Grand Canyon Education, Inc. : Reports Third Quarter 2019 Results

PHOENIX, Nov. 6, 2019 /PRNewswire/ -- Grand Canyon Education, Inc. (NASDAQ: LOPE), ("GCE" or the "Company"), is a publicly traded education services company that currently provides services to 21 university partners.  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 today announced financial results for the quarter ended September 30, 2019.

Explanatory Note

Prior to July 1, 2018, the Company owned and operated Grand Canyon University (the "University"), a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party employers of its students. On July 1, 2018, the Company consummated an Asset Purchase Agreement (the "Asset Purchase Agreement") with Grand Canyon University, an Arizona non-profit corporation formerly known as Gazelle University ("GCU") in which it sold the assets comprising the University to GCU in return for a secured note and entered into a services agreement (the "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").  As a result of this Transaction, GCE became an educational services company focused on providing a full array of support services to institutions in the post-secondary education sector.

Prior to July 1, 2018, our 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 Services Agreement.  Accordingly, the Transaction resulted in a reduction in our net revenue for the nine-month period over period.

Additionally, on January 22, 2019, the Company acquired Orbis Education Services, LLC ("Orbis Education"), an educational services company that supports healthcare education programs for 21 universities across the United States for $361.2 million, net of cash acquired (the "Acquisition").  Therefore, the results of operations for the three- and nine-month periods ended September 30, 2019 include Orbis Education's financial results for the period from January 22, 2019 to September 30, 2019.  As a result of the Acquisition, we incurred transaction costs of $4.0 million and amortization of intangible assets acquired of $6.0 million in the nine months ended September 30, 2019.

Non-GAAP Information

The Company is providing certain non-GAAP financial measures in this report, as the Company believes that these measures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations as an educational services provider and measure the Company's performance more consistently across periods.  The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company's core business operations.  Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information.  The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of intangible assets, Loss on transaction expenses and contributions made in lieu of state income taxes to school sponsoring organizations allows investors to develop a more meaningful understanding of the Company's performance over time in its educational services business.

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 Services Agreement.  The following table sets forth the Company's as reported net revenue, total costs and expenses, and operating income for the respective three-month and nine-month periods.  The table then adjusts these as reported balances to reflect the Loss on transaction, university related expenses, amortization of intangible assets, and contributions made in lieu of state income taxes to school sponsoring organizations and then shows 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.  This table is intended to increase transparency and to provide comparability of our results of operations between the three- and nine-month periods ended September 30, 2019, during all of which we operated as an education services provider, and the three- and nine-month periods ended September 30, 2018, during which we owned and operated the University for the six months ended June 30, 2018 and operated as an education services provider for the three months ended September 30, 2018.  These as 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
		September 30,						September 30,						September 30,
		2019			2018			2019			2018			2019			2018
		As Reported						Adjustment						As Adjusted[a]
Service revenue		$	193,289		$	155,454		$	—		$	—		$	193,289		$	155,454
University related revenue			—			—			—			—			—			—
Net revenue		$	193,289		$	155,454		$	—		$	—		$	193,289		$	155,454
Total costs and expenses		$	133,555		$	126,034		$	(6,182)	[c]	$	(25,897)	[c]	$	127,373		$	100,137
Operating income		$	59,734		$	29,420		$	6,182	[d]	$	25,897	[d]	$	65,916		$	55,317
		Nine Months Ended						Nine Months Ended						Nine Months Ended
		September 30,						September 30,						September 30,
		2019			2018			2019			2018			2019			2018
		As Reported						Adjustment						As Adjusted[a]
Service revenue		$	565,396		$	155,454		$	—		$	—		$	565,396		$	155,454
University related revenue			—			512,499			—			(205,000)	[b]		—			307,499
Net revenue		$	565,396		$	667,953		$	—		$	(205,000)		$	565,396		$	462,953
Total costs and expenses		$	382,237		$	489,953		$	(14,013)	[c]	$	(195,053)	[c]	$	368,224		$	294,900
Operating income		$	183,159		$	178,000		$	14,013	[d]	$	(9,947)	[d]	$	197,172		$	168,053

[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.  We have also excluded amortization of intangible assets, the Loss on transaction, and contributions made in lieu of state income taxes to school sponsoring organizations.  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 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, (iii) intangible asset amortization and (iv) contributions made in lieu of state income taxes to school sponsoring organizations.
[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.

