Grand Canyon Education(LOPE) - 2019 Q4 - Annual Report

PART I Item 1. Business Grand Canyon Education provides comprehensive education services to Grand Canyon University and 22 other university partners, operating in a competitive and highly regulated market - GCE transitioned from owning and operating Grand Canyon University (GCU) to an education services company on July 1, 2018[19] - Acquired Orbis Education Services LLC in January 2019, expanding services to 22 university partners, primarily in healthcare programs[18][20] - GCE's revenue model for GCU is 60% of GCU's tuition and fee revenue; Orbis Education agreements generally yield higher revenue per student due to higher service percentages, tuition rates, and credit loads[20][272] - GCE provides a comprehensive suite of services including technology and academic services, counseling services and support, marketing and communication, and certain back-office services for GCU[23][24][25][28][33][35] - The company is subject to extensive regulation by state post-secondary agencies, accrediting commissions, and the U.S. Department of Education (ED), both directly and indirectly[60][64][66] - Key competitive factors in the education services market include reputation, client base quality, marketing effectiveness, technology solutions, service breadth, and program quality[54][62] Item 1A. Risk Factors The company faces significant risks from its revenue dependency on GCU, potential interest divergence, and the extensive regulatory environment of the higher education industry - A large percentage of GCE's revenue is attributable to its contractual relationship with GCU, making it highly dependent on GCU's performance and enrollment[136][137] - GCU's board of trustees and management have fiduciary duties to GCU, which could lead to interests diverging from GCE's over time[140] - ED's determination to treat GCU as a proprietary institution for Title IV purposes could limit GCU's ability to market itself as non-profit, potentially harming enrollment and GCE's financial performance[146] - The incentive compensation rule and its 'bundled services' exception are critical to GCE's business model; any alteration could require a business model change[147][148][151] - GCE and its university partners are subject to extensive regulatory requirements, with non-compliance potentially leading to financial penalties or loss of financial aid funding[182] - Risks associated with future acquisitions include integration difficulties, increased debt, dilution of stockholders, and disruption of ongoing business[152][154] - Data security and privacy regulations pose risks due to the collection of sensitive personal information; breaches could harm reputation and operations[174][177][178] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[226] Item 2. Properties GCE owns a large administrative building in Phoenix and leases numerous skills labs and offices across multiple states to support its university partners - Owns a 325,000 sq ft administrative building in Phoenix, Arizona, designed for energy efficiency[227] - Leases seventeen skills labs and multiple office locations in California, Colorado, and Indiana, with plans for expansion[228] Item 3. Legal Proceedings The company is subject to ordinary litigation that is not expected to have a material adverse effect on its financial position - Subject to ordinary and routine litigation; management does not expect material adverse effects on financial position, results of operations, or cash flows[229] Item 4. Mine Safety Disclosures There are no mine safety disclosures to report - No mine safety disclosures[230] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities GCE's common stock trades on Nasdaq under 'LOPE', with earnings retained for growth and an active share repurchase program in place - Common stock trades on Nasdaq Global Market under symbol 'LOPE'[233] - As of December 31, 2019, there were approximately 146 registered holders of common stock[234] - The company does not anticipate paying cash dividends in the foreseeable future, prioritizing retention of earnings for business development and growth[224][235] - Board authorized repurchase of up to $175.0 million in common stock, with $52.3 million remaining as of December 31, 2019; in 2019, 376,384 shares were