American Public Education, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; interim financial statements are unaudited. APEI provides online postsecondary education, primarily to military and public-service communities, through American Public University System.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $60.8 million | $46.3 million | $119.5 million | $93.6 million |
| Operating income | $14.9 million | $11.7 million | $28.0 million | $24.9 million |
| Operating margin | 24.5% | 25.3% | 23.5% | 26.6% |
| Net income | $9.0 million | $7.0 million | $16.8 million | $14.7 million |
| Diluted EPS | $0.49 | $0.37 | $0.92 | $0.77 |
- Revenue grew 31% in Q2 and 28% in the first half; adjusted net course registrations grew 28% and 29%, respectively.
- For the six months, operating cash flow was $25.7 million, capital expenditures were $6.8 million, and cash increased by $13.2 million to $94.5 million.
- At June 30, cash was $94.5 million and current assets were $111.7 million, against current liabilities of $41.0 million. No debt is reported on the balance sheet.
- Deferred revenue and student deposits were $22.6 million, up from $18.8 million at year-end 2010.
Changes and management commentary
Growth was driven primarily by new civilian students. Q2 costs and expenses rose 33%, faster than revenue, and first-half costs rose 33% against 28% revenue growth. General and administrative expense increased substantially, including financial-aid processing, bad-debt, technology, and recruiting costs. Marketing spending also increased to attract civilian students. Consequently, operating margin declined year over year, particularly for the first half.
Management said operating cash flow and available cash should fund ongoing operations and planned capital expenditures for the foreseeable future. It expected capital expenditures could increase in future periods, including the near term, and described continued marketing to build civilian enrollment. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies, and unusual items
- Government funding exposure: DoD tuition-assistance students generated approximately 44% of Q2 and 45% of first-half 2011 revenue, versus 51% and 52% a year earlier. Title IV aid accounted for approximately 34% and 32%, versus 22% and 21%. The company warned that reductions in either program could materially affect results.
- Title IV program review: The Department of Education identified three findings, including a disputed interpretation of unofficial student withdrawals and required aid returns. The filing gives conflicting estimates of potential exposure: approximately $837,000 in the financial-statement note and up to approximately $1.2 million in MD&A. No penalty had been specified and no amount was accrued; possible refunds could be offset by amounts recovered from students.
- Accreditation: In July 2011, the Higher Learning Commission reaffirmed accreditation without affiliation stipulations. An interim progress report on graduate-studies coordination is due in July 2015.
- Legal matters: A securities class action was awaiting a court decision on defendants’ dismissal motion. A separate trademark declaratory-judgment action was contested; the company stated it believed the complaint was without merit.
- Other risks: The company cited possible DoD tuition-assistance changes, increasing student-enrollment and financial-aid fraud risks, and the need to maintain eligibility for Title IV funding and accreditation.
- The company repurchased 158,000 shares in Q2 for an aggregate $6.7 million under its repurchase program. It also adopted a new 2011 incentive plan authorizing up to 2.0 million shares, subject to plan terms.
Investor verification priorities
- Reconcile the Title IV program-review exposure estimates of $837,000 and $1.2 million, and monitor the Department of Education’s final determination.
- Track changes to DoD tuition assistance and Title IV participation, given their material share of revenue.
- Assess whether civilian enrollment growth can continue to cover higher administrative, marketing, technology, and instructional costs while stabilizing margins.
- Review capital-spending plans, share repurchases, and the potential dilution from outstanding equity awards and the 2011 incentive plan.
- Follow the outcomes of the securities and trademark litigation and the company’s response to enrollment and financial-aid fraud risks.