Grand Canyon Education, Inc. Reports Fourth Quarter and Full Year 2018 Results
PHOENIX, Feb. 20, 2019 /PRNewswire/ -- Grand Canyon Education, Inc. (NASDAQ: LOPE), ("GCE" or the "Company"), is a publicly traded education services company. GCE provides a full array of support services in the post-secondary education sector and has developed significant technological solutions, infrastructure and operational processes to provide superior services in these areas on a large scale. GCE currently provides services to Grand Canyon University, an Arizona non-profit corporation ("GCU"), its client, that include technology and academic services, counseling services and support, marketing and communication services, and several back office services such as accounting, reporting, tax, human resources, and procurement services. GCU owns and operates a comprehensive regionally accredited university (the "University") that offers over 240 graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its over 262 acre campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party employers. GCE today announced financial results for the quarter and year ended December 31, 2018.
Explanatory Note
On July 1, 2018, the Company consummated an Asset Purchase Agreement (the "Asset Purchase Agreement") with GCU (formerly known as Gazelle University) in which it sold the assets comprising the University to GCU in return for a secured note and entered into a master services agreement with GCU pursuant to which the Company provides identified technology and academic services, counseling services and support, marketing and communication services, and several back office services to GCU in return for 60% of GCU's tuition and fee revenue (the "Transaction").
Prior to July 1, 2018, the Company's business consisted exclusively of owning and operating the University and the Company's results of operations discussed herein for periods prior to July 1, 2018 reflect those operations. Commencing July 1, 2018, the Company's results of operations do not include the operations of GCU but rather reflect the operations of the Company as an education services provider pursuant to the Master Services Agreement. Accordingly, the Transaction has resulted in a reduction in our net revenue period over period.
In order to enhance comparability between periods, we provide, for periods prior to July 1, 2018, net revenue, total costs and expenses and operating income on both an as reported and comparable basis. To calculate the comparable results, we have multiplied "university related revenue" by 60%. The percentage used to make this calculation corresponds to the percentage of GCU's tuition and fee revenue to which the Company is entitled under the master services agreement. The following tables set forth the Company's as reported net revenue, total costs and expenses, and operating income for the respective three and twelve month periods. The tables then adjust these as reported balances to reflect the Transaction, and show the Company's as adjusted "non-GAAP" net revenue, as adjusted "non-GAAP" total costs and expenses, and as adjusted "non-GAAP" operating income on a comparable basis. These tables are intended to increase transparency and to provide comparability of our results of operations between the three month period and year ended December 31, 2018, during all or a part of which we operated as an education services provider, and the three month period and year ended December 31, 2017, during all of which we owned and operated the University. These adjusted "non-GAAP" measures in the tables below do not necessarily represent actual results had the Company operated as an education services provider during the full periods presented.
Three Months Ended Three Months Ended Three Months Ended
December 31, December 31, December 31,
2018 2017 2018 2017 2018 2017
As Reported
Adjustment As Adjusted[a]
Service
revenue $
177,548 $
177,548
$
University
related
revenue $
271,418 $
(108,567) [b] 162,851
Net revenue $
177,548 $
271,418 $
177,548 $
162,851
Total costs
and
expenses $
97,399 $
180,072 $
(365) [c] $
(86,917) [c] $
97,034 $
93,155
Operating
income $
80,149 $
91,346 $
365 [d] $
(21,650) [d] $
80,514 $
69,696
Year Ended December 31, Year Ended December 31, Year Ended December 31,
2018 2017 2018 2017 2018 2017
As Reported
Adjustment As Adjusted[a]
Service
revenue $
333,002 $
333,002
$
University
related
revenue 512,499 974,134 (205,000) [b] (389,654) [b] 307,499 584,480
Net revenue $
845,501 $
974,134 $
640,501 $
584,480
Total costs
and
expenses $
587,352 $
691,380 $
(195,418) [c] $
(326,726) [c] $
391,934 $
364,654
Operating
income $
258,149 $
282,754 $
(9,582) [d] $
(62,928) [d] $
248,567 $
219,826
[a] As Adjusted
amounts in
these
columns, to
the extent of
any
adjustments,
are non-GAAP
measures. We
are providing
these
measures
solely to to
enhance
investor
understanding
of the
underlying
trends in our
education
services
provider
business and
to provide
for better
comparability
between
periods in
which we have
operated as
an education
services
provider and
historical
periods when
we owned and
operated the
University.
