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APEI > SEC Filings for APEI > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for AMERICAN PUBLIC EDUCATION INC

Form 10-Q for AMERICAN PUBLIC EDUCATION INC


5-Nov-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 and the audited financial information and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Forward-Looking Statements

Some of the statements contained in this Quarterly Report on 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 Quarterly Report on 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 Quarterly Report on Form 10-Q, in the "Risk Factors" section of this Quarterly Report on 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 Quarterly Report on 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" or the "Company") 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. APUS 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.

APUS 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 2% and 6% for the three- and nine-month periods ended September 30, 2013, over the comparable prior year periods. For the three- and nine-month periods ended September 30, 2013, our revenue increased from $77.1 million to $81.8 million, or by 6%, and from $227.5 million to $246.5 million, or by 8%, over the comparable prior year periods. Operating margins decreased to 21.4% from 22.7% and increased to 21.4% from 20.8% for the three- and nine-month periods ended September 30, 2013, over the comparable prior year periods.

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 were 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.

In October 2013, the TA programs were temporarily suspended as a result of the U.S. government partial shutdown. On October 1, 2013, prior to the government shutdown, course registrations for October 2013 were approximately 41,200. As of October 14, 2013, however, approximately 13,100 registrations had been dropped, resulting in a net course registration reduction of approximately 20% compared to October 2012. We believe that many of these dropped registrations resulted from the suspension of the TA programs. We anticipate, but cannot assure, that many of the students who were dropped from courses due to the suspension of the TA programs may reenroll now that the government has reopened. We are currently unable to estimate the potential impact of the government shutdown and the suspension of the TA programs on our overall course enrollments and revenues for the fourth quarter and for the fiscal year. The shutdown and suspension, and any other shutdown or suspension, could have a material adverse effect on our operations. The potential risks associated with these events are further addressed in the risk factors appearing elsewhere in this Form 10-Q.

In the beginning of the third quarter, we transitioned from using the services of a third party to assist us with the administration and management of our participation in Title IV programs to utilizing an internal solution that relies, in part, on software and services provided by a third party vendor. We experienced unexpected delays and difficulties in financial aid processing as a result of various software and programming errors, resulting in, among other things, the Department of Education's rejection of certain student records and the inability to disburse federal student aid to some students. These problems, and the related customer service and reputational issues that they caused, could have the effect of permanently deferring or, in some cases, causing us to lose course registrations by students that would otherwise have been realized. We continue to experience some delays and customer service issues, and although we and our software vendor are working to resolve the outstanding software and programming defects, we are unable to estimate when the remaining processing delays will be fully resolved. As a result, we are unable to estimate the extent to which the delays and any related customer service and reputational issues will affect our overall course enrollments and revenues for the fourth quarter. The potential risks associated with this transition are further addressed in the risk factors in our Annual Report on Form 10-K.


On November 1, 2013, we acquired all of the outstanding equity of National Education Seminars, Inc., operating as Hondros College, Nursing Programs ("HCON"), for an adjusted aggregate purchase price, subject to post-closing working capital adjustments of approximately $45.0 million. The Company assumed no debt in the acquisition of HCON. The acquisition was financed from existing cash. HCON offers nursing programs including a diploma in practical nursing, an associate degree in nursing, and an online registered nurse to bachelor of science in nursing completion program to more than 1,500 students at four campus locations in the suburban areas of Cincinnati, Columbus, Dayton and Cleveland, Ohio. The potential risks associated with this transaction are further addressed in the risk factors appearing elsewhere in this Form 10-Q.

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          Nine Months Ended
                                        September 30,              September 30,
                                      2013          2012          2013         2012
Revenues                                100.0 %      100.0 %        100.0 %     100.0 %
Costs and expenses:
Instructional costs and services         34.4         34.2           34.0        35.4
Selling and promotional                  19.6         18.7           19.7        19.0
General and administrative               20.4         20.8           20.9        21.2
Depreciation and amortization             4.2          3.6            4.0         3.6

Total costs and expenses                 78.6         77.3           78.6        79.2

Income from operations before
interest income and income taxes         21.4         22.7           21.4        20.8
Interest income, net                      0.1            -            0.1           -

