Business context and reporting period
American Public Education, Inc. (APEI) provides online post-secondary education through American Public University System, primarily serving military and public-service communities. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $81.8m | $77.1m | $246.5m | $227.5m |
| Operating income | $17.5m | $17.5m | $52.9m | $47.4m |
| Operating margin | 21.4% | 22.7% | 21.4% | 20.8% |
| Net income | $10.9m | $10.8m | $33.0m | $29.1m |
| Diluted EPS | $0.61 | $0.60 | $1.84 | $1.61 |
Revenue grew 6% in Q3 and 8% for the nine-month period. Net course registrations increased 2% and 6%, respectively. Management attributed revenue growth to increased registrations and a technology fee introduced for courses beginning after September 1, 2012. Nine-month costs and expenses grew 7%; Q3 costs grew 8%. Q3 margin contracted year over year, while nine-month margin improved. Selling and promotional costs rose 11% in Q3 and 12% year to date, primarily from online advertising and strategic-relationship staffing. Depreciation and amortization increased 21% in Q3 and 22% year to date, reflecting prior capital investment.
For the first nine months, operating cash flow was $54.2m, compared with $34.5m in 2012; investing cash outflow was $19.3m versus $41.6m, and financing cash outflow was $6.0m versus $10.3m. Capital expenditures were $15.1m, down from $28.5m. Cash and cash equivalents were $143.8m at September 30, 2013, compared with $114.9m at December 31, 2012. Total liabilities were $65.5m, including $28.8m of deferred revenue and student deposits; the filing reports no debt balance. The company also held a $6.0m subordinated note receivable.
Material changes, outlook and risks
- In October 2013, a government shutdown temporarily suspended military tuition-assistance (TA) programs. From approximately 41,200 October 1 registrations, about 13,100 had been dropped by October 14; net registrations were approximately 20% below October 2012. The company could not estimate the resulting fourth-quarter or full-year revenue impact, and student re-enrollment was uncertain.
- A transition to an internally managed Title IV financial-aid process encountered software and programming defects, leading to delayed processing, rejected student records, and inability to disburse aid to some students. Management said issues continued and could not estimate when fully resolved or the enrollment and revenue effect.
- On November 1, 2013, APEI acquired Hondros College Nursing Programs for approximately $45.0m, funded from existing cash, with no debt assumed. The Ohio-based business serves more than 1,500 students at four campuses. Required post-closing regulatory and accreditation steps remained, including Department of Education and accreditor review. Management believed cash and other liquidity would cover operations and planned capital expenditures, including after the acquisition; no quantified earnings guidance was provided.
- Revenue exposure includes DoD tuition assistance, veterans benefits, and Title IV student aid: these represented approximately 36%, 16%, and 37% of Q3 revenue, respectively. Reductions, suspensions, or changes to these programs could materially affect results. The filing also discusses pending Department of Education rulemaking on gainful employment and campus-safety requirements.
- APEI invested $4.0m in Fidelis Education during the period and held a separate investment in NWHW Holdings. The company repurchased 226,389 shares for $7.4m under its repurchase program; $15.6m remained authorized at September 30. Management reported no material pending legal proceedings and no material changes to contractual commitments outside the ordinary course.
Important facts for investors to verify
- Whether TA-related registration losses were recovered after the government reopened, and the eventual fourth-quarter revenue and enrollment effects.
- Whether Title IV processing defects were resolved and whether affected students remained enrolled or received aid.
- Hondros’ post-acquisition integration, performance, and required federal, state, and accreditation approvals, including the audit finding concerning late Title IV fund returns.
- Enrollment and revenue sensitivity to military tuition assistance, veterans benefits, and Title IV funding, as well as potential effects of proposed federal regulations.
- Cash and liquidity following the $45.0m acquisition payment, and any subsequent capital spending or share repurchases.