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LOPE > SEC Filings for LOPE > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for GRAND CANYON EDUCATION, INC.

Form 10-Q for GRAND CANYON EDUCATION, INC.


7-May-2013

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; statements as to whether regulatory developments or other matters may or may not have a material adverse effect 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 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;

risks associated with 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.


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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, 2012, 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 programs online, on ground at our approximately 115 acre traditional campus in Phoenix, Arizona and onsite at facilities we lease and at facilities owned by third party employers.

At March 31, 2013, we had approximately 53,600 students, an increase of 15.7% over the approximately 46,300 students we had at March 31, 2012. At March 31, 2013, 86.4% of our students were enrolled in our online programs, and of our online and professional studies students, 42.2% were pursuing master's or doctoral degrees. In addition, revenue per student increased between periods as a result of improved retention as well as selective tuition price increases for students in our online and professional studies programs of up 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 selective tuition price increases for students in our online and professional studies programs of up to 6.5%, depending on the program, with a 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. Tuition increases have not historically been, and may not in the future be, consistent across our programs due to market conditions and differences in operating costs of individual programs. In fact it is our current intention to not increase tuition for our online, professional studies and traditional programs for our 2013-14 academic year. This reflects a concerted effort to control tuition pricing for students so that debt levels assumed by our students are reasonable.

The following is a summary of our student enrollment at March 31, 2013 and 2012 (which included less than 810 students pursuing non-degree certificates in each period) by degree type and by instructional delivery method:

                                                  2013(1)                                   2012(1)
                                      # of Students         % of Total          # of Students         % of Total
Graduate degrees(2)                           20,217               37.7 %               18,054               39.0 %
Undergraduate degree                          33,342               62.3 %               28,224               61.0 %

Total                                         53,559              100.0 %               46,278              100.0 %


                                                  2013(1)                                   2012(1)
                                      # of Students         % of Total          # of Students         % of Total
Online(3)                                     46,258               86.4 %               41,229               89.1 %
Ground(4)                                      7,301               13.6 %                5,049               10.9 %

Total                                         53,559              100.0 %               46,278              100.0 %

(1) Enrollment at March 31, 2013 and 2012 represents individual students who attended a course during the last two months of the calendar quarter.

(2) Includes 3,329 and 2,221 students pursuing doctoral degrees at March 31, 2013 and 2012, respectively.

(3) As of March 31, 2013 and 2012, 42.2% and 42.5%, 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, 2012. During the three months ended March 31, 2013, there have been no significant changes in our critical accounting policies.

Financial Statement Presentation

Effective during the first quarter of 2013, the University made changes in its presentation of operating expenses and reclassified prior periods to conform to the current presentation. The University determined that these changes would provide more meaningful information and are consistent with changes recently made by a number of other regionally accredited for-profit universities. Additionally, this new presentation better classifies its costs consistently with the operational changes the University has made related to the roles and responsibilities of its admissions personnel. Specifically the University has separated admissions advisory and related expenses from advertising, and marketing and promotional expenses as the admissions personnel role has evolved into one in which a substantial amount of their time is spent educating students not only during the admissions process but also through matriculation and during their program of study.


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Instructional Costs and Services

Instructional costs and services consist primarily of costs related to the administration and delivery of the University's educational programs. This expense category includes salaries, benefits and share-based compensation for full-time and adjunct faculty and administrative personnel, information technology costs, bad debt expense, curriculum and new program development costs (which are expensed as incurred) and costs associated with other support groups that provide services directly to the students. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of educational services, primarily at the University's Phoenix, Arizona campus.

Admissions Advisory and Related

The University previously reported costs related to our admissions advisory personnel in selling and promotional on our Consolidated Income Statement. Effective during the first quarter of 2013, the University began separating admissions advisory and related expenses from advertising, and marketing and promotional expenses on our Consolidated Income Statement as "admissions advisory and related." Based on the operational changes discussed above, the University believes the disaggregation of admissions personnel and related costs from advertising, and marketing and promotional expenses provides more meaningful information and is consistent with changes recently made by a number of other regionally accredited for-profit universities. This expense category includes salaries and benefits for admissions advisory personnel and, revenue share expense as well as an allocation of depreciation, amortization, rent and occupancy costs attributable to the admissions advisory personnel.

Advertising

As discussed above the University previously reported advertising costs in selling and promotional on our Consolidated Income Statement. Effective during the first quarter of 2013, the University began separating advertising expenses from admissions advisory and related expenses, and marketing and promotional expenses on our Consolidated Income Statement as "advertising." Advertising costs are expensed as incurred.

