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NAUH > SEC Filings for NAUH > Form 10-Q on 5-Apr-2013All Recent SEC Filings

Show all filings for NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.


5-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Certain of the statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as elsewhere in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). These statements are based on the Company's current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause its actual results to differ materially from those expressed in or implied by such statements. The assumptions, uncertainties and risks include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements, competitive factors, risks associated with the opening of new campuses and hybrid learning centers, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to continue to implement our growth strategy, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the Company's Annual Report on Form 10-K filed on August 3, 2012 and its other filings with the Securities and Exchange Commission (the "SEC"). The Company undertakes no obligation to update or revise any forward looking statement, except as may be required by law.

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Background

National American University, or NAU, is a regionally accredited, proprietary, multi-campus institution of higher learning offering associate, bachelor's and master's degree programs in business-related disciplines, such as accounting, management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites as well as online. As of April 5, 2013 operations include 37 locations (three of which are pending regulatory approvals - Tigard, Oregon; Houston, Texas; and the Rouche Graduate Center in Austin, Texas) located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota and Texas; distance learning service centers in Indiana and Texas; and distance learning operations and central administration offices in Rapid City, South Dakota.

As of February 28, 2013, NAU had 2,610 students enrolled in courses at its physical locations only, 6,946 students enrolled in online courses only, and 1,933 students enrolled in a hybrid format taking both online courses and courses at a physical location. NAU supports the instruction of 2,166 additional students at affiliated institutions for which NAU provides online course hosting and technical assistance. NAU provides courseware development, technical support and online class hosting services to various colleges, technical schools and training institutions in the United States and Canada that do not have the capacity to develop and operate their own in-house online curriculum for their students. NAU does not share revenues with these institutions, but rather charges a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.

The real estate operations consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 0.9% of our revenues for the quarter ended February 28, 2013.

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU's operations. For the three months ended February 28, 2013, approximately 92% of our revenue was generated from NAU's academic revenue, which consists of tuition and fees assessed at the start of each term. The remainder of our revenue comes from NAU's auxiliary revenue from sources such as NAU's book sales, and the real estate operations' rental income and condominium sales. Tuition revenue is reported net of adjustments for refunds and scholarships and is recognized on a daily basis over the length of the term. Upon withdrawal, students generally are refunded tuition based on the uncompleted portion of the term. Auxiliary revenue is recognized when earned.

Factors affecting net revenue include:

the number of students who are enrolled and who remain enrolled in courses throughout the term;

the number of credit hours per student;

the student's degree and program mix;

changes in tuition rates;

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the affiliates with which NAU is working as well as the number of students at the affiliates; and

the amount of scholarships for which students qualify.

We record unearned tuition for academic services to be provided in future periods. Similarly, we record a tuition receivable for the portion of the tuition that has not been paid. Tuition receivable at the end of any calendar quarter largely represents student tuition due for the prior academic quarter. Based upon past experience and judgment, we establish an allowance for doubtful accounts to recognize those receivables we anticipated will not be paid. Any uncollected account more than six months past due on students who have left NAU is charged against the allowance. Bad debt expenses as a percentage of revenues for the nine months ended February 28, 2013 and February 29, 2012 were 3.4% and 3.4%, respectively.

We define enrollments for a particular reporting period as the number of students registered in a course on the last day of the reporting period. Enrollments are a function of the number of continuing students registered and the number of new enrollments registered during the specified period. Enrollment numbers are offset by inactive students, graduations and withdrawals occurring during the period. Inactive students for a particular period are students who are not registered in a class and, therefore, are not generating net revenue for that period.

We believe the principal factors affecting NAU's enrollments and net revenue are the number and breadth of the programs being offered; the effectiveness of our marketing, recruiting and retention efforts; the quality of our academic programs and student services; the convenience and flexibility of our online delivery platform; the availability and amount of federal and other funding sources for student financial assistance; and general economic conditions.

The following chart is a summary of our student enrollment on February 28, 2013 and February 29, 2012, by degree type and by instructional delivery method.

