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LOPE > SEC Filings for LOPE > Form 10-Q on 7-May-2012All Recent SEC Filings

Show all filings for GRAND CANYON EDUCATION, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GRAND CANYON EDUCATION, INC.


7-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains certain "forward-looking statements," which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations regarding the material adverse effect that regulatory developments or other matters may have on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

our failure to comply with the extensive regulatory framework applicable to our industry, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements;

the results of the ongoing program review being conducted by the Department of Education of our compliance with Title IV program requirements, and possible fines or other administrative sanctions resulting therefrom;

the ability of our students to obtain federal Title IV funds, state financial aid, and private financing;

potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies in the for-profit postsecondary education sector;

risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards including pending rulemaking by the Department of Education;

our ability to hire and train new, and develop and train existing employees and faculty;

the pace of growth of our enrollment;

our ability to convert prospective students to enrolled students and to retain active students;

our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis;


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industry competition, including competition for students and for qualified executives and other personnel;

the competitive environment for marketing our programs;

failure on our part to keep up with advances in technology that could enhance the online experience for our students;

the extent to which obligations under our loan agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities;

our ability to manage future growth effectively; and

general adverse economic conditions or other developments that affect job prospects in our core disciplines.

Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as updated in our subsequent reports filed with the Securities and Exchange Commission ("SEC"), including any updates found in Part II, Item 1A of this Quarterly Report on Form 10-Q or our other reports on Form 10-Q. You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made and we assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.


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Overview

We are a regionally accredited provider of postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, healthcare, business, and liberal arts. We offer online programs as well as ground programs at our approximately 115 acre traditional campus in Phoenix, Arizona and onsite at the facilities of employers.

At March 31, 2012, we had approximately 46,300 students, an increase of 8.9% over the approximately 42,500 students we had at March 31, 2011. At March 31, 2012, 89.1% of our students were enrolled in our online programs, and of our online and professional studies students, 42.5% were pursuing master's or doctoral degrees. In addition, revenue per student increased between periods as we increased tuition prices for students in our online and professional studies programs by 0.0% to 6.5%, depending on the program, with an estimated blended rate increase of 3.2% for our 2011-12 academic year, as compared to tuition price increases for students in our online and professional studies programs of 0.0% to 5.7% for our 2010-11 academic year, depending on the program, with an estimated blended rate increase of 3.5% for the prior academic year. Tuition for our traditional ground programs had no increase for our 2011-12 or 2010-11 academic years.

The following is a summary of our student enrollment at March 31, 2012 and 2011 (which included less than 700 students pursuing non-degree certificates in each period) by degree type and by instructional delivery method:

                                                  2012(1)                                   2011(1)
                                      # of Students         % of Total          # of Students         % of Total
Graduate degrees(2)                           18,054               39.0 %               18,438               43.4 %
Undergraduate degree                          28,224               61.0 %               24,067               56.6 %

Total                                         46,278              100.0 %               42,505              100.0 %


                                                  2012(1)                                   2011(1)
                                      # of Students         % of Total          # of Students         % of Total
Online(3)                                     41,229               89.1 %               38,655               90.9 %
Ground(4)                                      5,049               10.9 %                3,850                9.1 %

Total                                         46,278              100.0 %               42,505              100.0 %

(1) Enrollment at March 31, 2012 and 2011 represents individual students who attended a course during the last two months of the calendar quarter.

(2) Includes 2,221 and 1,301 students pursuing doctoral degrees at March 31, 2012 and 2011, respectively.

(3) As of March 31, 2012 and 2011, 42.5% and 46.3%, respectively, of our online and professional studies students were pursuing graduate degrees.

(4) Includes both our traditional on-campus ground students, as well as our professional studies students.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. During the three months ended March 31, 2012, there have been no significant changes in our critical accounting policies.

