American Public Education, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; quarterly figures below refer to Q4 2010. The company provides online postsecondary education through American Military University and American Public University, principally serving military and public-service communities.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $198.2 million | $149.0 million |
| Operating income | $50.0 million; 25.2% margin | $39.9 million; 26.8% margin |
| Net income | $29.9 million; diluted EPS $1.59 | $23.9 million; diluted EPS $1.27 |
| Operating cash flow | $47.1 million | $36.8 million |
| Capital expenditures | $22.5 million | $10.8 million |
| Cash and cash equivalents, year-end | $81.4 million | $74.9 million |
| Working capital, year-end | $60.4 million | $59.4 million |
| Total assets / stockholders’ equity, year-end | $141.8 million / $97.3 million | $115.8 million / $82.0 million |
No borrowings are reported on the balance sheet; the filing lists operating lease obligations of $5.0 million. The company reported a Department of Education financial-responsibility composite score of 3.0, the maximum. It said cash and operating cash flow should fund operations and planned capital expenditures for the foreseeable future.
Q4 2010 revenue was $56.3 million, up from $43.7 million in Q4 2009; net income was $9.6 million versus $8.4 million. Q4 operating cash flow was $14.2 million, compared with $25.9 million a year earlier.
Material changes and operating trends
- FY2010 revenue rose 33% and net course registrations increased 31% to 272,173. Net income grew 25%.
- Operating margin contracted to 25.2% from 26.8%, chiefly because selling and promotional expense rose 67% to $34.3 million as the company expanded civilian-market advertising. Advertising expense increased to $22.0 million from $12.1 million.
- Instructional costs increased 29% but declined as a share of revenue, to 38.0% from 39.2%; general and administrative expense also fell as a share of revenue, to 16.2% from 16.8%.
- Operating cash flow increased, while investing outflow rose to $23.0 million, principally reflecting capital spending. The company repurchased 682,046 shares for approximately $20.2 million during 2010, completing its $20 million program. It does not anticipate cash dividends in the foreseeable future.
- DoD tuition assistance accounted for approximately 50% of 2010 revenue, down from 56% in 2009; Title IV student aid accounted for approximately 24%, up from 19%. Tuition-assistance-funded registrations were 50% of net course registrations.
Outlook, commentary, risks and contingencies
- Management expects growth-rate percentages to decline as the revenue base expands, while expecting dollar revenue growth to increase. The filing provides no numerical earnings or revenue guidance.
- Management attributed a greater-than-expected slowdown in active-duty military registrations beginning in Q3 2010 partly to increased military operations and deployments, and said the duration and future effect were uncertain.
- The transition from the Educator online classroom to the Sakai platform was underway. Graduate courses had moved by January 2011; undergraduate migration was expected to begin in March 2011 and finish in fall 2011. A delayed, costly, or poorly received transition could disrupt operations or student retention.
- Regulatory exposure is significant. New federal state-authorization requirements were generally due to take effect July 1, 2011; the company was evaluating compliance. It also faced evolving rules on gainful employment, incentive compensation, credit hours and program approvals. Loss of accreditation, state authorization, DoD tuition assistance or Title IV eligibility could materially harm enrollment and results.
- Congressional and regulatory scrutiny of for-profit education and military education benefits could lead to restrictions or added costs. The company received a congressional document request and incurred legal and other response costs. A Department of Education Title IV program review was scheduled to begin February 28, 2011.
- A putative securities class action filed in August 2010 alleges misleading statements about the company’s prospects. Plaintiffs seek unspecified damages; the company said it intends to defend the case. Management did not expect ordinary-course litigation matters to have a material adverse effect, but the class-action outcome was uncertain.
- The company planned approximately $9–$11 million of additional renovation spending over 12–18 months for acquired West Virginia properties intended to add about 85,000 square feet.
Important facts for investors to verify
- Whether active-duty enrollment stabilizes and whether civilian-market growth can offset the slowdown without further margin pressure.
- Progress and costs of the Sakai conversion, and any effect on student experience, retention or system reliability.
- Outcomes of the scheduled Department of Education review and the company’s compliance with new federal and state authorization requirements.
- Actual 2010 90/10 Rule calculation: the filing says auditors would recompute it; the latest stated HEOA-formula result was approximately 19% for 2009.
- Cash-flow conversion and capital spending, including the planned building renovations, as well as the effect of the completed share repurchase on per-share results.
- Status and potential financial or reputational consequences of the securities class action.