Business context and reporting period
Grand Canyon Education, Inc. filed its Form 10-K for the fiscal year ended December 31, 2013. The company provides undergraduate and graduate education online, at its Phoenix campus, and at employer and leased sites. Enrollment was 59,658 at year-end, up 14.1%; 83.1% of students were online. The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenue | $598.3 million | $511.3 million | +17.0% |
| Operating income | $143.3 million | $114.1 million | +25.6% |
| Net income | $88.7 million | $69.4 million | +27.7% |
| Diluted EPS | $1.92 | $1.53 | +25.5% |
| Operating margin | 23.9% | 22.3% | +1.6 percentage points |
| Net margin | 14.8% | 13.6% | +1.2 percentage points |
| Operating cash flow | $118.4 million | $144.2 million | Down $25.7 million |
| Capital expenditures | $78.9 million | $97.7 million | Down $18.7 million |
Fourth-quarter 2013 revenue was $162.4 million, operating income $40.9 million, net income $26.2 million, and diluted EPS $0.56. In fourth-quarter 2012, the respective figures were $141.3 million, $33.2 million, $20.9 million, and $0.46.
At year-end, cash and cash equivalents were $55.8 million and short-term investments $108.4 million; restricted cash was $64.4 million. Total notes payable were $93.1 million, down from $99.7 million, and capital lease obligations were $0.6 million. The company had an undrawn $50 million revolving facility and reported compliance with debt covenants. Current assets were $263.7 million and current liabilities $165.6 million.
Material changes versus the prior comparable period
- Ground enrollment grew 32.6% and online enrollment 10.9%. Ground students rose to 16.9% of enrollment from 14.5%.
- Revenue growth reflected higher enrollment and ancillary campus revenue, partly offset by higher scholarships. Scholarships reduced revenue by $111.8 million, versus $94.3 million in 2012.
- Operating margin improved as instructional, admissions, and general and administrative costs declined as a share of revenue. Advertising rose to 10.2% of revenue from 10.0%.
- Operating cash flow declined despite higher net income; investing cash outflow increased to $172.5 million, including net purchases of $108.4 million in short-term investments.
- Interest expense increased to $2.2 million from $0.7 million following the expanded credit facility. Interest and other income rose to $3.9 million, primarily from income on a note-receivable settlement.
Outlook, management commentary, risks and unusual items
- Management forecast approximately $300 million of capital expenditures over the next two years for campus expansion, technology, and equipment. This included approximately $170 million for the planned Mesa campus, intended to accommodate 5,000 students. Management said cash flows and other liquidity sources should fund operations and planned needs for at least 24 months.
- The company planned continued Phoenix campus expansion and targeted 15,000 traditional ground students at the start of the 2016–2017 academic year. These are plans, not guaranteed outcomes; the filing gives no formal numerical earnings guidance.
- In September 2013, the Department of Education program review was closed under an agreement resolving five preliminary findings. The University paid $7.387 million, primarily for Title IV fund returns, and agreed not to seek reimbursement from affected students. Full Title IV certification was received in October 2013 and runs through September 30, 2017.
- Title IV-funded tuition represented 78.5% of regulatory 90/10 revenue in 2013, compared with 80.3% in 2012. Management expected the share to remain stable or decline, but noted sensitivity to funding rules and economic conditions.
- Key risks include extensive federal, state, and accreditation oversight; potential changes to Title IV and gainful-employment rules; online-program authorization requirements; enrollment retention and competition; student receivable collections; execution of major campus investments; and variable-rate debt exposure.
- The company recorded a $3.646 million gain related to a note receivable and included $3.937 million of estimated litigation and regulatory reserves among its Adjusted EBITDA adjustments. Adjusted EBITDA was $185.1 million, a non-GAAP measure.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether enrollment growth, particularly ground enrollment, can continue while maintaining retention, student outcomes, and cost discipline.
- Whether the planned Mesa and Phoenix construction can be delivered on schedule and within the stated capital budget, and how the investment affects liquidity and debt covenants.
- Ongoing compliance with Title IV requirements, the 90/10 threshold, state authorization, accreditation, and any new federal rules.
- The basis and collectability of student receivables and the final resolution of note-receivable amounts still in dispute.
- Cash generation relative to capital spending, restricted cash, debt service, and share repurchases; also distinguish unrestricted cash and investments from restricted funds.