Non-GAAP Net Income and Non-GAAP Diluted Income Per Share

The Company believes the above table presentation will not be comparable for net income and diluted income per share for the three- and nine-month periods ending September 30, 2018, due to many changes in our business that impact income and expenses after operating income.  Included in the three- and nine-months ended September 30, 2019 are interest income on Secured Note, interest expense on a significantly larger credit facility with an increase of approximately $191.1 million and the correlating tax impact of these items.  However, the Company believes the presentation of non-GAAP net income and non-GAAP diluted income per share information that excludes amortization of intangible assets and Loss on transaction expenses allows investors to develop a more meaningful understanding of the Company's performance over time.  Accordingly, for the three- and nine-month periods ended September 30, 2019, the table below provides reconciliations of these non-GAAP items to GAAP net income and GAAP diluted income per share, respectively:

				Three Months Ended			Nine Months Ended
				September 30,			September 30,
				2019			2019
GAAP Net income			$	58,151		$	182,506
Amortization of intangible assets				2,179			6,044
Loss on transaction				—			3,966
Income tax effects of adjustments (1)				(451)			(1,827)
As Adjusted, Non-GAAP Net income			$	59,879		$	190,689
GAAP Diluted income per share			$	1.20		$	3.78
Amortization of intangible assets (2)			$	0.04		$	0.10
Loss on transaction (3)			$	-		$	0.07
As Adjusted, Non-GAAP Diluted income per share			$	1.24		$	3.95

(1)	The income tax effects of adjustments are based on the effective income tax rate applicable to adjusted (non-GAAP) results.
(2)	The amortization of acquired intangible assets per diluted share is net of an income tax benefit of $0.01 and $0.02 for the three and nine months ended September 30, 2019, respectively.
(3)	Loss on transaction expenses per diluted share are net of an income tax benefit of nil and $0.01 for the three and nine months ended September 30, 2019, respectively.

For the three months ended September 30, 2019:

• Service revenue was $193.3 million for the third quarter of 2019 compared to $155.5 million for the third quarter of 2018. The 24.3% increase year over year in comparable service fee revenue was primarily due to our Orbis Education acquisition on January 22, 2019 and the increase in GCU enrollments between years.
• End-of-period enrollment in the programs at our university partners for which we provide services increased 10.2% between September 30, 2019 and September 30, 2018 to 108,821 from 98,715. This increase is due to partner enrollments in programs serviced by Orbis Education at September 30, 2019 of 3,975 and due to an increase in enrollments at GCU to 104,846, an increase of 6.2%. Partner enrollments in programs serviced by Orbis Education were 3,104 at September 30, 2018.
• Operating income for the three months ended September 30, 2019 was $59.7 million, an increase of $30.3 million as compared to $29.4 million for the same period in 2018. The operating margin for the three months ended September 30, 2019 was 30.9%, compared to 18.9% for the same period in 2018. As adjusted operating income and as adjusted operating margin for the three months ended September 30, 2019, were $65.9 million and 34.1%, respectively. As adjusted operating income and as adjusted operating margin for the three months ended September 30, 2018, were $55.3 million and 35.6%, respectively.
• The tax rate in the three months ended September 30, 2019 was 20.7% compared to 20.5% in the same period in 2018. The slight increase in the effective tax rate resulted from lower excess tax benefits of $0.4 million in the third quarter of 2019 as compared to $1.4 million in the same period in 2018, partially offset by an increase in contributions in lieu of state income taxes to school sponsoring organizations from $3.7 million in the third quarter of 2018 to $4.0 million in the same period in 2019.
• Net income increased 72.3% to $58.2 million for the third quarter of 2019, compared to $33.8 million for the same period in 2018. As adjusted net income was $59.9 million for the third quarter of 2019.
• Diluted net income per share was $1.20 and $0.70 for the third quarter of 2019 and 2018, respectively. As adjusted diluted net income per share was $1.24 for the third quarter of 2019.
• Adjusted EBITDA increased 19.1% to $73.3 million for the third quarter of 2019, compared to $61.6 million for the same period in 2018.

