American Public Education, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 29, 2016. The company provides online higher education through APUS and nursing education through Hondros College of Nursing (HCON). The filing also reports unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $327.9 million | $350.0 million | Down 6.3% |
| Operating income | $52.3 million | $65.8 million | Down 20.6% |
| Operating margin | 16.0% | 18.9% | Down 2.9 percentage points |
| Net income | $32.4 million | $40.9 million | Down 20.8% |
| Diluted EPS | $1.93 | $2.33 | Down 17.2% |
| Operating cash flow | $57.2 million | $61.0 million | Down $3.8 million |
| Capital expenditures | $26.0 million | $24.6 million | Up $1.4 million |
| Cash and cash equivalents at year-end | $105.7 million | $115.6 million | Down $9.9 million |
| Working capital at year-end | $80.3 million | $88.0 million | Down $7.7 million |
Net margin was approximately 9.9%, versus 11.7% in 2014. EBITDA from continuing operations was $72.8 million, compared with $82.0 million. The balance sheet reports $66.7 million of total liabilities and $237.2 million of stockholders’ equity; it lists no interest-bearing debt. The filing reports no material derivative instruments.
Fourth-quarter revenue was $85.9 million versus $91.3 million in Q4 2014; net income was $9.8 million versus $11.8 million. Q4 2015 diluted EPS was $0.60, compared with $0.68.
Business and segment trends
- APUS net course registrations fell 7.1%, to approximately 375,100. APEI Segment revenue declined 7.0% to $297.4 million, and operating income declined 21.7% to $49.0 million.
- HCON revenue increased 1.1% to $30.5 million; segment operating income was approximately $3.3 million, down 0.6%. Management cited lower ADN enrollment and students taking fewer courses per term.
- Consolidated costs and expenses declined 3.0%, less than revenue. Depreciation and amortization rose 27.3% to $20.5 million; bad-debt expense fell to $12.7 million, or 3.9% of revenue, from $19.2 million, or 5.5%.
- APEI funding mix in 2015 was 32% Title IV, 35% DoD tuition assistance, 21% VA benefits, and 12% cash and other sources. HCON derived approximately 86.1% of its revenue from students receiving federal student aid.
Management outlook, risks, and unusual items
The filing provides no numerical revenue or earnings guidance. Management says enrollment and revenue forecasting is difficult and does not predict whether or when APUS will return to growth. It expects operating cash flow and existing liquidity to fund ongoing operations and planned capital expenditures for the foreseeable future, while noting that significant acquisitions or investments could require additional capital.
- Management attributes APUS’s registration decline partly to increased competition, its revised marketing approach, the April 2015 admissions assessment, and the July 2015 tuition increase. A new Army tuition-assistance enrollment tool was causing access problems that management expected could affect APUS registrations in 2016.
- APUS transitioned financial-aid processing to Global Financial Aid Services, substantially completing the transition by year-end 2015. Prior processing delays and transition costs adversely affected operations; further costs and execution risks remain.
- APUS incurred $1.4 million of accelerated depreciation, $0.7 million of asset write-offs, and $1.6 million of workforce-realignment charges in 2015. Management notes that similar charges may recur.
- HCON received ED approval of its change in ownership in January 2016 and provisional Title IV certification through December 31, 2018. While provisional, it must obtain ED approval for certain new programs and locations. HCON’s 90/10 ratio was 87% in 2014; the filing does not provide a 2015 ratio.
- ED fined HCON $27,500 for a finding of substantial misrepresentation of programmatic accreditation status before APEI’s ownership; HCON paid the fine in December 2015. HCON also had a $128,290 irrevocable letter of credit related to a prior Title IV refund-timing audit issue, scheduled to expire in July 2016.
- Key risks include changes or interruptions in DoD, VA, or Title IV funding; regulatory, accreditation, and state-authorization requirements; Title IV compliance and the 90/10 rule; student bad debt and fraud; competition and enrollment declines; and technology, privacy, cybersecurity, and vendor-transition risks.
There were no material legal proceedings pending. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether APUS registrations stabilize after the admissions, marketing, tuition, and financial-aid-processing changes—and whether the Army enrollment-tool issues persist.
- Whether lower bad-debt expense is sustained and whether the multiple-disbursement approach reduces bad debt without materially weakening enrollment.
- HCON’s enrollment, ADN program outcomes, ED provisional-certification conditions, and progress toward accreditation renewal; also confirm the status of the prior refund-related letter of credit.
- Exposure to federal funding: APUS’s DoD and Title IV reliance, HCON’s Title IV concentration, and current 90/10 ratios. The filing does not state 2015 institutional 90/10 ratios.
- Cash generation and capital allocation: operating cash flow was $57.2 million, while the company spent $35.3 million repurchasing shares and invested $3.5 million in an online social-networking company during 2015.
- Whether margin pressure, elevated depreciation, workforce changes, and planned technology or HCON investments affect future profitability and liquidity.