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PHOENIX, Aug. 6, 2019 /PRNewswire/ -- Grand Canyon Education, Inc. (NASDAQ: LOPE), ("GCE" or the "Company"), is a publicly traded education services company that currently provides services to 19 university partners. GCE provides a full array of support services in the post-secondary education sector and has developed significant technological solutions, infrastructure and operational processes to provide superior services in these areas on a large scale. GCE today announced financial results for the quarter ended June 30, 2019.
Explanatory Note
Prior to July 1, 2018, the Company owned and operated Grand Canyon University (the "University"), a comprehensive regionally accredited university that offers graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party employers of its students. On July 1, 2018, the Company consummated an Asset Purchase Agreement (the "Asset Purchase Agreement") with GCU (formerly known as Gazelle University) in which it sold the assets comprising the University to GCU in return for a secured note and entered into a services agreement (the "Services Agreement") with GCU pursuant to which the Company provides identified technology and academic services, counseling services and support, marketing and communication services, and several back office services to GCU in return for 60% of GCU's tuition and fee revenue (the "Transaction"). As a result of this Transaction, GCE became an educational services company focused on providing a full array of support services to institutions in the post-secondary education sector.
Prior to July 1, 2018, our business consisted exclusively of owning and operating the University and the Company's results of operations discussed herein for periods prior to July 1, 2018 reflect those operations. Commencing July 1, 2018, the Company's results of operations do not include the operations of GCU but rather reflect the operations of the Company as an education services provider pursuant to the Services Agreement. Accordingly, the Transaction resulted in a reduction in our net revenue period over period.
Additionally, on January 22, 2019, the Company completed the acquisition of Orbis Education Services, LLC ("Orbis Education"), an educational services company that supports healthcare education programs for 18 universities across the United States for $361.2 million, net of cash acquired (the "Acquisition"). Therefore, the results of operations for the three and six month periods ended June 30, 2019 include Orbis Education's financial results for the period from January 22, 2019 to June 30, 2019. As a result of the Acquisition, we incurred transaction costs of $4.0 million and amortization of intangible assets acquired of $3.9 million in the six months ended June 30, 2019.
Non-GAAP Information
The Company is providing certain non-GAAP financial measures in this report, as the Company believes that these measures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations as an educational services provider and measure the Company's performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company's core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of intangible assets and Loss on Transaction expenses allows investors to develop a more meaningful understanding of the Company's performance over time in its educational services business.
In order to enhance comparability between periods, we provide, for periods prior to July 1, 2018, net revenue, total costs and expenses and operating income on both an as reported and comparable basis. To calculate the comparable results, we have multiplied "university related revenue" by 60%. The percentage used to make this calculation corresponds to the percentage of GCU's tuition and fee revenue to which the Company is entitled under the Services Agreement. The following table sets forth the Company's as reported net revenue, total costs and expenses, and operating income for the respective three month periods. The table then adjusts these as reported balances to reflect the Loss on Transaction, university related expenses, and amortization of intangible assets and show the Company's as adjusted "non-GAAP" net revenue, as adjusted "non-GAAP" total costs and expenses, and as adjusted "non-GAAP" operating income on a comparable basis. This table is intended to increase transparency and to provide comparability of our results of operations between the three and six month periods ended June 30, 2019, during all of which we operated as an education services provider, and the three and six month periods ended June 30, 2018, during all of which we owned and operated the University. These as adjusted "non-GAAP" measures in the tables below do not necessarily represent actual results had the Company operated as an education services provider during the full periods presented.
Non-GAAP Net Income and Non-GAAP Diluted Income Per Share
The Company believes the above table presentation will not be comparable for net income and diluted income per share for the three and six month periods ending June 30, 2018, due to many changes in our business that impact income and expenses after operating income. Included in the three and six months ended June 30, 2019 are interest income on Secured Note, interest expense on a significantly larger credit facility with an increase of approximately $191.1 million and the correlating tax impact of these items. However, the Company believes the presentation of non-GAAP net income and non-GAAP diluted income per share information that excludes amortization of intangible assets and Loss on Transaction expenses allows investors to develop a more meaningful understanding of the Company's performance over time. Accordingly, for the three and six month periods ended June 30, 2019, the table below provides reconciliations of these non-GAAP items to GAAP net income and GAAP diluted income per share, respectively:
For the three months ended June 30, 2019:
For the six months ended June 30, 2019:
Balance Sheet and Cash Flow
During 2019, we financed our Acquisition of Orbis Education for $361.2 million, net of cash acquired, from an increase in our credit facility of $190.1 million and the use of $171.1 million of operating cash on hand. Our unrestricted cash and cash equivalents and investments were $80.0 million at June 30, 2019. As of June 30, 2019, we had $300,000 of restricted cash and cash equivalents, for pledged collateral for a newly acquired site lease.
