Item 8.
Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Grand Canyon Education, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Grand Canyon Education, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2012.
Phoenix, Arizona
February 20, 2019
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 tax 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, noncurrent
|
|
|
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
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Grand Canyon Education, Inc.
Consolidated Income Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands, except per share data)
|
|
2018
|
|
2017
|
|
2018
|
|
Service revenue
|
|
$
|
333,002
|
|
$
|
—
|
|
$
|
—
|
|
University related revenue
|
|
|
512,499
|
|
|
974,134
|
|
|
873,344
|
|
Net revenue
|
|
|
845,501
|
|
|
974,134
|
|
|
873,344
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
Technology and academic services
|
|
|
43,574
|
|
|
41,834
|
|
|
39,101
|
|
Counseling services and support
|
|
|
204,690
|
|
|
188,595
|
|
|
175,045
|
|
Marketing and communication
|
|
|
117,420
|
|
|
109,092
|
|
|
98,592
|
|
General and administrative
|
|
|
29,968
|
|
|
27,157
|
|
|
28,079
|
|
University related expenses
|
|
|
173,330
|
|
|
324,140
|
|
|
294,188
|
|
Loss on Transaction
|
|
|
18,370
|
|
|
562
|
|
|
1,136
|
|
Total costs and expenses
|
|
|
587,352
|
|
|
691,380
|
|
|
636,141
|
|
Operating income
|
|
|
258,149
|
|
|
282,754
|
|
|
237,203
|
|
Interest income on Secured Note
|
|
|
26,947
|
|
|
—
|
|
|
—
|
|
Interest expense
|
|
|
(1,536)
|
|
|
(2,169)
|
|
|
(1,328)
|
|
Investment interest and other
|
|
|
3,440
|
|
|
2,943
|
|
|
249
|
|
Income before income taxes
|
|
|
287,000
|
|
|
283,528
|
|
|
236,124
|
|
Income tax expense
|
|
|
57,989
|
|
|
80,209
|
|
|
87,610
|
|
Net income
|
|
$
|
229,011
|
|
$
|
203,319
|
|
$
|
148,514
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
4.81
|
|
$
|
4.31
|
|
$
|
3.22
|
|
Diluted income per share
|
|
$
|
4.73
|
|
$
|
4.22
|
|
$
|
3.15
|
|
Basic weighted average shares outstanding
|
|
|
47,608
|
|
|
47,140
|
|
|
46,083
|
|
Diluted weighted average shares outstanding
|
|
|
48,414
|
|
|
48,235
|
|
|
47,121
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Grand Canyon Education, Inc.
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
229,011
|
|
$
|
203,319
|
|
$
|
148,514
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on hedging derivatives, net of taxes of $39, $6, and $94 for the years ended December 31, 2018, 2017 and 2016, respectively
|
|
|
118
|
|
|
11
|
|
|
(151)
|
|
Unrealized gains (losses) on available for sale securities, net of taxes of $103, $108 and $168 for the years ended December 31, 2018, 2017 and 2016, respectively
|
|
|
309
|
|
|
175
|
|
|
(270)
|
|
Comprehensive income
|
|
$
|
229,438
|
|
$
|
203,505
|
|
$
|
148,093
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Grand Canyon Education, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Retained
|
|
|
|
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Cost
|
|
Capital
|
|
Loss
|
|
Earnings
|
|
Total
|
Balance at December 31, 2015
|
|
50,288
|
|
$
|
503
|
|
3,411
|
|
$
|
(69,332)
|
|
$
|
177,167
|
|
$
|
(489)
|
|
$
|
502,402
|
|
$
|
610,251
|
Comprehensive income
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(421)
|
|
|
148,514
|
|
|
148,093
|
Common stock purchased for treasury
|
|
—
|
|
|
—
|
|
416
|
|
|
(15,367)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,367)
|
Restricted shares forfeited
|
|
—
|
|
|
—
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Share-based compensation
|
|
275
|
|
|
3
|
|
114
|
|
|
(4,695)
|
|
|
12,273
|
|
|
—
|
|
|
—
|
|
|
7,581
|
Exercise of stock options
|
|
946
|
|
|
9
|
|
—
|
|
|
—
|
|
|
13,198
|
|
|
—
|
|
|
—
|
|
|
13,207
|
Excess tax benefits
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
9,921
|
|
|
—
|
|
|
—
|
|
|
9,921
|
Balance at December 31, 2016
|
|
51,509
|
|
|
515
|
|
3,950
|
|
|
(89,394)
|
|
|
212,559
|
|
|
(910)
|
|
|
650,916
|
|
|
773,686
|
Cumulative effect from the adoption of accounting pronouncements, net of taxes
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
(59)
|
|
|
—
|
Comprehensive income
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
186
|
|
|
203,319
|
|
|
203,505
|
Common stock purchased for treasury
|
|
—
|
|
|
—
|
|
17
|
|
|
(1,510)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,510)
|
Restricted shares forfeited
|
|
—
|
|
|
—
|
|
34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Share-based compensation
|
|
192
|
|
|
2
|
|
151
|
|
|
(9,790)
|
|
|
12,686
|
|
|
—
|
|
|
—
|
|
|
2,898
|
Exercise of stock options
|
|
576
|
|
|
6
|
|
—
|
|
|
—
|
|
|
7,366
|
|
|
—
|
|
|
—
|
|
|
7,372
|
Balance at December 31, 2017
|
|
52,277
|
|
|
523
|
|
4,152
|
|
|
(100,694)
|
|
|
232,670
|
|
|
(724)
|
|
|
854,176
|
|
|
985,951
|
Cumulative effect from the adoption of accounting pronouncements, net of taxes
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,174)
|
|
|
(1,174)
|
Comprehensive income
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
427
|
|
|
229,011
|
|
|
229,438
|
Adoption impact – ASU 2018-02
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(156)
|
|
|
156
|
|
|
—
|
Common stock purchased for treasury
|
|
—
|
|
|
—
|
|
91
|
|
|
(9,606)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,606)
|
Restricted shares forfeited
|
|
—
|
|
|
—
|
|
95
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Share-based compensation
|
|
163
|
|
|
2
|
|
151
|
|
|
(15,152)
|
|
|
19,506
|
|
|
—
|
|
|
—
|
|
|
4,356
|
Exercise of stock options
|
|
250
|
|
|
2
|
|
—
|
|
|
—
|
|
|
4,630
|
|
|
—
|
|
|
—
|
|
|
4,632
|
Balance at December 31, 2018
|
|
52,690
|
|
$
|
527
|
|
4,489
|
|
$
|
(125,452)
|
|
$
|
256,806
|
|
$
|
(453)
|
|
$
|
1,082,169
|
|
$
|
1,213,597
|
The accompanying notes are an integral part of these consolidated financial statements.
Grand Canyon Education, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,011
|
|
$
|
203,319
|
|
$
|
148,514
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
19,508
|
|
|
12,688
|
|
|
12,276
|
|
Provision for bad debts
|
|
|
8,669
|
|
|
18,478
|
|
|
18,639
|
|
Depreciation and amortization
|
|
|
35,673
|
|
|
54,228
|
|
|
45,683
|
|
Deferred income taxes
|
|
|
(11,507)
|
|
|
(5,160)
|
|
|
8,432
|
|
Loss on transaction, net of costs and asset impairment
|
|
|
12,605
|
|
|
—
|
|
|
—
|
|
Other, including fixed asset impairments
|
|
|
2,101
|
|
|
3,883
|
|
|
1,161
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from GCU
|
|
|
(51,480)
|
|
|
—
|
|
|
—
|
|
Accounts receivable
|
|
|
(7,784)
|
|
|
(19,848)
|
|
|
(20,598)
|
|
Prepaid expenses and other
|
|
|
1,553
|
|
|
(2,399)
|
|
|
(1,715)
|
|
Accounts payable
|
|
|
(14,306)
|
|
|
5,378
|
|
|
(4,793)
|
|
Accrued liabilities
|
|
|
(15,700)
|
|
|
3,079
|
|
|
6,743
|
|
Income taxes receivable/payable
|
|
|
(8,662)
|
|
|
16,048
|
|
|
11,892
|
|
Deferred rent
|
|
|
(189)
|
|
|
(369)
|
|
|
(475)
|
|
Deferred revenue
|
|
|
6,881
|
|
|
6,156
|
|
|
2,863
|
|
Student deposits
|
|
|
(7,288)
|
|
|
9,417
|
|
|
9,139
|
|
Net cash provided by operating activities
|
|
|
199,085
|
|
|
304,898
|
|
|
237,761
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(94,527)
|
|
|
(113,586)
|
|
|
(178,292)
|
|
Purchases of land and building improvements related to off-site development
|
|
|
(330)
|
|
|
(10,368)
|
|
|
(60,727)
|
|
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)
|
|
|
—
|
|
|
—
|
|
Proceeds received from note receivable
|
|
|
—
|
|
|
—
|
|
|
501
|
|
Return of equity method investment
|
|
|
—
|
|
|
685
|
|
|
1,749
|
|
Purchases of investments
|
|
|
(46,948)
|
|
|
(94,054)
|
|
|
(49,157)
|
|
Proceeds from sale or maturity of investments
|
|
|
65,116
|
|
|
65,259
|
|
|
69,925
|
|
Net cash used in investing activities
|
|
|
(238,235)
|
|
|
(152,064)
|
|
|
(216,001)
|
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
Principal payments on notes payable and capital lease obligations
|
|
|
(6,719)
|
|
|
(6,805)
|
|
|
(7,224)
|
|
Debt issuance costs
|
|
|
—
|
|
|
—
|
|
|
(194)
|
|
Net borrowings from revolving line of credit
|
|
|
—
|
|
|
(25,000)
|
|
|
25,000
|
|
Repurchase of common shares including shares withheld in lieu of income taxes
|
|
|
(24,758)
|
|
|
(11,300)
|
|
|
(20,062)
|
|
Net proceeds from exercise of stock options
|
|
|
4,632
|
|
|
7,372
|
|
|
13,207
|
|
Net cash (used in) provided by financing activities
|
|
|
(26,845)
|
|
|
(35,733)
|
|
|
10,727
|
|
Net (decrease) increase in cash and cash equivalents and restricted cash
|
|
|
(65,995)
|
|
|
117,101
|
|
|
32,487
|
|
Cash and cash equivalents and restricted cash, beginning of period
|
|
|
248,008
|
|
|
130,907
|
|
|
98,420
|
|
Cash and cash equivalents and restricted cash, end of period
|
|
$
|
182,013
|
|
$
|
248,008
|
|
$
|
130,907
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,511
|
|
$
|
2,252
|
|
$
|
1,220
|
|
Cash paid for income taxes
|
|
$
|
78,195
|
|
$
|
69,606
|
|
$
|
66,206
|
|
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
|
|
$
|
7,746
|
|
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
|
|
$
|
—
|
|
$
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Nature of Business
Grand Canyon Education, Inc. (together with its subsidiaries, the “Company” or “GCE”) 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 service 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. On July 1, 2018 the Company consummated a transaction that impacted the nature of our business. See Note 2 to our consolidated financial statements for a full description of this transaction. The Company’s wholly-owned subsidiaries were historically used to facilitate expansion of the university campus prior to the transaction.