                                   February 28, 2013             February 29, 2012              % Growth for
                                    (Winter '13 Qtr)              (Winter '12 Qtr)              same quarter
                                   Number of Students            Number of Students            over prior year
Graduate                                           414                           392                        5.6 %
Undergraduate and Diploma                       11,075                        10,576                        4.7 %

Total                                           11,489                        10,968                        4.8 %

On-Campus                                        2,610                         3,286                      (20.6 )%
Online                                           6,946                         5,818                       19.4 %
Hybrid                                           1,933                         1,864                        3.7 %

Total                                           11,489                        10,968                        4.8 %

We experienced a 4.8% growth in enrollment in the winter term 2013 over the winter term 2012. This rate of growth was a decrease from our historic enrollment growth rate, which has averaged approximately 11.8% annually since 1998. We believe we have realized a significant, yet steady increase in enrollments since 2005 due to our investment of approximately $53.6 million to expand and develop physical locations and academic programming. In addition, we believe that our strategic plan was critical in obtaining the growth and results of operations that we have seen over the last year.

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We plan to continue expanding and developing our academic programming, opening 1-2 additional physical locations, focus on growth at our 37 existing locations and, potentially, making strategic acquisitions. This growth will be subject to applicable regulatory requirements and market conditions. With these efforts, we anticipate our positive enrollment trends will continue. To the extent the economic downturn has caused enrollment growth, our ability to maintain or increase that portion of our growth will depend on how economic factors are perceived by our target student market in relation to the advantages of pursuing higher education. If current market conditions continue, we believe that the extent to which these enrollment trends will continue will be correlated with the opening of additional physical locations, the number of programs that are developed, the number of programs that are expanded to other locations, and, potentially, the number of locations and programs added through strategic acquisitions. If market conditions decline or if we are unable to open new physical locations, develop or expand academic programming or make strategic acquisitions, whether as a result of regulatory limitations or other factors, our growth rate will likely decline.

Expenses. Expenses consist of cost of educational services, selling, general and administrative, auxiliary expenses, the cost of condominium sales, and the gain/loss on disposition of property and equipment. Cost of educational services expenses contains expenditures attributable to the educational activity of NAU. This expense category includes salaries and benefits of faculty and academic administrators, costs of educational supplies, faculty reference and support material and related academic costs, and facility costs. Selling, general and administrative expenses include the salaries of the learner services positions (and other expenses related to support of students), salaries and benefits of admissions staff, marketing expenditures, salaries of other support and leadership services (including finance, human resources, compliance and other corporate functions), legal expenses, expenses related to expansion and development of academic programs and physical locations, as well as depreciation, bad debt expenses and other related costs associated with student support functions. Auxiliary expenses include expenses for the cost of goods sold, including costs associated with books and clothing. The cost of condominium sales is the expense related to condominiums that are sold during the reporting period. The gain/loss on disposition of property and equipment expense records the remaining book value of assets that are no longer used by us.

Factors affecting comparability

Set forth below are selected factors we believe have had, or which we expect to have, a significant effect on the comparability of our recent or future results of operations:

Introduction of new programs and specializations.We plan to develop additional degree and diploma programs and specializations over the next several years, subject to applicable regulatory approvals. When introducing new programs and specializations, we invest in curriculum development, support infrastructure and marketing research. Revenues associated with these new programs are dependent upon enrollments, which are lower during the periods of introduction. During this period of introduction and development, the rate of growth in revenues and operating income has been, and may be, adversely affected, in part, due to these factors. Historically, as the new programs and specializations develop, increases in enrollment are realized, cost-effective delivery of instructional and support services are achieved, economies of scale are recognized and more efficient marketing and promotional processes are gained.

Introduction of new physical locations. We plan to develop additional physical locations over the next several years, subject to applicable regulatory approvals. When opening new locations, we invest significant funds in expenses related to opening new locations without the immediate impact of revenue to offset these expenses. Included in the expenses are depreciation related to capital funds for equipment and build-outs as well as operating funds for staff salaries and marketing dollars. These expenses will negatively impact the operating margin in the short-term with anticipated long-term gains due to the increased revenues.

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Stock-based compensation. We expect to incur increased non-cash, stock based compensation expense in connection with existing and future issuances under our 2009 Stock Option and Compensation Plan or other equity incentive plans.

Seasonality. Our operations are generally subject to seasonal trends. While we enroll students throughout the year, summer and winter quarter new enrollments and revenue are generally lower than enrollments and revenue in other quarters due to the traditional custom of summer breaks and the holiday break in December and January. In addition, we generally experience an increase in enrollments in the fall of each year when most students seek to begin their post-secondary education.

