American Public Education, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 12, 2019. APEI provides online higher education through APUS and campus-based nursing education through Hondros College of Nursing (HCN), serving approximately 82,100 students.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $67.9 million | $73.0 million | $211.9 million | $220.8 million |
| Operating income (loss) | $(2.9) million | $6.9 million | $4.1 million | $21.1 million |
| Operating margin | (4.3)% | 9.4% | 2.0% | 9.6% |
| Net income (loss) | $(1.6) million | $5.5 million | $4.3 million | $16.5 million |
| Diluted EPS | $(0.10) | $0.33 | $0.26 | $1.00 |
| Cash from operations | — | $31.9 million | $25.6 million |
Cash, cash equivalents and restricted cash totaled $210.1 million at September 30, 2019, down $2.0 million from year-end 2018. Nine-month capital expenditures were $4.2 million; financing cash outflow was $29.8 million, primarily reflecting stock repurchases. Total liabilities were $60.3 million, including $10.7 million of operating lease liabilities. The filing does not report borrowings or other financial debt. Management said cash and operating cash flow were expected to fund ongoing operations and planned capital expenditures for the foreseeable future.
Changes, segments and unusual items
- Q3 revenue fell 7.0%; nine-month revenue fell 4.0%. HCN revenue declined 26.8% in Q3 and 21.6% year to date, while APEI segment revenue declined 4.1% and 1.5%, respectively.
- HCN enrollment fell 30.0% in Q3 and 22.6% for the first nine months. HCN reported operating losses of $3.2 million in Q3 and $10.2 million year to date. APEI segment operating income was $0.2 million in Q3 and $14.4 million year to date.
- APUS net course registrations declined 5.1% in Q3 and 1.7% year to date, primarily due in part to the Navy’s temporary exhaustion of tuition-assistance funds. The company estimated a further approximately $0.4 million revenue impact in October 2019.
- Year-to-date results included $7.3 million of non-cash HCN goodwill impairment, $2.8 million in post-employment benefits for the APUS president, $3.0 million of increased advertising costs, $1.4 million of acquisition-evaluation professional fees, and $1.1 million of IT-system evaluation costs. Q3 also included $0.8 million of IT costs and a $1.5 million goodwill impairment.
- Operating cash flow increased year over year, largely due to working-capital timing. The company repurchased 966,081 shares for $29.8 million in cash during the first nine months; $7.7 million remained under the $35 million authorization at quarter-end.
Outlook, risks and other developments
- Management anticipated approximately $1.0 million of additional IT evaluation costs in Q4 2019 and $6–8 million of IT investment in 2020, including planned Learning Management and Customer Relationship Management system replacements. It also expected approximately $0.3 million of additional Indianapolis campus capital expenditures in Q4 2019.
- APUS announced tuition and technology-fee increases for registrations beginning January 1, 2020. Tuition grants are expected to keep eligible active-duty military students and their families at $250 per credit hour; the company estimated grants would apply to approximately 60% of net course registrations from that date.
- HCN’s enrollment deterioration was linked by management to revised academic and admissions requirements and negative perceptions among some student cohorts. HCN’s accreditor identified retention-rate deficiencies at programs and campuses, with specified compliance deadlines; failure to comply could lead to further action, including withdrawal of accreditation. HCN also had ongoing nursing-program approval and NCLEX pass-rate concerns.
- Additional risks include dependence on government tuition assistance, Title IV and veterans’ education benefits; evolving federal rules on borrower defenses, state authorization and accreditation; and possible Title IV financial-responsibility requirements. HCN goodwill valuations remain sensitive to enrollment, revenue, margins and valuation assumptions, and further impairment could be material.
- Angela Selden became APEI CEO in September 2019. The company reported no material pending legal proceedings and stated its disclosure controls were effective.
Important facts for investors to verify
- Whether HCN enrollment stabilizes and affected programs meet accreditor retention, placement and state nursing requirements by their deadlines.
- Whether APUS registrations and revenue recover following the Navy tuition-assistance disruption and changes to military eligibility and funding limits.
- Progress and actual costs of the planned IT transformation and Indianapolis campus, alongside cash generation and repurchases.
- Whether HCN’s performance or valuation assumptions lead to additional goodwill impairment, and how new federal rules affect Title IV participation and potential financial protections.