Grand Canyon Education, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The company operates a regionally accredited university offering online and campus-based degree programs. This unaudited report covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Amounts below are in millions except per-share data and enrollment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $174.7 | $158.6 | $368.9 | $326.0 |
| Operating income | $42.3 | $37.9 | $98.2 | $81.3 |
| Operating margin | 24.2% | 23.9% | 26.6% | 24.9% |
| Net income | $25.8 | $23.1 | $60.0 | $49.4 |
| Diluted EPS | $0.55 | $0.49 | $1.27 | $1.05 |
- Q2 revenue increased 10.2%, operating income 11.5%, and net income 11.7% year over year. For the six-month period, increases were 13.1%, 20.8%, and 21.5%, respectively.
- Q2 net margin was 14.8% versus 14.5%; six-month net margin was 16.3% versus 15.1%.
- End-of-period enrollment rose 9.1% to 62,935: online enrollment increased 8.9% and ground enrollment 10.9%. Graduate students represented 44.8% of enrollment, up from 42.3%.
- Management attributed revenue growth mainly to enrollment, with additional room, board, and student-fee revenue, partly offset by higher institutional scholarships. Tuition was unchanged for the 2014–15 and 2015–16 academic years.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $81.7, compared with $89.4 in 2014. Capital expenditures were $111.9, versus $82.0; reported investing cash flow was negative $94.7. Operating cash flow less capital expenditures was approximately negative $30.2.
- Cash and cash equivalents were $50.7 at June 30, down from $65.2 at year-end 2014. Unrestricted cash and investments totaled $134.2; restricted cash, cash equivalents, and investments were $63.7.
- Total assets were $828.9, including property and equipment of $588.3, up from $478.2 at year-end. Construction in progress increased to $125.4 from $20.7.
- Notes payable totaled $83.2, including $6.6 current; capital lease obligations totaled approximately $0.7. The company had no borrowings on its $50.0 revolving credit line at June 30.
- Current assets were $231.1 and current liabilities $189.5. Contractual obligations totaled $164.4, including $83.2 of long-term notes, $56.5 of purchase obligations, and $24.0 of operating leases.
- Management said operating cash flow and other liquidity sources were expected to fund operations, planned capital spending, and working capital for at least 24 months.
Changes, outlook, and risks
- Six-month instructional costs increased 11.2%, slower than revenue growth; instructional costs were 41.8% of revenue versus 42.5%. Admissions costs fell to 15.1% of revenue from 16.1%, while advertising rose to 10.4% from 10.0%, reflecting increased digital and regional branding spend.
- Campus expansion drove higher investment: capital spending included four dormitories, a classroom building, a parking structure, and adjacent land. Management expects campus depreciation and occupancy costs to continue increasing as a share of revenue in the second and third quarters. Summer seasonality and the growing share of traditional ground students may make seasonal effects more pronounced.
- No specific financial or enrollment guidance was provided. Management reported no significant change in previously identified trends and described competition, enrollment growth and retention, regulation, staffing, and execution of strategic initiatives as risks.
- The gainful-employment regulations took effect July 1, 2015. Management believed no programs would fail under its current assessment but noted that some undergraduate programs could fall into the “Zone”; adverse results could threaten Title IV eligibility, enrollment, and reputation.
- The university said it was in material compliance with applicable regulations. It disclosed ordinary-course litigation and a pending appeal and fee ruling in a disputed note-receivable matter; outcomes and potential losses for most pending matters could not be estimated with certainty. Management did not expect legal charges to have a material adverse effect.
- A $75.0 share-repurchase authorization remained in effect through September 30, 2016; $25.9 remained available. No plan repurchases occurred in the first half of 2015, although shares were withheld for taxes on restricted awards.
Important facts for investors to verify
- Enrollment growth, retention, and the revenue contribution from ground students versus online students.
- Whether campus expansion spending and rising fixed costs generate returns while seasonal margins remain under pressure.
- Operating cash generation relative to elevated capital expenditures and the company’s planned liquidity needs.
- Program-level outcomes under gainful-employment rules and continuing eligibility for Title IV funding.
- Developments in the note-receivable litigation, other legal matters, and compliance with debt covenants.