The As
Adjusted
amounts, to
the extent of
any
adjustment,
should not be
considered as
a substitute
for net
revenue,
total costs
and expenses,
or operating
income
derived in
accordance
with and
reported
under GAAP.
[b] Adjustment to
reduce as
reported
University
related
revenue by
40% to
reflect
revenue share
percentage of
60% under the
master
services
agreement.
[c] Adjustment to
reduce as
reported
total costs
and expenses
by an amount,
for each
period, equal
to the sum of
(i)
University
related
expenses,
(ii) the Loss
on
Transaction,
and (iii) the
contributions
made in lieu
of state
income taxes
of $3.7
million for
2018 and $2.0
million for
2017 (which,
in this
table, are
only excluded
from the year
ended
adjustments,
since they
were expensed
in the third
quarter of
each year).
[d] Adjustment to
increase
(decrease) as
reported
operating
income by an
amount, for
each period,
equal to the
total change
from
adjustments
[b] and [c]
for the
respective
period.
For the three months ended December 31, 2018:
-- Service revenue was $177.5 million for the fourth quarter of 2018
compared to University related revenue of $271.4 million for the fourth
quarter of 2017. As an education services provider to GCU, the Company
receives, as service revenue, 60% of GCU's tuition and fee revenue and
no longer has University related revenue, thus resulting in the decrease
from the prior period. On a comparable basis, as adjusted University
related revenue for the three months ended December 31, 2017 was $162.9
million. The 9.0% increase year over year in comparable revenue was
primarily due to an increase in GCU's enrollment and, to a lesser
extent, an increase in GCU's ancillary revenue (e.g. from housing, food,
etc.) resulting from the increased traditional student enrollment,
partially offset by an increase in institutional scholarships.
-- End-of-period enrollment at GCU increased 7.8% between December 31, 2018
and December 31, 2017 to 97,369 from 90,297.
-- Operating income for the three months ended December 31, 2018 was $80.1
million, a decrease of $11.2 million as compared to $91.3 million for
the same period in 2017. The operating margin for the three months ended
December 31, 2018 was 45.1%, compared to 33.7% for the same period in
2017. As adjusted operating income and as adjusted operating margin for
the three months ended December 31, 2018, were $80.5 million and 45.3%,
respectively. As adjusted operating income and as adjusted operating
margin for the three months ended December 31, 2017, were $69.7 million
and 42.8%, respectively.
-- The tax rate in the three months ended December 31, 2018 was 19.5%
compared to 25.5% in the same period in 2017. The lower effective tax
rate year over year is primarily a result of the Tax Cuts and Jobs Act
(the "Act") which was signed into law on December 22, 2017. The Act
reduced the corporate federal tax rate from a maximum of 35% to a flat
21% rate effective January 1, 2018. The Act created the opportunity for
the Company to submit method changes in conjunction with the filing of
its 2017 federal tax return during the three months ended December 31,
2018. These method changes resulted in a favorable impact to tax expense
of $0.8 million. Additionally, our contributions made in lieu of state
income taxes to school sponsoring organizations increased from $2.0
million in the third quarter of 2017 to $3.7 million in the third
quarter of 2018. The Company receives a dollar-for-dollar state tax
credit for these contributions, which are recorded in general and
administrative expenses in the third quarter. 75% of these amounts are
recorded as a reduction in income tax expense in this third quarter and
25% is recorded as a reduction in income tax expense in the three months
ended December 31, 2018. Additionally, the Company continues to receive
the benefit from our adoption of the share-based compensation standard.
This standard requires us to recognize excess tax benefits from
share-based compensation awards that vested or settled in the
consolidated income statement. The favorable impact from excess tax
benefits was $2.6 million and $1.1 million in the three months ended
December 31, 2018 and 2017, respectively. The effective tax rates for
both periods were lower than our annual rates due to these
contributions.
-- Net income increased 10.7% to $75.5 million for the fourth quarter of
2018, compared to $68.3 million for the same period in 2017.
-- Diluted net income per share was $1.56 for the fourth quarter of 2018,
compared to $1.41 for the same period in 2017.
-- Adjusted EBITDA increased 13.4% to $86.8 million for the fourth quarter
of 2018, compared to $76.6 million for the same period in 2017.