repurchased for $35.8 million[238][297] Share Repurchases (Q4 2019) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Publicly Announced Program | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program | |:---|:---|:---|:---|:---:| | October 1, 2019 – October 31, 2019 | 77,622 | $99.09 | 77,622 | $63,100,000 | | November 1, 2019 – November 30, 2019 | 92,500 | $86.46 | 92,500 | $55,100,000 | | December 1, 2019 – December 31, 2019 | 31,400 | $89.27 | 31,400 | $52,300,000 | | Total | 201,522 | $91.76 | 201,522 | $52,300,000 | GCE Stock Performance vs. Benchmarks (2014-2019) | | 12/14 | 12/15 | 12/16 | 12/17 | 12/18 | 12/19 | |:---|:---:|:---:|:---:|:---:|:---:|:---:| | Grand Canyon Education, Inc. | 100.00 | 85.98 | 125.27 | 191.88 | 206.04 | 205.29 | | S&P 500 | 100.00 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | | 2019 Peer Group | 100.00 | 66.60 | 71.71 | 91.80 | 101.23 | 92.84 | Item 6. Selected Consolidated Financial and Other Data This section provides five years of selected financial and operational data, reflecting the company's transition to an education services model Selected Consolidated Income Statement Data (2015-2019, in thousands) | Income Statement Data: | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---:|:---:|:---:|:---:|:---:| | Service revenue | $778,643 | $333,002 | $— | $— | $— | | University related revenue | — | 512,499 | 974,134 | 873,344 | 778,200 | | Net revenue | 778,643 | 845,501 | 974,134 | 873,344 | 778,200 | | Total costs and expenses | 513,512 | 587,352 | 691,380 | 636,141 | 567,839 | | Operating income | 265,131 | 258,149 | 282,754 | 237,203 | 210,361 | | Interest income on Secured Note | 59,297 | 26,947 | — | — | — | | Interest expense | (11,311) | (1,536) | (2,169) | (1,328) | (1,248) | | Investment interest and other | 4,385 | 3,440 | 2,943 | 249 | (106) | | Income before income taxes | 317,502 | 287,000 | 283,528 | 236,124 | 209,007 | | Income tax expense | 58,327 | 57,989 | 80,209 | 87,610 | 77,596 | | Net income | $259,175 | $229,011 | $203,319 | $148,514 | $131,411 | | Earnings per common share (Basic) | $5.42 | $4.81 | $4.31 | $3.22 | $2.86 | | Earnings per common share (Diluted) | $5.37 | $4.73 | $4.22 | $3.15 | $2.78 | | Period end enrollment | 106,861 | 97,369 | 90,297 | 81,908 | 74,506 | Selected Consolidated Balance Sheet Data (2015-2019, in thousands) | Balance Sheet Data: | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---:|:---:|:---:|:---:|:---:| | Cash and cash equivalents, and investments | $143,873 | $120,346 | $242,745 | $108,572 | $106,400 | | Restricted cash, cash equivalents and investments | $300 | $61,667 | $94,534 | $84,931 | $75,384 | | Secured Note receivable | $969,912 | $900,093 | $— | $— | $— | | Total assets | $1,690,289 | $1,324,017 | $1,303,573 | $1,092,493 | $891,982 | | Notes payable (including short-term) | $140,918 | $59,905 | $66,616 | $98,252 | $79,877 | | Total stockholders' equity | $1,443,433 | $1,213,597 | $985,951 | $773,686 | $610,251 | Adjusted EBITDA Reconciliation (2015-2019, in thousands) | | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---:|:---:|:---:|:---:|:---:| | Net income | $259,175 | $229,011 | $203,319 | $148,514 | $131,411 | | Plus: interest expense | 11,311 | 1,536 | 2,169 | 1,328 | 1,248 | | Less: interest income on Secured Note | (59,297) | (26,947) | — | — | — | | Less: investment interest and other | (4,385) | (3,440) | (2,943) | (249) | 106 | | Plus: income tax expense | 58,327 | 57,989 | 80,209 | 87,610 | 77,596 | | Plus: amortization of intangible assets | 8,223 | — | — | — | — | | Plus: depreciation and amortization (GCE assets) | 18,696 | 15,571 | 15,612 | 12,510 | 11,479 | | EBITDA, excluding university related depreciation and amortization | 292,050 | 273,720 | 298,366 | 249,713 | 221,840 | | Plus: contributions in lieu of state income taxes | 4,003 | 3,718 | 2,025 | 4,000 | 2,750 | | Plus: loss on transaction | 3,966 | 18,370 | 562 | 1,136 | 1,702 | | Plus: university related expenses | — | 173,330 | 324,140 | 294,188 | 253,263 | | Less: 40% of university related revenue | — | (205,000) | (389,654) | (349,338) | (311,280) | | Plus: share-based compensation (GCE employees) | 10,300 | 9,914 | 9,683 | 9,659 | 8,960 | | Plus: estimated litigation and regulatory reserves | 1,023 | — | — | — | — | | Adjusted EBITDA | $311,342 | $274,052 | $245,122 | $209,358 | $177,235 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial performance in 2019 was shaped by the Orbis acquisition and the transition to a service model, resulting in higher comparable revenue and operating income - Net revenue for 2019 was $778.6 million, a 7.9% decrease from 2018, primarily due to the transition from university ownership to an education services model[20][272] - Comparable service fee revenue increased by 21.6% year-over-year, driven by the Orbis Education acquisition and a 5.9% increase in GCU enrollments[20][272] - Operating income increased 2.7% to $265.1 million in 2019; adjusted operating income rose 13.2% to $281.3 million, reflecting leverage of operating expenses[21] - Interest income on the Secured Note from GCU increased to $59.3 million in 2019 from $26.9 million in 2018 due to a full year of interest earnings[281] - Interest expense increased to $11.3 million in 2019 from $1.5 million in 2018 due to a $190.1 million increase in the credit facility for the Orbis acquisition[282] - Net income for 2019 was $259.2 million, a 13.2% increase from $229.0 million in 2018[286] - Net cash provided by operating activities increased to $306.3 million in 2019 from $199.1 million in 2018, driven by higher net income and working capital changes[298] - Net cash used in investing activities was $405.9 million in 2019, primarily for the Orbis Education acquisition ($361.2 million) and funding GCU capital expenditures[299] - Unrestricted cash and cash equivalents and investments totaled $143.9 million at December 31, 2019[288] Key Expense Changes (2019 vs. 2018, in millions) | Expense Category | 2019 (Actual) | 2018 (Actual) | Change ($) | Change (%) | Primary Drivers | |:---|:---:|:---:|:---:|:---:|:---| | Technology and academic services | $90.5 | $43.6 | $46.9 | 107.7% | Orbis Education acquisition (headcount, facilities, equipment), increased GCU service costs | | Counseling services and support | $223.6 | $204.7 | $18.9 | 9.2% | Orbis Education acquisition (headcount), increased GCU enrollment support, increased travel costs | | Marketing and communication | $142.9 | $117.4 | $25.5 | 21.7% | Orbis Education partnership marketing, increased GCU program marketing | | General and administrative | $44.3 | $30.0 | $14.3 | 47.9% | Orbis Education acquisition (headcount, office space), professional fees, increased contributions | | Amortization of intangible assets | $8.2 | $0.0 | $8.2 | N/A | Orbis Education acquisition | | Loss on transaction | $4.0 | $18.4 | $(14.4) | -78.3% | Orbis Education acquisition costs (2019) vs. GCU transaction costs (2018) | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company believes inflation has not materially impacted operations and manages interest rate risk on its variable rate debt, with minimal expected impact from rate changes - Inflation has not had a material impact on operations for 2017-2019[310] - Managed 30-day LIBOR interest exposure with an interest rate corridor that expired in December 2019[311][312] - A 10% increase or decrease in interest rates would not have a material impact on future earnings, fair values, or cash flows as of December 31, 2019[313] Item 8. Consolidated Financial Statements and Supplementary Data This section presents GCE's audited consolidated financial statements, which received an unqualified opinion from its independent registered public accounting firm - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2019, and on the effectiveness of internal control over financial reporting[317][318][498][499] - The acquisition of Orbis Education Services, LLC for $361.2 million on January 22, 2019, resulted in $210.3 million in intangible assets and $157.8 million in goodwill[323][325][360][363] - Service revenue for 2019 included $85.9 million and a net loss of $2.6 million from Orbis Education since its acquisition date[365] - The company adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019, recognizing right-of-use (ROU) assets and lease liabilities on the balance sheet[319][423] - The Secured Note from GCU had an initial principal of $870.1 million, bears 6.0% annual interest, matures June 30, 2025, and is secured by GCU's assets[353] Notes to Consolidated Financial Statements 1. Nature of Business GCE is an education services