American Public Education, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with the three months ended March 31, 2010 unless noted. APEI provides online postsecondary education, primarily to military and public-service communities, through the American Public University System.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $58.7 million | $47.3 million | Up 24% |
| Operating income | $13.1 million | $13.1 million | Approximately flat |
| Operating margin | 22.2% | 27.8% | Down 5.6 percentage points |
| Net income | $7.9 million | $7.6 million | Up 3% |
| Diluted EPS | $0.43 | $0.40 | Up 8% |
| Operating cash flow | $19.9 million | $14.2 million | Up $5.7 million |
| Capital expenditures | $3.6 million | $3.7 million | Down $0.1 million |
Adjusted net course registrations increased 31%, primarily reflecting growth in new civilian students. Costs and expenses rose 33% to $45.6 million. Selling and promotional costs increased 54% to $10.9 million, while general and administrative costs rose 38% to $10.5 million. The effective tax rate was 40.0%, versus 41.9%.
At March 31, 2011, cash and cash equivalents were $96.5 million, compared with $81.4 million at December 31, 2010. Current assets were $112.6 million and current liabilities $46.5 million. The balance sheet reports no debt. Total liabilities were $53.4 million and stockholders’ equity was $105.0 million. Cash increased $15.2 million during the quarter; investing activities used $3.7 million and financing activities used $1.0 million, including stock repurchases.
Material changes and management commentary
Revenue growth was driven primarily by increased net course registrations from civilian students. Management said marketing spending had been increased since 2010 to support civilian registrations and brand awareness amid slower growth in active-duty military registrations. Instructional costs rose with the number of classes offered. Higher depreciation reflected capital spending, a larger fixed-asset base, and software-license amortization.
Revenue mix shifted: Department of Defense tuition-assistance-funded students represented approximately 47% of revenue, down from 53% a year earlier; Title IV financial-aid students represented approximately 30%, up from 20%. Management expects operating cash flow and existing liquidity to fund ongoing operations and planned capital expenditures, and said capital expenditures could increase in coming periods. No specific earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Title IV program review: The Department of Education’s review produced three findings, including a dispute over treatment of certain students as unofficial withdrawals and related financial-aid returns. APEI disagrees with the Department’s interpretation and was reviewing affected files. No penalty had been specified and no amount was accrued. The company estimated potential refunds could be up to approximately $1.2 million, potentially offset by collections from students or amounts already repaid.
- Accreditation: A Higher Learning Commission reaccreditation site visit took place in February 2011; the company had not received the final report or decision.
- Funding concentration: Reductions or changes to military tuition assistance or Title IV programs could materially affect enrollment, revenue, and operations. APEI also noted congressional scrutiny and potential DoD oversight changes concerning tuition assistance.
- Litigation: A putative securities class action alleging misleading statements during February–August 2010 remained pending. Defendants had moved to dismiss; the complaint did not specify damages. Management reported no other known pending or threatened litigation expected to have a material adverse effect.
- Repurchases: The company repurchased 32,000 shares in Q1 for approximately $1.3 million under a program authorizing repurchases of up to an estimated 219,208 shares.
Investor verification points
- Track outcomes of the Department of Education review, including any final liability and the company’s response to the unofficial-withdrawal finding.
- Verify the reaccreditation decision and any resulting requirements.
- Monitor military tuition-assistance and Title IV policy changes, and their effects on student mix, registrations, and revenue.
- Assess whether higher marketing, administrative, and capital spending continues to pressure margins as revenue grows.
- Follow developments in the securities class action and any material change in exposure.