Results of Operations-Nine Months Ended February 28, 2013 Compared to Nine
Months Ended February 29, 2012

National American University Holdings, Inc.

The following table sets forth statements of operations data as a percentage of
total revenue for each of the periods indicated:



                                                     Nine Months                Nine Months
                                                        Ended                      Ended
                                                     February 28,               February 29,
                                                         2013                       2012
                                                    In percentages             In percentages
Total revenues                                                100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                   22.6                       23.6
Selling, general and administrative                            64.0                       66.7
Auxiliary expense                                               5.2                        2.4
Cost of condominium sales                                       0.0                        0.0
Loss (gain) on disposition of property                          0.1                       (0.1 )

Total operating expenses                                       91.9                       92.6
Operating income                                                8.1                        7.4
Interest expense                                               (0.8 )                     (0.4 )
Interest income                                                 0.1                        0.1
Other income                                                    0.0                        0.1

Income before income taxes                                      7.4                        7.2
Income tax expense                                             (2.9 )                     (3.0 )
Net income (loss) attributable to
non-controlling interest                                        0.0                       (0.1 )

Net income attributable to the Company                          4.5 %                      4.1 %

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For the nine months ended February 28, 2013, our total revenue was $96 million, an increase of $10.2 million or 11.9%, as compared to total revenue of $85.8 million for the same period in 2012. The increase was primarily due to the execution of our strategic growth plan which resulted in an average enrollment increase of 7.4% for the nine months ended February 28, 2013 over the same period in 2012 and an increase in auxiliary revenue due to a change in the way we sell books and the move to an online book vendor. The average enrollment increase is comprised of 10.2% during the summer quarter, 7.2% during the fall quarter and 4.8% during the winter. The enrollment increases were driven by management's execution of our strategic plan which detailed our investment in new programs, expansion of existing programs to new markets and an improved enrollment management system which monitors and improves our recruitment processes. Our revenue for the nine months ended February 28, 2013 consisted of $95.2 million from our NAU operations and $0.8 million from our other operations.

Total operating expenses were $88.3 million or 91.9% of total revenue for the nine months ended February 28, 2013, which is an increase of $8.8 million compared to the same period in 2012. Income from operations was $7.8 million or 8.1% of total revenue for the nine months ended February 28, 2013, which is an increase of $1.4 million compared to the same period in 2012. Net income attributable to the Company was $4.3 million or 4.5% of total revenue for the nine months ended February 28, 2013 as compared to $3.5 million or 4.1% of total revenue for the nine months ended February 29, 2012.

NAU

The following table sets forth statements of operations data as a percentage of
total revenue for each of the periods indicated:



                                                          Nine Months                Nine Months
                                                             Ended                      Ended
                                                          February 28,               February 29,
                                                              2013                       2012
                                                         In percentages             In percentages
Total revenues                                                     100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                        22.8                       23.8
Selling, general and administrative                                 63.2                       65.8
Auxiliary expense                                                    5.3                        2.5
Cost of condominium sales                                            0.0                        0.0
Loss on disposition of property                                      0.0                        0.0

Total operating expenses                                            91.3                       92.1
Operating income                                                     8.7                        7.9
Interest expense                                                    (0.8 )                     (0.4 )
Interest income                                                      0.1                        0.1
Other income                                                        (0.1 )                      0.0

Income before non-controlling interest and taxes                     7.9 %                      7.6 %

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Total revenue. The total revenue for NAU for the nine months ended February 28, 2013 was $95.2 million, an increase of $10.2 million or 12.0%, as compared to total revenue of $85.0 million for the same period in 2012. The increase was primarily due to the average enrollment increase of 7.4% for the nine months ended February 28, 2013 over the same period in 2012 and an increase in auxiliary revenue due to a change in the way we sell books and the move to an online book vendor. The average enrollment increase is comprised of 10.2% during the summer quarter, 7.2% during the fall quarter and 4.8% during the winter. In addition, the increase is due to a board approved tuition increase of 5.4% that became effective September 2012. We believe that NAU's well-defined strategic plan continues to contribute to the increase in the revenues.