Income from operations
before income taxes                      21.5         22.7           21.5        20.8
Income tax expense                        8.1          8.7            8.1         8.0
Investment loss, net of taxes            (0.1 )          -              -           -

Net Income                               13.3 %       14.0 %         13.4 %      12.8 %

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenues. Our revenues for the three months ended September 30, 2013 were $81.8 million, an increase of $4.7 million, or 6%, compared to $77.1 million for the three months ended September 30, 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 September 30, 2013 were $64.3 million, an increase of $4.7 million, or 8%, compared to $59.6 million for the three months ended September 30, 2012. Costs and expenses as a percentage of revenues increased to 78.6% for the three months ended September 30, 2013 from 77.3% for the three months ended September 30, 2012.

Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended September 30, 2013 were $28.1 million, representing an increase of 6% from $26.4 million for the three months ended September 30, 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 34.4% for the three months ended September 30, 2013, compared to 34.2% for the three months ended September 30, 2012. Instructional costs as a percentage of revenue increased in the three months ended September 30, 2013 as a result of higher utilization of adjunct faculty.

Selling and promotional expenses. Our selling and promotional expenses for the three months ended September 30, 2013 were $16.0 million, representing an increase of 11% from $14.4 million for the three months ended September 30, 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 19.6% for the three months ended September 30, 2013 from 18.7% for the three months ended September 30, 2012.

General and administrative expenses. Our general and administrative expenses for the three months ended September 30, 2013 were $16.8 million, representing an increase of 5% from $16.0 million for the three months ended September 30, 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 20.4% for the three months ended September 30, 2013 from 20.8% for the three months ended September 30, 2012. This decrease was primarily due to bad debt expense as a percentage of revenue decreasing to 4.1% for the three months ended September 30, 2013, compared to 4.4% for the three months ended September 30, 2012.

Depreciation and amortization. Depreciation and amortization expenses were $3.4 million for the three months ended September 30, 2013, compared with $2.8 million for the three months ended September 30, 2012. This represents an increase of 21%. 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 $940,000 and $1,022,000 in the aggregate for each of the three months ended September 30, 2012 and September 30, 2013, respectively.

Income tax expense. We recognized income tax expense for the three months ended September 30, 2013 and September 30, 2012 of $6.6 million and $6.7 million, respectively, or effective tax rates of 37.6% and 38.3%, respectively. The reduction in our effective tax rate in 2013 is primarily due to lower state tax rates.

Net income. Our net income was $10.9 million for the three months ended September 30, 2013, compared to net income of $10.8 million for the three months ended September 30, 2012, an increase of $0.1 million, or 1.0%. This increase was related to the factors discussed above.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenues. Our revenues for the nine months ended September 30, 2013 were $246.5 million, an increase of $19.0 million or 8%, compared to $227.5 million for the nine months ended September 30, 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 nine months ended September 30, 2013 were $193.6 million, an increase of $13.5 million, or 7%, compared to $180.1 million for the nine months ended September 30, 2012. Costs and expenses as a percentage of revenues decreased to 78.6% for the nine months ended September 30, 2013 from 79.2% for the nine months ended September 30, 2012.

Instructional costs and services expenses. Our instructional costs and services expenses for the nine months ended September 30, 2013 were $83.7 million, representing an increase of 4% from $80.5 million for the nine months ended September 30, 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 34.0% for the nine months ended September 30, 2013, compared to 35.4% for the nine months ended September 30, 2012. Instructional costs as a percentage of revenue improved in the nine months ended September 30, 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 nine months ended September 30, 2013 were $48.6 million, representing an increase of 12% from $43.3 million for the nine months ended September 30, 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 nine months ended September 30, 2013 from 19.0% for the nine months ended September 30, 2012.

General and administrative expenses. Our general and administrative expenses for the nine months ended September 30, 2013 were $51.4 million, representing an increase of 7% from $48.2 million for the nine months ended September 30, 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 nine months ended September 30, 2013 from 21.2% for the nine months ended September 30, 2012. This decrease was primarily due to bad debt expense as a percentage of revenue decreasing to 4.1% for the nine months ended September 30, 2013, compared to 4.7% for the nine months ended September 30, 2012.

