Grand Canyon Education, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. The company operates a regionally accredited university offering more than 200 programs online and at campus and other locations. Financial amounts below are in millions unless noted.
Operating and financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $227.0 | $194.1 | +16.9% |
| Operating income | $68.7 | $56.0 | +22.7% |
| Operating margin | 30.3% | 28.8% | +1.5 percentage points |
| Net income | $43.7 | $34.2 | +27.8% |
| Diluted earnings per share | $0.93 | $0.72 | +29.2% |
| Operating cash flow | $96.3 | $68.2 | +$28.1 |
| Capital expenditures | $49.8 | $44.2 | +$5.6 |
- Net margin was 19.2%, compared with 17.6%. Income tax expense was $26.7 million; the effective tax rate was 38.0%, versus 38.8%.
- Enrollment at March 31 rose 8.0% to 75,096: ground enrollment increased 17.0% and online enrollment 6.1%. Online students were 81.1% of total enrollment.
- Instructional costs increased 20.3% to $94.7 million and rose to 41.7% of revenue from 40.5%, reflecting higher staffing, instructional supplies, and campus occupancy and depreciation costs. Admissions and advertising costs grew more slowly than revenue, declining as a share of revenue.
- Interest expense was $0.3 million. Interest and other income increased to $2.0 million, primarily from $1.7 million of equity-method income related to LoudCloud.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $48.8 million; unrestricted investments were $84.1 million. Restricted cash, cash equivalents and investments were a further $62.5 million and are principally student-aid funds. Management reported unrestricted cash and investments of $132.9 million.
- Current assets were $226.1 million and current liabilities $222.7 million. Operating cash flow was $96.3 million, while investing and financing activities used $56.0 million and $14.5 million, respectively.
- Notes payable totaled $78.2 million, including $6.6 million current; capital lease obligations totaled approximately $0.5 million. No amounts were drawn on the $150 million revolving credit line, amended in January 2016 and available through December 2017. The term loan matures in December 2019.
- Capital spending supported campus construction and expansion, land purchases, and an off-site office building and garage expected to be completed in late 2016. The company repurchased 395,555 shares for $14.6 million during the quarter; $100 million remained under its $175 million authorization.
Outlook, commentary and risks
- Management said operating cash flow, cash and investments, and the revolving facility should provide adequate funds for operations, planned capital expenditures and working capital for at least 24 months. The filing provides no numerical earnings or revenue guidance.
- Management expects seasonal fluctuations to continue. Lower traditional-campus attendance during summer has historically reduced margins, and management expects this effect to become more pronounced as ground enrollment grows.
- Key risks include Title IV and other regulatory compliance and access to student financial aid; enrollment growth, student conversion and retention; competition for working-adult students and marketing; staffing and program development; campus expansion and growth management; and debt covenants and repayment obligations. Management reported material compliance with applicable regulations but cautioned that investigations or claims could adversely affect the business.
- The company reported no material change to the risk factors in its 2015 Form 10-K. It described ordinary-course litigation; outcomes for most pending matters could not be estimated, but management did not expect resulting charges to materially affect financial condition, results or cash flows.
- Unusual items include the $1.7 million LoudCloud equity-method income and $1.1 million of legal and professional costs related to consideration of a not-for-profit conversion. Management also reported that the quarter’s increased operating cash flow reflected timing of income-tax and employee-related payments and other working-capital changes.
Important facts for investors to verify
- Whether enrollment growth—especially the 17.0% increase in ground enrollment—continues, and how it affects revenue per student and campus costs.
- Progress, timing and total spending for campus and off-site construction; Q1 capital expenditures were $49.8 million and contractual obligations included $181.4 million of purchase obligations.
- Cash-flow sustainability after considering working-capital timing, student deposits and deferred revenue, and the distinction between unrestricted and restricted funds.
- Debt repayment, credit-facility terms and covenants, and exposure to variable rates; the interest-rate corridor had a $78.3 million notional amount and runs through December 2019.
- Developments in Title IV, state and accreditation requirements, and any investigations or litigation that could affect student funding or operations.
- Seasonality and summer operating margins as the traditional-campus student mix increases; the filing cautions that interim results are not necessarily indicative of full-year results.