American Public Education, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 6, 2018. APEI provides online and campus-based postsecondary education through APUS and Hondros College of Nursing (HCN), serving approximately 84,200 students.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $73.0 million | $73.3 million | $220.8 million | $221.2 million |
| Operating income | $6.9 million | $7.6 million | $21.1 million | $22.2 million |
| Operating margin | 9.4% | 10.4% | 9.6% | 10.1% |
| Net income | $5.5 million | $4.4 million | $16.5 million | $12.7 million |
| Diluted EPS | $0.33 | $0.27 | $1.00 | $0.78 |
For the nine months, operating cash flow was $25.6 million, versus $29.3 million; investing cash use was $5.3 million and capital expenditures were $4.7 million. Cash and cash equivalents were $197.6 million at September 30, up from $179.2 million at year-end 2017. Current assets were $219.7 million and current liabilities $41.0 million. The filing reports no debt balance. Cash included approximately $1.6 million of restricted student funds.
Changes and business drivers
- Consolidated revenue was nearly flat: down 0.4% in Q3 and 0.2% for nine months. APUS segment revenue fell 1.6% in Q3 and 2.1% year to date; APUS net course registrations declined 0.2% and 1.6%, respectively. Management cited competition, military-market challenges, and lower revenue per registration.
- HCN revenue increased 8.9% in Q3 and 15.5% for nine months, with Q3 enrollment up 10.6% to approximately 1,980. HCN operating income nevertheless declined 12.5% in Q3, while rising 44.0% year to date.
- General and administrative expense rose 12.0% in Q3 and 8.0% year to date, contributing to lower operating margins. Net income increased despite lower operating income, aided in part by higher interest income and a lower effective tax rate.
Outlook, commentary, risks, and unusual items
- Management gave no formal revenue or earnings guidance. It said existing cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future; future investment or acquisition activity could require additional capital.
- 2018 year-to-date expenses included approximately $1.7 million for APUS’s voluntary workforce reduction and $0.7 million of professional fees for an acquisition no longer being pursued. The reduction involved 48 employees; management estimated annualized pretax savings of $2.1–$2.8 million.
- APEI recorded a $0.5 million noncash impairment of its RallyPoint investment in Q1; equity investment loss was $0.5 million for the nine-month period. Additional impairment is possible if valuation assumptions are not realized.
- The effective tax rate fell to 25.2% in Q3 and 26.6% year to date, versus 43.0% and 43.2%, respectively, primarily reflecting the federal corporate tax rate reduction and other tax adjustments.
- Key regulatory and accreditation exposures include APUS’s ongoing ED Title IV program review and HLC review of its shared-services structure; the company had posted a required approximately $0.7 million letter of credit related to Title IV return calculations. HCN’s ADN program remained on provisional approval after missing Ohio nursing-exam pass-rate standards.
- HCN began offering extended student payment plans in July 2018, creating credit and regulatory-compliance risks. HCN discontinued new RN-to-BSN enrollments and anticipated starting a Medical Laboratory Technician program in early 2019.
- Walmart will not renew its APUS partnership after June 2019; students associated with the partnership represented approximately 1.3% of 2017 consolidated revenue. APUS’s primary course-material supplier ceased operations on October 26, 2018; the company was seeking alternatives.
- APEI adopted ASC 606 using the modified retrospective method; prior-year comparisons were not restated and the reported impact was immaterial. It expected to adopt the lease accounting standard in Q1 2019, with an anticipated increase in recognized assets and liabilities.
Most important facts for investors to verify
- Whether APUS can stabilize course registrations and revenue per registration amid competitive and military-market pressures.
- Progress and outcomes of APUS’s ED and HLC reviews, and HCN’s ADN licensure-exam performance and accreditation requirements.
- Whether HCN’s enrollment growth translates into sustained operating profitability, and the credit quality and compliance costs of its new payment plans.
- Execution of APUS cost savings, replacement of the course-material supplier, and the financial impact of the Walmart partnership ending.
- Cash-flow conversion and receivables: accounts receivable increased by $6.1 million from year-end, attributed largely to delayed DoD and VA payments; operating cash flow declined year over year.