Marketing and Promotional

The University previously reported costs related to our marketing and promotional expenses in selling and promotional on our Consolidated Income Statement. Effective during the first quarter of 2013, the University began separating marketing and promotional expenses from admissions advisory and related expenses and advertising expenses on our Consolidated Income Statement as "marketing and promotional." This expense category includes salaries, benefits and share-based compensation for marketing personnel, and other promotional expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to marketing and promotional activities. Marketing and promotional costs are expensed as incurred.

General and Administrative

General and administrative expenses include salaries, benefits and share-based compensation of employees engaged in corporate management, finance, human resources, compliance, and other corporate functions. General and administrative expenses also include an allocation of depreciation, amortization, rent, and occupancy costs attributable to the departments providing general and administrative functions.

We have reclassified our operating expenses for prior periods to conform to the above disaggregation and revisions to our presentation. There were no changes to total operating expenses or operating income as a result of these reclassifications.

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, 2012. Except as noted below, during the three months ended March 31, 2013, 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, 2012, which is incorporated herein by reference. Recent developments and challenges include:

Regulatory Environment

Congressional Action and Financial Aid Funding

On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (ATRA), delaying sequestration of many federal programs until March 1, 2013, including a potential 7.6% cut to campus-based aid programs such as Federal Supplemental Opportunity Grant (FSEOG). Additionally, ATRA extended the American Opportunity Tax Credit for five years, temporarily extended deductions for qualified tuition and related educational expenses for two years and permanently extended the deduction for student loan interest.


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Congress did not take the additional measures necessary to avoid sequestration, which took effect on March 1, 2013. While sequestration has no impact on 2012-2013 FSEOG funds, a reduction of the FSEOG allocation is anticipated for all participating institutions for the 2013-2014 award year, which begins on July 1, 2013. The Pell Grant program is specifically exempted for one year from the effects of sequestration. For the 2012-2013 and 2013-2014 award years, Pell Grant amounts remain in effect without any changes. It is unknown whether Congress will make changes to the Pell Grant for later award years.

Sequestration also imposed an immediate increase to the loan fee rate charged to borrowers utilizing the Federal Direct Loan program. In particular, Direct Subsidized or Direct Unsubsidized Loan fees will increase from 1.0 percent of the principal amount of the loan to 1.051 percent, while Direct PLUS Loan fees for parent borrowers will increase from 4.0 percent to 4.204 percent

On April 5, 2013, the Department of Education (ED) determined that the increased loan fee percentages must be applied to any loan disbursement for a loan where the first disbursement of the loan will be made on or after July 1, 2013. Loans issued prior to July 1, 2013 have been advised to continue to award and disburse Direct Loans using the pre-sequester loan fee amounts. When implemented in July 1, 2013, we anticipate that our students will cover this nominal loss of loan proceeds with other resources.

Various legislative proposals have been recently introduced in Congress:

On January 23, 2013, the Protecting Our Students and Taxpayers Act was introduced in the U.S. Senate, seeking to amend the 90/10 Rule. If adopted, this legislation would reduce the 90% threshold to the pre-1998 level of 85%, cause tuition revenues derived from military benefit programs to be included in the 85% portion under the rule instead of the non-federal 10% portion and impose Title IV ineligibility after one year of noncompliance rather than two.

Also on January 23, 2013, the Know Before You Owe Private Student Loan Act of 2013 was reintroduced and referred to committee. The bill seeks to further regulate student loan advisement.

On January 24, 2013, the "Protecting Financial Aid for Students and Taxpayers Act" was introduced in the U.S. House of Representatives. This bill would prohibit institutions of higher education from using federal education funds in marketing and recruiting. This bill was introduced in the Senate on March 12, 2013.

On February 5, 2013, the America Works Act was referred to a Congressional committee. This bill would encourage certain Federal job training and career education funding programs, such as the Workforce Investment Act and the Carl D. Perkins Career and Technical Education Act, to give priority to programs that lead to an industry-recognized and nationally portable postsecondary credential.

On February 28, 2013, the Students First Act of 2013 was referred to a Congressional committee. This bill seeks to amend the Higher Education Act of 1965, by modifying and formalizing program review requirements, establishing additional criteria for ED to perform a mandatory school review. In addition, this bill also establishes higher penalties for instances of regulatory noncompliance, including the automatic termination of Title IV eligibility.

This Congressional activity could result in the enactment of more stringent legislation by Congress, further rulemakings affecting participation in Title IV Programs and other governmental actions, increasing regulation of the for-profit sector. Action by Congress may also increase our administrative costs and require us to modify our practices in order for our institution to comply with Title IV Program requirements. We will continue to monitor Congressional activity for any impact to our business.