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 was formed in Delaware in November 2003 as a limited liability company, under the name Significant Education, LLC, for the purchase of acquiring the assets of the University from a non-profit foundation on February 2, 2004. On August 24, 2005, the Company converted from a limited liability company to a corporation and changed its name to Significant Education, Inc. On May 9, 2008, the Company changed its name to Grand Canyon Education, Inc.
2. The Transaction
Asset Purchase Agreement and Related Agreements
On July 1, 2018, the Company consummated an Asset Purchase Agreement (the “Asset Purchase Agreement”) with GCU (formerly known as Gazelle University). Prior to the consummation of the transactions contemplated by the Asset Purchase Agreement (the “Transaction”), the Company operated the University.
Pursuant to the Asset Purchase Agreement:
|
·
|
|
The Company transferred to GCU the real property and improvements comprising the University campus as well as tangible and intangible academic and related operations and assets related to the University (the “Transferred Assets”), and GCU assumed liabilities related to the Transferred Assets. Accordingly, GCU now owns and operates the University. The Asset Purchase Agreement contains customary representations, warranties, covenants, agreements and indemnities.
|
|
·
|
|
The final purchase price that GCU paid for the Transferred Assets at closing (and after giving effect to a post-closing adjustment as provided in the Asset Purchase Agreement) was $870,097. The final purchase price was equal to the book value of the tangible Transferred Assets as of July 1, 2018, plus $1.00 for the intangible Transferred Assets.
|
|
·
|
|
GCU paid the purchase price for the Transferred Assets by issuing to the Company a senior secured note (the “Secured Note”) that is governed by a credit agreement between the Company and GCU (the “Credit Agreement”). The Credit Agreement 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 the Company will loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term on the terms set forth therein.
|
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
|
·
|
|
In connection with the closing of the Asset Purchase Agreement, the Company and GCU entered into a long-term master services agreement (the “Master Services Agreement”) 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 Master Services Agreement has an initial term of fifteen (15) years, subject to renewal options, although GCU has the right to terminate the Master Services Agreement early after the later of seven (7) years or the payment in full of the Secured Note. If GCU were to terminate the Master Services Agreement early, then GCU would be required to pay the Company a termination fee equal to one-hundred percent (100%) of the fees paid in the trailing twelve (12) month period. If the Master Services Agreement were not renewed after the initial fifteen (15) year term, GCU would be required to pay the Company a non-renewal fee equal to fifty percent (50%) of the fees paid in the trailing twelve (12) month period.
|
As a result of the Transaction, effective July 1, 2018, various aspects of the Company’s operations changed in important ways. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Change in the Structure of Our Operations.”
Disposed Assets, previously Assets and Liabilities Held for Sale
The Company received Board approval to consummate the Transaction on June 28, 2018, and completed the Transaction on July 1, 2018. As a result, the Company determined that it had met the accounting requirements to classify the assets and liabilities to be transferred in the Transaction as assets and liabilities held for sale as of June 30, 2018. The assets and liabilities held for sale were sold as part of the Transaction on July 1, 2018. Accordingly, the following balances were transferred to GCU as of July 1, 2018:
|
|
|
|
Restricted cash and cash equivalents
|
|
$
|
97,443
|
Accounts receivable, net of allowance for doubtful accounts of $6,093
|
|
|
9,780
|
Other assets
|
|
|
7,677
|
Property and equipment, net of accumulated depreciation of $166,066
|
|
|
870,097
|
Total assets held for sale, current
|
|
$
|
984,997
|
|
|
|
|
Accrued and other liabilities
|
|
$
|
5,025
|
Student deposits
|
|
|
88,010
|
Deferred revenue
|
|
|
46,325
|
Note payable
|
|
|
79
|
Total liabilities held for sale, current
|
|
$
|
139,439
|
The Company received a Secured Note for the Transferred Assets. The Company also transferred cash equal to $34,107 representing a working capital adjustment as part of the closing. Except for identified liabilities assumed by GCU, GCE retained responsibility for all liabilities of the business arising from pre-closing operations. For the year ended December 31, 2018 the Company had a loss of $18,370, included in Loss on Transaction due to transaction costs of $5,765, which includes both disposition and acquisition related transaction costs, and an asset impairment of $3,037. In addition, the Company transferred to GCU cash of $9,568 to fund a deferred compensation plan for GCU employees that were formerly GCE employees (the “Transferred Employees”) and that held unvested restricted stock of GCE that was forfeited upon the Transaction. Included in the university related expenses for the three months ended September 30, 2018 is $7,880 of share-based compensation expense resulting from the modification and vesting of previously issued restricted stock grants held by Transferred Employees, employer tax expense of $191 related to the share-based compensation modification, net of reversals of employee related liabilities that were not part of the Transferred Assets for the Transaction of $1,502.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Variable Interest Entity and Related Party Considerations
ASC 810‑10‑15‑17 provides scope exceptions to the variable interest entity analysis that include a not-for profit entity carve out. GCU is not a related party to the Company in accordance with ASC Topic 850. The following factors were considered:
|
·
|
|
Since GCU is a non-profit corporation, the Company has no ownership interest or voting rights in GCU.
|
|
·
|
|
GCU is a separate non-profit entity under the control of an independent board of trustees, none of whose members have ever served in a management or corporate board role at the Company. GCU’s board of trustees has adopted bylaws and a related conflict of interest policy that, among other things, (i) prevents any trustee of GCU from attending any meeting, or voting on any matter, as to which such trustee has a conflict of interest, (ii) establishes a special committee of independent trustees to oversee on behalf of GCU all matters related to the Master Services Agreement and GCU’s relationship with the Company, and (iii) prohibits any trustee from having any financial interest in, or role with, the Company. Accordingly, the Company’s relationship with GCU, both pursuant to the Master Services Agreement and operationally, is no longer as owner and operator, but as a third party service provider to an independent customer. While the Company believes that its relationship with GCU will remain strong, GCU’s board of trustees and management will have fiduciary and other duties that will require them to focus on the best interests of GCU and over time those interests could diverge from those of the Company.
|
|
·
|
|
Mr. Brian E. Mueller has served as the Chief Executive Officer of the Company since 2008 and the Chairman of the Board of the Company since 2017 and has also served as the President of the University since 2012. In connection with the Transaction, the Board of Directors of the Company and the board of trustees of GCU each independently determined that Mr. Mueller should retain those roles. Accordingly, Mr. Mueller remains the Chairman of the Board and Chief Executive Officer of the Company and continues to serve as the President of GCU. As noted above, however, Mr. Mueller is prohibited from serving on the board of trustees of GCU. Aside from Mr. Mueller, no other employee of GCU or GCE has a dual role in both organizations. A structure has been put in place that prevents Mr. Mueller from participating in operational matters involving the Company and GCU, including with respect to the Master Services Agreement.
|
|
·
|
|
The terms of the Master Services Agreement vest in GCU and its board of trustees full authority over decision making related to the day-to-day operations of GCU, including, without limitation, (i) selecting, hiring and firing its personnel, (ii) selecting and adopting academic programs and courses, (iii) establishing admission standards and admitting students, (iv) overseeing instruction, (v) setting credit and student performance requirements, (vi) determining graduation requirements, and (vii) conferring degrees. Per the terms of the MSA, GCE has no authority over GCU’s day-to-day operations.
|
|
·
|
|
If GCU were to default under the Credit Agreement, the Company would be able to pursue assets of GCU, which are pledged as collateral for the Secured Note. However, the Company would not become the owner or operator of GCU.
|
|
·
|
|
There is no parent entity and subsidiary relationship between the Company and GCU.
|
|
·
|
|
The Company and GCU both engaged their own outside corporate counsel, outside regulatory counsel, and financial advisors to represent each party’s interest during the Transaction.
