American Public Education, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 7, 2019. APEI provides online postsecondary education through APUS and campus-based nursing education through Hondros College of Nursing (HCN), serving approximately 82,900 students. APUS had approximately 81,200 students; HCN had approximately 1,700.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $73.4 million | $75.0 million |
| Operating income | $1.4 million | $6.2 million |
| Operating margin | 1.8% | 8.2% |
| Net income | $1.0 million | $4.6 million |
| Diluted earnings per share | $0.06 | $0.28 |
| Operating cash flow | $7.9 million | $10.2 million |
| Capital expenditures | $1.6 million | $1.7 million |
Cash, cash equivalents and restricted cash were $215.9 million at March 31, 2019, versus $212.1 million at year-end 2018. Current assets were $238.4 million and current liabilities $40.5 million. The filing reports no borrowings; liabilities include operating lease obligations of $11.6 million, recognized following adoption of the new lease standard. Management said existing cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future.
By segment, APEI revenue was essentially flat at $65.7 million and operating income rose to $7.5 million from $5.1 million; its operating margin increased to 11.4% from 7.8%. HCN revenue fell 16.7% to $7.7 million, and its operating result swung to a $6.1 million loss from $1.0 million of income. HCN’s reported result included a $5.9 million goodwill impairment.
Material changes and unusual items
- Consolidated revenue declined 2.0%, driven by HCN; APUS net course registrations rose 1.2% to approximately 84,300, but lower revenue per registration offset the increase.
- HCN enrollment declined 15.0% to approximately 1,700, while new-student enrollment fell 32.5% to 339. Management attributed pressure in part to changes in admissions and academic requirements.
- The company recorded a $5.9 million non-cash HCN goodwill impairment after HCN underperformed internal targets. Management cautioned that further impairment could result if valuation assumptions are not realized.
- APEI incurred approximately $1.3 million of pretax professional fees related to evaluating an acquisition. Equity investment loss increased to $1.5 million, principally reflecting APEI’s share of an investee impairment.
- Operating cash flow fell year over year, primarily due to working-capital timing, including payments that reduced accounts payable. Cash used for share repurchases and tax withholding was $2.5 million. On May 2, 2019, the board authorized a new share repurchase program of up to $35 million.
Outlook, risks and contingencies
No specific financial guidance was provided. Management expects quarterly results to fluctuate with enrollment patterns and expenses and said HCN enrollment may remain pressured; it cannot assure a reversal of HCN’s revenue decline. HCN’s ADN program remained on provisional approval after missing the Ohio nursing-board pass-rate standard for a sixth consecutive year. Continued failure to meet requirements could jeopardize program approval; enrollment and operating results may also be affected by changes made to improve outcomes.
Regulatory exposure includes federal Title IV and borrower-defense requirements, state authorization rules for distance education, accreditation matters, and reliance on government-funded student payment programs. A court ruling described in the filing made the Distance Education Rule effective May 26, 2019, earlier than previously expected; noncompliance could affect authorization, Title IV eligibility, enrollment or costs. HCN revenue was highly reliant on Title IV funding (80%); APUS revenue included DoD tuition assistance (39%), Title IV (24%) and VA benefits (23%). The company reported no material pending legal proceedings and no material change to contractual commitments outside the ordinary course.
Important facts for investors to verify
- Whether HCN enrollment and new-student starts stabilize, and whether its admissions and academic-policy changes improve outcomes without further harming enrollment.
- The ADN program’s NCLEX pass rates and Ohio Board of Nursing approval status, as well as the MLT program’s accreditation progress.
- Implementation and financial effects of the Distance Education Rule and other borrower-defense, Title IV, state authorization and accreditation requirements.
- Whether HCN meets the assumptions used in its goodwill valuation and whether further impairment is necessary.
- Underlying operating performance excluding the goodwill impairment and acquisition-evaluation fees, and the drivers of the increased equity investment loss.
- Cash generation, working-capital movements, lease commitments and the extent of any purchases under the newly authorized $35 million repurchase program.