Grand Canyon Education, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Grand Canyon University offers approximately 200 programs online and on campus; year-end enrollment was 74,506.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $778.2 million | $691.1 million |
| Operating income / margin | $210.4 million / 27.0% | $180.8 million / 26.2% |
| Net income / margin | $131.4 million / 16.9% | $111.5 million / 16.1% |
| Diluted EPS | $2.78 | $2.37 |
| Adjusted EBITDA | $263.1 million | $227.8 million |
Revenue grew 12.6%, operating income 16.3%, and net income 17.9%. Enrollment rose 9.9%: ground enrollment increased 19.2% and online enrollment 7.7%. Online students represented 79.6% of year-end enrollment. Scholarships reduced revenue by $163.9 million, up from $140.0 million.
Fourth quarter: Revenue was $216.0 million versus $190.0 million a year earlier; net income was $38.1 million versus $33.1 million, and diluted EPS was $0.81 versus $0.70.
Cash flow and liquidity: Operating cash flow was $173.9 million. Capital expenditures were $204.7 million; operating cash flow less that amount was negative $30.8 million. Cash and investments available without restriction totaled $106.4 million at year-end, alongside $75.4 million of restricted cash, equivalents and investments. The company said operating cash flow and other liquidity sources should cover operations, planned capital spending and working capital for at least 24 months.
Debt: Notes payable totaled $79.9 million, including $6.6 million current; capital lease obligations were $1.5 million. No amounts were drawn on the revolving facility at year-end. A January 2016 amendment increased the revolver to $150 million. The company reported compliance with debt covenants.
Changes, outlook and risks
- Ground enrollment growth and related room, board and fee revenue were principal growth drivers. Operating margin improved, while instructional costs rose to 42.4% of revenue from 41.8%; advertising increased to 9.8% of revenue from 9.5%.
- Campus expansion and technology investment drove substantial spending. Management estimated 2016 capital expenditures of approximately $180 million for campus projects, technology and equipment, excluding the off-site office building and parking garage.
- Management sought 17,500 traditional ground students at the start of the 2016–17 academic year. No specific revenue or earnings guidance is provided in the filing.
- Key exposures include dependence on federal Title IV aid (74.8% of regulatory 90/10 revenue in 2015), extensive federal and state regulation, and gainful-employment rules that management said may affect some programs. The university’s Title IV participation agreement runs through September 30, 2017; regional reaccreditation review was scheduled for 2016–17.
- Other risks include competition in online education, enrollment and retention execution, student loan funding and defaults, campus expansion costs, and regulatory or reputational effects across the for-profit education sector. The 2015 cohort default rate was not stated; reported rates for federal fiscal years 2012, 2011 and 2010 were 10.3%, 15.7% and 19.0%.
- Unusual items included a $958,000 reversal of previously recognized note-receivable income after an appellate ruling, which the company intended to appeal, and $2.8 million of asset impairment and disposal charges, primarily related to campus buildings and software. Management reported ordinary-course litigation and did not expect it to materially affect results. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Enrollment growth, retention, and the mix and economics of ground versus online students.
- 2016 campus investment, remaining construction commitments, and liquidity after capital spending and repurchases.
- Title IV exposure, gainful-employment program outcomes, and accreditation and authorization milestones.
- Debt covenants, the status and terms of the amended revolving facility, and the interest-rate hedge.
- Resolution of the note-receivable appeal and any changes in legal, regulatory, or tax exposures.