For the nine months ended September 30, 2019:

• Net revenue decreased 15.4% to $565.4 million for the nine months ended September 30, 2019 compared to $668.0 million for the same period in 2018. Service revenue was $155.5 million and University related revenue was $512.5 million for the nine months ended September 30, 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 nine months ended September 30, 2018 was $463.0 million. The 22.1% increase year over year in comparable service fee revenue was primarily due to our Orbis Education acquisition on January 22, 2019 and the increase in GCU enrollments between years.
• Operating income for the nine months ended September 30, 2019 was $183.2 million, an increase of $5.2 million as compared to $178.0 million for the same period in 2018. The operating margin for the nine months ended September 30, 2019 was 32.4%, compared to 26.6% for the same period in 2018. As adjusted operating income and as adjusted operating margin for the nine months ended September 30, 2019, were $197.2 million and 34.9%, respectively. As adjusted operating income and as adjusted operating margin for the nine months ended September 30, 2018, were $168.1 million and 36.3%, respectively.
• The tax rate in the nine months ended September 30, 2019 was 18.3% compared to 20.6% in the same period in 2018. The decrease in the effective tax rate resulted from an agreement with the Arizona Department of Revenue regarding previously filed refund claims related to income tax obligations for prior calendar years, which resulted in a favorable tax impact of $5.9 million recorded as a discrete tax item in the first quarter of 2019. In addition, the effective tax rate was favorably impacted by a recent law change with respect to Arizona state taxes, and an increase in the third quarter for contributions in lieu of state income taxes to school sponsoring organizations from $3.7 million in the nine months ended September 30, 2018 to $4.0 for the same period in 2019. These increases were offset by a slight decrease in excess tax benefits to $7.2 million from $7.9 million in the nine months ended September 30, 2019 and 2018, respectively.
• Net income increased 18.9% to $182.5 million for the nine months ended September 30, 2019, compared to $153.5 million for the same period in 2018. As adjusted net income was $190.7 million for the nine months ended September 30, 2019.
• Diluted net income per share was $3.78 and $3.17 for the nine months ended September 30, 2019 and 2018, respectively. As adjusted diluted net income per share was $3.95 for the nine months ended September 30, 2019.
• Adjusted EBITDA increased 17.2% to $219.3 million for the nine months ended September 30, 2019, compared to $187.2 million for the same period in 2018.

Balance Sheet and Cash Flow

During 2019, we financed our Acquisition of Orbis Education for $361.2 million, net of cash acquired, from an increase in our credit facility of $190.1 million and the use of $171.1 million of operating cash on hand.  Our unrestricted cash and cash equivalents and investments were $133.9 million at September 30, 2019.  As of September 30, 2019, we had $300,000 of restricted cash and cash equivalents, reflecting amounts serving as pledged collateral for a site lease.

Concurrent with the closing of the Acquisition, we 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 provided a credit facility of $325.0 million comprised of a term loan facility of $243.8 million and a revolving credit facility of $81.3 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 $6.3 million drawn under the revolver and cash on hand, were used to pay the purchase price in the Acquisition. Concurrent with the entry into the amended and restated credit agreement and the completion of the Acquisition, we repaid our existing term loan of $59.9 million and our cash collateral of $61.7 million was released. 

