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APEI > SEC Filings for APEI > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for AMERICAN PUBLIC EDUCATION INC


9-May-2013

Quarterly Report


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

The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements

Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the Securities and Exchange Commission ("SEC"). We may, in some cases, use words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," "will," or "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition and results of operations may vary materially from those expressed in our forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this section of this Form 10-Q, in the "Risk Factors" section of this Form 10-Q, in the "Risk Factors" section of our annual report on Form 10-K for the fiscal year ended December 31, 2012 (the "Annual Report") and in our various filings with the SEC. You should read these factors and the other cautionary statements made in this Form 10-Q in combination with the more detailed description of our business in our Annual Report as being applicable to all related forward-looking statements wherever they appear in this quarterly report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

Background

American Public Education, Inc. ("APEI") is a provider of online post-secondary education directed primarily at the needs of the military and public service communities. We operate through the American Public University System ("APUS"), a regionally accredited online university that includes American Military University, or AMU, and American Public University, or APU.


We were founded as American Military University, Inc. in 1991 and began offering graduate courses in January 1993. In 1995, American Military University began offering undergraduate programs primarily directed to members of the armed forces. Over time, American Military University diversified its educational offerings in response to demand by military students for post-military career preparation. With its expanded program offerings, American Military University extended its outreach to the greater public service community, primarily police, fire, emergency management personnel and national security professionals. In 2002, we reorganized into a holding company structure, with APEI serving as the holding company of American Public University System, Inc., which operates APUS, which includes AMU and APU. Our university system achieved regional accreditation in May 2006 with The Higher Learning Commission of the North Central Association of Colleges and Schools and became eligible for participation in federal student financial aid programs under Title IV of the Higher Education Act of 1965, which we refer to as Title IV programs, for classes beginning in November 2006. In July 2011, The Higher Learning Commission reaffirmed accreditation of APUS for online courses and programs without any other stipulations on its affiliation status.

The university system offers terms beginning on the first Monday of each month in either eight or sixteen-week formats. Semesters and academic years are established to manage requirements for participation in Title IV programs and to assist students who are utilizing Title IV programs in meeting eligibility requirements.

Summary

Net course registrations increased 9% for the three-month period ended March 31, 2013 over the three-month period ended March 31, 2012. Our revenue increased from $75.8 million to $83.8 million, or by 11%, for the three-month period ended March 31, 2013 over the three-month period ended March 31, 2012. Operating margins increased to 21.7% from 19.5% for the three-month period ended March 31, 2013 over the three-month period ended March 31, 2012.

In March 2013, in response to automatic, across-the-board reductions in federal spending (also known as "sequestration"), each of the branches of the U.S. armed services suspended new enrollments in the Department of Defense ("DoD") voluntary education Tuition Assistance ("TA") programs. As a result of Congressional action, each of the services reinstated enrollments in the TA programs in April 2013. Our results of operations in the second quarter will be negatively impacted by the suspension of the TA programs, resulting in fewer enrollments from service members than otherwise would have been expected. While the TA programs were reinstated, budgetary pressures remain, and we do not know what future action will be taken with respect to TA programs, which could include elimination of the programs, reduction of the funds and/or benefits available or new restrictions on participation. Any such changes, or any other reduction in the funding for the TA programs, could have a material adverse effect on our operations.

As previously disclosed, we have determined to begin utilizing an internal solution to administer and manage our participation in Title IV programs and, accordingly, to terminate our relationship with Global Financial Aid Services, Inc., or Global, which has assisted us with administration of our participation in those programs since 2006. As a result of the transition from Global to the internal solution, which we are planning to effect mainly in the second quarter, we believe that there will be a delay in processing financial aid that is anticipated to last approximately one week. This transition could have the effect in the third quarter of 2013 of permanently deferring or, in some cases, losing course registrations from students that would otherwise have been realized.

Critical Accounting Policies

Critical accounting policies are disclosed in our consolidated financial statements and footnotes in the audited financial statements for the year ended December 31, 2012 included in our Annual Report for the year ended December 31, 2012. There have been no significant changes in our critical accounting policies from those disclosed in the Annual Report.


Results of Operations

The following table sets forth statements of income data as a percentage of
revenues for each of the periods indicated:

                                   Three Months Ended March 31,
                                      2013               2012
Revenues                               100.0 %             100.0 %
Costs and expenses:
Instructional costs and services        33.9                36.7
Selling and promotional                 19.7                19.0
General and administrative              20.9                21.2
Depreciation and amortization            3.8                 3.6

Total costs and expenses                78.3                80.5

Income from operations before
interest income and income taxes        21.7                19.5
Interest income, net                     0.1                 0.1

Income from operations
before income taxes                     21.8                19.6
Income tax expense                       8.2                 7.7
Investment loss, net of taxes              -                   -

Net Income                              13.6 %              11.9 %

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenues. Our revenues for the three months ended March 31, 2013 were $83.8 million, an increase of $8.0 million, or 11%, compared to $75.8 million for the three months ended March 31, 2012. The increase was primarily a result of an increase in the number of net course registrations from civilian and military students in addition to increased revenue per course as a result of implementing a technology fee for courses beginning after September 1, 2012.

Costs and expenses. Costs and expenses for the three months ended March 31, 2013 were $65.6 million, an increase of $4.6 million, or 8%, compared to $61.0 million for the three months ended March 31, 2012. Costs and expenses as a percentage of revenues decreased to 78.3% for the three months ended March 31, 2013 from 80.5% for the three months ended March 31, 2012.

Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2013 were $28.4 million, representing an increase of 2% from $27.8 million for the three months ended March 31, 2012. This increase was directly related to an increase in the number of classes offered due to the increase in net course registrations. Instructional costs and services expenses as a percentage of revenues were 33.9% for the three months ended March 31, 2013, compared to 36.7% for the three months ended March 31, 2012. Instructional costs as a percentage of revenue improved in the three months ended March 31, 2013 as a result of increased utilization of full-time faculty and improved textbook costs due to our e-press initiative.

Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2013 were $16.5 million, representing an increase of 15% from $14.4 million for the three months ended March 31, 2012. This increase was primarily due to higher costs associated with online advertising as well as increased staff focused on strategic relationships. Selling and promotional expenses as a percentage of revenues increased to 19.7% for the three months ended March 31, 2013 from 19.0% for the three months ended March 31, 2012.

General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2013 were $17.5 million, representing an increase of 9% from $16.1 million for the three months ended March 31, 2012. The increase in expense was a result of an increase in expenditures for financial aid processing fees and expenditures for technology projects for a larger student body. General and administrative expenses as a percentage of revenues decreased to 20.9% for the three months ended March 31, 2013 from 21.2% for the three months ended March 31, 2012. This decrease was primarily due to headcount growing at a slower rate than revenue.


Depreciation and amortization. Depreciation and amortization expenses were $3.2 million for the three months ended March 31, 2013, compared with $2.7 million for the three months ended March 31, 2012. This represents an increase of 19%. This increase resulted from greater capital expenditures and higher depreciation and amortization on a larger fixed-asset base.

Stock-based and other compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expense were $1.0 million in the aggregate for each of the three months ended March 31, 2012 and March 31, 2013.

Income tax expense. We recognized income tax expense for the three months ended March 31, 2013 and March 31, 2012 of $6.9 million and $5.8 million, respectively, or effective tax rates of 37.5% and 39.0%, respectively. The reduction in our effective tax rate in 2013 is primarily due to lower state tax rates as a result of the state tax study that we completed during the third quarter of 2011.

Net income. Our net income was $11.4 million for the three months ended March 31, 2013, compared to net income of $9.1 million for the three months ended March 31, 2012, an increase of $2.3 million, or 25%. This increase was related to the factors discussed above.

Liquidity and Capital Resources

Liquidity

The Company financed operating activities, and capital expenditures during the three months ended March 31, 2013 and March 31, 2012 primarily through cash provided by operating income and proceeds received from the exercise of stock options. In addition, in the 2013 period the Company also used cash for an investment in Fidelis Education, a company that is developing a technology platform to assist working adult students with education advising and career mentoring services as they pursue college degrees. Cash and cash equivalents were $120.6 million and $125.8 million at March 31, 2013 and March 31, 2012, respectively, representing a decrease of $5.2 million, or 4.1%.

We derive a significant portion of our revenues from tuition assistance programs from the DoD. Generally, these funds are received within 60 days of the start of the classes to which they relate. A growing source of revenue is derived from our participation in Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable class. These factors, together with the number of classes starting each month, affect our operational cash flow.

Our costs and expenses have increased with the increase in student enrollment, as well as our increased selling and promotional expenses, and we expect to fund these costs and expenses through cash generated from operations. Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash and cash equivalents, will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future.

Operating Activities

Net cash provided by operating activities was $20.6 million and $14.8 million for the three months ended March 31, 2013 and March 31, 2012, respectively.

Investing Activities

Net cash used in investing activities was $10.0 million and $6.7 million for the three months ended March 31, 2013 and March 31, 2012, respectively. Cash used in investing activities is primarily for capital expenditures, the majority of which have been related to buildings to support expansion, software development related to Partnership At a Distance, our customized student information and services system, and computers and equipment to support increased staff. In addition, the Company made a minority investment in Fidelis Education for $4.0 million.

We expect that we will continue to incur expenses for investing activities in strategic opportunities, or to enhance our business capabilities, such as our investment in Fidelis Education. Furthermore, capital expenditures could be higher in the future as a result of the acquisition of existing structures or potential new construction projects that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth. The Company will continue to explore opportunities to invest in other opportunities in the education industry, which could include purchasing other education-related companies or investing in companies developing new technologies.


Financing Activities

Net cash used in financing activities was $4.9 million and $1.3 million for the three months ended March 31, 2013 and March 31, 2012, respectively. Cash used in financing activities was from the repurchase of our common stock, net of cash received from the issuance of common stock as a result of stock option exercises, and the excess tax benefit from stock-based compensation.

On May 14, 2012, the Company's Board of Directors authorized a program to repurchase up to $20 million of shares of the Company's common stock. On March 14, 2013, the Company's Board of Directors increased the authorization by an additional $15 million. Subject to market conditions, applicable legal requirements and other factors, the repurchases may be made in open market transactions or privately negotiated transactions. The authorization does not obligate the Company to acquire any shares, and purchases may be commenced or suspended at any time based on market conditions and other factors that the Company deems appropriate. For the three-month period ended March 31, 2013, the Company repurchased 154,225 shares under the repurchase program for an aggregate amount of $5.0 million. As of March 31, 2013, there remained $18,001,740 of authorized availability under the program.

Off-Balance Sheet Arrangements

We do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Contractual Commitments

There were no material changes to our contractual commitments outside of the ordinary course of our business during the three months ended March 31, 2013.

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