Concurrent with the closing of the Acquisition, we entered into an amended and restated credit agreement dated January 22, 2019 and two related amendments dated January 31, 2019 and dated February 1, 2019, that together provided a credit facility of $325.0 million comprised of a term loan facility of $243.8 million and a revolving credit facility of $81.3 million, both with a five year maturity date. The term facility is subject to quarterly amortization of principal, commencing with the fiscal quarter ended June 30, 2019, in equal installments of 5% of the principal amount of the term facility per quarter. Both the term loan and revolver have monthly interest payments currently at 30 Day LIBOR plus an applicable margin of 2%. The proceeds of the term loan, together with $6.3 million drawn under the revolver and cash on hand, were used to pay the purchase price in the Acquisition. Concurrent with the entry into the amended and restated credit agreement and the completion of the Acquisition, we repaid our existing term loan of $59.9 million and our cash collateral of $61.7 million was released.
On July 1, 2018, in consideration for the transfer of assets under the Asset Purchase Agreement, we received a secured note from GCU in the initial principal amount of $870.1 million (the "Secured Note"). The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that we will loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term. Funding for capital expenditures for GCU since July 1, 2018 totals $199.8 million as of June 30, 2019, which includes an advance of $99.0 million for estimated capital expenditures through the end of 2019. Some amounts may be repaid during the six months remaining in the year ended December 31, 2019.
Net cash provided by operating activities for the six months ended June 30, 2019 was $189.3 million as compared to $143.7 million for the six months ended June 30, 2018. The increase in cash generated from operating activities between the six months ended June 30, 2018 and the six months ended June 30, 2019 is primarily due to the changes in other working capital such as receivables from our university partners and deferred revenue as a result of the change from being the owner-operator of GCU to being a service provider to 19 university partners. As a service provider, we generally receive our service fees from our university partners in arrears. This quarter GCU paid their estimated service fee for June prior to the quarter end resulting in an increase in operating cash flows for the six months ended June 30, 2019 of $41.1 million.
Net cash used in investing activities was $485.8 million and $67.4 million for the six months ended June 30, 2019 and 2018, respectively. Our cash used in investing activities was primarily related to the Acquisition, the funding of capital expenditures to GCU, and the liquidation of short-term investments and capital expenditures. We paid $361.2 million, net of cash acquired, to acquire Orbis Education on January 22, 2019. Funding to GCU for capital expenditures during the first six months of 2019 totaled $169.8 million. Proceeds from investments, net of purchases of short term investments, was $55.1 million and $11.7 million for the six months ended June 30, 2019 and 2018, respectively. Capital expenditures were $9.7 million and $79.2 million for the six months ended June 30, 2019 and 2018, respectively. During the six-month period for 2019, capital expenditures primarily consisted of leasehold improvements and equipment for new partner locations, internally developed software, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. During the six-month period for 2018, capital expenditures primarily consisted of the University's ground campus construction projects as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount.
Net cash provided by financing activities was $180.5 million for the six months ended June 30, 2019. Net cash used in financing activities was $14.7 million for the six months ended June 30, 2018. During the six-month period for 2019, $270.0 million of proceeds was drawn on the credit facility, and the term loan balance of the prior credit agreement of $59.9 million was repaid along with $12.1 million of principal payments on the new credit facility. In addition, $2.4 million of debt issuance costs were incurred on the new credit facility and $8.1 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $10.3 million was used to purchase treasury stock in accordance with the Company's share repurchase program. Proceeds from the exercise of stock options of $3.4 million were received in the six months ended June 30, 2019. During the six-month period for 2018, $11.5 million was used to purchase common shares withheld in lieu of income taxes resulting from restricted share awards and $1.6 million was used to purchase treasury stock in accordance with the Company's share repurchase program. Principal payments on notes payable and capital leases totaled $3.4 million, partially offset by proceeds from the exercise of stock options of $1.8 million.
