Grand Canyon Education, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included below. Unless otherwise noted, financial amounts are in millions of dollars.
Business context
Grand Canyon Education operates Grand Canyon University, a regionally accredited postsecondary provider offering online, campus-based and employer-site programs. At year-end, enrollment was 43,917: 38,918 online students (88.6%) and 4,999 ground students. Ground enrollment grew 33.4% year over year, while online enrollment grew 3.1%.
Financial and operating performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net revenue | $426.7 | $385.6 | +10.7% |
| Operating income | $82.2 | $58.2 | +41.2% |
| Operating margin | 19.3% | 15.1% | +4.2 percentage points |
| Net income | $50.5 | $35.2 | +43.6% |
| Net margin | 11.8% | 9.1% | +2.7 percentage points |
| Diluted EPS | $1.12 | $0.76 | +47.4% |
| Adjusted EBITDA | $107.4 | $85.8 | +25.2% |
| Cash from operations | $97.1 | $84.1 | +15.4% |
Fourth-quarter 2011 revenue was $113.0 million, operating income $23.3 million and net income $15.3 million, compared with $100.0 million, $9.1 million and $6.3 million, respectively, in Q4 2010.
- FY 2011 operating expenses were $344.6 million. Instructional costs were 45.6% of revenue, selling and promotional costs 28.1%, and general and administrative costs 6.8%.
- Bad-debt expense was $34.4 million, or 8.1% of revenue, down from $38.5 million, or 10.0%, in 2010. Management cited better current-student collections and fewer legacy receivables following the BBAY transition.
- Scholarships reduced revenue by $73.6 million, up from $55.8 million in 2010.
- Net cash used in investing was $84.3 million; cash-flow-statement capital expenditures were $80.5 million. Management separately reported capital expenditures of $86.5 million in selected data.
- At year-end, unrestricted cash and cash equivalents were $21.2 million; restricted cash, cash equivalents and investments were $56.7 million. Total assets were $317.8 million and stockholders’ equity was $163.3 million.
- Notes payable totaled $21.6 million and capital lease obligations $1.1 million. The company had no borrowings on its $50 million revolving credit line; $32.8 million was available under the loan covenant calculation. It reported compliance with debt covenants.
Material changes and unusual items
- Revenue growth reflected enrollment gains, tuition and fee increases, and increased room-and-board revenue, partly offset by higher scholarships and the BBAY financial-aid transition.
- Operating margin improved as bad-debt expense fell and selling costs declined as a percentage of revenue. FY 2010 had included $9.2 million of related-party contract termination fees; FY 2009 included a $5.2 million litigation loss.
- FY 2011 included $0.8 million of lease-termination costs. The company repurchased 1.6 million shares for $23.1 million during 2011; $26.1 million remained under its authorization at year-end.
- Campus and technology investment increased substantially: net property and equipment rose to $189.9 million from $124.0 million. Construction included additional dormitories and an Arts and Sciences building.
- The April 2011 loan amendment extended maturity to March 2016, reduced the variable-rate spread to LIBOR plus 2.00%, and added a $50 million revolving facility.
Outlook, management commentary and principal risks
- Management said operating cash flow and other liquidity sources should fund operations, planned capital expenditures and working capital for at least 24 months. It expected capital expenditures to remain at levels comparable to 2011 in 2012 and 2013.
- The company aims for 12,000 traditional ground students at the beginning of the 2015–2016 academic year. Management cautioned that greater campus enrollment may amplify summer seasonality; it also anticipated pressure on online enrollment from economic conditions, regulation and competition.
- Title IV funds represented approximately 80.2% of revenue under the Department of Education’s cash-basis regulatory calculation in 2011, versus 84.9% in 2010. The 90/10 Rule threshold is a critical exposure; management expected the share to remain stable or decline, but noted possible effects from regulatory changes and economic conditions.
- The Department of Education’s Title IV participation approval was provisional through December 31, 2013, with a full recertification application due by September 30, 2013. The company was no longer on month-to-month provisional status and reported no additional special conditions.
- An ongoing Department of Education program review produced a preliminary report with five findings, including incentive compensation, Title IV eligibility of the Interdisciplinary Studies program, and procedures for identifying unofficial withdrawals. The agency had not specified potential penalties; the company had accrued no amount and could not predict the outcome. Adverse findings could require repayment of Title IV funds, fines or other sanctions.
- New and changing federal and state requirements—including gainful-employment standards, incentive-compensation restrictions and state authorization rules—could raise costs, constrain programs or affect enrollment and access to student aid. Congressional proposals also raised potential changes to the 90/10 Rule and student-aid programs.
- Management reported that the 2011 material weakness concerning the allowance for doubtful accounts was remediated in Q4. Management and the independent auditor concluded internal control over financial reporting was effective at December 31, 2011; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Follow the Department of Education program review: final findings, any repayment exposure or sanctions, and resolution of the three principal compliance issues.
- Track Title IV recertification milestones and the effect of evolving gainful-employment and state-authorization requirements on programs and enrollment.
- Assess the sustainability of enrollment growth—especially whether ground growth offsets slower online growth—and monitor persistence, scholarships and bad-debt trends.
- Reconcile planned campus investment with operating cash flow, restricted cash, available credit and debt-covenant headroom.
- Review the assumptions behind Adjusted EBITDA, a non-GAAP measure, and distinguish it from GAAP earnings and cash available after capital expenditures.