The academic revenue for the nine months ended February 28, 2013 was $87.5 million, an increase of $6.9 million or 8.5%, as compared to academic revenue of $80.7 million for the same period in 2012. The increase was primarily due to the enrollment increase over the prior year. The auxiliary revenue was $7.6 million, an increase of $3.3 million or 77.3%, as compared to auxiliary revenue of $4.3 million for the same period in 2012. This increase in auxiliary revenue was primarily driven by increased enrollment growth and the implementation of a new online bookstore vendor resulting in a change in the book selling process.

Cost of educational services. The educational services expense as a percentage of total revenue decreased by 1.0 percentage points for the nine months ended February 28, 2013, to 22.8%, as compared to 23.8% for the same period in 2012. This decrease was a result of fixed costs such as facility expenses on an increasing revenue base.

Selling, general and administrative expenses. The selling, general and administrative expenses as a percentage of net revenue decreased by 2.6 percentage points for the nine months ended February 28, 2013, to 63.2%, as compared to 65.8% for the same period in 2012. The selling, general and administrative expenses for the nine months ended February 28, 2013 were $60.2 million, an increase of $4.3 million, or 7.6%, as compared to selling, general and administrative expenses of $55.9 million for the same period in 2012. Included in these numbers are the additional staffing and institutional support to bring the developmental campuses online which is required to ensure the operation of these new locations and to support the quality of our academic programs. As these locations mature and the revenue base grows, the costs associated with these locations will continue to see improvement as a percentage of revenue. In addition, the university is self-insured and experienced health insurance claims of $0.7 million higher than the same period of the previous year.

Auxiliary. Auxiliary expenses for the nine months ended February 28, 2013 were $5.0 million, an increase of $2.9 million as compared to auxiliary expenses of $2.1 million for the same period in 2012. As discussed above auxiliary expenses increased due to the implementation of a new online bookstore vendor.

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Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the nine months ended February 28, 2013 was $7.5 million, an increase of $1.0 million or 16.1%, as compared to $6.5 for the same period in 2012. This increase is discussed above in more detail.

Results of Operations-Three Months Ended February 28, 2013 Compared to Three
Months Ended February 29, 2012

National American University Holdings, Inc.

The following table sets forth statements of operations data as a percentage of
total revenue for each of the periods indicated:



                                                     Three Months               Three Months
                                                        Ended                      Ended
                                                    February  28,              February  29,
                                                         2013                       2012
                                                    In percentages             In percentages
Total revenues                                                100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                   22.0                       23.2
Selling, general and administrative                            64.4                       70.3
Auxiliary expense                                               4.5                        2.0
Cost of condominium sales                                       0.0                        0.0
Loss on disposition of property                                 0.0                        0.0

Total operating expenses                                       90.9                       95.5
Operating income                                                9.1                        4.5
Interest expense                                               (0.9 )                     (0.8 )
Interest income                                                 0.1                        0.1
Other income                                                    0.0                        0.1

Income before income taxes                                      8.3                        3.9
Income tax expense                                             (3.3 )                     (2.2 )
Net income attributable to non-controlling
interest                                                        0.0                        0.0

Net income attributable to the Company                          5.0 %                      1.7 %

For the three months ended February 28, 2013, our total revenue was $32.1 million, an increase of $2.1 million or 7.1%, as compared to total revenue of $29.9 million for the same period in 2012. The increase was primarily due to the enrollment increase of 4.8% during the winter quarter 2013 over the winter quarter 2012 and an increase in auxiliary revenue due to a change in the online bookstore vendor and the way in which books are sold to the students. Our revenue for the three months ended February 28, 2013 consisted of $31.8 million from our NAU operations and $0.3 million from our other operations. Total operating expenses were $29.1 million or 90.9% of total revenue for the three months ended February 28, 2013, which is an increase of $0.6 million compared to the same period in 2012. Income from operations was $2.9 million or 9.1% of total revenue for the three months ended February 28, 2013, which is an increase of $1.6 million compared to the same period in 2012. Net income attributable to the Company was $1.6 million or 5.0% of total revenue for the three months ended February 28, 2013, an increase of 208.1%, compared to the same period in 2012. The enrollment increases were driven by management's execution of our strategic plan which detailed our investment in new programs, expansion of existing programs to new markets and an improved enrollment management system of monitoring and improving our recruitment processes. Selling, general, and administrative expenses decreased $0.4 million as a result of continued process improvements and cost containment measures. The additional details regarding these variances are described in greater detail below.

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