American Public Education, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. This is an annual filing, not a standalone fourth-quarter report. The company provides online postsecondary education through American Military University and American Public University, serving military, public-service, and civilian students.
Financial and operating performance
| Metric | FY2012 | Prior comparable period |
|---|---|---|
| Revenue | $313.5 million | $260.4 million in 2011; up 20% |
| Net income | $42.3 million | $40.8 million in 2011; up 4% |
| Diluted EPS | $2.35 | $2.23 in 2011 |
| Operating margin | 21.9% | 24.1% in 2011 |
| Net margin | 13.5% | 15.6% in 2011 |
| Operating cash flow | Approximately $52.8–$52.9 million | $70.4 million in 2011 |
| Capital expenditures | $35.0 million | $24.9 million in 2011 |
| Cash and cash equivalents | $114.9 million at year-end | $119.0 million in 2011 |
| Working capital | $86.0 million | $82.0 million in 2011 |
| Total assets / stockholders’ equity | $237.6 million / $171.2 million | $198.9 million / $133.8 million in 2011 |
| Debt | No borrowings are listed on the year-end balance sheet | |
| Net course registrations | 402,205; up 18% | 341,669 in 2011 |
Revenue growth outpaced registrations, but profitability grew more slowly as expenses rose 24% to $244.7 million. Selling and promotional costs increased 34% to $59.8 million, and general and administrative costs increased 31% to $63.6 million. Bad-debt expense rose to $13.6 million from $6.7 million, largely associated with civilian students using federal aid who withdrew and left unpaid balances. The effective tax rate was 38.5%, versus 35.3% in 2011. EBITDA from continuing operations was $79.9 million.
Year-end liquidity remained substantial, although cash declined by $4.1 million. Investing activities used $48.1 million, including $35.0 million of capital expenditures, a $6.8 million investment in NWHW Holdings, and a $6.0 million subordinated note to New Horizons. Operating cash flow was lower than 2011, which management attributed to receivables and timing of tuition receipts and payments. The filing reports operating cash flow as $52.8 million in some sections and $52.9 million in the cash-flow statement; the text does not provide a single consistent value.
Material changes and business developments
- Growth moderated: registrations rose 18% in 2012 versus 32% in 2011, while revenue growth slowed to 20% from 31%.
- Operating margin fell 2.2 percentage points as marketing, student-support, financial-aid processing, technology, compliance, and bad-debt costs increased. Instructional costs improved as a share of revenue, from 36.6% to 35.2%.
- Federal funding remained a significant revenue dependency: the filing attributes approximately 38% of 2012 revenue to DoD tuition assistance, 13% to veterans’ benefits, and 36% to Title IV aid.
- The company invested $6.8 million for an approximately 19.9% preferred-stock interest in NWHW Holdings, which acquired New Horizons Worldwide, and extended New Horizons a $6.0 million subordinated note. The note bears 5% interest for its first five years and 6% in year six, maturing in 2018.
- The company repurchased $15.9 million of shares in 2012. It reported no off-balance-sheet financing arrangements and $2.2 million in future operating lease obligations.
Outlook, risks, and contingencies
- Outlook: No quantitative revenue or earnings guidance is provided. Management expects percentage growth rates to decline as the revenue base expands, while indicating that absolute revenue growth may continue. It expects further investment in technology infrastructure and financial-aid processing, including increased spending in 2013.
- Regulation and funding: The business depends on continued accreditation, state authorization, Title IV eligibility, and DoD tuition-assistance and veterans’ benefit programs. Potential changes to benefit levels, Title IV funding, the 90/10 rule, or federal oversight could affect enrollment, revenue, and cash flow. The filing estimated that approximately 87% of funding came from federal sources, based on net registrations; that estimate is not a reported revenue percentage.
- Compliance matter: A Department of Education review resulted in a revised final determination of $1.03 million, including interest, for alleged failures to calculate and return aid for certain unofficial withdrawals. The company disagreed with the interpretation but elected not to appeal the revised determination; it had paid $909,095 by the time the revised letter was issued and undertook to pay the remaining amount. It recorded a reserve against amounts it may be unable to recover from former students and posted a $163,284 letter of credit.
- Other review: A Department of Veterans Affairs on-site review concluded in April 2012; the company had not received a formal report by the filing date.
- Accreditation and controls: The Higher Learning Commission reaffirmed accreditation in 2011; an interim progress report is due in July 2015. The Department of Education calculated the company’s financial-responsibility composite score at 3.0 out of 3.0. The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2012.
- Other risks: Management cited intensifying online-education competition, rising student acquisition costs, less predictable civilian enrollment and student persistence, technology outages and cybersecurity, and potential constraints from military-force reductions or sequestration. Management reported no material legal proceedings pending.
Important facts for investors to verify
- Reconcile the reported FY2012 operating cash-flow figures ($52.8 million versus $52.9 million) and assess the drivers of the year-over-year decline.
- Track bad-debt expense, receivable allowances, civilian-student persistence, and the conversion of marketing spending into registrations and retained students.
- Confirm the status and any remaining payment or recovery associated with the Department of Education determination, related reserve, and letter of credit.
- Monitor the concentration of revenue in DoD, veterans’ benefits, and Title IV funding, along with any policy changes affecting these programs or the 90/10 calculation.
- Assess the return, credit quality, and carrying value of the NWHW Holdings investment and New Horizons note receivable.
- Evaluate whether continued technology and capital investment can support growth without further material erosion in operating margins and cash generation.