company providing comprehensive support to GCU and, following the Orbis acquisition, to 22 additional university partners - GCE transitioned to an education services company on July 1, 2018, after selling Grand Canyon University (GCU) to a non-profit entity[349] - Acquired Orbis Education Services, LLC on January 22, 2019, adding 22 university partners for healthcare education programs[350][351] - Provides integrated technology and academic services, counseling, marketing, and back-office support to university partners[349] 2. The Transaction On July 1, 2018, GCE sold GCU to a non-profit entity in exchange for a Secured Note and entered into a long-term Master Services Agreement - GCE consummated an Asset Purchase Agreement with GCU on July 1, 2018, selling the university to an independent non-profit entity[353] - Received a Secured Note from GCU for $870.1 million, bearing 6.0% annual interest, with a maturity date of June 30, 2025[353] - Entered into a long-term Master Services Agreement with GCU, receiving 60% of GCU's tuition and fee revenue for comprehensive services[353] - The transaction resulted in a $18.4 million loss on transaction for GCE in 2018, including transaction costs and an asset impairment[357] 3. Acquisition GCE acquired Orbis Education for $361.2 million in January 2019, recognizing significant intangible assets and goodwill - Acquired Orbis Education Services, LLC on January 22, 2019, for $361.2 million (net of cash acquired), financed by a credit facility and operating cash[360] - Recorded $210.3 million in intangible assets (primarily university partner relationships) and $157.8 million in goodwill from the acquisition[360][363] - Transaction costs for the Orbis acquisition were $4.0 million in 2019[360] - Orbis Education contributed $85.9 million in service revenue and a net loss of $2.6 million to GCE's 2019 consolidated results[365] 4. Summary of Significant Accounting Policies This section details key accounting policies, including revenue recognition, business combinations, goodwill, and the adoption of new standards for leases - Revenue recognition for service agreements is based on a single performance obligation delivered ratably over distinct service periods[265][408] - Acquisitions are accounted for using the purchase method, allocating the purchase price to acquired assets and assumed liabilities at fair value[266][385] - Goodwill is assessed annually for impairment; finite-lived intangible assets are amortized straight-line over their estimated useful lives[387][388] - Adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recognizing ROU assets and lease liabilities on the balance sheet[319][423] - Recognizes deferred tax assets and liabilities for future tax consequences, with valuation allowances established if realization is not more-likely-than-not[267][397][398][399] - Capitalizes certain costs for internal-use software development and content creation for university partners, amortizing them over estimated useful lives[377][378][379] 5. Investments GCE held $21.6 million in short-term, highly-rated investments at year-end 2019 after reclassifying and liquidating assets to fund the Orbis acquisition - Investments totaled $21.6 million at December 31, 2019, down from $69.0 million in 2018[429] - Investments were reclassified from available-for-sale to trading in 2018 to fund the Orbis Education acquisition, resulting in a $372 thousand loss in 2018[372][429] - All investments are rated BBB or higher and have maturities of one year or less as of December 31, 2019[421][429] 6. Valuation and Qualifying Accounts The company had no allowance for doubtful accounts at year-end 2019, reflecting no losses since its transition to a service model - No allowance for doubtful accounts receivable at December 31, 2019, due to no losses on receivables since becoming an education service company[421][430] - In 2018, $6.1 million of allowance for doubtful accounts was transferred to GCU as part of the transaction[431] Allowance for Doubtful Accounts Receivable (2017-2019, in thousands) | | Balance at Beginning of Period | Charged to Expense | Deductions/Transfers | Balance at End of Period | |:---|:---:|:---:|:---:|:---:| | Year ended December 31, 2019 | $— | — | — | $— | | Year ended December 31, 2018 | $5,907 | 8,669 | (14,576) | $— | | Year