American Public Education, Inc. — Q1 2012 Form 10-Q
Business and reporting period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company provides online postsecondary education primarily to military and public-service communities through American Public University System, including American Military University and American Public University. It reports one operating segment.
Financial results and position
Unless otherwise stated, dollar amounts are in millions.
| Metric | Q1 2012 | Q1 2011 / prior date | Change |
|---|---|---|---|
| Revenue | $75.8 | $58.7 | +29% |
| Operating income | $14.9 | $13.1 | +14% |
| Operating margin | 19.5% | 22.2% | Down 2.7 percentage points |
| Net income | $9.1 | $7.9 | +15% |
| Diluted EPS | $0.50 | $0.43 | +16% |
| Operating cash flow | $14.8 | $19.9 | Down $5.0 |
| Cash and cash equivalents | $125.8 at Mar. 31, 2012 | $119.0 at Dec. 31, 2011 | Up $6.8 |
Costs and expenses rose 34% to $61.0 million, faster than revenue. Instructional costs increased 26% to $27.9 million; selling and promotional costs increased 32% to $14.4 million; and general and administrative costs increased 53% to $16.1 million. G&A included higher financial-aid processing and technology spending, as well as higher bad-debt expense. Bad-debt expense was 4.5% of revenue versus 1.1% a year earlier. The effective tax rate was 39.0%, versus 40.0%.
Operating cash flow was lower year over year, while investing cash use increased to $6.7 million from $3.7 million, primarily reflecting capital expenditures. Capital expenditures were $6.6 million. The company reported no debt in the supplied balance sheet; current assets were $144.6 million and current liabilities were $56.8 million at quarter-end. Management said cash and expected operating cash flows were adequate for ongoing operations and planned capital expenditures. The board-authorized repurchase program was completed: 87,033 shares were repurchased for $3.4 million, with cash paid of $3.9 million reported in financing activities.
Material changes and management commentary
- Adjusted net course registrations increased 24% year over year. Revenue growth reflected increased registrations from both civilian and military students.
- Management attributed higher selling costs to expanded civilian outreach, online advertising, and media advertising. It said increased G&A also reflected financial-aid processing, technology needs, and bad debt associated partly with students it believed enrolled primarily to obtain Title IV funds.
- Management cautioned that prior growth rates may not be sustainable through the rest of 2012, citing comparisons against periods with unusually high numbers of students less likely to persist, enrollment-control measures, competition, and market conditions. It projected that June 2012 net registrations from new students would decline year over year. No specific full-year revenue or earnings guidance is provided.
- In January 2012, the APUS board decided to withdraw voluntarily from DETC accreditation; APUS notified DETC on April 30, 2012, making the withdrawal effective immediately. The filing says the Higher Learning Commission remains APUS’s primary accreditor for Title IV purposes; its accreditation was reaffirmed in July 2011.
Risks, contingencies, and unusual items
- Title IV program review: The Department of Education’s review identified findings, including a disputed interpretation concerning students’ unofficial withdrawals and required returns of federal aid. No penalty had been specified and no amount was accrued. The company estimated potential refunds of up to approximately $837,000, subject to possible offsets from student collections or repayments.
- Funding concentration and regulation: Approximately 40% of Q1 2012 revenue came from students receiving Department of Defense tuition assistance, down from 46%; approximately 34% came from students using Title IV aid, up from 30%. Changes to either program could significantly affect operations. The filing discusses possible military tuition-assistance changes, a proposed bill restricting use of federal education funds for marketing and recruiting, and a new executive order on oversight and accountability for military and veterans education benefits.
- Fraud and student persistence: Management warned that enrollment and Title IV fraud could increase, that prevention measures may not keep pace, and that students enrolling primarily to obtain aid may be less likely to persist. A fraud-prevention measure introduced in late March was modified in early May because management believed it discouraged other prospective students.
- Other review and litigation: The Department of Veterans Affairs conducted an on-site program review in April 2012; no formal report had been received. A trademark dispute was dismissed without prejudice on April 9, 2012, to allow settlement discussions. Management said it knew of no pending or threatened litigation expected to have a material adverse effect.
- Investment risk: Cash equivalents bear variable interest rates; management said a 10% rate change would not materially affect future earnings or cash flows. The company reported no derivative financial instruments.
Important facts for investors to verify
- Whether the Department of Education issues a final determination in the Title IV review, and the amount, if any, of refunds or penalties.
- Whether DoD tuition-assistance or Title IV rules, funding levels, or oversight requirements change, and the effect on student demand and revenue.
- Whether new-student registrations decline as projected and whether enrollment-control measures affect persistence, bad debt, and growth.
- Whether civilian marketing and technology spending, bad-debt expense, and capital expenditures continue to pressure operating margins and cash flow.
- Progress and final cost of the approximately $18 million financial center project, then expected to be completed by September 2012; $11.6 million had been spent to date.