American Public Education, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. APEI provides online education through American Public University System (APUS) and nursing education through Hondros College of Nursing (HCN).
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $299.2 | $313.1 |
| Operating income | $34.9 | $38.3 |
| Operating margin | 11.6% | 12.2% |
| Net income | $21.1 | $24.2 |
| Diluted EPS | $1.29 | $1.49 |
| Cash from operations | $47.9 | $56.0 |
- Revenue fell 4.4%; net income fell 12.8%. Net margin was approximately 7.1%, versus 7.7% in 2016.
- Fourth-quarter revenue was $78.1 million and net income was $8.4 million, compared with $78.6 million and $6.9 million, respectively, in Q4 2016. Diluted EPS was $0.51 versus $0.42.
- Operating cash flow declined 14.4% to $47.9 million. Capital expenditures were $10.9 million; investing activities used $13.6 million and financing activities used $1.5 million.
- Cash and cash equivalents were $179.2 million at year-end, up from $146.4 million. Working capital was $147.8 million; current assets were $191.1 million against current liabilities of $43.4 million.
- Total liabilities were $49.6 million, primarily current liabilities and deferred taxes. The balance sheet reports no interest-bearing debt.
- Segment results diverged: APUS revenue declined 6.6% to $265.2 million and operating income fell 26.3% to $30.9 million. HCN revenue increased 16.5% to $34.0 million and moved from a $3.6 million operating loss to $4.0 million operating income.
Material changes versus the prior year
- APUS net course registrations declined 5.8% to approximately 325,000, amid competition, challenges in the military market, and continued weakness in new student registrations. HCN enrollment rose 23.3% to approximately 2,100, supported partly by its Toledo campus, opened in January 2017.
- Operating margin narrowed to 11.6% from 12.2%, as revenue declined faster than expenses. Costs and expenses fell 3.8% to $264.4 million.
- Bad-debt expense decreased to $4.7 million, or 1.6% of revenue, from $6.7 million, or 2.1% of revenue.
- Equity investment results shifted from $0.7 million of income to a $2.4 million loss, including $2.7 million of other-than-temporary impairment charges on minority investments.
- The prior year included a $4.7 million HCN goodwill impairment and $6.0 million in losses on asset disposals; 2017 included $2.1 million in disposal losses and no goodwill impairment.
Outlook, commentary, risks and unusual items
- Management expects to fund operations and planned capital expenditures through operating cash flow and existing cash, which it believes are adequate for the foreseeable future. The filing provides no specific revenue or earnings guidance and cautions that forecasting is difficult.
- Management prioritizes stabilizing APUS enrollment, improving student persistence and outcomes, expanding civilian-market reach and partnerships, and growing HCN. These initiatives may increase costs or further affect enrollment; success is not assured.
- HCN accreditation and funding: HCN’s accreditor, ACICS, had lost federal recognition. HCN’s application for recognized accreditation from ABHES was deferred to May 2018. Unless HCN obtained recognized accreditation or ACICS regained recognition by June 12, 2018, HCN would lose Title IV eligibility, a material risk given that 83% of HCN’s 2017 revenue came from Title IV programs. HCN also faced retention monitoring for three programs and provisional Ohio approval of its ADN program after low licensure-exam results.
- APUS regulatory matters: APUS received a Massachusetts Attorney General civil investigative demand concerning recruitment, retention, and education financing. HLC imposed a “governmental investigation” designation, with monitoring; the investigation’s outcome and financial impact were not estimable in the filing. APUS also had an open Department of Education program review and was directed to post an approximately $0.7 million letter of credit for Title IV return-of-funds findings; APUS requested reconsideration.
- APUS received two Department of Defense compliance findings concerning marketing testimonials and financial-aid information and was required to submit corrective actions. Funding disruptions or changes to DoD tuition assistance are material risks; DoD assistance represented 37% of APUS-segment revenue.
- Other unusual items included a $3.7 million tax benefit from revaluing deferred taxes after the Tax Cuts and Jobs Act, approximately $1.3 million of costs related to the former APUS president’s retirement, and costs for new doctoral programs and general-education changes.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether HCN obtained recognized institutional accreditation by the June 12, 2018 deadline and retained Title IV eligibility; review the outcome of ABHES’s May 2018 meeting.
- Progress and potential consequences of the Massachusetts Attorney General investigation, HLC’s designation, and APUS’s pending change-in-structure application.
- Resolution of the Department of Education program review, the approximately $0.7 million letter-of-credit requirement, and related Title IV compliance findings.
- Whether APUS enrollment and course-registration declines stabilize, and whether HCN can sustain growth while improving retention and ADN licensure results.
- Cash generation, margins, and liquidity trends, including the effects of regulatory costs, student-funding changes, and further investment impairments.