American Public Education, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014. APEI provides online and campus-based postsecondary education through APUS, serving primarily military, public safety and working-adult students, and Hondros College Nursing Programs (HCON), acquired November 1, 2013. HCON’s results are included in Q1 2014 but not Q1 2013, limiting comparability.
Financial performance and position
- Revenue: $88.6 million, up 6% year over year. APUS-segment revenue declined 3% to $81.3 million; HCON contributed $7.2 million.
- Profit and margins: Operating income was $16.7 million, down 8%; operating margin fell to 18.9% from 21.7%. Net income was $10.4 million versus $11.4 million; diluted EPS was $0.59 versus $0.63. Net margin was 11.8% versus 13.6%.
- Cash flow: Operating cash flow was $12.4 million, compared with $20.6 million. Capital expenditures were $4.6 million. Cash increased $4.9 million during the quarter.
- Liquidity and debt: Cash and cash equivalents were $99.7 million at March 31, 2014; current assets were $125.8 million and current liabilities $52.3 million. The balance sheet reports no debt. The company says cash and expected operating cash flow should fund operations and planned capital expenditures for the foreseeable future.
- Other: Total assets were $282.3 million and stockholders’ equity $216.3 million. The company repurchased 40,000 shares for $1.4 million under its repurchase authorization; $9.4 million remained authorized.
Material changes versus the prior comparable period
- Consolidated revenue growth primarily reflects HCON’s inclusion; APUS net course registrations declined 4% to 105,800, and APUS operating income fell 12% to $16.0 million.
- HCON enrollment was 1,290, up 14% year over year; its operating margin was 9.7%. Its campus-based delivery has a higher cost structure than APUS’s online model.
- Expenses rose 9% to $71.8 million, faster than revenue. Instructional costs increased to 35.4% of revenue from 33.9%; general and administrative costs rose to 22.0% from 20.9%.
- Bad-debt expense increased to $5.1 million, or 5.7% of revenue, from $3.6 million, or 4.3%. Lower accrued liabilities and higher receivables were among the factors reducing operating cash flow.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management anticipates continued quarterly fluctuations tied to enrollment patterns and expenses, and expects to seek possible HCON operating efficiencies. It may pursue strategic investments and additional capital spending.
- HCON was operating under a Temporary Provisional Program Participation Agreement after the acquisition. The Department of Education requested additional information before considering final approval; APEI submitted it in April 2014.
- APEI disclosed a proposed federal gainful-employment rule that could jeopardize Title IV eligibility for programs that fail specified metrics. The company also depends on public funding: 36% of Q1 revenue came from DoD tuition-assistance programs, 17% from students eligible for veterans benefits, and 35% from Title IV aid.
- A putative class action concerning alleged representations about nursing-program accreditation at HCON’s Independence campus is pending. The company cannot estimate the likelihood or range of loss, but does not currently believe an adverse outcome would materially affect its financial condition.
- On April 2, 2014, after quarter-end, APEI invested $1.5 million in preferred stock of an education software company for an approximately 25.9% interest.
Key facts for investors to verify
- Whether HCON receives final Department of Education approval and maintains required accreditation and program approvals.
- Enrollment and course-registration trends at APUS, and whether HCON growth and integration offset APUS weakness.
- Bad-debt expense, receivables and operating cash flow trends.
- The final gainful-employment rules and their potential effect on Title IV eligibility and enrollment.
- Developments in the HCON-related class action and any resulting financial exposure.