American Public Education, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. APEI provides online post-secondary education primarily to military and public-service communities through American Public University System, including American Military University and American Public University.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $77.1 million | $65.3 million | $227.5 million | $184.7 million |
| Operating income | $17.5 million | $15.0 million | $47.4 million | $43.0 million |
| Operating margin | 22.7% | 23.1% | 20.8% | 23.3% |
| Net income | $10.8 million | $10.9 million | $29.1 million | $27.8 million |
| Diluted EPS | $0.60 | $0.60 | $1.61 | $1.52 |
- Net course registrations increased 17% in Q3 and 20% for the nine-month period year over year. Revenue rose 18% and 23%, respectively.
- Margins weakened as costs and expenses grew faster than revenue. For the nine months, selling and promotional expense rose 34% and general and administrative expense rose 43%. Management cited civilian marketing, financial-aid processing, technology spending, and higher bad-debt expense.
- Bad-debt expense was 4.4% of revenue in Q3 versus 1.7% a year earlier, and 4.7% for the nine months versus 1.4%. Management reported modest Q3 improvement from procedures intended to reduce enrollment by students primarily seeking Title IV funds.
- Cash and cash equivalents were $101.6 million at September 30, 2012, versus $119.0 million at December 31, 2011. Current assets were $135.9 million and current liabilities $63.8 million. The balance sheet reports no borrowings or other debt.
- Nine-month operating cash flow was $34.5 million, down from $47.5 million. Investing used $41.6 million, including $28.5 million of capital expenditures, a $6.8 million minority investment, and a $6.0 million note receivable. Financing used $10.3 million, including share repurchases.
- Accounts receivable, net, was $19.9 million, with an allowance of $11.9 million. Receivables increased in Q3 partly because Air Force and Army payment-processing changes delayed collection of $11.8 million until October; management described this as a timing difference.
Material developments, outlook, and risks
- APEI invested approximately $6.8 million for a 19.9% preferred-stock interest in NWHW Holdings, associated with New Horizons Worldwide, and extended New Horizons a $6.0 million subordinated note. The note bears 5% interest for its first five years and 6% in year six, and matures in 2018.
- Management said ePress, which shifts textbook content to internally developed electronic materials, could reduce operating expenses by up to approximately $4 million in the second half of 2012 and $8 million in 2013. A $50-per-course technology fee announced in July was estimated to apply to approximately 39% of net course registrations. Management said these initiatives, along with expected lower bad-debt expense, could improve margins in 2013; this is not formal earnings guidance.
- Management cautioned that recent enrollment growth may not be sustainable, citing comparison with periods of unusually high non-persisting students, fraud-prevention measures, competition, and market conditions. Civilian enrollment growth also brings seasonal fluctuations and increased marketing and support costs.
- Revenue depends in part on federal programs: DoD tuition assistance accounted for 37% of Q3 revenue and 39% of nine-month revenue; Title IV aid accounted for 37% and 35%, respectively. Changes to either program could materially affect operations. The Marine Corps had reduced graduate tuition-assistance reimbursement; other military program changes remained possible.
- The Department of Education’s revised Final Program Review Determination set total liability, including interest, at $1.03 million. APUS decided not to appeal the revised determination; it had already paid $909,095 under the prior determination and undertook to pay the balance. A $163,284 irrevocable letter of credit was posted. A separate VA program review had concluded, but no formal report had been received.
- Regulatory uncertainty included proposed or evolving requirements concerning military and veterans’ education benefits, Title IV administration, gainful-employment disclosures, and state authorization for distance education. A proposed bill restricting use of federal education funds for marketing and recruiting could affect student recruitment if enacted. Management said it could not predict the effects of potential regulatory changes.
- Management believed available cash and operating cash flow would fund ongoing operations and planned capital expenditures for the foreseeable future. No material pending legal proceedings were reported. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether bad-debt expense and receivable collections improved after Q3, and whether the delayed military tuition-assistance payments were collected as expected.
- Actual enrollment persistence and registration growth, including the effectiveness and potential enrollment effects of fraud-prevention measures.
- Progress and realized savings from ePress and the technology fee, compared with management’s stated estimates.
- Final payment and any subsequent developments related to the Department of Education liability, the letter of credit, and the pending VA review.
- Any changes to DoD tuition assistance, Title IV funding or eligibility, and regulations governing online education and recruiting.
- Returns and strategic benefits from the NWHW/New Horizons investment and note, and the company’s future capital spending and share repurchases.