American Public Education, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. APEI provides online and campus-based postsecondary education through American Public University System (APUS) and Hondros College of Nursing (HCN).
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $70.6 million | $72.8 million | $144.0 million | $147.8 million |
| Operating income | $5.7 million | $8.0 million | $7.1 million | $14.2 million |
| Operating margin | 8.0% | 11.0% | 4.9% | 9.6% |
| Net income | $4.9 million | $6.5 million | $5.9 million | $11.0 million |
| Diluted EPS | $0.30 | $0.39 | $0.36 | $0.67 |
| Operating cash flow | Not separately stated | Not separately stated | $23.7 million | $19.6 million |
At June 30, cash, cash equivalents and restricted cash were $220.8 million, versus $212.1 million at year-end 2018; current assets were $240.0 million and current liabilities $42.2 million. The balance sheet reports no borrowings; operating lease liabilities totaled $11.1 million. Six-month capital expenditures were $3.0 million. Cash used for share repurchases was $12.1 million.
Material changes and segment results
- Consolidated revenue fell 3.1% in Q2 and 2.5% for the first half. HCN revenue declined 21.6% in Q2 and 19.1% year to date, while APEI segment revenue was nearly flat.
- HCN’s Q2 enrollment fell 25% to about 1,500 students; new enrollment fell 35.3%. HCN reported a $0.9 million Q2 operating loss, compared with $0.9 million operating income a year earlier. APUS net course registrations declined 1.2% in Q2, but increased 0.1% for the first half.
- Six-month results include a $5.9 million non-cash HCN goodwill impairment and approximately $1.4 million in professional fees related to evaluating an acquisition. The first half also included a $1.5 million equity investment loss associated with an investee impairment.
- Cash from operations increased year over year, primarily due to working-capital timing. Cash increased by $8.7 million during the first half.
Outlook, risks and notable items
- Management said existing cash and expected operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future. No earnings or revenue guidance was provided.
- APEI expects Navy tuition-assistance funding to be exhausted earlier than usual and anticipates a significant negative effect on Q3 2019 results; the duration and impact of subsequent Navy policy changes were uncertain.
- HCN’s enrollment decline, weak performance and goodwill impairment create risk of further impairment. Its nursing programs face Ohio Board of Nursing pass-rate requirements, and all HCN programs at all campuses failed ABHES retention thresholds for the year ended June 30, 2019; accreditation consequences could include corrective requirements or withdrawal.
- Federal distance-education state-authorization rules were in effect following a court decision and remained subject to appeal and rulemaking. The filing also identifies risks from Title IV and borrower-defense requirements and changes to military tuition-assistance programs.
- The company authorized up to $35 million in share repurchases in May 2019; $25.7 million remained available at June 30. It signed a lease for a new Indianapolis campus, with minimum payments of $1.8 million over the initial term. Adoption of the new lease standard recognized operating lease assets and liabilities without a reported net-income or liquidity impact.
Important facts for investors to verify
- Whether HCN enrollment and operating performance stabilize, and how accreditation and nursing-program outcomes develop.
- The actual Q3 impact of Navy tuition-assistance funding exhaustion and new Navy eligibility and funding limits.
- Whether HCN’s valuation assumptions change enough to trigger additional goodwill impairment.
- Progress and costs for planned technology investment, the Indianapolis campus and any acquisition-related activity.
- Developments in state-authorization, borrower-defense and other higher-education regulations that could affect Title IV eligibility or student demand.