|
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Second Amendment to Credit Agreement
The Company is a party to a credit agreement with Bank of America, N.A. as Administrative Agent, and other lenders, dated December 21, 2012 and amended as of January 15, 2016. Effective July 1, 2018, the Company and the lenders amended the credit agreement (the “Amendment”). Under the terms of the Amendment, (a) the lenders released the collateral securing the Company’s obligations under the credit agreement in order to enable the Company to consummate the Asset Purchase Agreement described above and modified certain financial and regulatory covenants to reflect the transactions described above, including the fact that the Company no longer operates a regulated educational institution, and (b) the Company (i) provided to the Administrative Agent cash collateral securing its remaining obligations under the credit agreement until such time as the Transaction has been approved by the ED (the “ED”), and (ii) agreed to collaterally assign its rights under the Asset Purchase Agreement, the Secured Note and the Master Services Agreement. The amount that is considered cash collateral is included as restricted cash on the consolidated balance sheet. The credit agreement, as amended by the Amendment, contains standard covenants, including covenants that, among other things, restrict the Company’s ability to incur additional debt or make certain investments and that require the Company to maintain a certain financial condition. Refer to Note 14 for subsequent event related to the credit agreement.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company invests a portion of its cash in excess of current operating requirements in short term certificates of deposit and money market instruments. The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Restricted Cash and Cash Equivalents
A significant portion of the Company’s university related revenue was received from students who participated in government financial aid and assistance programs. Prior to July 1, 2018, restricted cash and cash equivalents represented amounts received from the federal and state governments under various student aid grant and loan programs, such as Title IV. The Company received these funds subsequent to the completion of the authorization and disbursement process and held them for the benefit of the student. ED requires Title IV funds collected in advance of student billings to be restricted until the course begins. Prior to the Transaction, the Company recorded all of these amounts as a current asset in restricted cash and cash equivalents. The majority of these funds remained as restricted for an average of 60 to 90 days from the date of receipt. At the closing of the Transaction all restricted cash and cash equivalents were transferred to GCU. Restricted cash and cash equivalents at December 31, 2018 represents the cash collateral on the credit agreement.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Investments
The Company considers its investments in municipal bonds, mutual funds, municipal securities, certificates of deposit and commercial paper as available-for-sale securities. Available-for-sale securities are carried at fair value, determined using Level 1 and Level 2 of the hierarchy of valuation inputs, with the use of quoted market prices and inputs other than quoted prices that are observable for the assets, with unrealized gains and losses, net of tax, reported as a separate component of other comprehensive income. Unrealized losses considered to be other-than-temporary are recognized currently in earnings. Amortization of premiums, accretion of discounts, interest and dividend income and realized gains and losses are included in interest and other income. At December 31, 2018, the Company transferred its investments from available-for-sale to trading, due to the Company's decision to liquidate all investments to fund a significant business combination, that occurred in the first quarter of 2019. See Note 14 for further discussion on the subsequent event. As a result of the transfer to trading, the Company recorded a loss of $372 in investment interest and other for the year ended December 31, 2018.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method. Normal repairs and maintenance are expensed as incurred. Expenditures that materially extend the useful life of an asset are capitalized. Construction in progress represents items not yet placed in service and are not depreciated. The Company capitalizes interest using its interest rates on the specific borrowings used to finance the improvements, which approximated 3.7% in 2018, 2.8% in 2017, and 2.2% in 2016. Interest cost capitalized and incurred in the years ended December 31, 2018, 2017, and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Interest incurred
|
|
$
|
2,292
|
|
$
|
2,656
|
|
$
|
2,538
|
Interest capitalized
|
|
|
756
|
|
|
487
|
|
|
1,210
|
Interest expense
|
|
$
|
1,536
|
|
$
|
2,169
|
|
$
|
1,328
|
Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures, computer equipment, and vehicles generally have estimated useful lives of ten, four, and five years, respectively. Leasehold improvements are depreciated over the shorter of their lease term or their useful life. Land improvements and buildings are depreciated over lives ranging from 10 to 40 years.
Internally Developed Technology
The Company capitalizes certain costs related to internal-use software, primarily consisting of direct labor associated with creating the software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation or operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs of design, coding, integration, and testing of the software developed. Capitalization of costs requires judgment in determining when a project has reached the application development stage and the period over which we expect to benefit from the use of that software. Once the software is placed in service, these costs are amortized over the estimated useful life of the software, which is generally three years. These assets are a component of our property and equipment, net in our consolidated balance sheet.
Leases
The Company enters into various lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement to determine whether the lease is an operating or capital lease. In addition, many of the lease agreements contain renewal options and tenant improvement allowances. When such items are included in a lease agreement, the Company records a deferred liability on the consolidated balance sheet and records the rent expense
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
evenly over the term of the lease. Leasehold improvements are included as investing activities and are included as additions to property, plant and equipment. For leases with renewal options, the Company records rent expense and amortizes the leasehold improvement on a straight-line basis over the initial non-cancelable lease term unless it intends to exercise the renewal option. Once it extends the renewal option, the Company amortizes any tenant improvement allowances over the extended lease period as well as the leasehold improvement asset (unless the extended lease term is longer than the economic life of the asset). The Company expenses any additional payments under its operating leases for taxes, insurance or other operating expenses as incurred.
Other Assets
The Company developed our online delivery platform with an affiliated entity and put this platform into full production in 2011. The Company has prepaid perpetual license fees and source code rights for the software developed, and has prepaid maintenance and service fees. Included in current other assets is the amount that will be amortized in the next twelve month cycle for maintenance and service fees and included in property and equipment is the amount that will be amortized over fifteen years for the perpetual licenses.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets for impairment, other than goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Prepaid Royalty
In connection with its February 2004 acquisition of the assets of the University from a non-profit foundation, the Company recorded a future royalty payment obligation that was included in the Prepaid Royalty in the accompanying consolidated balance sheet, which was being amortized over a 20 year period. This asset was to be expensed over the periods that online education revenues were earned. At the completion of the Transaction on July 1, 2018, the remaining prepaid royalty assets were deemed impaired and $3,037 was expensed and included in Loss on Transaction in the consolidated income statement.
Goodwill
Goodwill represents the excess of the cost over the fair market value of net assets acquired, including identified intangible assets. Goodwill is tested annually or more frequently if circumstances indicate potential impairment. The Financial Accounting Standards Board (“FASB”) has issued guidance that permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company performed its annual goodwill impairment test, by performing a qualitative assessment. Following this assessment, the Company determined that it is more likely than not that its fair value exceeds its carrying amount.
Share-Based Compensation
The Company measures and recognizes compensation expense for share-based payment awards made to employees and directors. The fair value of the Company’s restricted stock awards is based on the market price of its common stock on the date of grant. Stock-based compensation expense related to restricted stock grants is expensed over the vesting period using the straight-line method for Company employees and the Company’s board of directors. Starting January 1, 2017 with the adoption of the share-based compensation accounting standard, the Company made an accounting policy election to account for forfeitures as they occur, prior to 2017 these forfeitures were estimated and reported net of the expense.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Derivatives and Hedging
Derivative financial instruments are recorded on the consolidated balance sheet as assets or liabilities and re-measured at fair value at each reporting date. For derivatives designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Derivative financial instruments enable the Company to manage its exposure to interest rate risk. The Company does not engage in any derivative instrument trading activity. Credit risk associated with the Company’s derivatives is limited to the risk that a derivative counterparty will not perform in accordance with the terms of the contract. Exposure to counterparty credit risk is considered low because these agreements have been entered into with institutions with Aa or higher credit ratings, and they are expected to perform fully under the terms of the agreements.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and benefits and accrued liabilities approximate their fair value based on the liquidity or the short-term maturities of these instruments. The carrying value of Secured Note receivable, non-current approximates fair value as the Secured Note resulted from the Transaction and was negotiated at fair market value. The carrying value of notes payable approximate fair value based on its variable rate index. Derivative financial instruments are carried at fair value, determined using Level 2 of the hierarchy of valuation inputs as defined in the FASB Accounting Standards Codification (“Codification”), with the use of inputs other than quoted prices that are observable for the asset or liability. See Note 9, Derivative Instruments.
The fair value of investments, primarily municipal securities, were determined using Level 2 of the hierarchy of valuation inputs, with the use of inputs other than quoted prices that are observable for the assets. The unit of account used for valuation is the individual underlying security. The municipal securities are comprised of city and county bonds related to schools, water and sewer, utilities, transportation, healthcare and housing.
Income Taxes
The Company accounts for income taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be realized.
The Company applies a more-likely-than-not threshold for financial statement recognition and measurement of an uncertain tax position taken or expected to be taken in a tax return. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018 and 2017, the Company has reserved approximately $1,960 and $2,008, respectively, for uncertain tax positions, including interest and penalties, which is classified within accrued liabilities on the accompanying consolidated balance sheet.
The Company has deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of the deferred tax assets is principally dependent upon achievement of projected future taxable income.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Commitments and Contingencies
The Company accrues for a contingent obligation when it is probable that a liability has been incurred and the amount is reasonably estimable. When the Company becomes aware of a claim or potential claim, the likelihood of any loss exposure is assessed. If it is probable that a loss will result and the amount of the loss is estimable, the Company records a liability for the estimated loss. If the loss is not probable or the amount of the potential loss is not estimable, the Company will disclose the claim if the likelihood of a potential loss is reasonably possible and the amount of the potential loss could be material. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve, and as additional information becomes available during the administrative and litigation process. The Company expenses legal fees as incurred.
