Grand Canyon Education, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions unless stated otherwise. GCE provides education services to university partners, principally Grand Canyon University (GCU), and through Orbis Education.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Service revenue | $185.8 | $174.8 | $407.4 | $372.1 |
| Operating income | $48.3 | $51.0 | $129.1 | $123.4 |
| Net income | $47.0 | $51.1 | $118.4 | $124.4 |
| Diluted EPS | $1.00 | $1.06 | $2.49 | $2.57 |
| Operating margin | 26.0% | 29.2% | 31.7% | 33.2% |
| Net margin | 25.3% | 29.2% | 29.1% | 33.4% |
Q2 revenue rose 6.3%, while net income fell 8.0%. For the first half, revenue rose 9.5%, while net income declined 4.8%. Enrollment at June 30 increased 8.0% at GCU to 94,606 and 12.2% in Orbis-serviced programs to 3,720. Q2 growth was partly offset by lower GCU ancillary revenue related to COVID-19 and fewer revenue-producing campus days.
For the six months, operating cash flow was $221.1 versus $189.3 in 2019. Investing cash use was $80.6, including $75.0 funded to GCU; financing cash use was $90.5, including $69.0 of treasury-stock purchases. Cash and cash equivalents ended at $172.5, up from $122.3 at year-end 2019; cash plus investments totaled $187.2. The filing says the company expects liquidity to cover operations, planned capital spending and working capital for at least 24 months.
At June 30, notes payable totaled $124.3, with no revolver drawn and $150.0 available. The credit facility bears interest at 30-day LIBOR plus 2.0% (2.17% at quarter-end); GCE reported covenant compliance. Lease liabilities were $45.2. Current assets were $222.6 and current liabilities $150.6. The secured note receivable from GCU was $1,039.9, net, and generated $29.4 of first-half interest income.
Material changes and unusual items
- Q2 operating income decreased despite higher revenue, reflecting higher technology and academic, marketing, and counseling costs; these costs also increased as a share of revenue. First-half general and administrative expense declined 7.5%, partly because 2019 included higher professional fees.
- First-half income tax expense rose to $38.1 from $25.6; the effective tax rate was 24.4% versus 17.1%. The prior-year rate benefited from a $5.9 Arizona tax-refund item and higher excess tax benefits from share-based compensation.
- First-half 2019 included Orbis only from its January 22, 2019 acquisition date and $4.0 of acquisition transaction costs; comparisons are therefore not fully like-for-like.
- GCE adopted the expected-credit-loss standard in January 2020 and recorded a $5.0 reserve on the GCU secured note, reducing retained earnings by $3.8 net of tax. Management said adoption did not materially affect reported financial condition or results.
- GCE repurchased 898,000 shares for $69.0 in the first half. In July, the board increased the repurchase authorization by $50.0 to $300.0; $58.3 remained under the prior authorization at June 30.
Outlook, commentary and risks
Management estimated COVID-19 would reduce second-half 2020 net revenue by approximately $20 million, with a comparable reduction in operating profit, assuming partner institutions and GCU began and completed fall terms as planned. Separately, GCU’s delayed fall start was expected to shift $9.9 million of revenue from Q3 to Q4. Management expected lower Q3 revenue and operating profit from both GCU and Orbis partners; further campus restrictions, reduced residential participation, or limited clinical rotations could worsen the impact. The duration and total financial effect of the pandemic were not reasonably estimable.
GCE reported that approximately 90% of its workforce was working remotely, creating potential internal-control, cybersecurity and operational risks. GCU generated 87.0% of first-half service revenue, making partner concentration a key exposure. The filing also identifies education-sector regulation, partner enrollment and retention, competition, technology, and credit- and covenant-related risks. Management reported no material legal proceedings, no material off-balance-sheet arrangements, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether GCU residential enrollment, ancillary revenue and campus operations recover as anticipated, and how the fall-term revenue shift affects quarterly results.
- Whether Orbis partner starts and clinical-placement capacity meet expectations, particularly given deferred summer students and planned new locations.
- The collectability and collateral support of the $1.04 billion GCU secured note, including any future allowance changes as COVID-19 effects evolve.
- Operating-margin trends as service costs and marketing investments grow, and the sustainability of cash flow after GCU funding and share repurchases.
- GCU’s dominant share of revenue, the company’s debt covenants and floating-rate exposure, and the timing and amount of future repurchases.