Grand Canyon Education(LOPE) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements For the three months ended March 31, 2019, the company reported service revenue of $197.3 million and net income of $73.2 million, reflecting a significant business model change from the prior year's university-related revenue of $275.7 million, with total assets increasing to $1.62 billion due to the Orbis Education acquisition Nature of Business Grand Canyon Education (GCE) transitioned from owning a university to an education services company, expanding partnerships through the acquisition of Orbis Education Services - On July 1, 2018, GCE sold Grand Canyon University and transitioned into an educational services company providing support services to post-secondary institutions[20] - On January 22, 2019, GCE acquired Orbis Education Services for $361.2 million (net of cash acquired), expanding its services to 17 additional university partners focused on healthcare education[21] - Following the Transaction and Acquisition, GCE provides services to 18 university partners and no longer owns or operates an institution of higher education[22] The Transaction GCE sold Grand Canyon University assets to a non-profit entity, receiving an $870.1 million Secured Note and entering a long-term master services agreement for 60% of GCU's tuition and fee revenue - As consideration for the sale of university assets, GCE received a Secured Note from GCU with an initial principal of $870.1 million, a 6.0% annual interest rate, and a maturity date of June 30, 2025[23] - GCE entered into a master services agreement to provide comprehensive support services to GCU in exchange for 60% of GCU's tuition and fee revenue[23] Acquisition GCE acquired Orbis Education for approximately $361.2 million, resulting in significant intangible assets and goodwill, and contributing $17.5 million in revenue and $0.4 million in net income in Q1 2019 - GCE acquired Orbis Education on January 22, 2019, for $361.2 million, financed through a new credit agreement ($191.0 million) and operating cash ($171.0 million)[27] Orbis Education Purchase Price Allocation (in thousands) | Item | Amount | | :--- | :--- | | Total net asset or liability purchased and assumed | $217,690 | | Purchase price | $365,977 | | Goodwill | $148,287 | | Intangible assets (primarily university partner relationships) | $210,280 | - From the acquisition date to March 31, 2019, Orbis Education contributed $17,481 thousand in revenue and $380 thousand in net income to GCE's consolidated results[32] Summary of Significant Accounting Policies The company's accounting policies reflect its new business model, including recognizing service revenue over time, capitalizing content development costs, and adopting the new lease accounting standard - Service revenue commenced on July 1, 2018, and is generated from long-term (7-15 years) agreements with university partners, recognized over time as services are provided in exchange for a percentage of tuition and fee revenue[48][49] - The company capitalizes costs to develop and create digital course content for university partners, amortizing these costs on a straight-line basis over the estimated course life, generally four years[53][54] - On January 1, 2019, the company adopted the new lease standard (ASU 2016-02), which resulted in recognizing right-of-use (ROU) assets and lease liabilities on the balance sheet, with the Orbis acquisition adding $13.1 million in ROU assets and lease liabilities[68] Notes Payable and Other Noncurrent Liabilities GCE entered into a new $325 million credit facility to finance the Orbis acquisition, resulting in total notes payable of $248.4 million as of March 31, 2019, with the company in compliance with all debt covenants - On January 22, 2019, GCE entered into a new $325 million credit facility, including a $243.75 million term loan and an $81.25 million revolver, to fund the Orbis acquisition and repay existing debt[85] Notes Payable as of March 31, 2019 (in thousands) | Description | Amount | | :--- | :--- | | Note payable (Term Loan) | $242,166 | | Revolving line of credit | $6,250 | | Total | $248,416 | | Less: Current portion | $48,422 | | Long-term portion | $199,994 | Share-Based Compensation In Q1 2019, GCE granted 149,000 shares of restricted common stock and recorded $2.6 million in share-based compensation expense under its 2017 Equity Incentive Plan - In Q1 2019, the company granted 149,000 shares of restricted stock and recorded total share-based compensation expense of $2.6 million[93][96] Restricted Stock Activity (Q1 2019) | (In thousands of shares) | Total Shares | | :--- | :--- | | Outstanding as of December 31, 2018 | 460 | | Granted | 149 | | Vested | (171) | | Forfeited, canceled or expired | (11) | | Outstanding as of March 31, 2019 | 427 | Treasury Stock The company repurchased 108,000 shares for $10.0 million in Q1 2019 under its $175 million share repurchase program, with $78.1 million remaining available as of March 31, 2019 - During Q1 2019, the company repurchased 108,000 shares for $10.0 million under its authorized plan[97] - As of March 31, 2019, $78.1 million was available for future repurchases under the current authorization, which expires on December 31, 2019[97] Consolidated Income Statement Highlights (Q1 2019 vs Q1 2018) | (In thousands, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Service revenue | $197,287 | $— | | University related revenue | $— | $275,681 | | Net revenue | $197,287 | $275,681 | | Operating income | $72,431 | $90,092 | | Net income | $73,243 | $73,681 | | Diluted income per share | $1.52 | $1.52 | Consolidated Balance Sheet Highlights | (In thousands) | March 31, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $88,467 | $120,346 | | Secured Note receivable | $929,998 | $900,093 | | Goodwill | $151,228 | $2,941 | | Total assets | $1,619,473 | $1,324,017 | | Total liabilities | $346,600 | $110,420 | | Total stockholders' equity | $1,272,873 | $1,213,597 | Consolidated Cash Flow Highlights (Q1 2019 vs Q1 2018) | (In thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76,337 | $119,008 | | Net cash used in investing activities | ($340,852) | ($38,525) | | Net cash provided by (used in) financing activities | $171,269 | ($12,829) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q1 2019 results to the successful transition to an education services provider and the acquisition of Orbis Education, driving service revenue growth and increased operating expenses to support expanded partnerships, while maintaining strong liquidity - The company transitioned from operating a university to a service provider model on July 1, 2018, and acquired Orbis Education on January 22, 2019, making direct year-over-year comparisons of reported revenue and expenses difficult[107][108] - End-of-period enrollment across all university partners grew 11.3% year-over-year to 101,679, including a 7.6% increase at GCU and the addition of 3,384 students from Orbis-serviced programs[109] - On a comparable basis, service revenue grew 19.3% YoY, driven by the Orbis acquisition and a 7.6% increase in GCU enrollments, with Orbis partner agreements generating higher revenue per student[114] - The effective tax rate for Q1 2019 was 13.5%, down from 18.8% in Q1 2018, primarily due to a one-time favorable state tax settlement of $5.9 million[127] Results of Operations In Q1 2019, service revenue was $197.3 million, with comparable growth of 19.3%, while operating expenses, particularly technology, academic, and marketing, increased significantly due to the Orbis acquisition, and interest expense rose due to new debt Operating Expense Changes (Q1 2019 vs Q1 2018) | Expense Category | Q1 2019 (in millions) | Q1 2018 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Technology and academic services | $19.0 | $10.7 | +78.0% | | Counseling services and support | $53.1 | $50.7 | +4.6% | | Marketing and communication | $35.5 | $28.5 | +24.3% | | General and administrative | $11.5 | $7.4 | +54.9% | - Interest income of $13.7 million was generated from the Secured Note received from GCU[124] - Interest expense increased by $2.3 million to $2.6 million, primarily due to a $190.1 million increase in outstanding debt to finance the Orbis acquisition[125] Liquidity and Capital Resources The company maintains strong liquidity with $102.7 million in unrestricted cash, having financed the Orbis acquisition through a combination of operating cash and a new $325 million credit facility, and expects to fund future capital expenditures from operations - Financed the $361.2 million Orbis acquisition with $190.1 million from an increased credit facility and $171.1 million of operating cash on hand[131] - Entered into an amended credit agreement for a $325.0 million facility, comprising a $243.8 million term loan and an $81.3 million revolving credit facility[132] Contractual Obligations (as of March 31, 2019, in millions) | Obligation | Total | Less than 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long term notes payable | $248.4 | $48.4 | $96.8 | $103.2 | $0.0 | | Lease liabilities | $13.3 | $1.5 | $4.4 | $3.7 | $3.7 | | Purchase obligations | $11.0 | $7.3 | $3.5 | $0.2 | $0.0 | | Total | $272.7 | $57.2 | $104.7 | $107.1 | $3.7 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on variable-rate debt, which is managed using an interest rate corridor instrument, and inflation is not considered to have a material impact - The company manages interest rate risk on its variable-rate debt using an interest rate corridor instrument with a notional amount of $58.3 million[145] - The interest rate corridor hedges risk by setting the company's rate at 1.5% when the 30-Day LIBOR is between 1.5% and 3.0%, and if LIBOR exceeds 3.0%, the company pays the actual rate less 1.5%[145] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[149] - No material changes to the internal control over financial reporting occurred during the first quarter of 2019[150] PART II – OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - None[151] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[152] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 107,527 shares for approximately $10.0 million in Q1 2019 under its $175.0 million share repurchase program, with $78.1 million remaining available Share Repurchases in Q1 2019 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Purchased as Part of Program | Maximum Dollar Value Remaining | | :--- | :--- | :--- | :--- | :--- | | Jan 2019 | 82,500 | $93.03 | 82,500 | $80,400,000 | | Feb 2019 | 25,027 | $92.90 | 25,027 | $78,100,000 | | Mar 2019 | — | $— | — | $78,100,000 | | Total | 107,527 | $93.00 | 107,527 | $78,100,000 | - As of March 31, 2019, $78.1 million remains available under the share repurchase authorization, which expires December 31, 2019[154]