Revenue Recognition
University related revenue – prior to July 1, 2018
On January 1, 2018, the Company adopted “Revenue from Contracts with Customers” using the modified retrospective method applied to all contracts. Prior to the Transaction on July 1, 2018, net revenues consisted primarily of tuition, net of scholarships, and fees derived from courses taught by the University online, on ground, and at facilities it leased or those of employers, as well as from related educational resources that the University provided to its students, such as access to online materials. Tuition revenue was recognized pro-rata over the applicable period of instruction. A contract was entered into with a student and covered a course or semester. Revenue recognition occurred once a student started attending a course. The University also charged online students an upfront learning management fee, which was deferred and recognized over the initial course. The University had no costs that were capitalized to obtain or to fulfill a contract with a customer. Ancillary revenues included housing and fee revenues that were recognized over the period the services were provided and also included revenues from sales and services such as food and beverage, merchandise, hotel, golf and arena events that were recognized as sales occurred or services were performed as these services were transferred at a point in time. For the six months ended June 30, 2018 and the years ended December 31, 2017 and 2016, the Company’s revenue was reduced by approximately $101,176, $196,334 and $179,230, respectively, as a result of scholarships that the Company offered to students. Sales tax collected from students is excluded from net revenues. Collected but unremitted sales tax is included as an accrued liability in our consolidated balance sheet.
The following table presents our revenues disaggregated by the nature of transfer of services for the six months ended June 30, 2018:
|
|
|
|
Tuition revenues
|
|
$
|
522,430
|
Ancillary revenues (housing, meals, fees, golf, hotel, arena, other)
|
|
|
91,245
|
Total revenues
|
|
|
613,675
|
Scholarships
|
|
|
(101,176)
|
Net Revenues
|
|
$
|
512,499
|
The Company’s receivables represented unconditional rights to consideration from its contracts with students; accordingly, students were not billed until they started attending a course and the revenue recognition process had commenced. Once a student had been invoiced, payment was due immediately. Included in each invoice to the student were all educational related items including tuition, net of scholarships, housing, educational materials, fees, etc. The Company did not have any contract assets. The Company’s contract liabilities were reported as deferred revenue and student deposits in the consolidated balance sheets. Deferred revenue and student deposits in any period represented the excess of tuition, fees, and other student payments received as compared to amounts recognized as revenue on the consolidated income statement and were reflected as current liabilities in the accompanying consolidated balance sheets. The Company’s education programs had starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs was not yet earned. The majority of the University’s
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
traditional ground students did not attend courses during the summer months (May through August), which affected our results for our second and third fiscal quarters.
The Company had identified a performance obligation associated with the provision of its educational instruction and other educational services, housing services, and other academic related services and used the output measure for recognition as the period of time over which the services were provided to our students. The Company had identified performance obligations related to its hotel, golf course, restaurants, sale of branded promotional items and other ancillary activities and recognized revenue at the point in time goods or services were provided to its customers. The Company maintained an institutional tuition refund policy, which provided for all or a portion of tuition to be refunded if a student withdrew during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which overrode the Company’s policy to the extent in conflict. If a student withdrew at a time when only a portion, or none of the tuition was refundable, then in accordance with its revenue recognition policy, the Company continued to recognize the tuition that was not refunded pro-rata over the applicable period of instruction. The Company did not record revenue on amounts that may be refunded. However, for students that had taken out financial aid to pay their tuition and for which a return of such money to ED under Title IV was required as a result of his or her withdrawal, the Company reassessed collectability for these students each quarter for the estimated revenue that will be returned and recognized the revenue in future periods when payment was received. The Company had elected the short-term contract exemption with respect to its performance obligations under its contracts with students as all such contracts had original terms of less than one year.
Service revenue commenced July 1, 2018
Starting July 1, 2018, the Company generates all of its revenue through the Master
Services Agreement, 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. Effective July 1, 2018, the Company applied “
Revenue from Contracts with Customers
” applied to our Master Service Agreement, our only revenue-producing contract, as an education service provider.
The Company’s contract with GCU has an initial 15 year term, subject to renewal options, although GCU has the right to terminate the Master Services Agreement early after the later of seven (7) years or the payment in full of the Secured Note. Refer to Note 2 for further discussion on the fees associated with early termination or non-renewal by GCU. The Company’s contract has a single performance obligation, as the promises to provide the identified services are not distinct within the context of the Master Services Agreement. The single performance obligation is delivered as our client receives and consumes benefits, which occurs ratably over the service period. Service revenue is recognized over time using the output method of measuring progress towards complete satisfaction of the single performance obligation. The output method provides a faithful depiction of the performance toward complete satisfaction of the performance obligation and can be tied to the time elapsed which is consumed evenly over the month and is a direct measurement of the value provided to our client. The service fees received from our client over the term of the agreement are variable in nature in that they are dependent upon the number of students attending the University and revenues generated from those students during the service period. Due to the variable nature of the consideration over the life of the service arrangement, the Company considered forming an expectation of the variable consideration to be received over the service life of this one performance obligation. However, since the performance obligation represents a series of distinct services, the Company will recognize the variable consideration that becomes known and billable each month because these fees relate to the distinct service period (month) in which the fees are earned. The Company meets the criteria in the standard and will exercise the practical expedient and not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period. The Company does not disclose the value of unsatisfied performance obligations because the directly allocable variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation. The service fees are calculated and settled monthly with GCU, resulting in a settlement duration of less than one year. There are no refunds or return rights under the Master Services Agreement.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
The Company’s receivables represent unconditional rights to consideration from our contract with GCU. Accounts receivable, net is stated at net realizable value, and the Company utilizes the allowance method to provide for doubtful accounts based on its evaluation of the collectability of the amounts due. There are no unbilled revenue amounts included in our accounts receivable. There have been no amounts written off and no reserves established as of December 31, 2018. The Company receives service revenue payments monthly. The Company will continue to review and revise its allowance methodology based on historical collection experience and other information relevant to collectability.
The Company does not have any contract assets or contract liabilities as the Company calculates the service fee and bills its client on the last day of each month. The Company has no costs that are capitalized to obtain or to fulfill a contract with a customer.
Financial Statement Presentation
On July 1, 2018 the Company consummated the Transaction, which impacted the nature of its business. See Note 2 to our consolidated financial statements for a full description of the Transaction. GCE now provides services to 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. The Company made changes in its presentation of operating expenses and reclassified prior periods to conform to the current presentation. The Company determined that these changes would provide more meaningful information as this new presentation provides transparency for costs that will be incurred as a service provider and costs that will not reoccur in the future as they are related to university expenses that were transferred to GCU in the Transaction.
Technical and Academic Services
Technical and academic services (previously primarily a component of instructional costs and services) consist primarily of costs related to ongoing maintenance of educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems. This also includes costs to provide support for curriculum and new program development, support for faculty training and development, technical support and assistance with state compliance. This expense category includes salaries, benefits and share-based compensation, information technology costs, curriculum and new program development costs (which are expensed as incurred) and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location.
Counseling Services and Support
Counseling services and support (previously primarily components of instructional costs and services and admissions advisory related expenses) consist primarily of costs including team-based counseling and other support to prospective and current students as well as financial aid processing. This expense category includes salaries, benefits and share-based compensation, and other costs such as dues, fees and subscriptions and travel costs. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location.
Marketing and Communication
Marketing and communication includes lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other promotional and communication services. This category was primarily from our historical captions of advertising and marketing and promotional. This expense category includes salaries, benefits and share-based compensation for marketing and communication personnel, brand advertising, marketing leads and other promotional and communication
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location. Advertising 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. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location.
University related expenses
University related expenses (previously primarily instructional costs and services) represent the costs that were transferred to GCU in the Transaction and that are no longer incurred by the Company.
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.
The following table presents our operating expenses as previously reported and as reclassified on our consolidated income statement for the years ended December 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2017
|
|
2017
|
|
2016
|
|
2016
|
|
|
As Reported
|
|
As Reclassified
|
|
As Reported
|
|
As Reclassified
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Technology and academic services
|
|
—
|
|
41,834
|
|
—
|
|
39,101
|
Counseling services and support
|
|
—
|
|
188,595
|
|
—
|
|
175,045
|
Marketing and communication
|
|
—
|
|
109,092
|
|
—
|
|
98,592
|
General and administrative
|
|
43,759
|
|
27,157
|
|
43,219
|
|
28,079
|
University related expenses
|
|
—
|
|
324,140
|
|
—
|
|
294,188
|
Loss on transaction
|
|
—
|
|
562
|
|
—
|
|
1,136
|
Instructional costs and services
|
|
410,840
|
|
—
|
|
373,101
|
|
—
|
Admissions advisory and related
|
|
128,544
|
|
—
|
|
119,286
|
|
—
|
Advertising
|
|
98,608
|
|
—
|
|
88,152
|
|
—
|
Marketing and promotional
|
|
9,629
|
|
—
|
|
8,860
|
|
—
|
Lease termination costs
|
|
—
|
|
—
|
|
3,523
|
|
—
|
Total costs and expenses
|
|
691,380
|
|
691,380
|
|
636,141
|
|
636,141
|
Lease termination costs
In July 2016, the Company notified a current landlord of its intent to vacate leased space by the end of the fourth quarter of 2016. As part of that notification, the Company was required to pay a termination fee to its landlord of $3,363 which was recorded as an expense in the third quarter of 2016. As of December 31, 2016, the Company had vacated the space, and expensed an additional $160 in the fourth quarter of 2016 related to the remaining amounts due under the lease net of remaining deferred rent. These amounts are included in university related expenses in our reclassified consolidated income statement.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Insurance/Self-Insurance
The Company uses a combination of insurance and self-insurance for a number of risks, including claims related to employee health care, workers’ compensation, general liability, and business interruption. Liabilities associated with these risks are estimated based on, among other things, historical claims experience, severity factors, and other actuarial assumptions. The Company’s loss exposure related to self-insurance is limited by stop loss coverage on a per occurrence and aggregate basis. The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to self-funded insurance programs. While the Company believes reserves are adequate, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known.
