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AMERICAN PUBLIC EDUCATION, INC. Reports Operating Results (10-K)

February 28, 2012 | About:
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AMERICAN PUBLIC EDUCATION, INC. (APEI) filed Annual Report for the period ended 2011-12-31.

Amer Pub Educat has a market cap of $772.8 million; its shares were traded at around $41.33 with a P/E ratio of 21.2 and P/S ratio of 3.9.
This is the annual revenues and earnings per share of APEI over the last 10 years. For detailed 10-year financial data and charts, go to 10-Year Financials of APEI.


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We believe that national security, homeland security, and public safety professionals also represent a large and growing market for online education. As with their military counterparts, these individuals have unique program requirements as well as unpredictable and demanding work schedules that often prevent them from attending traditional universities. Over the last several years, a number of our competitors have expanded their outreach and marketing efforts to the active-duty and reserve component military and veteran population. We believe this is related to a growing desire among for-profit institutions to seek new sources of revenue outside of Title IV programs, which is driven by concerns with a compliance obligation under the Higher Education Opportunity Act, commonly referred to as the “90/10 Rule,” which prohibits proprietary institutions from deriving from Title IV funds, on a cash accounting basis (except for certain institutional loans) for any fiscal year, more than 90% of its revenues (as computed for 90/10 Rule purposes). We believe that for-profit schools seek to attract military students in order to comply with the 90/10 Rule, as DoD tuition assistance and veterans education benefits currently do not count towards the 90% limit. See “Regulation of Our Business—Regulation of Title IV Financial Aid Programs—The ‘90/10 Rule ” below for more information on the 90/10 Rule, including recent proposals to count DoD tuition assistance and veterans educations benefits toward the 90% limit. 4 Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in enrollment. Student population varies as a result of new enrollments, graduations, and student attrition. While our number of enrolled students has grown in each sequential quarter over the past three years, the number of enrolled students has been proportionally greatest in the fourth quarter of each respective year. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns.

HEOA changed the 90/10 Rule from an eligibility requirement to a compliance obligation that is part of an institution s program participation agreement with the Department of Education. Accordingly, HEOA generally lessens the severity of noncompliance with the 90/10 Rule, although repeated noncompliance will result in loss of eligibility to participate in Title IV programs. Under the terms of HEOA, a proprietary institution of higher education that violates the 90/10 Rule for any fiscal year will be placed on provisional status for two fiscal years. Proprietary institutions of higher education that violate the 90/10 Rule for two consecutive fiscal years will become ineligible to participate in Title IV programs for at least two fiscal years and will be required to demonstrate compliance with Title IV eligibility and certification requirements for at least two fiscal years prior to resuming Title IV program participation. HEOA requires the Secretary of Education to disclose on its website any proprietary institution of higher education that fails to meet the 90/10 requirement and to report annually to Congress the relevant ratios for each proprietary institution of higher education. HEOA generally codifies the formula for 90/10 Rule calculations as set forth in preceding Department of Education regulations, but also expands on the Department of Education s formula in certain respects, including by broadening the categories of funds that may be counted as non-Title IV revenue for 90/10 Rule purposes. HEOA s changes to the 90/10 Rule took effect upon enactment, which occurred on August 14, 2008. The Department of Education issued final regulations implementing the 90/10 Rule and certain other HEOA provisions on October 29, 2009. The final regulations were effective July 1, 2010. The regulations generally track the HEOA provisions, but clarify the treatment of certain types of revenue. The regulations require institutions to report in their annual financial statement audits not only the percentage of revenues derived from Title IV funds during the fiscal year, but also the dollar amount of the numerator and denominator of the 90/10 calculation and specified categories of revenue. The regulations shorten from 90 to 45 days the time period within which institutions must notify the Secretary of Education after the end of a fiscal year in which the institution failed to meet the 90/10 requirement. Using the formula in effect prior to enactment of HEOA, we derived approximately 19% of our cash-basis revenues from eligible programs in 2008 compared to 14% in 2007 and 1% in 2006. Using the HEOA formula, we derived approximately 19%, and 26% of our cash-basis revenues from Title IV program funds in 2009 and 2010, respectively. Our percentage of cash-based revenues from Title IV program funds has increased as our population of students using Title IV program funds has increased. The population of our students using these funds is growing at a faster rate than students who use other sources of revenues, and we will continue to monitor compliance with the 90/10 Rule. In addition, certain members of Congress have stated that Congress should revise the 90/10 Rule to count DoD tuition assistance and veterans education benefits toward the 90% limit. For example, members of Congress raised this idea both in the September 2010 hearing before the House Armed Services Committee s Subcommittee on Oversight and Investigations reviewing DoD s oversight of distance education and for-profit institutions and in the December 2010 HELP Committee report examining the growing share of DoD tuition assistance and Post-9/11 GI Bill benefits flowing to for-profit institutions. Because we receive a substantial portion of our revenues from DoD tuition assistance and veterans educational benefits, such a change would significantly increase our risk of violating the 90/10 Rule. In January 2012, Senators Harkin and Durbin introduced a bill to modify the 90/10 Rule by reducing the threshold to 85% and counting the Title IV programs, the DoD tuition assistance program, and veterans education benefits programs as sources from which an institution may derive no more than 85% of its revenue. In February 2012, companion bills were introduced in the U.S. Senate and U.S. House of Representatives that would modify the 90/10 Rule to count DoD tuition assistance and veterans educations benefits toward the 90% limit, along with Title IV programs. We cannot predict the likelihood that Congress will amend the 90/10 Rule to count DoD tuition assistance and veterans education benefits toward the 90% limit or to lower the ratio to 85/15. If the calculation for purposes of the 90/10 Rule is changed so that DoD tuition assistance and/or veterans education benefits are counted toward a 90% or 85% limit, our percentage of revenues that would count toward such limit would be significantly higher than our current 90/10 calculation. We are not required to include all federal funding in our 90/10 calculation and do not track sources of funds for this purpose. Accordingly, we cannot estimate with precision what our percentage would be if any of these proposed amendments to the 90/10 Rule are made by Congress.. However, based on our assessment of net course registrations, we currently estimate that approximately 86% of our funding is derived from federal sources. 26 Student Loan Defaults. Under the Higher Education Act, an educational institution may lose its eligibility to participate in some or all of the Title IV programs if defaults on the repayment of FFEL program or Direct Loan Program loans by its students exceed certain levels. For each federal fiscal year, a rate of student defaults (known as a “cohort default rate”) is calculated for each institution with 30 or more borrowers entering repayment in a given federal fiscal year by determining the rate at which borrowers who become subject to their repayment obligation in that federal fiscal year default by the end of the next federal fiscal year. For such institutions, the Department of Education calculates a single cohort default rate for each federal fiscal year that includes in the cohort all current or former student borrowers at the institution who entered repayment on any FFEL program or Direct Loan Program loan during that year.

