Grand Canyon Education, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. The company operates a regionally accredited university offering online and campus-based programs.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $175.1m | $152.4m | $501.1m | $435.9m |
| Operating income | $46.0m | $37.3m | $127.3m | $102.4m |
| Net income | $29.0m | $22.5m | $78.4m | $62.6m |
| Diluted EPS | $0.62 | $0.49 | $1.67 | $1.36 |
| Operating margin | 26.3% | 24.5% | 25.4% | 23.5% |
| Net margin | 16.6% | 14.8% | 15.6% | 14.4% |
- Revenue rose 14.9% in Q3 and 15.0% year to date. Enrollment at quarter-end increased 13.7% to 68,122; ground enrollment grew 24.9% and online enrollment 11.4% year over year.
- For the nine months, operating cash flow was $156.7m, versus $101.8m. Capital expenditures were $141.2m, versus $59.2m, primarily for campus buildings, residence halls, land and technology. Investing cash outflow was $159.9m; financing cash inflow was $3.8m.
- At September 30, cash and cash equivalents were $56.5m, restricted cash $58.8m and investments $127.1m. Unrestricted cash and investments totaled $183.6m. Current assets were $275.2m and current liabilities $218.3m.
- Notes payable totaled $88.1m, including $6.6m current; capital lease obligations totaled $0.5m. No borrowings were outstanding on the $50m revolving credit line.
Changes, outlook and notable items
- Operating and net margins improved year over year. Management attributed revenue growth primarily to enrollment, and improved instructional expense ratios partly to lower bad-debt expense and operating leverage.
- Bad-debt expense fell $4.1m year to date, which management associated with improved student retention and collection efforts. Advertising costs grew more slowly than revenue, while marketing and promotional expenses increased.
- Q3 general and administrative expense included $2.7m of contributions to school tuition organizations in lieu of state income taxes; the contributions reduced state income taxes dollar for dollar. The nine-month effective tax rate was 37.9%, compared with 40.2%.
- Prior-year 2013 results included a $3.6m gain related to a note receivable settlement; the 2014 year-to-date comparison therefore had lower interest and other income. A remaining note-related dispute is subject to court proceedings; additional disputed amounts are treated as a gain contingency, not recorded as income or a receivable.
- Management said operating cash flow and other liquidity sources should cover ongoing operations, planned capital expenditures and working capital for at least 24 months. No specific financial guidance was provided. Management expects the seasonal summer effect on results to become more pronounced as ground enrollment grows; quarterly results also reflect fall and calendar-year enrollment starts.
- Capital spending increased substantially, including campus expansion projects. The company reported $137.8m of contractual obligations, including $88.1m of long-term notes payable, $28.8m of operating leases and $20.4m of purchase obligations.
Risks and contingencies
- The business is subject to extensive federal and state education regulation, accreditation requirements and dependence on student access to Title IV aid. Management identified regulatory compliance, enrollment and retention, competition, staffing, growth, technology and debt covenants as risks.
- A Department of Education program review identified three student-specific information or reporting errors. The university corrected them to the department’s satisfaction; the review was closed with no further action required. Management reported no material changes to previously disclosed risk factors.
- The IRS began examining the 2011 income tax return; no material adjustments had been proposed as of September 30, 2014. The company also disclosed ordinary-course litigation and $0.8m in reserves for probable, estimable non-income-tax matters.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether enrollment growth—especially campus growth—continues to translate into revenue while maintaining student retention and collections.
- Whether the $141.2m year-to-date capital investment supports planned enrollment and whether further spending affects cash generation and liquidity.
- Debt repayment, interest-rate exposure and compliance with loan covenants; the variable-rate debt is partly hedged by an interest-rate corridor.
- Developments in the note-receivable appeal, IRS examination and other legal or regulatory matters.
- Effects of institutional scholarships, tuition pricing and seasonality on revenue per student and margins.