Forward-Looking Statements
This news release contains "forward-looking statements" which include information relating to future events, future financial performance, strategies expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding: the Transaction; proposed new programs; statements as to whether regulatory developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, and forecasts as to our business, financial and operating results, and future economic performance; and statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to: the occurrence of any event, change or other circumstance that could give rise to the termination of any of our key university partner agreements; our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university partners, and expansion of services provided to our existing university partners; our failure to comply with the extensive regulatory framework applicable to us either directly as a third party education services provider or indirectly through our university partners, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; competition from other education services companies in our geographic region and market sector, including competition for students, qualified executives and other personnel; the pace of growth of our university partners' enrollment and its effect on the pace of our own growth; our ability to, on behalf of our university partners, convert prospective students to enrolled students and to retain active students to graduation; our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis for our university partners; and other factors discussed in reports on file with the Securities and Exchange Commission, including as set forth in Part I, Item 1A of our Annual Report on Form 10-K for period ended December 31, 2018.
Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Conference Call
Grand Canyon Education, Inc. will discuss its second quarter 2019 results and 2019 outlook during a conference call scheduled for today, August 6, 2019 at 4:30 p.m. Eastern time (ET). To participate in the live call, investors should dial 877-577-1769 (domestic and Canada) or 706-679-7806 (international), passcode 4266797 at 4:25 p.m. (ET). The Webcast will be available on the Grand Canyon Education, Inc. Web site at www.gce.com.
A replay of the call will be available approximately two hours following the conclusion of the call, at 855-859-2056 (domestic) or 404-537-3406 (international), passcode 4266797. It will also be archived at www.gce.com in the investor relations section for 60 days.
About Grand Canyon Education, Inc.
Grand Canyon Education (GCE), incorporated in 2008, is a publicly traded education services company that currently provides services to 19 university partners. GCE is uniquely positioned in the education services industry in that its leadership has 30 years of proven expertise in providing a full array of support services in the post-secondary education sector and has developed significant technological solutions, infrastructure and operational processes to provide superior services in these areas on a large scale. GCE provides services that support students, faculty and staff of partner institutions such as marketing, strategic enrollment management, counseling services, financial services, technology, technical support, compliance, human resources, classroom operations, content development, faculty recruitment and training, among others. For more information about Grand Canyon Education, Inc. visit the Company's website at www.gce.com.
Grand Canyon Education, Inc., 2600 W. Camelback Road, Phoenix, AZ 85017, www.gce.com.
Investor Relations Contact:Dan BachusChief Financial OfficerGrand Canyon Education, Inc.602-639-6648Dan.bachus@gce.com
GRAND CANYON EDUCATION, INC.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA is defined as net income plus interest expense, less interest income and other gain (loss) recognized on investments, plus income tax expense, and plus depreciation and amortization (EBITDA), as adjusted for (i) contributions to private Arizona school tuition organizations in lieu of the payment of state income taxes; (ii) loss on the Transaction; (iii) university related expenses; (iv) share-based compensation, (v) the revenue share rate on the master services agreement, and (vi) one-time, unusual charges or gains, such as litigation and regulatory reserves, impairment charges and asset write-offs, and exit or lease termination costs. We have reclassified depreciation and amortization related to university assets and share-based compensation for former GCE employees that now work for the university to University related expenses to provide comparability between periods. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our operating performance. We also make certain compensation decisions based, in part, on our operating performance, as measured by Adjusted EBITDA, and our loan agreement requires us to comply with covenants that include performance metrics substantially similar to Adjusted EBITDA. All of the adjustments made in our calculation of Adjusted EBITDA are adjustments to items that management does not consider to be reflective of our core operating performance. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period and does not consider the items for which we make adjustments (as listed above) to be reflective of our core performance.
We believe Adjusted EBITDA allows us to compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses), the book amortization of intangibles (affecting relative amortization expense), and other items that we do not consider reflective of underlying operating performance. We also present Adjusted EBITDA because we believe it is frequently used by securities analysts, investors, and other interested parties as a measure of performance.
In evaluating Adjusted EBITDA, investors should be aware that in the future we may incur expenses similar to the adjustments described above. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine, or non-recurring. Adjusted EBITDA has limitations as an analytical tool in that, among other things it does not reflect:
In addition, other companies, including other companies in our industry, may calculate these measures differently than we do, limiting the usefulness of Adjusted EBITDA as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered as a substitute for net income, operating income, or any other performance measure derived in accordance with and reported under GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We compensate for these limitations by relying primarily on our GAAP results and only use Adjusted EBITDA as a supplemental performance measure.
The following table provides a reconciliation of net income to Adjusted EBITDA, which is a non-GAAP measure for the periods indicated:
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SOURCE Grand Canyon Education, Inc.