Key Trends, Developments and Challenges

The key trends, developments and challenges facing the University are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Except as noted below, during the three months ended March 31, 2012, there have been no significant changes in these trends. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011, which is incorporated herein by reference. Recent developments and challenges include:

New Rulemaking Initiatives. In May 2011, the Department of Education announced its intention to establish certain negotiated rulemaking committees to prepare proposed regulations under the Higher Education Opportunity Act of 2008 (HEOA). Negotiations to address post-disbursement student loan issues, including issues with income-based and income contingent loan repayments plans, as well as teacher preparation issues, began in January 2012 and concluded in April 2012. While it is too early in the process to determine the impact of the rule changes on which the negotiators reached a consensus, or what, if any, other rules may be adopted, the University intends to monitor the negotiated rulemaking process and take actions it believes are appropriate to respond to final rules.


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Federal Budget Considerations. In February 2012, President Obama submitted his fiscal year 2013 federal budget request. If enacted, the President's budget request would, among other things:

maintain a 3.4% interest rate on undergraduate subsidized student loans for one additional year; without passage, the rate is scheduled to revert to 6.8% in July 2012;

fund a maximum Pell Grant of $5,635 for the 2013-2014 award year, an $85 increase over the prior year; and

make permanent the American Opportunity Tax Credit (a refundable tax credit for undergraduate education expenses).

Congress will determine 2013 fiscal year appropriations later in the year for federal education purposes and will consider the President's budget as a part of that process. Any action by Congress that significantly reduces Title IV program funding, or materially impacts the eligibility of our institutions or students to participate in Title IV programs could have a material impact on our enrollment, our cash flows, results of operations, and financial condition.

Results of Operations

The following table sets forth income statement data as a percentage of net
revenue for each of the periods indicated:



                                             Three Months Ended March 31,
                                              2012                  2011
       Net revenue                                100.0 %               100.0 %
       Operating expenses
       Instructional costs and services            43.4                  48.1
       Selling and promotional                     29.5                  29.3
       General and administrative                   6.4                   6.7

       Total operating expenses                    79.3                  84.1

       Operating income                            20.7                  15.9
       Interest expense                            (0.2 )                (0.1 )
       Interest income                              0.0                   0.0

       Income before income taxes                  20.5                  15.8
       Income tax expense                           8.1                   6.5

       Net income                                  12.4                   9.3

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Net revenue. Our net revenue for the quarter ended March 31, 2012 was $117.1 million, an increase of $15.4 million, or 15.2%, as compared to net revenue of $101.7 million for the quarter ended March 31, 2011. This increase was primarily due to an increase in ground and online enrollment and, to a lesser extent, increases in the average tuition per student as a result of tuition price increases, partially offset by an increase in institutional scholarships. End-of-period enrollment increased 8.9% between March 31, 2012 and March 31, 2011, as ground enrollment increased 31.1%, and online enrollment increased 6.7% over the prior year. We attribute the significant growth in our ground enrollment between years to our increasing brand recognition and the value proposition that our ground traditional campus affords to traditional-aged students and their parents. After scholarships, our ground traditional students pay an amount for tuition, room, board, and fees that can be one-half to one-third less than what it costs to attend a private, traditional university in another state and an amount comparable to what it costs to attend the public universities in the state of Arizona as an in-state student. We are anticipating increased pressure on new and continuing online enrollments due primarily to the increasing challenges presented in the economy, the impact of new and proposed regulations, and increased competition.

Instructional costs and services expenses. Our instructional costs and services expenses for the quarter ended March 31, 2012 were $50.8 million, an increase of $1.9 million, or 4.0%, as compared to instructional costs and services expenses of $48.9 million for the quarter ended March 31, 2011. This increase was primarily due to increases in employee compensation, instructional supplies, depreciation and amortization, faculty compensation, and other instructional compensation and related expenses, of $3.0 million, $1.4 million, $1.2 million, $1.0 million and $1.2 million, respectively. These increases were partially offset by a $5.9 million decrease in bad debt expense. The increase in employee compensation is primarily due to the increase in the number of ground traditional support staff in the Spring of 2012 to support the anticipated growth in ground campus enrollments. The increase in depreciation and amortization is the result of us placing into service over $70.0 million of new buildings for our ground traditional campus in the last twelve months. The increase in instructional supplies is primarily due to increased licensing fees related to educational resources, increased food costs due to increased food revenues and miscellaneous costs associated with making continued improvements in curriculum development and developing new and enhanced innovative educational tools. Our instructional costs and services expenses as a percentage of net revenues decreased by 4.7% to 43.4% for the quarter ended March 31, 2012, as compared to 48.1% for the quarter ended March 31, 2011 primarily due to improvements in bad debt expense as a percentage of revenue. Bad debt expense decreased as a percentage of net revenues from 9.9% in the first quarter of 2011 to 3.5% in the first quarter of 2012 as a result of improved collections of receivables due from current students between periods due to operational improvements made during 2011 and a reduction in receivables due from former students as a result of us moving further away from our transition to a borrower-based financial aid system. In addition our costs as a percentage of revenue declined due to our ability to leverage the fixed costs structure of our campus-based facilities and ground faculty across an increasing revenue base.