ended December 31, 2017 | $5,918 | 18,478 | (18,489) | $5,907 | 7. Property and Equipment Net property and equipment increased to $119.7 million in 2019, with depreciation expense of $18.4 million for the year - Depreciation expense for property and equipment was $18.4 million for the year ended December 31, 2019[433] - No interest was capitalized in 2019, compared to $756 thousand in 2018, reflecting a significant decline in capital expenditures[283][376] Property and Equipment, Net (in thousands) | | As of December 31, 2019 | As of December 31, 2018 | |:---|:---:|:---:| | Land | $5,579 | $5,579 | | Land improvements | 2,242 | 2,242 | | Buildings | 51,399 | 51,409 | | Buildings and leasehold improvements | 11,691 | 9,581 | | Computer equipment | 95,020 | 85,316 | | Furniture, fixtures and equipment | 10,423 | 4,955 | | Internally developed software | 37,175 | 39,270 | | Construction in progress | 3,238 | 2,376 | | Total gross property and equipment | 216,767 | 200,728 | | Less accumulated depreciation and amortization | (97,033) | (89,689) | | Property and equipment, net | $119,734 | $111,039 | 8. Intangible Assets Amortizable intangible assets from the Orbis acquisition totaled $202.1 million at year-end 2019, primarily from university partner relationships - Amortization expense for these intangible assets is projected to be $8.4 million annually from 2020 to 2024[434] Amortizable Intangible Assets (December 31, 2019, in thousands) | | Estimated Average Useful Life (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |:---|:---:|:---:|:---:|:---:| | University partner relationships | 25 | $210,000 | $(7,943) | $202,057 | | Trade names | 1 | 280 | (280) | — | | Total amortizable intangible assets, net | | $210,280 | $(8,223) | $202,057 | 9. Leases GCE has operating leases for facilities and equipment, with lease liabilities of $28.6 million recognized on the balance sheet as of year-end 2019 - Operating lease costs were $4.1 million in 2019, compared to $827 thousand in 2018[437] - As of December 31, 2019, the present value of lease liabilities was $28.6 million, with a weighted-average remaining lease term of 8.3 years[438][439] - Had $16.1 million in non-cancelable operating lease commitments not yet commenced as of December 31, 2019[438] 10. Notes Payable and Other Noncurrent Liabilities Notes payable increased to $140.9 million in 2019 following an amended credit facility used to finance the Orbis acquisition - Notes payable totaled $140.9 million at December 31, 2019, up from $59.9 million in 2018[444] - Entered into an amended and restated credit agreement in January 2019, providing a $325.0 million credit facility to finance the Orbis Education acquisition[440] - The credit facility was further amended in October 2019, increasing the revolving commitment to $150.0 million and reducing the term loan to $150.6 million[441] - GCE was in compliance with its debt covenants as of December 31, 2019[443] 11. Commitments and Contingencies The company is involved in routine legal proceedings that are not expected to have a material adverse effect on its financial condition - Subject to ordinary and routine litigation; management does not expect material adverse effects on financial condition, results of operations, or cash flows[445][446] - Accrues for contingent obligations when probable and reasonably estimable[400][445] - No reserves for probable non-income tax related matters as of December 31, 2019 and 2018[447] 12. Derivative Instruments GCE's interest rate corridor hedging instrument expired in December 2019, and the company held no derivative instruments at year-end - An interest rate corridor hedging instrument, used to manage 30-day LIBOR interest exposure, expired in December 2019[311][448][452] - Upon expiration, $1.1 million was reclassified from accumulated other comprehensive income into interest expense[283][448][451] - No derivative financial instruments as of December 31, 2019[312] 13. Earnings Per Share For 2019, basic earnings per share was $5.42 and diluted earnings per share was $5.37 - Diluted weighted average shares outstanding excludes anti-dilutive stock options and restricted stock awards[454] Earnings Per Share (2017-2019) | Denominator: | 2019 | 2018 | 2017 | |:---|:---:|:---:|:---:| | Basic weighted average shares