The Company entered into a second amendment for the credit facility on October 31, 2019.  This amendment, among other things, increased the revolving commitment by $68.8 million to $150.0 million.  The term loan was reduced by the same $68.8 million to $150.6 million.  Our consolidated balance sheet was adjusted to reflect the amounts owed per the terms of the credit facility.  The Company elected to repay the $68.8 million revolver balance on November 1, 2019.

On July 1, 2018, in consideration for the transfer of assets under the Asset Purchase Agreement, we received a secured note from GCU in the initial principal amount of $870.1 million (the "Secured Note").  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.  Funding for capital expenditures for GCU since July 1, 2018 totaled $139.8 million as of September 30, 2019.  GCU repaid $60.0 million during the third quarter of 2019 and another $40.0 million in October of 2019, further reducing total outstanding capital expenditure borrowings to GCU to $99.8 million.  The second amendment to our credit facility, described above, increased the total principal amount that the Company may have outstanding at any one time under its credit agreement with GCU in the form of loans to GCU to finance capital expenditures by GCU from $200.0 million to $300.0 million.

Net cash provided by operating activities for the nine months ended September 30, 2019 was $195.1 million as compared to $96.5 million for the nine months ended September 30, 2018.  The increase in cash generated from operating activities between the nine months ended September 30, 2018 and the nine months ended September 30, 2019 is primarily due to the increase in net income and changes in other working capital such as receivables from our university partners, accounts payable and accrued liabilities as a result of the change from being the owner-operator of GCU to being a service provider to 21 university partners.  As a service provider, we generally receive our service fees from our university partners in arrears. 

Net cash used in investing activities was $431.1 million and $215.7 million for the nine months ended September 30, 2019 and 2018, respectively.  Our cash used in investing activities was primarily related to the Acquisition, the funding of capital expenditures to GCU, and the liquidation of short-term investments and capital expenditures.  We paid $361.2 million, net of cash acquired, to acquire Orbis Education on January 22, 2019.  Funding to GCU for capital expenditures during the first nine months of 2019 totaled $109.8 million, net of repayments made by GCU of $60.0 million in the third quarter of 2019.  Proceeds from investments, net of purchases of short-term investments, was $55.3 million and $19.1 million for the nine months ended September 30, 2019 and 2018, respectively. Capital expenditures were $15.2 million and $90.5 million for the nine months ended September 30, 2019 and 2018, respectively.  During the nine-month period for 2019, capital expenditures primarily consisted of leasehold improvements and equipment for new partner locations, internally developed software, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.  During the nine-month period for 2018, capital expenditures primarily consisted of the University's ground campus construction projects as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.  

Net cash provided by financing activities was $174.0 million for the nine months ended September 30, 2019.  Net cash used in financing activities was $22.3 million for the nine months ended September 30, 2018. During the nine-month period for 2019, we drew $270.0 million of proceeds on the credit facility, repaid the term loan balance of the prior credit agreement of $59.9 million, and made $12.1 million of principal payments on the new credit facility.  In addition, $2.4 million of debt issuance costs were incurred on the new credit facility and $8.1 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $17.3 million was used to purchase treasury stock in accordance with the Company's share repurchase program.  Proceeds from the exercise of stock options of $3.7 million were received in the nine months ended September 30, 2019.  During the nine-month period for 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 $4.1 million was used to purchase treasury stock in accordance with the Company's share repurchase program.  Principal payments on notes payable and capital leases totaled $5.1 million, partially offset by proceeds from the exercise of stock options of $2.1 million.

2019 Outlook
Q4 2019:	Net revenue of $213.9 million; Target Operating Margin 39.1%; As Adjusted Diluted EPS of $1.54 using 48.3 million diluted shares
Full Year 2019:	Net revenue of $779.3 million; Target Operating Margin 35.5%; As Adjusted Diluted EPS of $5.49 using 48.3 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 occurrence of any event, change or other circumstance that could give rise to the termination of any of our key university partner agreements; our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university partners, and expansion of services provided to our existing university partners; 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 partners, 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 partners' enrollment and its effect on the pace of our own growth; our ability to, on behalf of our university partners, 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 partners; 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 third quarter 2019 results and fourth quarter and full year 2019 outlook during a conference call scheduled for today, November 6, 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 3437458 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 3437458.  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 that currently provides services to 21 university partners.  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, content 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
[e-mail]