Announcement of New Rulemaking by the U.S. Department of Education. On April 15, 2013 the Department announced its intent to establish a negotiated rulemaking committee covering the following areas: Title IV Federal Student Aid; changes to the definition of "adverse credit" for borrowers in the Federal Direct PLUS Loan program; state authorization pertaining to distance and correspondence education; state authorization for foreign locations of institutions; clock-to-credit hour conversions; gainful employment; and changes made to the Violence Against Women Act. The Department announced it will hold three public hearings in May 2013 for interested parties to provide comments on these topics with negotiations beginning in September 2013. The Department indicated that this proposed rulemaking would be part of a series of rulemakings to achieve a long-term agenda in higher education focused on: access, affordability, academic quality and completion. Any rulemaking committees that are established and begin negotiations in September 2013 will not likely meet the November 1, 2013 publication deadline for a July 1, 2014 effective date. Therefore, the earliest effective date for regulations coming out of this round of rulemaking would be July 1, 2015


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Industry-related Judicial Outcomes

On March 19, 2013, the U.S. District Court for the District of Columbia denied the Department of Education's motion for the court to amend its earlier judgment to vacate certain rules related to gainful employment. The Department of Education had sought a reinstatement of the "debt measures" to determine whether programs are in fact preparing their students for gainful employment, which had been invalidated in the summer of 2012. Those measures required detailed data reporting by schools for use by the Department of Education to examine the income earned and debt repaid by students, and required institutions to meet at least one of three benchmarks in order to remain eligible to receive federal student aid. The court upheld the decision to vacate those requirements. The Department of Education officials are currently evaluating the court's decision and determining next steps, if any, to be taken. Because of the significance of this regulation, and the basis on which the District Court made its decision, it is possible the Department of Education will appeal the full decision to the U.S. Court of Appeals for the District of Columbia Circuit.

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,
                                              2013                  2012
       Net revenue                                100.0 %               100.0 %
       Operating expenses
       Instructional costs and services            42.2                  43.4
       Admissions advisory and related             16.2                  17.1
       Advertising                                 11.2                  11.6
       Marketing and promotional                    1.0                   0.8
       General and administrative                   5.7                   6.4

       Total operating expenses                    76.3                  79.3

       Operating income                            23.7                  20.7
       Interest expense                            (0.5 )                (0.2 )
       Interest income and other income             1.5                   0.0

       Income before income taxes                  24.7                  20.5
       Income tax expense                          10.0                   8.1

       Net income                                  14.7                  12.4

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Net revenue. Our net revenue for the quarter ended March 31, 2013 was $142.0 million, an increase of $24.9 million, or 21.3%, as compared to net revenue of $117.1 million for the quarter ended March 31, 2012. 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, selective tuition price increases and an increase in room and board and other student fees, partially offset by an increase in institutional scholarships. End-of-period enrollment increased 15.7% between March 31, 2013 and March 31, 2012, as ground enrollment increased 44.6%, and online enrollment increased 12.2% 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 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 online enrollments due primarily to increased competition for students from traditional colleges and universities as such institutions, including those with well-established reputations for excellence, increasingly seek to provide alternative learning modalities.

Instructional costs and services expenses. Our instructional costs and services expenses for the quarter ended March 31, 2013 were $60.0 million, an increase of $9.2 million, or 18.0%, as compared to instructional costs and services expenses of $50.8 million for the quarter ended March 31, 2012. This increase was primarily due to increases in employee compensation and related expenses, faculty compensation, instructional supplies, depreciation and amortization, bad debt expense and other instructional compensation and related expenses, of $3.0 million, $1.9 million, $1.3 million, $1.0 million, $0.8 million and $1.2 million, respectively. The increase in employee compensation and related expenses and faculty compensation are primarily due to the increase in the number of staff to support the increasing number of students attending the University. In addition, we have incurred an increase in medical and other benefit costs between years. The increase in depreciation and amortization is the result of us placing into service two additional dormitories, an Arts and Sciences classroom building, and a parking garage for our ground traditional campus in the Fall of 2012. 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 curriculum and the continued development of new and enhanced innovative educational tools and new educational programs. Our instructional costs and services expenses as a percentage of net revenues decreased by 1.2% to 42.2% for the quarter ended March 31, 2013, as compared to 43.4% for the quarter ended March 31, 2012 primarily due to our ability to leverage our employees and the fixed costs structure of our campus-based facilities and ground faculty across an increasing revenue base. Bad debt expense was at 3.5% of net revenues in both the first quarter of 2013 and 2012.


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Admissions advisory and related expenses. Our admissions advisory and related expenses for the quarter ended March 31, 2013 were $23.0 million, an increase of . . .

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