Costs and expenses were $197.5 million for the year ended December 31, 2011, an increase of $49.3 million, or 33%, compared to $148.2 million for prior year ended December 31, 2010. This increase was due to the specific factors discussed below. Costs and expenses as a percentage of revenues increased to 75.9% in 2011 from 74.8% in 2010. Similarly, our income before interest income and income taxes, or our operating margin, decreased to 24.1% from 25.2% over that same period. This increase in costs and expenses as a percentage of revenues and decrease in operating margins resulted from the factors described below. Overall, our costs and expenses as a percentage of revenue increased due to increased general and administrative expenses primarily attributable to an increase in expenditures for financial aid processing fees, expenditures for technology required to support the increase in civilian students and regulatory changes, and increased bad debt primarily associated with our civilian students. Instructional costs and services. Instructional costs and services expenses for the year ended December 31, 2011 were $95.2 million, representing an increase of 26% from $75.3 million for the year ended December 31, 2010. 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 expense as a percentage of revenues decreased to 36.6% in 2011 from 38.0% in 2010. This decrease was primarily due the number of full-time academic support staff increasing at a slower rate than revenue.

Costs and expenses were $197.5 million for the year ended December 31, 2011, an increase of $49.3 million, or 33%, compared to $148.2 million for prior year ended December 31, 2010. This increase was due to the specific factors discussed below. Costs and expenses as a percentage of revenues increased to 75.9% in 2011 from 74.8% in 2010. Similarly, our income before interest income and income taxes, or our operating margin, decreased to 24.1% from 25.2% over that same period. This increase in costs and expenses as a percentage of revenues and decrease in operating margins resulted from the factors described below. Overall, our costs and expenses as a percentage of revenue increased due to increased general and administrative expenses primarily attributable to an increase in expenditures for financial aid processing fees, expenditures for technology required to support the increase in civilian students and regulatory changes, and increased bad debt primarily associated with our civilian students.

Costs and expenses were $148.2 million for the year ended December 31, 2010, an increase of $39.1 million, or 36%, compared to $109.1 million for prior year ended December 31, 2009. This increase was due to the specific factors discussed below. Costs and expenses as a percentage of revenues increased to 74.8% in 2010 from 73.2% in 2009. Similarly, our income before interest income and income taxes, or our operating margin, decreased to 25.2% from 26.8% over that same period. This increase in costs and expenses as a percentage of revenues and decrease in operating margins resulted from the factors described below. Overall, our costs and expenses as a percentage of revenue increased due to increased selling and promotion expenses related to marketing for civilian students.

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