 

GRAND CANYON EDUCATION, INC.
Consolidated Income Statements
(Unaudited)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(In thousands, except per share data)		2019			2018			2019			2018
Service revenue		$	193,289		$	155,454		$	565,396		$	155,454
University related revenue			—			—			—			512,499
Net revenue			193,289			155,454			565,396			667,953
Costs and expenses:
Technology and academic services			24,231			11,101			65,384			32,476
Counseling services and support			56,249			51,116			163,641			152,701
Marketing and communication			37,340			31,546			109,033			90,168
General and administrative			13,556			10,092			34,169			23,273
Amortization of intangible assets			2,179			—			6,044			—
University related expenses			—			6,569			—			173,735
Loss on transaction			—			15,610			3,966			17,600
Total costs and expenses			133,555			126,034			382,237			489,953
Operating income			59,734			29,420			183,159			178,000
Interest income on Secured Note			16,208			13,248			44,425			13,248
Interest expense			(2,875)			(558)			(8,368)			(961)
Investment interest and other			255			371			4,042			2,919
Income before income taxes			73,322			42,481			223,258			193,206
Income tax expense			15,171			8,720			40,752			39,726
Net income		$	58,151		$	33,761		$	182,506		$	153,480
Earnings per share:
Basic income per share		$	1.21		$	0.71		$	3.82		$	3.22
Diluted income per share		$	1.20		$	0.70		$	3.78		$	3.17
Basic weighted average shares outstanding			47,920			47,682			47,833			47,592
Diluted weighted average shares outstanding			48,337			48,422			48,317			48,429

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 private 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						Nine Months Ended
		September 30,						September 30,
		2019			2018			2019			2018
		(Unaudited, in thousands)
Net income		$	58,151		$	33,761		$	182,506		$	153,480
Plus: interest expense			2,875			558			8,368			961
Less: interest income on Secured Note			(16,208)			(13,248)			(44,425)			(13,248)
Less: investment interest and other			(255)			(371)			(4,042)			(2,919)
Plus: income tax expense			15,171			8,720			40,752			39,726
Plus: amortization of intangible assets			2,179			—			6,044			—
Plus: depreciation and amortization			4,755			3,812			13,821			11,681
EBITDA, excluding depreciation and amortization included in university related expenses			66,668			33,232			203,024			189,681
Plus: contributions in lieu of state income taxes			4,003			3,718			4,003			3,718
Plus: loss on transaction			—			15,610			3,966			17,600
Plus: university related expenses			—			6,569			—			173,735
Less: 40% of university related revenue			—			—			—			(205,000)
Plus: estimated litigation reserves			121			—			594			—
Plus: share-based compensation			2,555			2,449			7,740			7,472
Adjusted EBITDA		$	73,347		$	61,578		$	219,327		$	187,206

 

