Grand Canyon Education(LOPE) - 2019 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q3 2019 and 2018 are presented, reflecting the company's business model transformation and Orbis acquisition - On July 1, 2018, the company transformed its business model by selling Grand Canyon University to a non-profit entity, GCU. GCE now operates as an education services company, providing a suite of support services to university partners[23] - On January 22, 2019, GCE acquired Orbis Education Services for $361.2 million, expanding its services to support healthcare education programs for 21 additional university partners[24][32] Consolidated Income Statement Highlights (Unaudited, In thousands) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Service Revenue | $193,289 | $155,454 | $565,396 | $155,454 | | University Related Revenue | — | — | — | $512,499 | | Operating Income | $59,734 | $29,420 | $183,159 | $178,000 | | Net Income | $58,151 | $33,761 | $182,506 | $153,480 | | Diluted EPS | $1.20 | $0.70 | $3.78 | $3.17 | Consolidated Balance Sheet Highlights (Unaudited, In thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $119,709 | $120,346 | | Secured Note receivable | $1,009,912 | $900,093 | | Goodwill | $160,871 | $2,941 | | Total Assets | $1,760,672 | $1,324,017 | | Notes payable, less current portion | $211,060 | $23,437 | | Total Liabilities | $378,842 | $110,420 | | Total Stockholders' Equity | $1,381,830 | $1,213,597 | Consolidated Cash Flow Highlights (Unaudited, In thousands) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $195,134 | $96,536 | | Net cash used in investing activities | ($431,110) | ($215,729) | | Net cash provided by (used in) financing activities | $173,972 | ($22,269) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, emphasizing the 2018 business model change, 2019 Orbis acquisition, and strong liquidity - End-of-period enrollment in programs at university partners increased 10.2% to 108,821 as of September 30, 2019, from 98,715 a year prior. This was driven by a 6.2% increase in GCU enrollments and the addition of 3,975 students from Orbis Education partners[136] Q3 2019 vs. Q3 2018 Performance | Metric | Q3 2019 | Q3 2018 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Service Revenue | $193.3M | $155.5M | +$37.8M | +24.3% | | Operating Income | $59.7M | $29.4M | +$30.3M | +103.1% | | Net Income | $58.2M | $33.8M | +$24.4M | +72.3% | - The increase in revenue was primarily due to the Orbis Education acquisition and a 6.2% increase in GCU enrollments. Orbis partnership agreements generally generate higher revenue per student[141] - The company believes its cash flow from operations, along with cash reserves and its revolving line of credit, will provide adequate liquidity for ongoing operations and planned expenditures for at least the next 24 months[184] Results of Operations Detailed Q3 2019 and 2018 financial performance, driven by Orbis acquisition and GCU enrollment growth, with rising operating expenses Q3 2019 vs Q3 2018 Operating Expense Breakdown (in millions) | Expense Category | Q3 2019 | Q3 2018 | Change % | | :--- | :--- | :--- | :--- | | Technology and academic services | $24.2 | $11.1 | +118.3% | | Counseling services and support | $56.3 | $51.1 | +10.0% | | Marketing and communication | $37.3 | $31.5 | +18.4% | | General and administrative | $13.6 | $10.1 | +34.3% | - Technology and academic services expenses increased significantly as a percentage of revenue (from 7.1% to 12.5% in Q3) primarily because the Orbis Education partnership agreements require a higher level of service, including physical classroom facilities[142][144] - For the nine-month period, comparable service fee revenue increased 22.1% year-over-year, driven by the Orbis acquisition and growth at GCU[158][159] Liquidity and Capital Resources The company financed the Orbis acquisition through debt and operating cash, maintaining strong liquidity with increased cash from operations - The company financed the Orbis acquisition with a combination of debt from an amended credit facility ($190.1 million) and operating cash on hand ($171.1 million)[178] Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Operating Cash Flow | $195.1 | $96.5 | | Investing Cash Flow | ($431.1) | ($215.7) | | Financing Cash Flow | $174.0 | ($22.3) | Contractual Obligations (as of Sep 30, 2019, in millions) | Obligation | Total | Less than 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long term notes payable | $256.4 | $20.5 | $66.3 | $66.3 | $103.3 | | Lease liabilities | $28.1 | $0.5 | $6.0 | $6.5 | $15.1 | | Total | $287.9 | $22.0 | $74.2 | $73.3 | $118.4 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on variable-rate debt, managed via an interest rate corridor instrument - The company manages interest rate risk on its variable-rate debt using an interest rate corridor instrument with a notional amount of $55.0 million, which matures in December 2019[197] - The interest rate corridor instrument hedges 30-Day LIBOR exposure. If LIBOR is between 1.5% and 3.0%, the company pays a fixed 1.5%. If LIBOR exceeds 3.0%, the company pays the actual rate less 1.5%[199] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of September 30, 2019[201] - No material changes to internal control over financial reporting were identified during the quarter[202] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal proceedings during the period - The company reported 'None' for this item, indicating no material legal proceedings[203] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the 2018 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the company's 2018 Annual Report on Form 10-K[204] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales; company repurchased 64,335 shares for $7.0 million in Q3 2019, with $70.8 million remaining for repurchases - The company has a Board authorization to repurchase up to $175.0 million of its common stock, with an expiration date of December 31, 2020[206] Share Repurchases in Q3 2019 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2019 | 10,000 | $116.25 | | August 2019 | — | $ — | | September 2019 | 54,335 | $106.56 | | Total Q3 | 64,335 | $108.07 | - As of September 30, 2019, $70.8 million remained available for future repurchases under the current program[206] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - The company reported 'None' for this item[208] Item 4. Mine Safety Disclosures This item is not applicable to the company's business - The company reported 'None' for this item[209] Item 5. Other Information The company reports no other information required to be disclosed under this item - The company reported 'None' for this item[210] Item 6. Exhibits This section lists exhibits filed with the 10-Q report, including credit agreement amendments and SOX certifications - Exhibits filed with the report include an amendment to the credit agreement, CEO/CFO certifications (SOX 302 & 906), and financial data in Inline XBRL format[211]