Grand Canyon Education(LOPE) - 2019 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements, reflecting the company's business model transformation and the financial effects of the GCU sale and Orbis acquisition - On July 1, 2018, the company transitioned from a university operator to an educational services company by selling Grand Canyon University to GCU[22] - On January 22, 2019, the company acquired Orbis Education Services, LLC for $361.2 million, expanding services to 18 additional university partners[23][29] Consolidated Income Statements The consolidated income statements for the six months ended June 30, 2019, reflect the new service-based revenue model, with increased net income driven by interest income and a lower tax rate Consolidated Income Statement Highlights (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $372,107 | $512,499 | -27.4% | | Service Revenue | $372,107 | $0 | N/A | | University Related Revenue | $0 | $512,499 | N/A | | Operating Income | $123,425 | $148,580 | -16.9% | | Interest Income on Secured Note | $28,217 | $0 | N/A | | Net Income | $124,355 | $119,719 | +3.9% | | Diluted EPS | $2.57 | $2.47 | +4.0% | Consolidated Balance Sheets The consolidated balance sheets as of June 30, 2019, show increased total assets due to the Secured Note and Orbis acquisition, alongside a rise in total liabilities Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $108,717 | $309,466 | | Secured Note Receivable | $1,069,912 | $900,093 | | Goodwill | $160,871 | $2,941 | | Amortizable Intangible Assets, net | $206,415 | $0 | | Total Assets | $1,677,522 | $1,324,017 | | Total Current Liabilities | $113,266 | $80,518 | | Total Liabilities | $349,715 | $110,420 | | Total Stockholders' Equity | $1,327,807 | $1,213,597 | Consolidated Statements of Cash Flows For the first six months of 2019, operating cash flow increased, while investing activities used significant cash for the Orbis acquisition and GCU capital expenditures Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $189,335 | $143,662 | | Net cash used in investing activities | ($485,762) | ($67,435) | | Net cash provided by (used in) financing activities | $180,515 | ($14,728) | | Net decrease in cash | ($115,912) | ($26,376) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting the operational shift post-GCU transaction and Orbis acquisition, and confirms strong liquidity for future operations - The company's results now reflect its role as a service/technology provider to 19 university partners, a significant change from its pre-July 2018 operations[132][133] - End-of-period enrollment at partner universities grew 11.4% year-over-year to 90,906 as of June 30, 2019, driven by GCU and Orbis Education partners[134] - Management presents an adjusted Non-GAAP net revenue metric for comparability, calculating 60% of prior year's university-related revenue[138] Results of Operations Results of operations for Q2 2019 show comparable service fee revenue growth driven by the Orbis acquisition and GCU enrollments, alongside increased operating expenses Comparison of Q2 2019 vs Q2 2018 (in millions) | Metric | Q2 2019 | Q2 2018 (Comparable) | Change | | :--- | :--- | :--- | :--- | | Service Revenue | $174.8 | $142.1 (60% of Univ. Revenue) | +23.0% | | Technology & Academic Services | $22.5 | $10.7 | +111.0% | | Counseling Services & Support | $54.3 | $50.8 | +6.8% | | Marketing & Communication | $35.7 | $30.1 | +18.7% | | Net Income | $51.1 | $46.0 | +11.1% | - The Orbis acquisition introduced partnership agreements generating higher revenue per student due to increased service fee percentages and partner tuition rates[134][139] - For the six months ended June 30, 2019, income tax expense decreased 17.5% to $25.6 million, with the effective tax rate falling to 17.1% due to a favorable state tax settlement[168] Liquidity and Capital Resources The company maintains a strong liquidity position, supported by a new credit facility for the Orbis acquisition and a significant Secured Note from GCU - A new $325 million credit facility, comprising a $243.8 million term loan and $81.3 million revolving credit facility, partially funded the Orbis acquisition[174] - A Secured Note from GCU with an initial principal of $870.1 million bears 6.0% annual interest, with an additional $199.8 million loaned for capital expenditures[175] - The Board authorized a $175.0 million share repurchase program, with $77.8 million remaining available as of June 30, 2019[177][180] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on variable rate debt, managed by an interest rate corridor, with no material impact from inflation or hypothetical rate changes - The company uses an interest rate corridor to manage 30-Day LIBOR exposure on variable rate debt, hedging between 1.5% and 3.0% on a notional amount of $56.7 million[188] - Management believes inflation has not materially impacted results, and a 10% change in interest rates would not materially affect future earnings, fair values, or cash flows[187][190] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures are effective as of June 30, 2019[193] - No material changes in internal control over financial reporting were identified during the quarter[194] PART II – OTHER INFORMATION Legal Proceedings The company reports no material legal proceedings for the period - None[195] Risk Factors There have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[196] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities and details share repurchases under its authorized program, with remaining availability Issuer Purchases of Equity Securities (Q2 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | Approx. Value Remaining in Program | | :--- | :--- | :--- | :--- | | April 2019 | 0 | $— | $78,100,000 | | May 2019 | 3,000 | $113.52 | $77,800,000 | | June 2019 | 0 | $— | $77,800,000 | - The Board authorized a $175.0 million common stock repurchase program, expiring December 31, 2019[198] Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[200] Mine Safety Disclosures This item is not applicable to the company's business - None[201] Other Information The company reports no other information for the period - None[202] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - Exhibits filed include CEO and CFO certifications and XBRL data files[204] Signatures - The report was signed on August 6, 2019, by Daniel E. Bachus, Chief Financial Officer[209]