American Public Education, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 28, 2012. The filing also reports unaudited fourth-quarter results. APEI operates American Military University and American Public University, providing exclusively online postsecondary education, with a focus on military and public-service communities.
Financial and operating performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $260.4 million | $198.2 million |
| Operating income | $62.9 million | $50.0 million |
| Operating margin | 24.1% | 25.2% |
| Net income | $40.8 million | $29.9 million |
| Diluted EPS | $2.23 | $1.59 |
| Operating cash flow | $70.4 million | $47.1 million |
| Capital expenditures | $24.9 million | $22.5 million |
| Cash and cash equivalents, year-end | $119.0 million | $81.4 million |
| Working capital, year-end | $82.0 million | $60.4 million |
| Adjusted net course registrations | 341,669 | 259,389 |
Revenue grew 31% and adjusted net course registrations grew 32%. Net income rose 36%. The operating margin declined as costs grew faster than revenue. General and administrative expense increased 51% to $48.4 million, including bad-debt expense of $6.7 million versus $2.1 million in 2010. Management attributed the increase largely to financial-aid processing, technology and regulatory costs, and higher bad debt associated primarily with civilian students. The effective tax rate fell to 35.3% from 40.4%, reflecting tax-credit studies and other credits.
In Q4 2011, revenue was $75.7 million versus $56.3 million in Q4 2010, and net income was $13.0 million versus $9.6 million. Q4 operating cash flow was $22.9 million versus $14.2 million.
Year-end total assets were $198.9 million and total liabilities were $65.1 million. The balance sheet lists no borrowings; the filing text does not identify debt outstanding. Operating cash flow funded operations and capital spending. Investing activities used $25.2 million, while financing activities used $7.6 million, including $9.7 million of common and restricted-stock repurchases. Management said available cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future. Operating lease commitments totaled $3.5 million.
Material changes and management commentary
- Growth continued but moderated: annual revenue growth was 31% in 2011, versus 33% in 2010. Management expects percentage growth rates to decline as the revenue base expands, while anticipating higher dollar revenue growth; no numeric forecast was provided.
- Student mix shifted toward civilian and Title IV-funded students. Title IV aid represented approximately 37% of 2011 revenue, while DoD tuition assistance represented approximately 41%. The filing estimates approximately 86% of funding came from federal sources based on net course registrations, but does not provide a 2011 90/10-rule revenue calculation.
- The Sakai online classroom migration was completed in fall 2011. The company experienced peak-period downtime afterward and said it had taken steps to mitigate the cause, but could not assure the issue was fully resolved.
- Capital spending supported facilities, software, and technology. A Charles Town finance center renovation was underway; the filing estimated renovation costs at $18 million.
- Regional accreditation was reaffirmed in July 2011, and the national accreditor voted to reaccredit APUS in January 2012. An enhancement report was due to the national accreditor by May 1, 2012.
Outlook, risks, and contingencies
- Funding and regulation: APEI depends materially on DoD tuition assistance, veterans’ benefits, and Title IV programs. Potential changes to military tuition assistance and proposed changes to the 90/10 rule could affect student affordability, enrollment, and revenue. Management could not estimate the effects of future changes.
- Title IV review: A Department of Education program review identified three findings, including a dispute over treatment of certain students as unofficial withdrawals and return of federal aid. No penalty had been specified and no amount accrued. APEI estimated potential refunds of up to approximately $837,000, potentially offset by recoveries from students.
- Other regulatory exposure: The filing highlights risk from gainful-employment standards, state authorization, accreditation oversight, incentive-payment and misrepresentation rules, and compliance requirements. Loss or restriction of accreditation, state authorization, tuition assistance eligibility, or Title IV participation could materially harm results.
- Enrollment and operations: Military deployments and possible military force reductions may affect registrations. Civilian-student acquisition costs, bad debt, and enrollment forecasting uncertainty have increased. Online-classroom outages or security incidents could impair service and reputation.
- Legal matters: A securities class action was dismissed with prejudice in December 2011. A separate trademark declaratory-judgment case remained pending, and the company said it believed the complaint was without merit.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Key facts for investors to verify
- Whether the Department of Education resolves the withdrawal finding, and the ultimate refund exposure after any recoveries.
- Actual 2011 revenue dependence on federal funding and the company’s 90/10-rule calculation; the filing does not provide a clear 2011 ratio.
- Subsequent DoD tuition-assistance and 90/10-rule policy developments, and their effect on registrations and student affordability.
- Whether classroom reliability improved after the Sakai migration and whether technology and student-support spending affects margins.
- Trends in civilian-student persistence, receivables, bad debt, and course registrations relative to revenue growth.
- Progress on the accreditor’s enhancement-report requirements and the status of the pending trademark case.