For the year ended December 31, 2018:
-- Net revenue decreased 13.2% to $845.5 million for the year ended
December 31, 2018, compared to $974.1 million for the same period in
2017. Service revenue was $333.0 million and University related revenue
was $512.5 million for the year ended December 31, 2018. As an education
services provider to GCU, the Company receives, as service revenue, 60%
of GCU's tuition and fee revenue and no longer has University related
revenue, thus resulting in the decrease from the prior period. On a
comparable basis, as adjusted net revenue for the year ended December
31, 2018 was $640.5 million, while as adjusted net revenue for the year
ended December 31, 2017 were $584.5 million. The 9.6% increase year over
year in comparable revenue was primarily due to an increase in GCU's
enrollment and, to a lesser extent, an increase in GCU's ancillary
revenue (e.g. from housing, food, etc.) resulting from the increased
traditional student enrollment, partially offset by an increase in
institutional scholarships.
-- Operating income for the year ended December 31, 2018 was $258.1
million, a decrease of $24.7 million as compared to $282.8 million for
the same period in 2017. The operating margin for the year ended
December 31, 2018 was 30.5%, compared to 29.0% for the same period in
2017. As adjusted operating income and as adjusted operating margin for
the year ended December 31, 2018, were $248.6 million and 38.8%,
respectively. As adjusted operating income and as adjusted operating
margin for the year ended December 31, 2017 were $219.8 million and
37.6%, respectively.
-- The tax rate for the year ended December 31, 2018 was 20.2% compared to
28.3% in the same period in 2017. The lower effective tax rate year over
year is primarily as a result of the Act. The contributions in lieu of
state income taxes to school sponsoring organizations contributed to the
lower effective tax rate as our contributions increased from $2.0
million in the year ended December 31, 2017 to $3.7 million in the year
ended December 31, 2018. Additionally, the Company continues to receive
the benefit from our adoption of the share-based compensation standard.
This standard requires us to recognize excess tax benefits from
share-based compensation awards that vested or settled in the
consolidated income statement. The favorable impact from excess tax
benefits was $10.5 million and $16.5 million in the years ended December
31, 2018 and 2017, respectively. The inclusion of excess tax benefits
and deficiencies as a component of our income tax expense will increase
volatility within our provision for income taxes as the amount of excess
tax benefits or deficiencies from share-based compensation awards are
dependent on our stock price at the date the restricted awards vest, our
stock price on the date an option is exercised, and the quantity of
options exercised.
-- Net income increased 12.6% to $229.0 million for the year ended December
31, 2018, compared to $203.3 million for the same period in 2017. Net
income for the year ended December 31, 2018, excluding costs incurred
related to the Transaction of $18.4 million, University related expenses
of $6.2 million for the six months ended December 31, 2018, and
contributions in lieu of state income taxes of $3.7 million, was $246.5
million. Net income for the year ended December 31, 2017, excluding
contributions in lieu of state income taxes of $2.0 million and
transaction costs of $0.6 million, was $202.9 million.
-- Diluted net income per share was $4.73 for the year ended December 31,
2018, compared to $4.22 for the same period in 2017. Diluted net income
per share, excluding costs incurred related to the Transaction and
acquisition costs of $18.4 million, University related expenses of $6.2
million for the six months ended December 31, 2018, and contributions in
lieu of state income taxes of $3.7 million, was $5.09 for the year ended
December 31, 2018. Diluted net income per share, excluding the
contributions made in lieu of state income taxes of $2.0 million and
transaction costs of $0.6 million, was $4.21 for the year ended December
31, 2017.
-- Adjusted EBITDA increased 11.8% to $274.1 million for the year ended
December 31, 2018, compared to $245.1 million for the same period in
2017. The difference in the year over year increase in Adjusted EBITDA
in comparison to the year over year increase in adjusted diluted net
income per share is due to interest income earned by the Company of
$26.9 million in the six months ended December 31, 2018 on the Secured
Note of GCU and the lower effective tax rate.
Balance Sheet and Cash Flow
During 2018, we financed our operating activities and capital expenditures primarily through cash provided by operating activities. Our unrestricted cash, cash equivalents and investments were $120.3 million at December 31, 2018. As of December 31, 2018, we had restricted cash and cash equivalents of $61.7 million, which represented cash collateral related to our credit agreement.
