American Public Education, Inc. — Q2 2016 Form 10-Q
Business and period: Online and campus-based postsecondary education provider serving approximately 93,100 students through American Public University System (APUS) and Hondros College of Nursing (HCON). This unaudited filing covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $76.7 million | $80.3 million | $160.7 million | $165.7 million |
| Operating income | $10.7 million | $11.6 million | $26.6 million | $26.0 million |
| Operating margin | 13.9% | 14.4% | 16.6% | 15.7% |
| Net income | $6.6 million | $7.1 million | $16.9 million | $15.9 million |
| Diluted EPS | $0.41 | $0.42 | $1.05 | $0.93 |
For the first half, operating cash flow was $28.8 million, capital expenditures were $6.9 million, and cash increased by $18.4 million to $124.1 million. At June 30, total liabilities were $60.3 million, including $44.3 million in current liabilities; the balance sheet reports no borrowings or debt. Current assets were $143.1 million versus current liabilities of $44.3 million. Restricted cash of $3.3 million is included in cash and cash equivalents.
Changes and operating drivers
- Q2 revenue fell 4.4% year over year; first-half revenue fell 3.0%. APUS net course registrations declined 7.9% in Q2 and 5.8% for the first half. Management cited competition, military-market challenges, and the admissions assessment process introduced in 2015; tuition increases partly offset lower registrations.
- HCON revenue declined 6.1% in Q2 and 4.8% for the first half. Enrollment was down approximately 14.3% at June 30. HCON’s operating margin fell to 4.8% in Q2 and 7.2% for the first half, with curriculum-related recruiting challenges among the cited factors.
- First-half net income rose 6.7% despite lower revenue, aided by lower operating costs, including reduced bad-debt and advertising expenses, and $0.7 million of equity investment income. Management said that income primarily reflected a favorable deferred-tax-asset valuation-allowance adjustment at an investee. Q2 net income decreased 6.7%.
- First-half operating cash flow increased from $22.7 million to $28.8 million, while investing outflows decreased from $14.0 million to $8.7 million, mainly due to lower capital spending. Financing outflows were $1.7 million versus $20.6 million in the prior-year period, when share repurchases were substantially higher.
Outlook, risks, and notable items
No numerical earnings or revenue guidance is provided. Management expects existing cash and operating cash flow to fund ongoing operations and planned capital expenditures for the foreseeable future, while noting potential additional spending on technology, strategic investments, and HCON’s planned Toledo campus, expected to open in early 2017. Management cautioned it cannot predict whether enrollment initiatives will reverse revenue declines.
- Accreditation and Title IV exposure: HCON’s accreditor, ACICS, faced a recommendation against renewal of federal recognition. Loss of recognition could threaten HCON’s eligibility for Title IV funding absent alternative accreditation or continued ED certification; the filing describes a potentially material adverse effect. HCON was pursuing accreditation with another agency.
- Other regulatory risks: Proposed federal borrower-defense and financial-responsibility rules could create repayment liability, additional claims, or requirements to post a substantial letter of credit. Proposed distance-education authorization rules could also impose new requirements. Effects and final rules were uncertain.
- HCON academic risk: Its ADN program had missed Ohio NCLEX pass-rate requirements for three years and could be placed on provisional approval if it also missed the requirement in 2016. HCON’s Cleveland campus accreditation renewal was pending; the filing also notes that HCON received nursing-program pre-accreditation candidacy and approval to open a Toledo campus.
- Funding concentration: For APUS, Title IV represented 29.0% of first-half segment revenue, DoD tuition assistance 36.0%, and VA education benefits 22.0%. Approximately 85% of HCON first-half revenue came from Title IV programs.
- Other considerations include possible goodwill impairment if HCON results do not improve, competition and enrollment declines, and the potential costs or operational challenges of technology changes and organizational realignment. The company reported no pending material legal proceedings, no material change in contractual commitments, and effective disclosure controls.
Important facts for investors to verify
- Whether APUS registrations stabilize and whether its admissions-process changes and pricing initiatives improve enrollment and revenue.
- ACICS’s final recognition status and HCON’s ability to maintain Title IV eligibility through alternative accreditation or other ED action.
- HCON enrollment, NCLEX pass rates, program approvals, Cleveland campus accreditation, and the costs and launch progress of the Toledo campus.
- Final federal borrower-defense, financial-responsibility, and state-authorization rules, including any potential liabilities or letter-of-credit requirements.
- The sustainability of lower bad-debt expense and the contribution of the investee tax-valuation adjustment to first-half earnings.