate debt and earnings, which the company said are affected by factors beyond its control. State authorization, accreditation, student loan defaults and regulatory compliance also pose risks.
- The company recorded approximately $3.4 million of impairment adjustments in 2014, largely related to ending use of the Ken Blanchard name for the College of Business. The former name-related prepaid royalty balance was written down.
- A Department of Education program review concluded in June 2014 after three student-specific reporting or information errors were corrected; no further action was required. A separate earlier review was resolved in 2013, with the university paying $7.4 million, primarily for returns of Title IV funds, and agreeing not to seek repayment from affected students.
- Ordinary-course legal matters were disclosed; management did not expect their resolution to materially affect financial position, results or cash flows. The company reported effective disclosure controls and internal control over financial reporting. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether enrollment growth, particularly on the ground campus, can continue while maintaining student retention and academic quality.
- Actual 2015 capital expenditures versus the approximately $195 million forecast, and the resulting effect on cash generation and liquidity.
- Title IV revenue concentration, compliance with the 90/10 rule, and the impact of the gainful-employment rule and other regulatory changes.
- How scholarship growth affects net revenue, student affordability, and profitability.
- Debt covenant headroom and variable-rate exposure, including the effectiveness of the interest-rate corridor.