Concentration of Credit Risk
The Company believes the credit risk related to cash equivalents and investments is limited due to its adherence to an investment policy that required investments to have a minimum BBB rating, depending on the type of security, by one major rating agency at the time of purchase. All of the Company’s cash equivalents and investments as of December 31, 2018 and 2017 consist of investments rated BBB or higher by at least one rating agency. Additionally, the Company utilizes more than one financial institution to conduct initial and ongoing credit analysis on its investment portfolio to monitor and lower the potential impact of market risk associated with its cash equivalents and investment portfolio. The Company is also subject to credit risk for its accounts receivable balance. The Company has not experienced any losses on receivables to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts, if needed. Our dependence on one customer subjects us to the risk that declines in our customer’s operations would result in a sustained reduction in revenues and interest income on Secured Note for the Company.
Segment Information
The Company operates as a single educational services company using a core infrastructure that serves the curriculum and educational delivery needs of its client, GCU. The Company’s Chief Executive Officer manages the Company’s operations as a whole and no expense or operating income information is generated or evaluated on any component level.
Accounting Pronouncements Adopted in 2018
In May 2014, the FASB issued “
Revenue from Contracts with Customers
, as amended.” The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The accounting guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgements and changes in judgements and assets recognized from costs incurred to obtain or fulfill a contract. The Company adopted this new standard on January 1, 2018, using the modified retrospective method applied to all contracts. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows. The Company elected the short-term contract exemption with respect to disclosures associated with its performance obligations as all performance obligations as of the end of any reporting period have original terms of less than a year. The cumulative effect for the Company upon adoption of this new standard was $1,174, net of tax. The adoption impact resulted from the removal of $9,015 of costs that were direct and incremental previously capitalized for online students, and the removal of deferred revenue from an upfront learning fee of $7,451. These fees are no longer capitalized and amortized over the average expected term of a student. The fee is now amortized over the first course for the online student.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
In January 2016, the FASB issued “
Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
.” The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard was effective for us as of January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows.
In May 2017, the FASB issued “
Compensation – Stock Compensation – Scope of Modification Accounting
.” This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This standard was effective for fiscal years beginning after December 15, 2017. Early adoption was permitted, including adoption in any interim period. Accordingly, the standard was adopted by us as of July 1, 2018. The vesting conditions for approximately 100 former GCE employees who became GCU employees upon the closing of the Transaction, were accelerated contingent upon the closing of the Transaction. As a result, the incremental share-based compensation expense from the modification on 82,027 restricted stock awards for the accelerated vesting date was $7,880 and is included in the university related expenses in the consolidated income statement.
In February 2018, the FASB issued “
Income Statement – Reporting Comprehensive Income.”
This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Elimination of the stranded tax effects resulting from the Tax Cuts and Jobs Act will improve the usefulness of information reported to financial statement users. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Accordingly, the standard was adopted by us as of April 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows.
Recent Accounting Pronouncements
In February 2016, the FASB issued “
Leases
.” The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with lease terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Accordingly, the standard is effective for us on January 1, 2019 using a modified retrospective transition approach. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company continues to evaluate the impact that the future adoption of this standard will have on our consolidated financial statements and we believe the adoption will slightly increase our assets and liabilities, and will increase our financial statement disclosures.
In August 2017, the FASB issued “
Targeted Improvements to Accounting for Hedging Activities
.” This standard targets improvements in the hedge relationship documentation, testing and disclosures for derivatives. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted for fiscal years and interim period within those years, beginning in August 2017. Accordingly, the standard is effective for us on January 1, 2019. The adoption of this guidance will not have a material impact on the Company’s financial condition, results of operations or statement of cash flows.
The Company has determined that no other recent accounting pronouncements apply to its operations or could otherwise have a material impact on its consolidated financial statements.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
4. Investments
The following is a summary of investments as of December 31, 2018 and 2017. At December 31, 2018, the Company transferred its investments from available-for-sale classification to trading, due to the Company's decision to liquidate all investments to complete a significant business combination, that occurred in the first quarter of 2019. See Note 14 for further discussion on the subsequent event. As a result of the transfer to trading, the Company recorded a loss of $372 in investment interest and other for the year ended December 31, 2018 and there was no unrealized gain or loss as of December 31, 2018. Prior to December 2018, the Company considered all investments as available for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
Adjusted
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Value
|
Municipal securities
|
|
$
|
69,002
|
|
$
|
—
|
|
$
|
—
|
|
$
|
69,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
69,002
|
|
$
|
—
|
|
$
|
—
|
|
$
|
69,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Adjusted
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Fair Value
|
Municipal securities
|
|
$
|
84,768
|
|
$
|
—
|
|
$
|
(409)
|
|
$
|
84,359
|
Certificates of Deposit
|
|
$
|
4,915
|
|
$
|
—
|
|
$
|
(3)
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
89,683
|
|
$
|
—
|
|
$
|
(412)
|
|
$
|
89,271
|
The cash flows of municipal securities are backed by the issuing municipality’s credit worthiness. All municipal securities and certificates of deposit are due in one year or less as of December 31, 2018. For the years ended December 31, 2018 and 2017, the net unrealized losses on available-for-sale securities were $0 and $255, net of taxes, respectively.
5. Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Charged to
|
|
Deductions/
|
|
End of
|
|
|
Period
|
|
Expense
|
|
Transfers
(1)(2)
|
|
Period
|
Allowance for doubtful accounts receivable
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
$
|
5,907
|
|
8,669
|
|
(14,576)
|
|
$
|
—
|
Year ended December 31, 2017
|
|
$
|
5,918
|
|
18,478
|
|
(18,489)
|
|
$
|
5,907
|
Year ended December 31, 2016
|
|
$
|
5,137
|
|
18,639
|
|
(17,858)
|
|
$
|
5,918
|
|
(1)
|
|
Deductions represent accounts written off, net of recoveries.
|
|
(2)
|
|
$6,093 included in the deductions column for the year ended December 31, 2018, represents the allowance that was transferred to GCU with other educational assets and liabilities on July 1, 2018. See Note 2.
|
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
6. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
Land
|
|
$
|
5,579
|
|
$
|
160,126
|
|
Land improvements
|
|
|
2,242
|
|
|
25,630
|
|
Buildings
|
|
|
51,409
|
|
|
595,384
|
|
Buildings and leasehold improvements
|
|
|
9,581
|
|
|
117,460
|
|
Equipment under capital leases
|
|
|
—
|
|
|
5,937
|
|
Computer equipment
|
|
|
85,316
|
|
|
116,477
|
|
Furniture, fixtures and equipment
|
|
|
4,955
|
|
|
63,470
|
|
Internally developed software
|
|
|
39,270
|
|
|
36,173
|
|
Other
|
|
|
—
|
|
|
1,176
|
|
Construction in progress
|
|
|
2,376
|
|
|
32,390
|
|
|
|
|
200,728
|
|
|
1,154,223
|
|
Less accumulated depreciation and amortization
|
|
|
(89,689)
|
|
|
(231,939)
|
|
Property and equipment, net
|
|
$
|
111,039
|
|
$
|
922,284
|
|
Depreciation and amortization expense associated with property and equipment, including assets under capital lease, totaled $ 35,525, $53,607, and $44,829 for the years ended December 31, 2018, 2017, and 2016, respectively.
7. Notes Payable and Other Noncurrent Liabilities
In 2012, we entered into a new credit agreement, which increased our term loan to $100,000 with a maturity date of December 2019. Additionally, this facility, as amended in January 2016, provided a revolving line of credit in the amount of $150,000 through December 2017 to be utilized for working capital, capital expenditures, share repurchases and other general corporate purposes. The amendment to this facility increased the revolving line of credit from $50,000 to $150,000. The revolver expired on December 31, 2017. On July 1, 2018, we amended our credit agreement, which resulted in no change to our term loan maturity date of December 2019. Indebtedness under the credit facility is now secured by our remaining assets after giving effect to the Transaction, as well as cash collateral until such time as the Transaction has been approved by ED, and we agreed to collaterally assign our rights under the Asset Purchase Agreement, the Secured Note and the Master Services Agreement. Our lenders released their lien on the real estate collateral previously securing our obligations under the credit agreement in order to enable us to consummate the Asset Purchase Agreement. The credit agreement contains standard covenants that, among other things, restrict the Company’s ability to incur additional debt or make certain investments, and require the Company to achieve certain financial ratios and maintain certain financial condition. As of December 31, 2018, the Company is in compliance with its debt covenants. As a result of the refinancing of our credit agreement, that occurred in the first quarter of 2019, we have reclassified our current debt to reflect the principal payments due in 2019, and the remainder of our term loan balance would be repaid in 2020. See Note 14 for further discussion on the subsequent event.