outstanding | 47,814 | 47,608 | 47,140 | | Effect of dilutive stock options and restricted stock | 452 | 806 | 1,095 | | Diluted weighted average shares outstanding | 48,266 | 48,414 | 48,235 | | Basic income per share | $5.42 | $4.81 | $4.73 | | Diluted income per share | $5.37 | $4.73 | $4.22 | 14. Equity Transactions GCE has an authorized share repurchase program of up to $175.0 million, with $52.3 million remaining at year-end 2019 - 10,000 shares of authorized but unissued and undesignated preferred stock, with terms determined by the board[455] - Board authorized a share repurchase program of up to $175.0 million, expiring December 31, 2020[238][457] - Repurchased 376,000 shares of common stock for $35.8 million in 2019, leaving $52.3 million available under the authorization[238][457] 15. Income Taxes The company's effective tax rate decreased to 18.4% in 2019, primarily due to a favorable state tax refund agreement and a law change - Income tax expense for 2019 was $58.3 million, with an effective tax rate of 18.4%, compared to 20.2% in 2018[285][462] - The decrease in effective tax rate was primarily due to a $5.9 million favorable tax impact from a state tax refund agreement and a law change in Arizona state taxes[285] - Unrecognized tax benefits totaled $6.8 million at December 31, 2019, including $153 thousand in accrued interest[464] Components of Income Tax Expense (2017-2019, in thousands) | | 2019 | 2018 | 2017 | |:---|:---:|:---:|:---:| | Current: Federal | $57,354 | $60,764 | $76,966 | | Current: State | (1,344) | 8,732 | 8,589 | | Total Current | 56,010 | 69,496 | 85,555 | | Deferred: Federal | 2,804 | (10,708) | (6,189) | | Deferred: State | (487) | (799) | 843 | | Total Deferred | 2,317 | (11,507) | (5,346) | | Total Income Tax Expense | $58,327 | $57,989 | $80,209 | Deferred Income Tax Assets and Liabilities (December 31, 2019 & 2018, in thousands) | | As of December 31, 2019 | As of December 31, 2018 | |:---|:---:|:---:| | Deferred tax assets: Share-based compensation | $2,499 | $3,030 | | Deferred tax assets: Employee compensation | 614 | 780 | | Deferred tax assets: Intangibles | 23,693 | — | | Deferred tax assets: State taxes | 1,764 | 879 | | Deferred tax assets: Other | 432 | 386 | | Total Deferred tax assets | 29,002 | 5,075 | | Deferred tax liability: Property and equipment | (10,865) | (10,778) | | Deferred tax liability: Goodwill | (36,295) | (762) | | Deferred tax liability: Other | (162) | — | | Total Deferred tax liability | (47,322) | (11,540) | | Net deferred tax liability | $(18,320) | $(6,465) | 16. Share-Based Compensation Plans GCE grants restricted stock awards under its 2017 Equity Incentive Plan, with total unrecognized compensation cost of $23.0 million at year-end 2019 - Grants restricted stock awards under the 2017 Equity Incentive Plan, with 1.8 million shares available for grants as of December 31, 2019[466] - Total unrecognized share-based compensation cost for unvested restricted stock was $23.0 million as of December 31, 2019, to be recognized over a weighted average period of 2.1 years[470] - No stock options were granted in 2017, 2018, or 2019; as of December 31, 2019, 232,000 stock options were outstanding and exercisable[471][474] - Made a discretionary matching contribution of $2.2 million to its 401(k) Plan for 2019[479] Restricted Stock Activity (2017-2019, in thousands of shares) | | Total Shares | Weighted Average Grant Date Fair Value per Share | |:---|:---:|:---:| | Outstanding as of December 31, 2017 | 776 | $49.16 | | Granted (2018) | 163 | $92.34 | | Vested (2018) | (384) | $65.57 | | Forfeited, canceled or expired (2018) | (95) | $71.60 | | Outstanding as of December 31, 2018 | 460 | $63.28 | | Granted (2019) | 152 | $93.62 | | Vested (2019) | (174) | $56.14 | | Forfeited, canceled or expired (2019) | (16) | $82.11 | | Outstanding as of December 31, 2019 | 422 | $76.43 | Share-Based Compensation Expense by Category (2017-2019, in thousands) | | 2019 | 2018 | 2017 | |:---|:---:|:---:|:---:| | Technology and academic services | $1,721 | $1,585 | $1,555 | | Counseling support and services | 5,297 | 4,926 | 4,700 | | Marketing and communication | 87 | 48 | 26 | | General and administrative | 3,195 | 3,355 | 3,402 | | University related expenses | — | 9,594 | 3,005 | | Total Share-based compensation