GRAND CANYON EDUCATION, INC.
Consolidated Balance Sheets
		September 30,			December 31,
(In thousands, except par value)		2019			2018
		(Unaudited)
ASSETS:
Current assets
Cash and cash equivalents		$	119,709		$	120,346
Restricted cash and cash equivalents			300			61,667
Investments			14,152			69,002
Accounts receivable, net			83,377			46,830
Interest receivable on Secured Note			5,192			4,650
Income tax receivable			3,559			8
Other current assets			11,255			6,963
Total current assets			237,544			309,466
Property and equipment, net			118,637			111,039
Right-of-use assets			27,730			—
Secured Note receivable			1,009,912			900,093
Amortizable intangible assets, net			204,236			—
Goodwill			160,871			2,941
Other assets			1,742			478
Total assets		$	1,760,672		$	1,324,017
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Accounts payable		$	20,742		$	14,274
Accrued compensation and benefits			23,689			15,427
Accrued liabilities			18,947			8,907
Income taxes payable			3,396			5,442
Deferred revenue			9,201			—
Current portion of lease liability			2,709			—
Current portion of notes payable			45,332			36,468
Total current liabilities			124,016			80,518
Deferred income taxes, noncurrent			18,310			6,465
Other long term liability			16			—
Lease liability, less current portion			25,440			—
Notes payable, less current portion			211,060			23,437
Total liabilities			378,842			110,420
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018			—			—
Common stock, $0.01 par value, 100,000 shares authorized; 53,050 and 52,690 shares issued and 48,303 and 48,201 shares outstanding at September 30, 2019 and December 31, 2018, respectively			530			527
Treasury stock, at cost, 4,747 and 4,489 shares of common stock at September 30, 2019 and December 31, 2018, respectively			(150,872)			(125,452)
Additional paid-in capital			268,279			256,806
Accumulated other comprehensive loss			(782)			(453)
Retained earnings			1,264,675			1,082,169
Total stockholders' equity			1,381,830			1,213,597
Total liabilities and stockholders' equity		$	1,760,672		$	1,324,017

 

GRAND CANYON EDUCATION, INC.
Consolidated Statements of Cash Flows
(Unaudited)
		Nine Months Ended
		September 30,
(In thousands)		2019			2018
Cash flows provided by operating activities:
Net income		$	182,506		$	153,480
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation			7,740			17,066
Provision for bad debts			—			8,669
Depreciation and amortization			13,821			31,783
Amortization of intangible assets			6,044			—
Deferred income taxes			1,873			(13,551)
Loss on transaction, net of costs and asset impairment			3,966			12,605
Other, including fixed asset impairments			(369)			1,411
Changes in assets and liabilities:
Accounts receivable and interest receivable from university partners			(33,853)			(69,501)
Accounts receivable			—			(7,784)
Prepaid expenses and other			(2,187)			(555)
Right-of-use assets and lease liabilities			419			—
Accounts payable			1,485			(11,938)
Accrued liabilities			10,130			(8,666)
Income taxes receivable/payable			(5,597)			(15,887)
Deferred rent			—			(189)
Deferred revenue			9,156			6,881
Student deposits			—			(7,288)
Net cash provided by operating activities			195,134			96,536
Cash flows used in investing activities:
Capital expenditures			(15,178)			(90,482)
Additions of amortizable content			(191)			—
Acquisition, net of cash acquired			(361,184)			—
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			(169,819)			(12,803)
Repayment by GCU for capital expenditures			60,000			—
Purchases of investments			(1,695)			(31,455)
Proceeds from sale or maturity of investments			56,957			50,561
Net cash used in investing activities			(431,110)			(215,729)
Cash flows provided by (used in) financing activities:
Principal payments on notes payable			(71,959)			(5,076)
Debt issuance costs			(2,385)			—
Proceeds from notes payable			243,750			—
Net borrowings from revolving line of credit			26,250			—
Repurchase of common shares including shares withheld in lieu of income taxes			(25,420)			(19,288)
Net proceeds from exercise of stock options			3,736			2,095
Net cash provided by (used in) financing activities			173,972			(22,269)
Net decrease in cash and cash equivalents and restricted cash			(62,004)			(141,462)
Cash and cash equivalents and restricted cash, beginning of period			182,013			248,008
Cash and cash equivalents and restricted cash, end of period		$	120,009		$	106,546
Supplemental disclosure of cash flow information
Cash paid for interest		$	7,751		$	738
Cash paid for income taxes		$	45,786		$	69,161
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		$	1,796		$	924
Reclassification of capitalized costs – adoption of ASC 606		$	—		$	9,015
Reclassification of deferred revenue – adoption of ASC 606		$	—		$	7,451
Lease adoption - gross up of right of use assets and lease liabilities		$	498		$	—
Reclassification of tax effect within accumulated other comprehensive income		$	—		$	156

 

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SOURCE Grand Canyon Education, Inc.