Grand Canyon Education(LOPE) - 2021 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION The first part presents the company's financial statements, management's discussion, market risk disclosures, and internal controls Item 1. Financial Statements The company's financial statements for the period ended June 30, 2021, show increased service revenue and net income, stable total assets, increased liabilities, and decreased operating cash flow due to working capital changes Consolidated Income Statements Q2 and H1 2021 vs 2020 Performance | Metric (In thousands, except per share) | Q2 2021 | Q2 2020 | YoY Change | H1 2021 | H1 2020 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Service Revenue | $201,487 | $185,768 | +8.5% | $438,421 | $407,423 | +7.6% | | Operating Income | $50,248 | $48,310 | +4.0% | $134,474 | $129,106 | +4.2% | | Net Income | $49,461 | $47,010 | +5.2% | $127,573 | $118,395 | +7.8% | | Diluted EPS | $1.09 | $1.00 | +9.0% | $2.78 | $2.49 | +11.6% | Consolidated Balance Sheets Balance Sheet Highlights (In thousands) | Account | June 30, 2021 | Dec 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $69,448 | $245,769 | -71.7% | | Secured Note receivable, net | $1,154,912 | $964,912 | +19.7% | | Total Assets | $1,846,967 | $1,844,579 | +0.1% | | Total Liabilities | $304,284 | $270,250 | +12.6% | | Total Stockholders' Equity | $1,542,683 | $1,574,329 | -2.0% | - The significant decrease in cash and cash equivalents is primarily due to share repurchases and funding provided to GCU, while the increase in the Secured Note receivable reflects additional loans to GCU[12][18] Consolidated Statements of Cash Flows Cash Flow Summary for Six Months Ended June 30 (In thousands) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $210,329 | $221,052 | | Net cash used in investing activities | ($240,085) | ($80,577) | | Net cash used in financing activities | ($146,565) | ($90,515) | | Net (decrease) increase in cash | ($176,321) | $49,960 | - The decrease in operating cash flow was mainly due to changes in working capital, particularly income taxes[18] The significant increase in cash used for investing activities was driven by a $190 million funding to GCU and increased investment purchases[18] Cash used in financing activities rose due to a substantial increase in common share repurchases, totaling $167.7 million in H1 2021 versus $74.0 million in H1 2020[18][169] Notes to Consolidated Financial Statements The notes detail the company's business as an education services provider for 27 university partners, with Grand Canyon University (GCU) being the most significant, outlining key accounting policies, the Secured Note from GCU, leases, debt obligations, and an active share repurchase program - GCE provides education services to 27 university partners as of June 30, 2021, with Grand Canyon University (GCU) as its most significant partner[21][23] - Revenue is generated through services agreements where GCE receives a percentage of its university partners' tuition and fee revenue, which is 60% for GCU[29][50] - The company holds a Secured Note from GCU with a principal balance of $1.15 billion as of June 30, 2021, bearing interest at 6.0% annually[29][12] - The company has an active share repurchase program, which was increased by $100 million in January 2021 and $970 million in July 2021, with 1.55 million shares repurchased for $151.7 million during H1 2021[97][102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting an 8.5% increase in Q2 2021 service revenue driven by partner enrollments and higher revenue per student, detailing COVID-19's impact on enrollment growth, increased operating expenses for new sites, and strong liquidity supported by cash and an active share repurchase program Impact of COVID-19 - The pandemic initially accelerated GCU's online enrollment growth in 2020 as more working adults returned to school[117] - Beginning in Q2 2021, online enrollment growth rates began to slow as new enrollments and re-entries declined year-over-year, and student dropouts returned to historical levels, a trend expected to continue through the rest of 2021[119] - GCU's non-tuition revenue, negatively impacted in 2020, saw recovery in 2021, with residential student capacity expected to be full for Fall 2021[116][117] Results of Operations For Q2 2021, service revenue grew 8.5% to $201.5 million, driven by increased partner enrollments and higher revenue per student, while operating expenses rose, particularly in Technology and Academic Services, contributing to a 7.8% net income growth for H1 2021 Q2 2021 vs Q2 2020 Results Summary | Metric | Q2 2021 | Q2 2020 | YoY Change | Key Driver | | :--- | :--- | :--- | :--- | :--- | | Service Revenue | $201.5M | $185.8M | +8.5% | 3.5% increase in partner enrollments and higher revenue per student | | Technology & Academic Services Expense | $33.7M | $27.2M | +24.0% | Increased headcount and costs for new off-campus sites | | Counseling Services & Support Expense | $60.9M | $57.6M | +5.8% | Increased headcount and travel costs | | Marketing & Communication Expense | $45.4M | $41.1M | +10.6% | Increased advertising for new partners and locations | | Net Income | $49.5M | $47.0M | +5.2% | Revenue growth partially offset by higher operating costs | - Total partner enrollments reached 101,808 at June 30, 2021, a 3.5% increase from the prior year, with enrollments at off-campus classroom and laboratory sites growing 13.2%[127] - The effective tax rate for Q2 2021 was 23.3%, down from 24.6% in Q2 2020, due to favorable adjustments from state audits[139] Liquidity and Capital Resources The company ended Q2 2021 with $113.9 million in unrestricted cash and investments, plus $115.0 million available on its credit line, supporting a significant share repurchase program and a short-term loan to GCU - As of June 30, 2021, the company had $113.9 million in unrestricted cash, cash equivalents, and investments, with an additional $115.0 million available on its credit facility[157] - The Board of Directors increased the share repurchase authorization by $100 million in January 2021 and $970 million in July 2021, bringing the total program authorization to $1.47 billion[162] - The company entered into two Accelerated Share Repurchase (ASR) agreements in March and May 2021 to buy back $35.0 million and $50.0 million of its common stock, respectively[164][167] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that inflation has not materially impacted its results, and while market risk is primarily related to interest rate fluctuations, a 10% change is not expected to have a material impact on earnings, fair values, or cash flows - The company believes inflation has not materially impacted its results of operations[175] - Interest rate risk is managed by investing excess funds in a portfolio of cash equivalents and various rated securities, with a 10% change in interest rates not expected to have a material impact[177] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[178] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[179][181] PART II – OTHER INFORMATION The second part covers legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings The company reported no material legal proceedings - None[182] Item 1A. 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, 2020 - No material changes from the risk factors disclosed in the 2020 Form 10-K[183] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its significant share repurchase activity, including a substantial increase in its repurchase authorization, with 981,431 shares repurchased at an average price of $97.13 during Q2 2021 through open market purchases and two Accelerated Share Repurchase (ASR) agreements - The Board of Directors increased the stock repurchase authorization by $100.0 million in January 2021 and $970.0 million in July 2021, bringing the aggregate authorization to $1.47 billion[185] - The company executed two ASR agreements in Q2 2021: one for $35.0 million initiated in March and completed in May, and another for $50.0 million initiated in May to be completed by September 2021[186][187] Share Repurchases in Q2 2021 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 31,360 | $110.32 | | May 2021 | 720,046 | $98.74 | | June 2021 | 230,025 | $90.30 | | Total Q2 | 981,431 | $97.13 | Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[191] Item 4. Mine Safety Disclosures Not applicable to the company - None[192] Item 5. Other Information The company reported no other information - None[193] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and the financial statements formatted in Inline XBRL - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[196] - The financial statements and notes were also filed in Inline XBRL format[196]