American Public Education, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; compared with the corresponding 2010 periods. APEI provides online postsecondary education, primarily to military and public-service communities, through American Public University System, including AMU and APU.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $65.3 million | $48.3 million | $184.7 million | $141.9 million |
| Operating income | $15.0 million | $9.3 million | $43.0 million | $34.2 million |
| Net income | $10.9 million | $5.6 million | $27.8 million | $20.3 million |
| Diluted EPS | $0.60 | $0.30 | $1.52 | $1.07 |
| Operating margin | 23.1% | 19.3% | 23.3% | 24.1% |
- Revenue grew 35% in Q3 and 30% year to date; adjusted net course registrations increased 32% and 30%, respectively.
- Q3 net income rose 96%; nine-month net income rose 37%. Nine-month cost and expense growth (32%) exceeded revenue growth (30%), and operating margin declined year over year.
- Cash and cash equivalents were $107.3 million at September 30, 2011, versus $81.4 million at December 31, 2010. Current assets were $127.2 million and current liabilities $50.0 million. The balance sheet reports no debt.
- Nine-month operating cash flow was $47.5 million, versus $32.8 million in 2010; investing cash use was $14.0 million, including $13.8 million of capital expenditures. Financing cash use was $7.6 million, including share repurchases.
Drivers, changes, and outlook
- Growth came from increased registrations by both civilian and military students. Management said it continued investing in marketing to expand civilian enrollment after slower active-duty registration growth in 2010.
- Q3 instructional costs and selling and promotional costs declined as a share of revenue. General and administrative costs increased 49% in Q3, driven by financial-aid processing, technology, and higher bad-debt expense; management also cited recruiting and regulatory-related costs for the nine-month increase.
- The 2011 effective tax rate benefited from completed state tax and R&D credit studies, which generated stated tax savings of $1.4 million and $498,000, respectively. The adjustments were recorded in Q3.
- Management said cash and operating cash flow should fund ongoing operations and planned capital expenditures. A new 106,000-square-foot financial center was estimated to cost approximately $18 million, with completion expected by August 2012; $2.8 million had been spent on the project through September 30. Capital expenditures were expected to increase in future periods. No specific earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- The Department of Education’s Title IV program review identified three findings. A disputed finding concerns failure to return aid for certain students deemed unofficial withdrawals. No penalty had been specified or accrued; potential refunds were estimated at up to approximately $837,000, potentially offset by recoveries from students.
- DoD tuition-assistance students accounted for approximately 40% of Q3 revenue and 43% of nine-month revenue, down from 48% and 51% in 2010. Title IV-funded students accounted for 39% and 34%, up from 25% and 22%. Management warned that changes to military tuition assistance could affect enrollment and revenue; the Marine Corps reduced graduate tuition assistance rates, while broader program changes remained uncertain.
- Newly highlighted risks included increasing attempts to defraud Title IV programs and possible effects on compliance or program eligibility, as well as online-classroom disruptions following the Sakai system migration. APEI reported unplanned downtime after migration and said it believed the issue had been mitigated, but could not ensure recurrence would not occur.
- Regional accreditation was reaffirmed in July 2011. The filing also describes a securities class action awaiting a court decision and a trademark-related dispute that APEI characterized as without merit. Management said it knew of no pending or threatened litigation expected to have a material adverse effect.
Facts investors should verify
- Progress and any final determination, liability, or appeal relating to the Department of Education review.
- DoD tuition-assistance policy changes and their potential effects on military registrations and revenue mix.
- Whether bad-debt expense continues to rise as civilian enrollment expands, and whether Title IV fraud controls remain adequate.
- Online classroom reliability after the Sakai migration and any effect on student retention or operations.
- Financial-center construction spending, total project cost, and the resulting capital expenditure and cash-flow requirements.
- The sustainability of reported earnings growth given Q3 tax-study benefits and higher nine-month costs.