On July 1, 2018, in conjunction with the Asset Purchase Agreement, we received a Secured Note from GCU for the purchase of the Transferred Assets in the initial principal amount of $870.1 million. The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that we will loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term. We provided funding of $30 million to GCU for the six months ended December 31, 2018 for GCU approved capital expenditures, increasing the principal balance of the Secured Note to $900.1 million as of December 31, 2018. Funding expectations for future capital expenditures for GCU are $100 million for the year ended December 31, 2019.
On January 22, 2019, we acquired Orbis Education Services, LLC for $365.8 million in cash (inclusive of closing date adjustments). Concurrent with the closing of the acquisition, GCE entered into an amended and restated credit agreement dated January 22, 2019 and two related amendments, dated January 31, 2019 and dated February 1, 2019 that together provide a credit facility of $325.0 million comprised of a term loan facility of $243.75 million and a revolving credit facility of $81.25 million, both with a five year maturity date. The term facility is subject to quarterly amortization of principal, commencing with the fiscal quarter ended June 30, 2019, in equal installments of 5% of the principal amount of the term facility per quarter. Both the term loan and revolver have monthly interest payments currently at 30 Day LIBOR plus an applicable margin of 2%. The proceeds of the term loan, together with $6.25 million drawn under the revolver and cash on hand, were used to pay the purchase price in the acquisition.
Net cash provided by operating activities for the years ended December 31, 2018 and 2017 was $199.1 million and $304.9 million, respectively. Cash provided by operations in 2018 and 2017 resulted from our increased net income adjusted for non-cash charges for share-based compensation, depreciation and amortization, timing of income tax and employee related payments and changes in other working capital. The significant decrease in net cash from operating activities between 2017 and 2018 is primarily due to the decrease in the Company's liabilities between December 31, 2017 and 2018 due to the Transaction, the increase in the accounts receivable due from GCU as GCU pays us one month in arrears for the educational services we provide, the decrease in non-cash charges subsequent to the Transaction and the timing of income tax payments between years.
Net cash used in investing activities was $238.2 million and $152.1 million for the years ended December 31, 2018 and 2017, respectively. Cash used in investing activities for the year ended December 31, 2018 was primarily related to the Transaction, the purchase of short-term investments and capital expenditures partially offset by proceeds from the sale of investments. The Transaction resulted in $131.6 million of cash being transferred to GCU at its close on July 1, 2018. Proceeds from investment, net of purchases of short-term investments was $18.2 million for the year ended December 31, 2018. Capital expenditures during the year ended December 31, 2018 of $94.5 million is primarily due to the amount spent on the University's ground campus construction projects through the date of the Transaction as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. Cash used in investing activities for the year ended December 31, 2018 also includes $30.0 million in funding to GCU subsequent to the Transaction for GCU approved campus construction projects such as residence halls, classroom buildings and parking garages. Our cash used in investing activities for 2017 is primarily related to the purchase of short-term investments and capital expenditures, partially offset by proceeds from the sale or maturity of short-term investments. Purchases of short-term investments, net of proceeds of these investments, was $28.8 million for the year ended December 31, 2017. Capital expenditures were $113.6 million for the year ended December 31, 2017. In 2017, capital expenditures primarily consisted of University campus construction projects and land acquisitions adjacent to the campus to support the growing traditional student enrollment, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. Included in off-site development for 2017 is $10.4 million that we spent to build a student services center and parking garage that is in close proximity to the University's ground campus. GCE employees that worked in two leased office buildings in the Phoenix area were relocated to this new building by the end of 2016.
Net cash used in financing activities was $26.8 million and $35.7 million for the years ended December 31, 2018 and 2017, respectively. During 2018, $15.2 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $9.6 million was used to purchased treasury stock in accordance with the Company's share repurchase program. Principal payments on notes payable and capital leases totaled $6.7 million, partially offset by proceeds from the exercise of stock options of $4.6 million. During 2017, $25.0 million was used to repay our revolving line of credit, $1.5 million was used to purchase treasury stock in accordance with the Company's share repurchase program and $9.8 million was used to purchase common shares withheld in lieu of income taxes resulting from restricted share awards while principal payments on notes payable and capital leases totaled $6.8 million, partially offset by proceeds from the exercise of stock options of $7.4 million.
