American Public Education, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The company provides online postsecondary education, primarily for military and public-service communities, through American Public University System, including AMU and APU. Financial statements are unaudited.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $46.3 million | $35.7 million | $93.6 million | $68.9 million |
| Operating income | $11.7 million | $8.8 million | $24.9 million | $17.5 million |
| Net income | $7.0 million | $5.3 million | $14.7 million | $10.6 million |
| Diluted EPS | $0.37 | $0.28 | $0.77 | $0.56 |
| Operating margin | 25.4% | 24.6% | 26.6% | 25.4% |
Net margin was 15.1% in Q2 2010 versus 14.9% a year earlier, and 15.7% for the first half versus 15.3%. Net course registrations grew 34% in Q2 and 37% in the first half. Revenue growth was attributed mainly to increased registrations from new civilian students.
For the six months, operating cash flow was $18.2 million, compared with $12.6 million in 2009. Investing cash outflow was $18.7 million, including $10.0 million invested in marketable securities and $8.5 million of capital expenditures; financing cash inflow was $1.9 million. Planned and ongoing investment includes facilities in Charles Town and a new learning management system. Management expects capital expenditures to rise, including in the near term.
At June 30, the balance sheet reports current assets of $101.5 million and current liabilities of $28.9 million. Total liabilities were $34.5 million, with no debt reported. Stockholders’ equity was $100.1 million. The filing gives conflicting cash figures: the balance sheet and some MD&A text state $86.2 million, while the cash-flow statement reports $76.2 million at period-end. The cash-flow statement’s beginning cash of $74.9 million plus the reported $1.3 million increase reconciles to $76.2 million.
Changes and management commentary
- Q2 revenue rose 30% and net income rose 32% year over year; first-half revenue rose 36% and net income rose 39%.
- Operating margins improved, with instructional, general and administrative, and depreciation costs declining as a percentage of revenue. Selling and promotional costs increased to 17.6% of Q2 revenue from 14.4%, reflecting expanded civilian marketing.
- Management cited a $1.6 million reduction in accrued incentive compensation, primarily because it did not expect to pay the financial-performance portion of its annual incentive plan.
- Management expects slower growth in registrations and revenue as active-duty military registration growth has weakened. It cited deployments and limited internet access as possible factors, but said the causes and duration are uncertain. Seasonal enrollment patterns may also become more pronounced as overall growth slows.
- The Department of Education fully recertified the university system for Title IV participation through December 31, 2014, removing its provisional status.
Risks, contingencies and outlook
- Students receiving Department of Defense tuition assistance accounted for 51% of Q2 revenue and 52% of first-half revenue, down from 57% and 58% a year earlier. Title IV-funded students accounted for 22% and 21%, respectively, up from 18% and 17%. The company warns that reductions in either program could significantly affect operations.
- Proposed Department of Education rules and congressional scrutiny of for-profit education could affect Title IV eligibility, enrollment, costs, and operations. The company was evaluating the proposed rules; no quantified financial impact or formal financial guidance was provided.
- The company said cash flow and other liquidity sources should fund ongoing operations and planned capital expenditures for the foreseeable future. No material pending legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Reconcile the $10 million discrepancy between the reported $86.2 million balance-sheet/MD&A cash figure and the $76.2 million cash-flow statement ending balance.
- Track active-duty military registrations, civilian student growth, marketing costs, and enrollment seasonality against management’s expectation of slower growth.
- Monitor final Department of Education rules and any effects on Title IV participation, student eligibility, or the company’s business model.
- Review capital spending and liquidity as facility construction and learning-management-system investment continue.