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Selling and promotional expenses. Our selling and promotional expenses for the quarter ended March 31, 2012 were $34.6 million, an increase of $4.8 million, or 15.8%, as compared to selling and promotional expenses of $29.8 million for the quarter ended March 31, 2011. This increase is primarily the result of increases in advertising and employee compensation of $3.1 million and $2.1 million, respectively, which is partially offset by lower promotional and other expenses of $0.4 million for the quarter. Our selling and promotional expenses as a percentage of net revenue increased by 0.2% to 29.5% for the quarter ended March 31, 2012, from 29.3% for the quarter ended March 31, 2011. This increase occurred as a result of increased advertising due to a branding campaign launch focused on the southwest region and increased expenses associated with our new Mind Streams contract. The increase in employee compensation and related expenses as a percentage of revenue is a result of increasing the number of enrollment counselors between years primarily for our ground traditional campus. Although we incur immediate expenses in connection with hiring new ground traditional campus enrollment counselors, these counselors will typically not recruit students that are enrolled at the University until September 2012. We plan to continue to add additional enrollment counselors in the future, although the number of additional hires as a percentage of the total headcount is expected to remain flat or decrease.

General and administrative expenses. Our general and administrative expenses for the quarter ended March 31, 2012 were $7.5 million, an increase of $0.7 million, or 10.4%, as compared to general and administrative expenses of $6.8 million for the quarter ended March 31, 2011. This increase was primarily due to increases in employee compensation and related expenses of $0.6 million. Our general and administrative expenses as a percentage of net revenue decreased by 0.3% to 6.4% for the quarter ended March 31, 2012, from 6.7% for the quarter ended March 31, 2011.

Income tax expense. Income tax expense for the quarter ended March 31, 2012 was $9.5 million, an increase of $2.9 million, or 44.2%, as compared to income tax expense of $6.6 million for the quarter ended March 31, 2011. Our effective tax rate was 39.7% during the first quarter of 2012 compared to 41.1% during the first quarter of 2011. The decrease in the effective tax rate was primarily due to certain non-recurring tax items, which had the effect of decreasing our effective tax rate in the first quarter of 2012 and increasing the effective tax rate in the first quarter of 2011.

Net income. Our net income for the quarter ended March 31, 2012 was $14.5 million, an increase of $5.0 million, as compared to $9.5 million for the quarter ended March 31, 2011, due to the factors discussed above.

Seasonality

Our net revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in enrollment. Student population varies as a result of new enrollments, graduations, and student attrition. The majority of our traditional ground students do not attend courses during the summer months (May through August), which affects our results for our second and third fiscal quarters. Since a significant amount of our campus costs are fixed, the lower revenue resulting from the decreased ground student enrollment has historically contributed to lower operating margins during those periods. As we have increased the relative proportion of our online students, this summer effect has recently lessened. However, it is our intent to increase the number of ground traditional students significantly during the next few years. To accomplish this, we doubled the number of ground traditional campus enrollment staff during 2011 and will significantly increase the number of ground traditional support staff in the Spring and Summer of 2012. Thus, we expect this summer effect to become even more pronounced in 2012 and thereafter. Partially offsetting this summer effect in the third quarter has been the sequential quarterly increase in enrollments that has occurred as a result of the traditional fall school start. This increase in enrollments also has occurred in the first quarter, corresponding to calendar year matriculation. In addition, we typically experience higher net revenue in the fourth quarter due to its overlap with the semester encompassing the traditional fall school start and in the first quarter due to its overlap with the first semester of the calendar year. A portion of our expenses do not vary proportionately with these fluctuations in net revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in operating results to continue as a result of these seasonal patterns.