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Notes Payable
|
|
|
|
|
|
|
Note payable, monthly payment of $556; interest at 30 day LIBOR plus 1.75% (4.10% at December 31, 2018) through December 31, 2019
|
|
$
|
59,905
|
|
$
|
66,477
|
Annuities; quarterly payments of $34; interest at 10%
|
|
|
—
|
|
|
139
|
|
|
|
59,905
|
|
|
66,616
|
Less: Current portion
|
|
|
36,468
|
|
|
6,691
|
|
|
$
|
23,437
|
|
$
|
59,925
|
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
The annuities were transferred to GCU with other educational assets and liabilities on July 1, 2018. See Note 2. Long-term deferred rent included in other noncurrent liabilities as of December 31, 2017 was $460.
8. Commitments and Contingencies
Leases
Total rent expense and related taxes and operating expenses under operating leases for the years ended December 31, 2018, 2017 and 2016 was $ 827, $1,545, and $6,694, respectively. The majority of the Company’s leases were included in the educational assets and liabilities transferred to GCU on July 1, 2018. See Note 2.
Legal Matters
From time to time, the Company is party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of business, some of which are covered by insurance. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. With respect to the majority of pending litigation matters, the Company’s ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to those matters are not considered probable.
Upon resolution of any pending legal matters, the Company may incur charges in excess of presently established reserves. Management does not believe that any such charges would, individually or in the aggregate, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Tax Reserves, Non-Income Tax Related
From time to time the Company has exposure to various non-income tax related matters that arise in the ordinary course of business. At both December 31, 2018 and 2017, the Company has no reserve for tax matters where its ultimate exposure is considered probable and the potential loss can be reasonably estimated.
9. Derivative Instruments
On February 27, 2013, the Company entered into an interest rate corridor to manage its 30 Day LIBOR interest exposure related to its variable rate debt. This instrument did not contain financing elements. The contractual terms of the Company’s derivative instrument have not been structured such that net payments made by one party in the earlier periods are to be subsequently returned by the counterparty in later periods of the derivative’s term. The Company’s derivative instrument has not been amended or modified since inception. The fair value of the interest rate corridor instrument as of December 31, 2018 and 2017 was $600 and $509, respectively, which is included in other assets. The fair value of the derivative instrument was determined using a hypothetical derivative transaction and Level 2 of the hierarchy of valuation inputs. This derivative instrument was originally designated as a cash flow hedge of variable rate debt obligations. The adjustments of $157, $17, and $245 for the years ended December 31, 2018, 2017 and 2016, respectively, for the effective portion of the gain/loss on the derivative is included as a component of other comprehensive income, net of taxes.
The interest rate corridor instrument reduces variable interest rate risk starting March 1, 2013 through December 20, 2019 with a notional amount of $60,000 as of December 31, 2018. The corridor instrument’s terms permit the Company to hedge its interest rate risk at several thresholds; the Company pays variable interest monthly based on the 30-day LIBOR rates until that index reaches 1.5%. If 30-day LIBOR is equal to 1.5% through 3.0%, the Company pays 1.5%. If
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
30-day LIBOR exceeds 3.0%, the Company pays actual 30-day LIBOR less 1.5%. Therefore, the Company has hedged its exposure to future variable rate cash flows through December 20, 2019.
As of December 31, 2018 no derivative ineffectiveness was identified. Any ineffectiveness in the Company’s derivative instrument designated as a hedge would be reported in interest expense in the income statement. At December 31, 2018, the Company expects to reclassify any gains or losses on derivative instruments from accumulated other comprehensive income (loss) into earnings during the next 12 months as the derivative instrument expires in December 2019.
10. Earnings Per Share
Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the assumed conversion of all potentially dilutive securities, consisting of stock options and restricted stock awards, for which the estimated fair value exceeds the exercise price, less shares which could have been purchased with the related proceeds, unless anti-dilutive. For employee equity awards, repurchased shares are also included for any unearned compensate ion adjusted for tax. The table below reflects the calculation of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted earnings per common share.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
47,608
|
|
47,140
|
|
46,083
|
|
Effect of dilutive stock options and restricted stock
|
|
806
|
|
1,095
|
|
1,038
|
|
Diluted weighted average shares outstanding
|
|
48,414
|
|
48,235
|
|
47,121
|
|
Diluted weighted average shares outstanding excludes the incremental effect of unvested restricted stock and shares that would be issued upon the assumed exercise of stock options in accordance with the treasury stock method. For each of the years ended December 31, 2018, 2017 and 2016, approximately 0, 2 and 344, respectively, of the Company’s stock options and restricted stock awards outstanding were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. These options and restricted stock awards could be dilutive in the future.
11. Equity Transactions
Preferred Stock
As of December 31, 2018 and 2017, the Company had 10,000 shares of authorized but unissued and undesignated preferred stock. The Company’s charter provides that the board of directors has authority to issue preferred stock, with voting powers, designations, preferences, and special rights, qualifications, limitation, or restrictions as permitted by law as determined by the board of directors, without stockholder approval. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock.
Treasury Stock
The Board of Directors has authorized the Company to repurchase up to $175,000 in aggregate of common stock, from time to time, depending on market conditions and other considerations. The expiration date on the repurchase authorization has been extended to December 31, 2019. Repurchases occur at the Company’s discretion. Repurchases may be made in the open market. or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. Since its approval of the share repurchase plan, the Company has purchased 3,600 shares of
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
common stock at an aggregate cost of $86,898, which are recorded at cost in the accompanying December 31, 2018 consolidated balance sheet and statement of stockholders’ equity. During the year ended December 31, 2018 the Company repurchased 91 shares of common stock at an aggregate costs of $9,606. At December 31, 2018, there remained $88,102 available under its current share repurchase authorization. Shares repurchase in lieu of taxes are not included in the repurchase plan totals as they were approved in conjunction with the restricted share awards.
12. Income Taxes
The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities is principally dependent upon achievement of projected future taxable income. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not that the Company will realize the benefits of these deductible differences. The Company has no valuation allowance at December 31, 2018 and 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The rate reduction took effect on January 1, 2018. The Company concluded that the Act caused the Company’s deferred tax assets and liabilities to be revalued. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted though income tax expense. The Company’s net deferred tax liability was revalued as of December 22, 2017. The Company recorded a $10.7 million income tax benefit related to the revaluation of its net deferred tax liabilities. Excluding this income tax benefit in 2017, our effective tax rate would have been 32.1%. Due to the enactment date and complexities of the new tax law, the regulations may have not been fully interpreted by the federal and state taxing authorities, thus there may be additional impacts to the tax provision that may not have been included herein.
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
60,764
|
|
$
|
76,966
|
|
$
|
64,006
|
State
|
|
|
8,732
|
|
|
8,589
|
|
|
4,831
|
|
|
|
69,496
|
|
|
85,555
|
|
|
68,837
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(10,708)
|
|
|
(6,189)
|
|
|
7,961
|
State
|
|
|
(799)
|
|
|
843
|
|
|
891
|
|
|
|
(11,507)
|
|
|
(5,346)
|
|
|
8,852
|
Tax expense recorded as an increase of paid-in capital
|
|
|
—
|
|
|
—
|
|
|
9,921
|
|
|
$
|
57,989
|
|
$
|
80,209
|
|
$
|
87,610
|
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Statutory U.S. federal income tax rate
|
|
21.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
4.0
|
|
3.2
|
|
3.2
|
|
State tax credits, net of federal effect
|
|
(1.0)
|
|
(0.7)
|
|
(1.5)
|
|
Excess tax benefits
|
|
(3.7)
|
|
(5.8)
|
|
—
|
|
Deferred tax revaluation (Federal Rate change)
|
|
—
|
|
(3.7)
|
|
—
|
|
Nondeductible expenses
|
|
0.4
|
|
—
|
|
0.2
|
|
Other
|
|
(0.5)
|
|
0.3
|
|
0.2
|
|
Effective income tax rate
|
|
20.2
|
%
|
28.3
|
%
|
37.1
|
%
|
Significant components of the Company’s deferred income tax assets and liabilities, included in Deferred income taxes, non-current on the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
|
Share-based compensation
|
|
$
|
3,030
|
|
$
|
4,201
|
Employee compensation
|
|
|
780
|
|
|
950
|
Allowance for doubtful accounts
|
|
|
—
|
|
|
1,685
|
Deferred tuition revenue
|
|
|
—
|
|
|
1,294
|
Deferred scholarship
|
|
|
—
|
|
|
618
|
Intangibles
|
|
|
—
|
|
|
590
|
State taxes
|
|
|
879
|
|
|
985
|
Other
|
|
|
386
|
|
|
526
|
Deferred tax assets
|
|
|
5,075
|
|
|
10,849
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
Property and equipment
|
|
|
(10,778)
|
|
|
(28,028)
|
Goodwill
|
|
|
(762)
|
|
|
(762)
|
Other
|
|
|
—
|
|
|
(421)
|
Deferred tax liability
|
|
|
(11,540)
|
|
|
(29,211)
|
Net deferred tax liability
|
|
$
|
(6,465)
|
|
$
|
(18,362)
|
The net deferred tax liability on the accompanying consolidated balance sheet is comprised of the following:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Deferred income taxes, current
|
|
$
|
1,871
|
|
$
|
5,214
|
Deferred income taxes, non-current
|
|
|
(8,336)
|
|
|
(23,576)
|
Net deferred tax liability
|
|
$
|
(6,465)
|
|
$
|
(18,362)
|
The Company recognizes the impact of a tax position in its financial statements if that position is more-likely-than-not to be sustained on audit, based on the technical merits of the position. The Company discloses all unrecognized tax benefits, which includes the reserves recorded for uncertain tax positions on filed tax returns and the unrecognized portion of affirmative claims. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Unrecognized tax benefits as of December 31, 2018 and 2017 were not significant.
