Grand Canyon Education, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Although the request references 2012 Q4, this is an annual filing; fourth-quarter figures are included where provided. Amounts below are in U.S. dollars.
Business context
Grand Canyon Education operates Grand Canyon University, a regionally accredited postsecondary education provider offering online, campus-based and employer-site programs. Year-end enrollment was 52,292, up 19.1% from 2011; 85.5% of students were enrolled online and 14.5% in ground programs. The business is substantially reliant on federal student aid: Title IV funds represented 80.3% of regulatory-basis revenue in 2012.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net revenue | $511.3 million | $426.7 million |
| Operating income / margin | $114.1 million / 22.3% | $82.2 million / 19.3% |
| Net income | $69.4 million | $50.5 million |
| Diluted EPS | $1.53 | $1.12 |
| Operating cash flow | $144.2 million | $88.0 million |
| Capital expenditures | $97.7 million | $80.5 million |
- Revenue increased 19.8%; operating income rose 38.8% and net income rose approximately 37.4%. Net margin increased to 13.6% from 11.8%.
- Fourth-quarter 2012 revenue was $141.3 million and net income was $20.9 million, compared with $113.0 million and $15.3 million, respectively, in Q4 2011. Q4 operating income was $33.2 million versus $23.3 million.
- Cash and cash equivalents were $105.1 million at year-end; restricted cash and cash equivalents were $56.2 million. Operating cash flow less reported capital expenditures was approximately $46.5 million.
- Notes payable totaled $99.7 million, including $6.6 million current; capital lease obligations were $0.7 million. The December 2012 credit agreement provides a $100 million term loan and a $50 million revolving facility, of which none was drawn at year-end. The company reported compliance with debt covenants.
- Current assets were $214.2 million and current liabilities $152.7 million. Management said available liquidity should fund operations, planned capital expenditures and working capital for at least 24 months.
- Operating margin improvement was aided by lower bad-debt expense: $18.0 million, or 3.5% of revenue, versus $34.4 million, or 8.1%, in 2011. Instructional costs fell to 43.1% of revenue from 45.6%.
Material changes and unusual items
- Enrollment grew 19.1%; ground enrollment rose 52.1% and online enrollment 14.8%. Ground students increased to 7,602 from 4,999.
- Scholarships reduced reported revenue by $94.3 million, up from $73.6 million in 2011. Revenue growth also reflected improved retention, selective online tuition increases, and higher room, board and student fees.
- The company spent $97.7 million on capital expenditures, principally campus expansion and technology. It also invested $27.0 million in a real-estate-secured note receivable bearing 11% interest, including a 5% default-rate component.
- A $3.5 million reserve was recorded for potential Pell Grant returns related to the ongoing Department of Education program review; additional refunds or penalties, if any, were not determinable. Adjusted EBITDA included $3.8 million of estimated litigation and regulatory reserves.
- The company repurchased $15.2 million of stock during 2012; $10.9 million remained under the authorization at year-end. No dividends were anticipated in the foreseeable future.
Outlook, commentary and principal risks
- Management planned continued campus growth, including two dormitories and food-service and library work in 2013, and targeted 12,000 traditional ground students at the start of the 2015–2016 academic year. These are plans, not guaranteed results; the filing provides no specific earnings or revenue guidance.
- Management cited stronger brand recognition, ground-campus value and improved retention as growth drivers, while anticipating pressure on online enrollment from increasing competition, including traditional universities and emerging online offerings.
- The Department of Education’s review remained open. Preliminary findings addressed enrollment-counselor compensation, program eligibility and procedures for identifying unofficial withdrawals, among other matters. The company had reserved $3.5 million for identified Pell returns but could not estimate any additional exposure or the review’s final outcome.
- Title IV certification was provisional through December 31, 2013, with a full recertification application due by September 30, 2013. Failure to renew, or restrictions on participation, could materially affect enrollment and results.
- Regulatory and funding changes, state authorization requirements, student-loan defaults, accreditation, and the 90/10 rule are material risks. Title IV revenue was 80.3% under the rule’s calculation in 2012; the statutory threshold is 90% for two consecutive fiscal years.
- Campus expansion requires significant investment; competition, student affordability and repayment capacity, retention, and the effectiveness of marketing and technology also pose risks. The company reported an unqualified audit opinion and effective internal control over financial reporting.
Key facts for investors to verify
- Progress and final resolution of the Department of Education program review, including whether additional Pell refunds, fines or sanctions are required.
- Outcome and timing of Title IV recertification, and any conditions imposed on the university.
- Enrollment trends by online and ground delivery, retention, scholarship levels and bad-debt expense to assess the durability of growth and margin expansion.
- Execution, cost and funding of campus plans; debt covenant headroom and use of the undrawn revolving credit facility.
- Repayment and collateral status of the $27.0 million real-estate-secured note receivable.