American Public Education, Inc. — Q3 2010 Form 10-Q
Business and period: The company provides online postsecondary education primarily to military and public-service communities through American Military University and American Public University. This unaudited report covers the quarter and nine months ended September 30, 2010; comparisons are with the same 2009 periods.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $48.3 million | $36.5 million | $141.9 million | $105.3 million |
| Operating income | $9.3 million | $8.4 million | $34.2 million | $25.9 million |
| Operating margin | 19.3% | 23.0% | 24.1% | 24.6% |
| Net income | $5.6 million | $5.0 million | $20.3 million | $15.6 million |
| Diluted EPS | $0.30 | $0.27 | $1.07 | $0.82 |
- Revenue increased 32% in Q3 and 35% year to date; management attributed the increase primarily to more course registrations from new civilian students. Net course registrations grew 25% and 32%, respectively.
- Net income increased 11% in Q3 and 30% year to date. Q3 net margin was 11.6%, versus 13.8%; nine-month net margin was 14.3%, versus 14.8%.
- Expense growth exceeded revenue growth in Q3: total costs and expenses rose 39%, with selling and promotional expense up 72%. Marketing, faculty and student-support investments contributed to lower operating margins.
- Cash and equivalents were $86.6 million at September 30, 2010, up from $74.9 million at December 31, 2009. Current assets were $102.6 million and current liabilities $36.2 million. The filing reports no debt balance.
- Nine-month operating cash flow was $32.8 million, compared with $22.8 million. Investing cash outflow was $14.3 million, including $14.0 million of capital expenditures, versus $8.6 million of investing outflow and $7.8 million of capital expenditures in 2009. Financing cash outflow was $6.8 million, including $9.2 million of share repurchases.
Changes, outlook and risks
- Management said active-duty military registration growth slowed more than expected in Q2 and declined markedly in Q3. It cited increased military operations and deployments, and limited internet access for some deployed students, as possible factors; the future trend was uncertain. The company expected slower growth in total registrations and revenue.
- Management planned to maintain heightened marketing spending in Q4 and expected capital expenditures to continue increasing in the near term, including for a Charles Town facility and a new learning management system. No specific financial guidance was provided.
- DoD tuition assistance accounted for 48% of Q3 revenue and 51% of nine-month revenue, down from 55% and 57% in 2009. Title IV aid accounted for 25% and 22%, respectively, up from 20% and 18%. Management warned that reductions or restrictions in either source could significantly affect operations.
- New Department of Education rules and proposed gainful-employment requirements, state authorization, credit-hour, incentive-payment and misrepresentation rules could increase compliance costs or affect program and Title IV eligibility. The company was evaluating their impact and said uncertainty and compliance challenges could materially harm results.
- Congressional scrutiny of for-profit education and DoD tuition assistance may lead to legislation, rule changes or stronger enforcement. The company incurred $326,000 of additional legal and related costs responding to a Senate committee information request and expected further costs.
- A putative securities class action filed August 12, 2010 alleges misleading statements or omissions about company prospects during February 22–August 5, 2010. Damages were unspecified; the company said it intended to defend the case. Management reported no other known pending or threatened litigation expected to have a material adverse effect.
- The company repurchased 340,000 shares for $9.2 million through September 30 under a $20 million authorization; it repurchased a further 260,000 shares for $8.3 million through November 5. The filing states that disclosure controls were effective and there was no material change in internal control over financial reporting.
Investor verification points
- Track active-duty military registrations, civilian growth, and the effects of deployment activity on enrollment and revenue.
- Assess whether increased marketing and support costs can be absorbed without further margin erosion.
- Monitor final gainful-employment rules, state authorization compliance, and changes affecting Title IV and DoD tuition assistance.
- Review capital spending, facility and learning-system commitments, and the pace of share repurchases against available cash.
- Follow the securities litigation and congressional inquiries, including any subsequent costs, findings or disclosures.