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LOPE > SEC Filings for LOPE > Form 10-Q on 6-Aug-2012All Recent SEC Filings

Show all filings for GRAND CANYON EDUCATION, INC.

Form 10-Q for GRAND CANYON EDUCATION, INC.


6-Aug-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 historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated 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, such as standards applicable to the Higher Learning Commission;

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, including, for example, a recent report issued by Sen. Tom Harkin, Chairman of the HELP Committee, relating to us and various other proprietary schools;

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 properly manage risks and challenges associated with potential acquisitions of, or investments in, new businesses, acquisitions of new properties, or the expansion of our campus to new locations;

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;

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

the competitive environment for marketing our programs;


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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 June 30, 2012, we had approximately 44,400 students, an increase of 12.4% over the approximately 39,500 students we had at June 30, 2011. At June 30, 2012, 94.8% of our students were enrolled in our online programs, and of our online and professional studies students, 42.0% 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 5.9%, depending on the program, with an estimated blended rate increase of 2.5% for our 2012-13 academic year, as compared to tuition price increases for students in our online and professional studies programs of 0.0% to 6.5% for our 2011-12 academic year, depending on the program, with an estimated blended rate increase of 3.2% for the prior academic year. Tuition for our traditional ground programs had no increase for our 2012-13 or 2011-12 academic years.

The following is a summary of our student enrollment at June 30, 2012 and 2011 (which included less than 774 students pursuing non-degree certificates in each period) by degree type and by instructional delivery method:

                                                                       June 30,
                                                  2012(1)                                   2011(1)
                                      # of Students         % of Total          # of Students         % of Total
Graduate degrees(2)                           18,161               40.9 %               17,205               43.5 %
Undergraduate degree                          26,274               59.1 %               22,320               56.5 %

Total                                         44,435              100.0 %               39,525              100.0 %


                                                                       June 30,
                                                  2012(1)                                   2011(1)
                                      # of Students         % of Total          # of Students         % of Total
Online(3)                                     42,121               94.8 %               37,915               95.9 %
Ground(4)                                      2,314                5.2 %                1,610                4.1 %

Total                                         44,435              100.0 %               39,525              100.0 %

(1) Enrollment at June 30, 2012 and 2011 represents individual students who attended a course during the last two months of the calendar quarter.

(2) Includes 2,417 and 1,409 students pursuing doctoral degrees at June 30, 2012 and 2011, respectively.

(3) As of June 30, 2012 and 2011, 42.0% and 44.2%, respectively, of our online and professional studies students are 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 six months ended June 30, 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 its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012. Except as noted below, during the six months ended June 30, 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 include:


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Gainful Employment Rules. Under the Higher Education Act, proprietary schools are eligible to participate in Title IV programs in respect of educational programs that lead to "gainful employment in a recognized occupation," with the limited exception of qualified programs leading to a bachelor's degree in liberal arts. Historically, this concept has not been defined in detail. On June 13, 2011, the Department of Education issued its final gainful employment rule, which generally provides that a program leads to gainful employment in a recognized occupation if it meets one of the following metrics:

Loan Repayment Rate - at least 35% of former students are repaying their loans;

Debt-to-Discretionary Income Ratio - the estimated annual loan repayment of a typical graduate does not exceed 30% of his or her discretionary income or

Debt-to-Earnings Ratio - the estimated annual loan payment of a typical graduate does not exceed 12% of his or her total earnings.

The final gainful employment rule was to become effective on July 1, 2012. On June 30, 2012, the U.S. District Court for the District of Columbia found that the Department of Education failed to adequately justify the 35% minimum student loan repayment rate measure. Because the Court determined that the debt-to-discretionary income ratio and the debt-to-total earnings ratio are inextricably intertwined with the minimum loan repayment rate measure, it struck down all three metrics. In addition, the Court invalidated two other provisions of the gainful employment regulations-one that requires institutions seeking to offer a new program to obtain prior approval from the Department of Education, and one that requires institutions to provide data to Department of Education to calculate the two debt measures-based on the Court's finding that the provisions are tied to the now-invalid minimum loan repayment metric. With enforcement of much of the regulatory framework of the gainful employment rules now blocked, Department of Education has not yet announced whether it will appeal the Court's decision, seek to revise the gainful employment regulations through another negotiated rulemaking session, or to take other steps. We will continue to monitor the Department of Education's next steps with respect to gainful employment regulations for any impact on our business.