2019 Outlook
Q1 2019: Net revenue of $195.5
million; Target Operating
Margin 37.8%; Diluted EPS
of $1.49 using 48.3
million diluted shares
Q2 2019: Net revenue of $174.4
million; Target Operating
Margin 27.6%; Diluted EPS
of $0.94 using 48.3
million diluted shares
Q3 2019: Net revenue of $190.2
million; Target Operating
Margin 31.1%; Diluted EPS
of $1.11 using 48.5
million diluted shares
Q4 2019: Net revenue of $215.4
million; Target Operating
Margin 40.3%; Diluted EPS
of $1.56 using 48.6
million diluted shares
Full Year 2019: Net revenue of $775.5
million; Target Operating
Margin 34.6%; Diluted EPS
of $5.10 using 48.4
million diluted shares
Forward-Looking Statements
This news release contains "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: the Transaction; 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, and forecasts as to our business, financial and operating 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: the failure of the Company to operate successfully as a third party education services provider to GCU and its other customers; GCU's failure to operate the University as successfully as it was previously operated by the Company; the occurrence of any event, change or other circumstance that could give rise to the termination of any of our key customer agreements; our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses (including our acquisition of Orbis Education), acquisitions of new properties and new university clients, and expansion of services provided to our existing university clients; our failure to comply with the extensive regulatory framework applicable to us either directly as a third party education services provider or indirectly through our university clients, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; competition from other education services companies in our geographic region and market sector, including competition for students, qualified executives and other personnel; the pace of growth of our university client's enrollment and its effect on the pace of our own growth; our ability to, on behalf of our university client, convert prospective students to enrolled students and to retain active students to graduation; 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 for our university clients; and other factors discussed in reports on file with the Securities and Exchange Commission, including as set forth in Part I, Item 1A of our Annual Report on Form 10-K for period ended December 31, 2018.
Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. 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.
Conference Call
Grand Canyon Education, Inc. will discuss its fourth quarter and full year 2018 results and 2019 outlook during a conference call scheduled for today, February 20, 2019 at 4:30 p.m. Eastern time (ET). To participate in the live call, investors should dial 877-577-1769 (domestic and Canada) or 706-679-7806 (international), passcode 3894767 at 4:25 p.m. (ET). The Webcast will be available on the Grand Canyon Education, Inc. Web site at www.gce.com.
A replay of the call will be available approximately two hours following the conclusion of the call, at 855-859-2056 (domestic) or 404-537-3406 (international), passcode 3894767. It will also be archived at www.gce.com in the investor relations section for 60 days.
About Grand Canyon Education, Inc.
Grand Canyon Education (GCE), incorporated in 2008, is a publicly traded education services company. GCE is uniquely positioned in the education services industry in that its leadership has 30 years of proven expertise in providing a full array of support services in the post-secondary education sector and has developed significant technological solutions, infrastructure and operational processes to provide superior services in these areas on a large scale. GCE provides services that support students, faculty and staff of partner institutions such as marketing, strategic enrollment management, counseling services, financial services, technology, technical support, compliance, human resources, classroom operations, curriculum development, faculty recruitment and training, among others. For more information about Grand Canyon Education, Inc. visit the Company's website at www.gce.com.
Grand Canyon Education, Inc., 2600 W. Camelback Road, Phoenix, AZ 85017, www.gce.com.
Investor Relations Contact:
Dan Bachus
Chief Financial Officer
Grand Canyon Education, Inc.
602-639-6648
Dan.bachus@gce.com
GRAND CANYON EDUCATION, INC.
