American Public Education, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results under GAAP. APEI operates one reportable segment through American Public University System, an online post-secondary education provider focused primarily on military and public-service communities.
Financial results and liquidity
| Metric | Q2 2013 | Six months 2013 |
|---|---|---|
| Revenue | $80.9 million, up 9% | $164.8 million, up 10% |
| Net income | $10.8 million, up 17% | $22.1 million, up 21% |
| Diluted EPS | $0.60, versus $0.51 | $1.23, versus $1.01 |
| Operating margin | 21.2%, versus 20.1% | 21.5%, versus 19.9% |
- Net course registrations increased 7% in Q2 and 8% in the first half year over year. Revenue growth reflected more registrations and a technology fee introduced for courses beginning after September 1, 2012.
- For the first half, operating cash flow was $34.6 million, compared with $22.7 million; capital expenditures were $10.9 million, compared with $18.9 million. Investing cash outflow was $15.1 million, including a $4.0 million investment in Fidelis Education.
- Cash and cash equivalents were $128.1 million at June 30, up from $114.9 million at December 31, 2012. Current assets were $145.3 million and current liabilities $50.9 million, implying working capital of approximately $94.3 million.
- No interest-bearing debt is reported on the balance sheet. The company held a $6.0 million subordinated note receivable from New Horizons, bearing 5% interest for the first five years and maturing in 2018.
- Stock repurchases totaled $7.0 million under the expanded authorization during the first half; $16.0 million remained authorized at June 30.
Changes, outlook, and risks
- Margins improved year over year, with instructional costs falling as a percentage of revenue, attributed to greater full-time faculty utilization and lower textbook costs. Selling and promotional expense rose faster than revenue in the first half; depreciation and amortization also increased.
- DoD Tuition Assistance programs were suspended for new enrollments in March 2013 in response to sequestration and reinstated in April. APEI said the suspension reduced Q2 service-member enrollments versus expectations. DoD tuition assistance represented approximately 35% of Q2 revenue and 37% of first-half revenue; Title IV aid represented 36% and 35%, respectively. Changes to these programs could materially affect results.
- At the start of Q3, APEI transitioned Title IV administration from a third party to an internal solution supported in part by a vendor. Software and programming errors caused longer-than-expected financial-aid processing delays, rejected student records, and delayed aid disbursements. Management could not estimate when all delays would be resolved or their effect on Q3 enrollments and revenue.
- Management stated that cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future; the filing provides no numerical earnings or revenue guidance.
- The company reported no material pending legal proceedings and no material change in contractual commitments outside ordinary business. Management concluded disclosure controls were effective as of June 30, 2013.
Important facts for investors to verify
- Resolution and enrollment/revenue impact of the Q3 Title IV processing delays, including any continuing customer-service or reputational effects.
- Future DoD Tuition Assistance funding, participation rules, and the company’s exposure to changes in federal student-aid programs.
- Whether registration growth and margin improvement persist, given increased advertising, financial-aid processing, technology, and depreciation costs.
- Performance and recoverability of the New Horizons note and minority investments, including Fidelis Education.