Executive Order on Military and Veterans Benefits Programs. In April 2012, President Obama signed an executive order asking for the development of "Principles of Excellence: (Principles)", which would strengthen enforcement and compliance mechanisms required by educational institutions that serve service members, veterans and their family members. A Committee comprised of the Departments of Defense, Veterans Affairs and Education, and the Consumer Financial Protection Bureau, are required to present a plan to President Obama before July 27, 2012. On May 31, 2012, the Department of Veterans distributed a letter requesting that institutions confirm in writing their intent to comply or not comply with respect to the Principles. We confirmed in writing that we will comply with the Principles. These Principles could increase the cost of delivering educational services to our military and veteran students. We will continue to monitor the progress of this activity.


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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           Six Months Ended
                                             June  30,                   June  30,
                                        2012           2011          2012         2011
    Net revenue                           100.0 %       100.0 %       100.0 %      100.0 %
    Operating expenses
    Instructional cost and services        44.8          45.0          44.1         46.5
    Selling and promotional                27.5          26.9          28.5         28.1
    General and administrative              6.5           6.8           6.4          6.8

    Total operating expenses               78.7          78.6          79.0         81.4

    Operating income                       21.3          21.4          21.0         18.6
    Interest expense                       (0.1 )        (0.0 )        (0.1 )       (0.1 )
    Interest income                         0.0           0.0           0.0          0.0

    Income before income taxes             21.3          21.3          20.9         18.6
    Income tax expense                      8.2           8.9           8.2          7.7

    Net income                             13.1          12.5          12.7         10.9

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net revenue. Our net revenue for the quarter ended June 30, 2012 was $119.3 million, an increase of $16.2 million, or 15.7%, as compared to net revenue of $103.1 million for the quarter ended June 30, 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 improved retention and tuition price increases, partially offset by an increase in institutional scholarships. End-of-period enrollment increased 12.4% between June 30, 2012 and June 30, 2011, as ground enrollment increased 43.7%, and online enrollment increased 11.1% 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 is often half to a third of 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 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 June 30, 2012 were $53.4 million, an increase of $7.0 million, or 15.2%, as compared to instructional costs and services expenses of $46.4 million for the quarter ended June 30, 2011. This increase was primarily due to increases in employee compensation, program review reserve, faculty compensation, other instructional supplies, depreciation and amortization expenses, and other instructional costs and services expenses of $3.1 million, $3.0 million, $1.6 million, $1.4 million, $1.1 million, and $1.3 million, respectively. These increases were partially offset by a $4.5 million decrease in bad debt expense. The increase in employee compensation and faculty compensation is primarily due to an increase in headcount (both staff and ground and on-line fulltime faculty) needed to provide student instruction and support services to support the increase in enrollments. Additionally, in 2011 a reversal of $0.7 million was recorded in employee compensation for amounts accrued in previous periods that were to be paid to non-enrollment employees for students they previously recruited and for which bonuses were to be paid when those students completed 24 credit hours. As a result of new compensation rules that became effective July 1, 2011, these amounts could no longer be paid. The reserve for our program review primarily represents the estimated amounts that will be returned related to certain Pell grants. The increase in depreciation and amortization is the result of our continued growth and expansion of the ground traditional campus in order to accommodate the growth in our traditional ground enrollment. We also incurred an increase in instructional supplies due to increased licensing fees related to educational resources and increased food costs associated with a higher number of residential students. Our instructional costs and services expenses as a percentage of net revenues decreased by 0.2% to 44.8% for the quarter ended June 30, 2012, as compared to 45.0% for the quarter ended June 30, 2011 primarily due to improvements in bad debt expense, partially offset by increases as a percentage of net revenues in employee compensation and related expenses, other instructional supplies, program review reserve, and depreciation and amortization expenses. Bad debt expense decreased as a percentage of net revenues from 8.0% in the second quarter of 2011 to 3.1% in the second 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.


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Selling and promotional expenses. Our selling and promotional expenses for the quarter ended June 30, 2012 were $32.8 million, an increase of $5.1 million, or 18.2%, as compared to selling and promotional expenses of $27.7 million for the quarter ended June 30, 2011. This increase is primarily the result of increases in employee compensation and advertising of $4.2 million and $0.8 million, respectively. Our selling and promotional expenses as a percentage of net revenue increased by 0.6% to 27.5% for the quarter ended June 30, 2012, from 26.9% for the quarter ended June 30, 2011. The increase in employee compensation was due to changes made by the University to comply with the new employee compensation rules that went into effect July 1, 2011. During the second quarter of 2011, the University reversed $1.5 million of amounts accrued in previous periods that were to be paid to enrollment employees for students they previously recruited and for which bonuses were to be paid when those students completed 24 credit hours. Due to the compensation rule changes effective July 1, 2011, these amounts could no longer be paid. Additionally in 2012, employee compensation and related expenses as a percentage of revenue increased as a result of increasing the number of enrollment counselors between years. 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. The advertising expense increased due to us entering into a new revenue sharing agreement with MindStreams, L.L.C. in the third quarter of 2011.