The Company is subject to taxation in the United States, in states with an income tax and in several local jurisdictions. The Company is currently under audit by various state taxing authorities. The Company does not anticipate
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
any material adjustments as a result of these audits. As of December 31, 2018, the earliest tax year still subject to examination for federal and state purposes is 2015 and 2014, respectively.
13. Share-Based Compensation Plans
Incentive Plans
Prior to June 2017, the Company made grants of restricted stock and stock options under its 2008 Equity Incentive Plan (the “2008 Plan”). In January 2017, the Board of Directors of the Company approved, and at the Company’s 2017 annual meeting of stockholders held on June 14, 2017, the Company’s stockholders adopted a 2017 Equity Incentive Plan (the “2017 Plan”) under which a maximum of 3 million shares may be granted. As of December 31, 2018, 1,910 shares were available for grants under the 2017 Plan. All grants of equity incentives made after June 2017 have been made from the 2017 Plan.
Restricted Stock
During fiscal year 2018, 2017, and 2016, the Company granted 160, 188, and 264 shares of common stock, respectively, with a service vesting condition to certain of its executives, officers, faculty and employees. The restricted shares have voting rights and vest evenly at 20% over each of the next five years. Upon vesting, shares will be held in lieu of taxes equivalent to the statutory tax withholding required to be paid when the restricted stock vests. During the years ended December 31, 2018, 2017 and 2016, the Company withheld 151, 151, and 114 shares of common stock in lieu of taxes at a cost of $15,152, $9,790, and $4,695, on the restricted stock vesting dates, respectively. During 2018, 2017 and 2016, following the annual stockholders meeting, the Company granted 3, 4 and 11 shares of common stock to the non-employee members of the Company’s Board of Directors. The restricted shares granted to these directors have voting rights and vest on the earlier of (a) the one year anniversary of the date of grant or (b) immediately prior to the following year’s annual stockholders’ meeting. In conjunction with the Transaction, the Compensation Committee of the Company’s Board of Directors decided to modify the vesting condition for certain restricted stock awards for approximately 100 Transferred Employees who transferred employment from GCE to GCU, with the acceleration being contingent upon the closing of the Transaction on July 1, 2018. Refer to Note 2 for further discussion on the Transaction. As a result, the incremental share-based compensation expense from the modification on 82 restricted stock awards for the accelerated vesting date was $7,880 and is included in the university related expenses in the consolidated income statement. Additionally, the Company transferred cash to GCU totaling $9,568 to fund a deferred compensation plan in an amount equal to the value of the 86 shares forfeited by the Transferred Employees at the closing of the Transaction. This amount is included in the loss on transaction in the consolidated income statement.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
A summary of the activity related to restricted stock granted under the Company’s Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Total
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value per Share
|
Outstanding as of December 31, 2015
|
|
1,056
|
|
$
|
34.30
|
Granted
|
|
275
|
|
$
|
44.46
|
Vested
|
|
(329)
|
|
$
|
30.56
|
Forfeited, canceled or expired
|
|
(9)
|
|
$
|
37.94
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
993
|
|
$
|
38.32
|
Granted
|
|
192
|
|
$
|
70.44
|
Vested
|
|
(375)
|
|
$
|
32.46
|
Forfeited, canceled or expired
|
|
(34)
|
|
$
|
44.51
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
776
|
|
$
|
49.16
|
Granted
|
|
163
|
|
$
|
92.34
|
Vested
|
|
(384)
|
|
$
|
65.57
|
Forfeited, canceled or expired
|
|
(95)
|
|
$
|
71.60
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
460
|
|
$
|
63.28
|
As of December 31, 2018, there was approximately $20,376 of total unrecognized share-based compensation cost related to unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of 2.03 years.
Stock Options
No options were granted in 2018, 2017 and 2016. Prior to 2012, the Company granted time vested options to purchase shares of common stock with an exercise price equal to the fair market value on the date of grant to employees.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
These time vested options vest ratably over a period of five years and expire ten years from the date of grant. A summary of the activity related to stock options granted under the Company’s Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Stock Options Outstanding
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Aggregate
|
|
|
Total
|
|
Price per
|
|
Contractual
|
|
Intrinsic
|
|
|
Shares
|
|
Share
|
|
Term (Years)
|
|
Value ($)
(1)
|
Outstanding as of December 31, 2015
|
|
2,220
|
|
$
|
14.71
|
|
|
|
|
|
Granted
|
|
—
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
(946)
|
|
$
|
13.97
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
(2)
|
|
$
|
19.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
1,272
|
|
$
|
15.26
|
|
|
|
|
|
Granted
|
|
—
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
(576)
|
|
$
|
12.79
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
(2)
|
|
$
|
16.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
694
|
|
$
|
17.31
|
|
|
|
|
|
Granted
|
|
—
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
(250)
|
|
$
|
18.47
|
|
|
|
|
|
Forfeited, canceled or expired
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
444
|
|
$
|
16.66
|
|
1.95
|
|
$
|
35,222
|
Exercisable as of December 31, 2018
|
|
444
|
|
$
|
16.66
|
|
1.95
|
|
$
|
35,222
|
|
(1)
|
|
Aggregate intrinsic value represents the value of the Company’s closing stock price on December 31, 2018 ($96.14) in excess of the exercise price multiplied by the number of options outstanding or exercisable.
|
Share-based Compensation
Share-based Compensation Expense Assumptions – Restricted Stock Awards
The Company measures and recognizes compensation expense for share-based payment awards made to employees and directors. The fair value of the Company’s restricted stock awards is based on the market price of its common stock on the date of grant. Stock-based compensation expense related to restricted stock grants is expensed over the vesting period using the straight-line method for Company employees and the Company’s board of directors. Starting January 1, 2017 with the adoption of the share-based compensation accounting standard, the Company made an accounting policy election to account for forfeitures as they occur, prior to 2017 these forfeitures were estimated and reported net of the expense. The restricted shares have voting rights.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
The table below outlines share-based compensation expense for the fiscal years ended December 31, 2018, 2017 and 2016 related to restricted stock and stock options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Technical and academic services
|
|
$
|
1,585
|
|
$
|
1,555
|
|
$
|
1,498
|
|
Counseling support and services
|
|
|
4,926
|
|
|
4,700
|
|
|
4,711
|
|
Marketing and communication
|
|
|
48
|
|
|
26
|
|
|
20
|
|
General and administrative
|
|
|
3,355
|
|
|
3,402
|
|
|
3,430
|
|
University related expenses
|
|
|
9,594
|
|
|
3,005
|
|
|
2,617
|
|
Share-based compensation expense included in operating expenses
|
|
|
19,508
|
|
|
12,688
|
|
|
12,276
|
|
Tax effect of share-based compensation
|
|
|
(4,877)
|
|
|
(5,075)
|
|
|
(4,910)
|
|
Share-based compensation expense, net of tax
|
|
$
|
14,631
|
|
$
|
7,613
|
|
$
|
7,366
|
|
401(k) Plan
The Company has established a 401(k) Defined Contribution Benefit Plan (the “Plan”). The Plan provides eligible employees, upon date of hire, with an opportunity to make tax-deferred contributions into a long-term investment and savings program. All employees over the age of 21 are eligible to participate in the plan. The Plan allows eligible employees to contribute to the Plan subject to Internal Revenue Code restrictions and the Plan allows the Company to make discretionary matching contributions. The Company plans to make a matching contribution to the Plan of approximately $1,625 for the year ended December 31, 2018. The Company made discretionary matching contributions to the Plan of $2,837 and $1,920 for the years ended December 31, 2017 and 2016, respectively.
14. Subsequent Event
On December 17, 2018, the Company entered into a definitive Agreement and Plan of Merger to acquire Orbis Education Services, LLC (“Orbis Education”). Orbis Education is an education services company that supports healthcare education programs for 17 universities across the United States. The closing of the Merger occurred on January 22, 2019 and, as a result of the Merger, GCE acquired all of the outstanding equity interests of Orbis Education for $365,834 in cash. The Company financed a portion of the purchase price through a consortium of banks led by our existing bank group, as described below.
Senior Credit Facilities.
Concurrently with the closing of the Merger, GCE entered into an amended and restated credit agreement, dated January 22, 2019, among GCE, Orbis Education, as guarantor, Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer, and the other lenders named therein (the “Credit Agreement”). The Credit Agreement provides for a $62,500 five-year senior secured revolving credit facility and a $187,500 five-year senior secured term loan facility (the “Senior Credit Facilities”). Concurrent with the amendment of the credit agreement and acquisition, the Company repaid its term loan of $60.0 million and its cash collateral of $61.7 million was released.
The Senior Credit Facilities mature five years after the closing of the Senior Credit Facilities and the proceeds thereof were used to pay the consideration in connection with the Merger, to repay GCE’s and Orbis Education’s existing debt, and to pay the fees and expenses relating to the Merger and the financing transactions. The senior secured revolving credit facility is available for general corporate purposes, including permitted acquisitions, working capital and the issuance of letters of credit. All borrowings under the senior secured revolving credit facility will be subject to the satisfaction of customary conditions, including the absence of a default and compliance with representations and warranties.