Liquidity and Capital Resources

Liquidity. We financed our operating activities and capital expenditures during the three months ended March 31, 2012 and 2011 primarily through cash provided by operating activities. Our unrestricted cash and cash equivalents were $56.7 million and $21.2 million at March 31, 2012 and December 31, 2011, respectively. Our restricted cash and cash equivalents at March 31, 2012 and December 31, 2011 were $51.0 million and $56.7 million, respectively.


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Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash and cash equivalents and our revolving line of credit, will provide adequate funds for ongoing operations,

planned capital expenditures, and working capital requirements for at least the next 24 months. No amounts are borrowed on the $50.0 million revolving line of credit as of March 31, 2012.

Share Repurchase Program

On July 28, 2011, our Board of Directors authorized the University to repurchase up to an additional $25 million ($50 million total) of common stock, from time to time, depending on market conditions and other considerations. The expiration date on the repurchase authorization is September 30, 2012. Repurchases occur at the University's discretion. The 2011 repurchase authorization is an expansion of, and does not replace the 2010 repurchase authorization.

Under our share purchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission Rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.

Between the approval of the initial share repurchase plan and March 31, 2012, the University has purchased 1,657,300 shares of common shock shares at an aggregate cost of $23.9 million which includes no shares of common stock during the three months ended March 31, 2012. At March 31, 2012, there remains $26.1 million available under our current share repurchase authorization.

Cash Flows

Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2012 was $45.2 million as compared to $23.4 million for the three months ended March 31, 2011. Cash provided by operating activities in the three months ended March 31, 2012 and 2011 resulted from our net income plus non-cash charges for bad debts, depreciation and amortization and share-based compensation and changes in assets and liabilities, including our income tax receivable/payable and deferred revenue.

Investing Activities. Net cash used in investing activities was $11.2 million and $11.9 million for the three months ended March 31, 2012 and 2011, respectively. Capital expenditures were $16.9 million and $14.7 million for the three months ended March 31, 2012 and 2011, respectively. In 2012, capital expenditures primarily consisted of ground campus building projects such as the construction costs for two additional dormitories, an Arts and Science classroom building and our first parking garage to support our increasing traditional student enrollment as well as purchases of computer equipment, other internal use software projects and furniture and equipment. In 2011, capital expenditures primarily consisted of ground campus building projects such as a new dormitory and an events arena to support our increasing traditional ground student enrollment as well as purchases of computer equipment, other internal use software projects and furniture and equipment. In 2012 and 2011 expenditures were partially offset by a $5.7 million and $2.8 million, respectively, decrease in restricted cash as a result of timing differences between periods in the receipt of Title IV funds.

Financing Activities. Net cash provided by financing activities was $1.5 million for the three months ended March 31, 2012 and net cash used in financing activities was $14.9 million in the three months ended March 31, 2011. During the first three months of 2012 proceeds from the exercise of stock options of $2.3 million were partially offset by principal payments on notes payable and capital lease obligations of $0.8 million. During the first three months of 2011, $14.2 million was used to purchase treasury stock in accordance with the University's share repurchase program and principal payments on notes payable and capital leases totaled $0.7 million.

Contractual Obligations

The following table sets forth, as of March 31, 2012, the aggregate amounts of
our significant contractual obligations and commitments with definitive payment
terms due in each of the periods presented (in millions):



                                                                       Payments Due by Period
                                                      Less than                                        More than
                                         Total       1 Year  (1)       2-3 Years       4-5 Years        5 Years
Long term notes payable                 $  21.2     $         1.3     $       3.4     $      16.2     $       0.3
Capital lease obligations                   0.7               0.1             0.2             0.4             0.0
Purchase obligations(2)                    48.6              41.3             4.9             2.3             0.1
Operating lease obligations                54.3               5.4            13.8            13.0            22.1

Total contractual obligations           $ 124.8     $        48.1     $      22.3     $      31.9     $      22.5

(1) Less than one year represents expected expenditures from April 1, 2012 through December 31, 2012.

(2) The purchase obligation amounts include expected spending by period under contracts that were in effect at March 31, 2012.


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Off-Balance Sheet Arrangements

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