General and administrative expenses. Our general and administrative expenses for the quarter ended June 30, 2012 were $7.7 million, an increase of $0.7 million, or 9.4%, as compared to general and administrative expenses of $7.0 million for the quarter ended June 30, 2011. This increase was primarily due to increases in employee compensation and related expenses of $0.5 million. Our general and administrative expenses as a percentage of net revenue decreased by 0.3% to 6.5% for the quarter ended June 30, 2012, from 6.8% for the quarter ended June 30, 2011.

Income tax expense. Income tax expense for the quarter ended June 30, 2012 was $9.7 million, an increase of $0.6 million, or 6.6%, as compared to income tax expense of $9.1 million for the quarter ended June 30, 2011. Our effective tax rate was 38.5% during the second quarter of 2012 compared to 41.5% during the second 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 second quarter of 2012 and increasing the effective tax rate in the second quarter of 2011.

Net income. Our net income for the quarter ended June 30, 2012 was $15.6 million, an increase of $2.7 million or 21.2%, as compared to $12.9 million for the quarter ended June 30, 2011, due to the factors discussed above.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Net revenue. Our net revenue for the six months ended June 30, 2012 was $236.4 million, an increase of $31.6 million, or 15.4%, as compared to net revenue of $204.8 million for the six months ended June 30, 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 improved retention and tuition price increases, partially offset by an increase in institutional scholarships. End-of-period enrollment increased 12.4% between June 30, 2012 and June 30, 2011, as ground enrollment increased 43.7%, and online enrollment increased 11.1% 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 is often half to a third of 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 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 six months ended June 30, 2012 were $104.2 million, an increase of $9.0 million, or 9.5%, as compared to instructional costs and services expenses of $95.2 million for the six months ended June 30, 2011. This increase was primarily due to increases in employee compensation, faculty compensation, program review reserve, instructional supplies, depreciation and amortization, arena expense and other instructional compensation and related expenses, of $6.1 million, $2.7 million, $3.0 million, $2.9 million, $2.2 million, $1.1 million, and $1.4 million, respectively. These increases were partially offset by a $10.4 million decrease in bad debt expense. The increase in employee compensation and faculty compensation is primarily due to an increase in headcount (both staff and ground and on-line fulltime faculty) needed to provide student instruction and support services to support the increase in enrollments. Additionally, in 2011 a reversal of $0.7


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million was recorded in employee compensation for amounts accrued in previous periods that were to be paid to non-enrollment employees for students they previously recruited and for which bonuses were to be paid when those students completed 24 credit hours. As a result of our compensation rules that became effective on July 1, 2011, these amounts could no longer be paid. The reserve for our program review primarily represents the estimated amounts that will be returned related to certain Pell grants. The increase in depreciation and amortization is the result of our continued growth and expansion of the ground traditional campus in order to accommodate the growth in our traditional ground enrollment. We also incurred an increase in instructional supplies due to increased licensing fees related to educational resources and increased food costs associated with a higher number of residential students. Our instructional costs and services expenses as a percentage of net revenues decreased by 2.4% to 44.1% for the six months ended June 30, 2012, as compared to 46.5% for the six months ended June 30, 2011 primarily due to improvements in bad debt expense, partially offset by increases as a percentage of net revenues in employee compensation and related expenses, program review reserve, other instructional supplies and food costs, depreciation and amortization expense and arena expenses. Bad debt expense decreased as a percentage of net revenues from 8.9% in the six months ended June 30, 2011 to 3.3% in the six months ended June 30, 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.

Selling and promotional expenses. Our selling and promotional expenses for the six months ended June 30, 2012 were $67.3 million, an increase of $9.8 million, or 17.0%, as compared to selling and promotional expenses of $57.5 million for the six months ended June 30, 2011. This increase is primarily the result of increases in employee compensation and advertising of $6.3 million and $3.9 million, respectively, which is partially offset by lower promotional expenses of $0.4 million for the quarter. Our selling and promotional expenses as a percentage of net revenue increased by 0.4% to 28.5% for the six months ended June 30, 2012, from 28.1% for the six months ended June 30, 2011. The increase in employee compensation was due to changes made by the University to comply . . .

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