American Public Education, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009; comparisons are to the corresponding 2008 periods unless noted. Unaudited consolidated results. APEI provides online postsecondary education primarily to military and public-service communities through American Military University and American Public University.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $36.5m | $27.4m | $105.3m | $75.6m |
| Operating income before interest and taxes | $8.4m | $6.2m | $25.9m | $17.4m |
| Operating margin | 23.0% | 22.6% | 24.6% | 23.1% |
| Net income | $5.0m | $3.8m | $15.6m | $11.1m |
| Diluted EPS | $0.27 | $0.20 | $0.82 | $0.59 |
| Operating cash flow | — | — | $22.8m | $19.9m |
| Capital expenditures | — | — | $7.8m | $6.5m |
Q3 revenue rose 33% and net income 31%; nine-month revenue rose 39% and net income 40%. Net margins were 13.8% for Q3 2009 versus 13.9% in Q3 2008, and 14.8% for the nine months versus 14.7%. Net course registrations increased 42% in both comparison periods. Title IV-funded registrations grew 94.6% in Q3 and 94.2% year to date.
At September 30, cash and cash equivalents were $63.8m, versus $47.7m at December 31, 2008. Total assets were $105.1m and total liabilities $32.5m. The balance sheet reports no borrowings; a secured $5.0m credit line expired September 15, 2009 and was not renewed. Management said operating cash flow and available cash should fund operations and planned capital expenditures for the foreseeable future.
Material changes and management commentary
- Marketing and promotional expense increased 56% in Q3 and 79% year to date, reflecting expanded civilian outreach, online and media advertising. As a share of revenue, it rose to 15.4% from 13.1% in Q3 and to 14.3% from 11.1% year to date.
- General and administrative expense grew more slowly than revenue; its share of revenue declined to 17.7% from 20.4% in both comparison periods, which management attributed to scale efficiencies.
- Instructional expense was 40.4% of Q3 revenue, up from 39.8%, as staffing and class costs grew faster than enrollment. Year-to-date instructional expense declined as a share of revenue, to 39.7% from 41.4%.
- Interest income fell to $30,000 in Q3 from $181,000 and to $70,000 year to date from $619,000, primarily due to lower rates and a more conservative investment strategy.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management cautioned that Title IV participation, changing enrollment patterns and seasonality make growth and margin forecasting difficult; seasonal patterns may become more pronounced.
- Approximately 60% of Q3 revenue and 62% of nine-month revenue came from students receiving Department of Defense tuition assistance, down from 64% and 65% in the respective 2008 periods. A reduction in the program could significantly affect operations.
- APEI acquired land for $0.8m for a planned 40,000-square-foot facility, expected to require about $10m in additional spending over 18–30 months. It also acquired two buildings and parking land for $1.2m during Q3. Management noted future capital expenditures could be significantly higher.
- Accreditation and Title IV eligibility are important risks. New Higher Learning Commission policies expand review of changes in institutional or parent-company control and structure; a change from accredited status to candidate status could affect Title IV participation.
- The company reported no material pending legal proceedings or material commitments or contingencies requiring disclosure, and no subsequent events through November 5, 2009. Disclosure controls were assessed as effective; no material change in internal control was reported.
Most important facts for investors to verify
- Whether enrollment and course-registration growth can be sustained, including growth in Title IV-funded students.
- Exposure to Department of Defense tuition assistance and any changes to program funding or eligibility.
- Accreditation and regulatory developments that could affect institutional status or Title IV participation.
- Marketing efficiency and the effect of increased civilian outreach on acquisition costs and margins.
- Timing and total cost of planned facilities investment, and the adequacy of cash after capital spending.