Depreciation and amortization. Depreciation and amortization expenses were $9.9 million for the nine months ended September 30, 2013, compared with $8.1 million for the nine months ended September 30, 2012. This represents an increase of 22%. 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 $2.9 million and $3.0 million in the aggregate for the nine months ended September 30, 2012 and September 30, 2013, respectively.

Income tax expense. We recognized income tax expense for the nine months ended September 30, 2013 and September 30, 2012 of $20.0 million and $18.3 million, respectively, or effective tax rates of 37.6% and 38.5%, respectively. The reduction in our effective tax rate in 2013 is primarily due to lower state tax rates.

Net income. Our net income was $33.0 million for the nine months ended September 30, 2013, compared to net income of $29.1 million for the nine months ended September 30, 2012, an increase of $3.9 million, or 13%. This increase was related to the factors discussed above.

Liquidity and Capital Resources

Liquidity

We financed operating activities and capital expenditures during the nine months ended September 30, 2013 and September 30, 2012 primarily through cash provided by operating income and proceeds received from the exercise of stock options. In the first quarter of 2013, we also used cash for a minority investment in Fidelis Education, a company that is developing a technology platform that will assist working adult students with education advising and career mentoring services as they pursue college degrees. Cash and cash equivalents were $143.8 million and $101.6 million at September 30, 2013 and September 30, 2012, respectively, representing an increase of $42.2 million, or 42%.

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. On November 1, 2013, we used approximately $45.0 million of existing cash to acquire all of the outstanding equity of HCON, which provides nursing programs to more than 1,500 students at four campus locations in Ohio. Even with this capital expenditure, 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 $54.2 million and $34.5 million for the nine months ended September 30, 2013 and September 30, 2012, respectively.

Investing Activities

Net cash used in investing activities was $19.3 million and $41.6 million for the nine months ended September 30, 2013 and September 30, 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, we made an equity 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. 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. We will continue to explore opportunities to invest 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 $6.0 million and $10.3 million for the nine months ended September 30, 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, our Board of Directors authorized a program to repurchase up to $20 million of shares of our common stock. On March 14, 2013, our Board of Directors increased the authorization by an additional $15 million of shares. Subject to market conditions, applicable legal requirements and other factors, the repurchases may be made from time to time in open market transactions or privately negotiated transactions. The authorization does not obligate us to acquire any shares, and purchases may be commenced or suspended at any time based on market conditions and other factors that we deem appropriate. For the nine-month period ended September 30, 2013, we repurchased 226,389 shares under the repurchase program for an aggregate amount of $7.4 million. As of September 30, 2013, $15.6 million remained authorized for repurchase under the expanded program.

HCON Acquisition Regulatory Review

The acquisition of HCON was required to be reported to, and in some cases approved by, various education regulatory bodies. An institution must obtain U.S. Department of Education ("Department of Education") approval for a change in ownership and control in order to continue to participate in Title IV programs under the new ownership. The Department of Education does not provide pre-closing approval, but at the request of the parties, the Department of Education will conduct a "pre-acquisition review" of a proposed change. Upon completion of the pre-acquisition review, the Department of Education sends the institution a letter that identifies any conditions that the Department of Education anticipates imposing on the institution in connection with its continued participation in Title IV programs after closing. In this case, the parties requested that the Department of Education conduct a "pre-acquisition review." The Department of Education issued a letter that identified no concerns regarding the transaction and no conditions on HCON's eligibility to continue to participate in the
Title IV programs while the Department of Education completes its postclosing review, other than those conditions that are imposed in the ordinary course on institutions that undergo a change in ownership and control. The Department of Education letter also noted that the Department of Education expects to resolve an audit finding related to late returns of Title IV funds when a student withdraws from HCON. As required, we intend to timely notify the Department of Education about the occurrence of the change in ownership of HCON and submit a materially complete application for approval to participate in Title IV programs. As part of the application for final approval, we must provide other required documents to the Department of Education by the end of December 2013. If we do so, HCON may continue to participate in Title IV programs pending Department of Education action on the application.

The Accrediting Council for Independent Colleges and Schools ("ACICS"), which accredits HCON as an institution, and the Commission on Collegiate Nursing Education ("CCNE"), which accredits the registered nurse to bachelor of science . . .

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