expense | $10,300 | $19,508 | $12,688 | | Tax effect of share-based compensation | (2,575) | (4,877) | (5,075) | | Share-based compensation expense, net of tax | $7,725 | $14,631 | $7,613 | 17. Quarterly Results of Operations (Unaudited) This section provides unaudited quarterly results, illustrating the seasonal fluctuations in revenue and operating income driven by academic calendars - Net revenue and operating results normally fluctuate due to seasonal variations in university partners' enrollment, with lower revenues in summer months and higher revenues in Q1 and Q4[287] Unaudited Quarterly Results of Operations (2019, in thousands) | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |:---|:---:|:---:|:---:|:---:| | Service revenue | $197,287 | $174,820 | $193,289 | $213,247 | | Net revenue | 197,287 | 174,820 | 193,289 | 213,247 | | Total costs and expenses | 124,856 | 123,826 | 133,555 | 131,275 | | Operating income | 72,431 | 50,994 | 59,734 | 81,972 | | Net income | $73,243 | $51,112 | $58,151 | $76,669 | | Basic income per share | $1.54 | $1.07 | $1.21 | $1.61 | | Diluted income per share | $1.52 | $1.06 | $1.20 | $1.59 | Unaudited Quarterly Results of Operations (2018, in thousands) | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |:---|:---:|:---:|:---:|:---:| | Service revenue | $— | $— | $155,454 | $177,548 | | University related revenue | 275,681 | 236,818 | — | — | | Net revenue | 275,681 | 236,818 | 155,454 | 177,548 | | Total costs and expenses | 185,589 | 178,330 | 126,034 | 97,399 | | Operating income | 90,092 | 58,488 | 29,420 | 80,149 | | Net income | $73,681 | $46,038 | $33,761 | $75,531 | | Basic income per share | $1.55 | $0.97 | $0.71 | $1.58 | | Diluted income per share | $1.52 | $0.95 | $0.70 | $1.56 | PART III Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[488] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that disclosure controls and procedures were effective as of December 31, 2019[490] - Management assessed and believes the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[496] - KPMG LLP issued an unqualified opinion on the effectiveness of GCE's internal control over financial reporting as of December 31, 2019[497][498] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2019[507] Item 9B. Other Information The company permits Rule 10b5-1 trading plans for its directors, officers, and employees and will disclose their establishment or termination in future reports - Company policy permits directors, officers, and employees to enter into Rule 10b5-1 trading plans[508] - Will disclose the establishment or termination of trading plans by executive officers and directors in future quarterly and annual reports[509] Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement - Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2020 proxy statement[511] - Code of Business Conduct and Ethics and committee charters are available on the company's website[512][513] Item 11. Executive Compensation Information relating to executive compensation is incorporated by reference from the company's 2020 proxy statement - Executive compensation information is incorporated by reference from the 2020 proxy statement[514] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2020 proxy statement - Security ownership information is incorporated by reference from the 2020 proxy statement[515] Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the 2020 proxy statement - Information on related transactions and director independence is incorporated by reference from the 2020 proxy statement[516] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2020 proxy statement - Principal accounting fees and services information is incorporated by reference from the 2020 proxy statement[517] PART IV Item 15. Exhibits and Consolidated Financial Statement Schedules This section lists the consolidated financial statements and exhibits filed as part of the Annual Report - Includes consolidated financial statements: Balance Sheets, Income Statements, Statements of Comprehensive Income, Statements of Stockholders' Equity, and Statements of Cash Flows[519] - Provides an Exhibit Index listing various documents such as the Asset Purchase Agreement, Plan of Merger, Equity Incentive Plans, Employment Agreements, and Credit Agreements[519][520][521][524]