Consolidated Income Statements
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
2018 2017 2018 2017
(In thousands, except per share
data)
---
Service revenue $
177,548
$ $
333,002
$
University related revenue 271,418 512,499 974,134
Net revenue 177,548 271,418 845,501 974,134
Costs and expenses:
Technology and academic services 11,098 10,739 43,574 41,834
Counseling services and support 51,989 50,213 204,690 188,595
Marketing and communication 27,252 26,227 117,420 109,092
General and administrative 6,695 5,975 29,968 27,157
University related expenses (405) 86,356 173,330 324,140
Loss on Transaction 770 562 18,370 562
Total costs and expenses 97,399 180,072 587,352 691,380
Operating income 80,149 91,346 258,149 282,754
Interest income on Secured Note 13,699 26,947
Interest expense (575) (527) (1,536) (2,169)
Investment interest and other 521 757 3,440 2,943
Income before income taxes 93,794 91,576 287,000 283,528
Income tax expense 18,263 23,320 57,989 80,209
Net income $
75,531 $
68,256 $
229,011 $
203,319
Earnings per share:
Basic income per share $
1.58 $
1.44 $
4.81 $
4.31
Diluted income per share $
1.56 $
1.41 $
4.73 $
4.22
Basic weighted average shares
outstanding 47,708 47,342 47,608 47,140
Diluted weighted average shares
outstanding 48,422 48,382 48,414 48,235
GRAND CANYON EDUCATION, INC.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA is defined as net income plus interest expense, less interest income and other gain (loss) recognized on investments, plus income tax expense, and plus depreciation and amortization (EBITDA), as adjusted for (i) contributions to Arizona school tuition organizations in lieu of the payment of state income taxes; (ii) loss on the Transaction; (iii) university related expenses; (iv) share-based compensation, (v) the revenue share rate on the master services agreement, and (vi) one-time, unusual charges or gains, such as litigation and regulatory reserves, impairment charges and asset write-offs, and exit or lease termination costs. We have reclassified depreciation and amortization related to university assets and share-based compensation for former GCE employees that now work for the university to University related expenses to provide comparability between periods. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our operating performance. We also make certain compensation decisions based, in part, on our operating performance, as measured by Adjusted EBITDA, and our loan agreement requires us to comply with covenants that include performance metrics substantially similar to Adjusted EBITDA. All of the adjustments made in our calculation of Adjusted EBITDA are adjustments to items that management does not consider to be reflective of our core operating performance. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period and does not consider the items for which we make adjustments (as listed above) to be reflective of our core performance.
We believe Adjusted EBITDA allows us to compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses), the book amortization of intangibles (affecting relative amortization expense), and other items that we do not consider reflective of underlying operating performance. We also present Adjusted EBITDA because we believe it is frequently used by securities analysts, investors, and other interested parties as a measure of performance.
In evaluating Adjusted EBITDA, investors should be aware that in the future we may incur expenses similar to the adjustments described above. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine, or non-recurring. Adjusted EBITDA has limitations as an analytical tool in that, among other things it does not reflect:
-- cash expenditures for capital expenditures or contractual commitments;
-- changes in, or cash requirements for, our working capital requirements;
-- interest expense, or the cash required to replace assets that are being
depreciated or amortized; and
-- the impact on our reported results of earnings or charges resulting from
the items for which we make adjustments to our EBITDA, as described
above and set forth in the table below.
In addition, other companies, including other companies in our industry, may calculate these measures differently than we do, limiting the usefulness of Adjusted EBITDA as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered as a substitute for net income, operating income, or any other performance measure derived in accordance with and reported under GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We compensate for these limitations by relying primarily on our GAAP results and only use Adjusted EBITDA as a supplemental performance measure.
The following table provides a reconciliation of net income to Adjusted EBITDA, which is a non-GAAP measure for the periods indicated:
Three Months Ended Year Ended
December 31, December 31,
2018 2017 2018 2017
(Unaudited, in thousands)
Net income $
75,531 $
68,256 $
229,011 $
203,319
Plus: interest
expense 575 527 1,536 2,169
Less: interest
income on Secured
Note (13,699) (26,947)
Less: investment
interest and other (521) (757) (3,440) (2,943)
Plus: income tax
expense 18,263 23,320 57,989 80,209
Plus: depreciation
and amortization 3,890 4,472 15,571 15,612
EBITDA, excluding
depreciation and
amortization
included in
university related
expenses 84,039 95,818 273,720 298,366
Plus: contributions
in lieu of state
income taxes 3,718 2,025
Plus: loss on
Transaction 770 562 18,370 562
Plus: university
related expenses (405) 86,356 173,330 324,140
Less: 40% of
university related
revenue (108,567) (205,000) (389,654)
Plus: share-based
compensation 2,444 2,403 9,914 9,683
Adjusted EBITDA $
86,848 $
76,572 $
274,052 $
245,122
GRAND CANYON EDUCATION, INC.
