American Public Education, Inc. — Q2 2012 Form 10-Q
Business context and period. The company 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. This unaudited report covers the quarter and six months ended June 30, 2012; financial amounts below are in millions except per-share data.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $74.6 | $60.8 | $150.4 | $119.5 |
| Operating income | $15.0 | $14.9 | $29.9 | $28.0 |
| Operating margin | 20.1% | 24.7% | 19.9% | 23.6% |
| Net income | $9.2 | $9.0 | $18.3 | $16.8 |
| Diluted EPS | $0.51 | $0.49 | $1.01 | $0.92 |
- Revenue grew 23% in Q2 and 26% in the first half; adjusted net course registrations rose 18% and 21%, respectively.
- Operating expenses increased 30% in Q2 and 32% in the first half, outpacing revenue growth. Selling and promotional expense rose 49% in Q2; general and administrative expense rose 48%, including higher financial-aid processing, technology, and bad-debt costs.
- Bad-debt expense was 5.1% of revenue in Q2 and 4.8% for the first half, versus 1.4% and 1.2% in the comparable 2011 periods. Management linked the increase partly to students enrolling primarily to obtain Title IV funds and to amounts owed back to the federal government that may not be collectible.
- First-half operating cash flow was $22.7, down from $25.7. Capital expenditures were $18.9, versus $6.8; investing cash outflow was $19.2. Cash declined from $119.0 at year-end 2011 to $116.7 at June 30, 2012.
- At June 30, cash was $116.7, current assets $137.4, current liabilities $53.1, total assets $211.0, and total liabilities $62.6. The balance sheet reports no debt. The company said cash and operating cash flow should fund operations and planned capital expenditures for the foreseeable future.
- First-half repurchases used $8.3 of cash. The company had bought back 240,459 shares by June 30 and had a separate $20 million repurchase authorization, with $15.5 million remaining under it at quarter-end.
Material changes and management outlook
Revenue growth reflected increased civilian and military course registrations. Instructional costs declined as a share of revenue, aided by faculty utilization, lower textbook costs, and student-support efficiencies. These benefits were more than offset at the operating-margin level by increased civilian marketing, financial-aid processing, technology spending, and bad debt. Management said growth rates may not be sustainable through the rest of 2012, citing comparisons against periods with more low-persistence students, fraud-prevention measures, competition, and market conditions.
No formal earnings or revenue guidance is provided. Management expected its ePress electronic-textbook initiative to reduce operating expenses by up to approximately $4 million in the second half of 2012 and up to approximately $8 million in 2013. It said this, anticipated lower bad-debt expense in 2013, and a new $50-per-course technology fee—estimated to apply to about 39% of net course registrations—could improve 2013 margins.
Regulatory matters, risks, and unusual items
- Department of Education review: The May 2012 Final Program Review Determination identified total liability of $1.04 million including interest. APUS paid $909,091 and appealed the remainder, citing student-record discrepancies; it accrued $56,000 of interest and posted the required $163,284 irrevocable letter of credit. On July 24, 2012, after quarter-end, the Department withdrew the determination without prejudice and said it intended to issue a revised one. The company expected a reissued determination to be at least the amount already paid. The filing says related amounts were included in accounts receivable, with a partial reserve because collection from former students was uncertain.
- Funding and regulation: Approximately 39% of 2012 revenue came from students receiving Department of Defense tuition assistance and 34% from Title IV aid. Changes to either program could materially affect the business. The filing also discusses proposed limits on use of federal aid for marketing, possible military tuition-assistance changes, new oversight requirements under Executive Order 13607, and evolving Title IV rules. A court struck down certain gainful-employment debt measures on June 30, 2012, but related disclosure requirements remained.
- Fraud and student persistence: Management warned that increasingly sophisticated enrollment and Title IV fraud may evade controls, and that students with lower persistence could affect enrollment and bad debt. The company said prevention measures may also discourage otherwise qualified students.
- Other matters: The company voluntarily withdrew from DETC accreditation in April 2012; it identified the Higher Learning Commission as its primary Title IV accreditor. A trademark action was dismissed without prejudice in April 2012 to allow settlement discussions. Management reported no pending or threatened litigation it believed would have a material adverse effect.
- Management reported disclosure controls effective as of June 30, 2012 and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track bad-debt expense, receivable reserves, and collection outcomes, particularly for former students and Title IV-related refunds.
- Review the revised Department of Education determination, any additional liability or interest, and the status of the appeal and letter of credit.
- Assess whether enrollment and registration growth can continue while the company tightens fraud controls and manages student persistence.
- Monitor DoD tuition-assistance and Title IV policy changes, including the impact of the new technology fee and federal oversight initiatives.
- Compare expected ePress savings and planned capital spending—including completion of the new financial center—with subsequent results and cash flow.