On January 31, 2019, GCE and the other parties to the Credit Agreement entered into a First Amendment (the “First Amendment”) to the Credit Agreement. Under Section 2.16 of the Credit Agreement, GCE had the right, during the
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
period from January 22, 2019 to March 31, 2019 (or such later date as agreed by the administrative agent) to increase the principal amount of the term loan and the aggregate revolving commitments by up to $50,000, from an aggregate of $250,000 to up to an aggregate of $300,000 (subject to certain conditions). Per the terms of the First Amendment, GCE was granted the right to increase the principal amount of the term loan and the aggregate revolving commitments by up to $75,000, from an aggregate of $250,000 to up to an aggregate of $325,000 (subject to certain other conditions).
On February 1, 2019, GCE and the parties to the Credit Agreement entered into a First Incremental Facility Amendment (the “First Incremental Facility Amendment”) to the Credit Agreement. Pursuant to the First Incremental Facility Amendment, GCE borrowed an incremental $56,250 principal amount of term loans and increased the aggregate revolving commitments by $18,750, thereby increasing the principal amount of the term loan borrowed to $243,750 and the principal amount of the aggregate revolving commitments to $81,250. No other changes were made to the Credit Agreement.
Repayment of Loans.
GCE is required to repay the aggregate principal amount of all revolving loans outstanding by the maturity date. The term facility is subject to quarterly amortization of principal, commencing with the fiscal quarter ending June 30, 2019, in equal installments of 5% of the original principal amount of the term facility, which represents $12,188 per quarter.
Interest and Fees.
The interest rate per annum applicable to loans under the Senior Credit Facilities is LIBOR plus an applicable margin of 2.0% per annum or, at GCE’s option, the base rate plus an applicable margin of 0.75% per annum. LIBOR will be reset at the beginning of each selected interest period based on the LIBOR rate then in effect. The base rate is a fluctuating interest rate equal to the highest of (i) the federal funds effective rate from time to time plus 0.50%, (ii) the prime lending rate announced from time to time by the administrative agent, and (iii) LIBOR (after taking account of any applicable floor) applicable for an interest period of one month plus 1.25%. If LIBOR or the base rate is below zero, then such rate will be equal to zero plus the applicable margin.
Prepayments
. Voluntary prepayments of the term loan and the revolving loans and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the Credit Agreement governing the Senior Credit Facilities, with prior notice but without premium or penalty.
Collateral and Guarantees
. The obligations under the Senior Credit Facilities are secured by substantially all of the present and after acquired assets of each of GCE and any subsidiary guarantors (excluding owned and leased real property and certain other assets) (the “Collateral”) including, (a) a perfected first priority pledge of all equity interests of each domestic direct, wholly owned material restricted subsidiary held by GCE, and (b) a perfected first priority security interest in substantially all other tangible and intangible assets of GCE and any subsidiary guarantors (excluding owned and leased real property and certain other assets but including accounts receivable, inventory, equipment, general intangibles, intellectual property and the proceeds of the foregoing). Subject to certain exceptions, the Senior Credit Facilities are unconditionally guaranteed by GCE and its material domestic subsidiaries.
Covenants and Other Matters.
The Credit Agreement governing the Senior Credit Facilities contains certain covenants that, among other things, limit GCE’s ability, and the ability of certain of its subsidiaries, to incur additional indebtedness; sell assets or consolidate or merge with or into other companies; pay dividends or repurchase or redeem capital stock; make certain investments; issue capital stock of subsidiaries; incur liens; prepay, redeem or repurchase subordinated debt; and enter into certain types of transactions with affiliates. The Credit Agreement governing the Senior Credit Facilities also requires GCE, together with its subsidiaries, to comply with certain financial covenants, including a consolidated leverage ratio, a consolidated fixed charge coverage ratio, and a consolidated tangible net worth test.
Events of default under the Credit Agreement governing the Senior Credit Facilities include customary events such as a cross-default provision with respect to other material debt and upon a change of control (as defined therein). In addition, an event of default under the Credit Agreement occurs if there is an event of default under GCE’s loan agreement with GCU or if the services agreement between GCE and GCU is terminated.
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Security Agreement.
In connection with the entry into the Credit Agreement governing the Senior Credit Facilities, GCE, the subsidiary guarantors and Bank of America, N.A., as administrative agent, entered into an amended and restated security and pledge agreement, dated as of January 22, 2019 (the “Security Agreement”), pursuant to which GCE and the subsidiary guarantors party thereto granted a security interest in the Collateral to the administrative agent as collateral for the Senior Credit Facilities.
15. Quarterly Results of Operations (Unaudited)
The following table summarizes the unaudited quarterly results of operations for 2018 and 2017 and should be read in conjunction with other information included in the accompanying consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Service revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
155,454
|
|
$
|
177,548
|
University related revenue
|
|
|
275,681
|
|
|
236,818
|
|
|
—
|
|
|
—
|
Net revenue
|
|
|
275,681
|
|
|
236,818
|
|
|
155,454
|
|
|
177,548
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and academic services
|
|
|
10,697
|
|
|
10,678
|
|
|
11,101
|
|
|
11,098
|
Counseling services and support
|
|
|
50,747
|
|
|
50,838
|
|
|
51,116
|
|
|
51,989
|
Marketing and communication
|
|
|
28,527
|
|
|
30,095
|
|
|
31,546
|
|
|
27,252
|
General and administrative
|
|
|
7,419
|
|
|
5,762
|
|
|
10,092
|
|
|
6,695
|
University related expenses
|
|
|
87,649
|
|
|
79,517
|
|
|
6,569
|
|
|
(405)
|
Loss on transaction
|
|
|
550
|
|
|
1,440
|
|
|
15,610
|
|
|
770
|
Total costs and expenses
|
|
|
185,589
|
|
|
178,330
|
|
|
126,034
|
|
|
97,399
|
Operating income
|
|
|
90,092
|
|
|
58,488
|
|
|
29,420
|
|
|
80,149
|
Interest income on Secured Note
|
|
|
—
|
|
|
—
|
|
|
13,248
|
|
|
13,699
|
Interest expense
|
|
|
(346)
|
|
|
(57)
|
|
|
(558)
|
|
|
(575)
|
Investment interest and other
|
|
|
981
|
|
|
1,567
|
|
|
371
|
|
|
521
|
Income before income taxes
|
|
|
90,727
|
|
|
59,998
|
|
|
42,481
|
|
|
93,794
|
Income tax expense
|
|
|
17,046
|
|
|
13,960
|
|
|
8,720
|
|
|
18,263
|
Net income
|
|
$
|
73,681
|
|
$
|
46,038
|
|
$
|
33,761
|
|
$
|
75,531
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
(1)
|
|
$
|
1.55
|
|
$
|
0.97
|
|
$
|
0.71
|
|
$
|
1.58
|
Diluted income per share
(1)
|
|
$
|
1.52
|
|
$
|
0.95
|
|
$
|
0.70
|
|
$
|
1.56
|
Basic weighted average shares outstanding
|
|
|
47,432
|
|
|
47,604
|
|
|
47,682
|
|
|
47,708
|
Diluted weighted average shares outstanding
|
|
|
48,397
|
|
|
48,411
|
|
|
48,422
|
|
|
48,422
|
|
(1)
|
|
The sum of quarterly income per share may not equal annual income per share due to rounding.
|
Table of Contents
Grand Canyon Education, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Service revenue
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
University related revenue
|
|
|
248,206
|
|
|
218,301
|
|
|
236,209
|
|
|
271,418
|
Net revenue
|
|
|
248,206
|
|
|
218,301
|
|
|
236,209
|
|
|
271,418
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and academic services
|
|
|
10,381
|
|
|
10,220
|
|
|
10,494
|
|
|
10,739
|
Counseling services and support
|
|
|
46,312
|
|
|
45,970
|
|
|
46,100
|
|
|
50,213
|
Marketing and communication
|
|
|
27,309
|
|
|
27,426
|
|
|
28,130
|
|
|
26,227
|
General and administrative
|
|
|
7,033
|
|
|
5,806
|
|
|
8,343
|
|
|
5,975
|
University related expenses
|
|
|
80,543
|
|
|
73,791
|
|
|
83,450
|
|
|
86,356
|
Loss on Transaction
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
562
|
Total costs and expenses
|
|
|
171,578
|
|
|
163,213
|
|
|
176,517
|
|
|
180,072
|
Operating income
|
|
|
76,628
|
|
|
55,088
|
|
|
59,692
|
|
|
91,346
|
Interest expense
|
|
|
(580)
|
|
|
(495)
|
|
|
(567)
|
|
|
(527)
|
Investment interest and other
|
|
|
2
|
|
|
739
|
|
|
1,445
|
|
|
757
|
Income before income taxes
|
|
|
76,050
|
|
|
55,332
|
|
|
60,570
|
|
|
91,576
|
Income tax expense
|
|
|
20,138
|
|
|
15,485
|
|
|
21,266
|
|
|
23,320
|
Net income
|
|
$
|
55,912
|
|
$
|
39,847
|
|
$
|
39,304
|
|
$
|
68,256
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
(1)
|
|
$
|
1.20
|
|
$
|
0.85
|
|
$
|
0.83
|
|
$
|
1.44
|
Diluted income per share
(1)
|
|
$
|
1.16
|
|
$
|
0.83
|
|
$
|
0.81
|
|
$
|
1.41
|
Basic weighted average shares outstanding
|
|
|
46,748
|
|
|
47,151
|
|
|
47,316
|
|
|
47,342
|
Diluted weighted average shares outstanding
|
|
|
48,070
|
|
|
48,192
|
|
|
48,292
|
|
|
48,382
|
|
(1)
|
|
The sum of quarterly income per share may not equal annual income per share due to rounding.
|