Consolidated Balance Sheets
As of December 31,
(In thousands, except par value) 2018 2017
---
ASSETS:
Current assets
Cash and cash equivalents $
120,346 $
153,474
Restricted cash and cash equivalents 61,667 94,534
Investments 69,002 89,271
Accounts receivable, net 46,830 10,908
Interest receivable on Secured Note 4,650
Income taxes receivable 8 2,086
Other current assets 6,963 24,589
Total current assets 309,466 374,862
Property and equipment, net 111,039 922,284
Secured Note receivable 900,093
Prepaid royalties 2,763
Goodwill 2,941 2,941
Other assets 478 723
Total assets $
1,324,017 $
1,303,573
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Accounts payable $
14,274 $
29,139
Accrued compensation and benefits 15,427 23,173
Accrued liabilities 8,907 20,757
Income taxes payable 5,442 16,182
Student deposits 95,298
Deferred revenue 46,895
Current portion of notes payable 36,468 6,691
Total current liabilities 80,518 238,135
Other noncurrent liabilities 1,200
Deferred income taxes, non-current 6,465 18,362
Notes payable, less current portion 23,437 59,925
Total liabilities 110,420 317,622
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value, 10,000
shares authorized; 0 shares issued and
outstanding at December 31, 2018 and
2017
Common stock, $0.01 par value, 100,000
shares authorized; 52,690 and 52,277
shares issued and 48,201 and 48,125
shares outstanding at December 31, 2018
and 2017, respectively 527 523
Treasury stock, at cost, 4,489 and 4,152
shares of common stock at December 31,
2018 and 2017, respectively (125,452) (100,694)
Additional paid-in capital 256,806 232,670
Accumulated other comprehensive loss (453) (724)
Retained earnings 1,082,169 854,176
Total stockholders' equity 1,213,597 985,951
Total liabilities and stockholders'
equity $
1,324,017 $
1,303,573
GRAND CANYON EDUCATION, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Year Ended
December 31,
(In thousands) 2018 2017
---
Cash flows provided by operating activities:
Net income $
229,011 $
203,319
Adjustments to reconcile net income to net
cash provided by operating activities:
Share-based compensation 19,508 12,688
Provision for bad debts 8,669 18,478
Depreciation and amortization 35,673 54,228
Deferred income taxes (11,507) (5,160)
Loss on transaction, net of costs and asset
impairment 12,605
Other 2,101 3,883
Changes in assets and liabilities:
Accounts receivable from GCU (51,480)
Accounts receivable (7,784) (19,848)
Prepaid expenses and other 1,553 (2,399)
Accounts payable (14,306) 5,378
Accrued liabilities and employee related
liabilities (15,700) 3,079
Income taxes receivable/payable (8,662) 16,048
Deferred rent (189) (369)
Deferred revenue 6,881 6,156
Student deposits (7,288) 9,417
Net cash provided by operating activities 199,085 304,898
Cash flows used in investing activities:
Capital expenditures (94,527) (113,586)
Purchases of land and building improvements
related to off-site development (330) (10,368)
Disposition (131,550)
Funding to GCU at closing in excess of
required capital (7,377)
Repayment of excess funds by GCU 7,377
Funding to GCU for capital expenditures (29,996)
Return of equity method investment 685
Purchases of investments (46,948) (94,054)
Proceeds from sale or maturity of investments 65,116 65,259
Net cash used in investing activities (238,235) (152,064)
Cash flows used in financing activities:
Principal payments on notes payable and
capital lease obligations (6,719) (6,805)
Net borrowings from revolving line of credit (25,000)
Repurchase of common shares including shares
withheld in lieu of income taxes (24,758) (11,300)
Net proceeds from exercise of stock options 4,632 7,372
Net cash used in financing activities (26,845) (35,733)
Net (decrease) increase in cash and cash
equivalents and restricted cash (65,995) 117,101
Cash and cash equivalents and restricted
cash, beginning of period 248,008 130,907
Cash and cash equivalents and restricted
cash, end of period $
182,013 $
248,008
Supplemental disclosure of cash flow
information
Cash paid for interest $
1,511 $
2,252
Cash paid for income taxes $
78,195 $
69,606
Supplemental disclosure of non-cash
investing and financing activities
Sale transaction to GCU through Secured Note
financing $
870,097
$
Purchases of property and equipment included
in accounts payable $
1,121 $
6,682
Reclassification of capitalized costs -
adoption of ASC 606 $
9,015
$
Reclassification of deferred revenue -
adoption of ASC 606 $
7,451
$
Reclassification of tax effect within
accumulated other comprehensive income $
156
$
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SOURCE Grand Canyon Education, Inc.
