American Public Education, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. APEI provides online and campus-based postsecondary education through APUS and Hondros College of Nursing (HCN), serving approximately 84,700 students.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $75.0 million | $75.7 million |
| Operating income | $6.2 million | $8.3 million |
| Operating margin | 8.2% | 11.0% |
| Net income | $4.6 million | $4.5 million |
| Diluted EPS | $0.28 | $0.28 |
| Operating cash flow | $10.2 million | $5.1 million |
| Capital expenditures | $1.4 million | $1.7 million |
At March 31, cash and cash equivalents were $186.2 million, investments were $12.3 million, and total liabilities were $52.5 million. The filing reports no debt balance. Cash increased $7.0 million from year-end 2017. Higher operating cash flow mainly reflected tax-payment timing: no estimated taxes were paid in Q1 2018, versus $6.1 million in Q1 2017. The company expected to pay $5.5 million in estimated taxes in Q2 2018. Management said cash and operating cash flow should fund foreseeable operations and planned capital expenditures.
Material changes and segment results
- Consolidated revenue declined 1.0%, while costs and expenses rose 2.1%; net income increased slightly as lower income-tax expense and higher interest income largely offset lower operating income. The effective tax rate fell to 28.9% from 46.1%, principally reflecting the federal corporate tax-rate reduction.
- APEI Segment revenue fell 3.6% to $65.7 million, and operating income declined 35.3% to $5.1 million. APUS net course registrations decreased 4.0% to approximately 83,300, attributed to competition, military-market challenges, and continuing effects of earlier registration declines.
- HCN revenue rose 23.0% to $9.3 million, and operating income increased to $1.0 million from $0.4 million. Enrollment grew 19.3% to approximately 2,040.
- Cash used in financing was $1.6 million, primarily for shares withheld to meet employee tax obligations. No open-market repurchases were reported in the quarter.
Outlook, risks, and unusual items
- Management estimated a 27%–29% 2018 effective tax rate before discrete tax benefits. A voluntary APUS reduction in force generated $1.7 million of Q1 severance expense; management estimated 2018 pretax savings of $1.7–$2.1 million and annualized savings of $2.1–$2.8 million. The workforce reduction was substantially completed by April 1; savings are estimates and not assured.
- APUS recorded approximately $0.4 million in Q1 costs related to new general-education requirements. A $0.5 million non-cash, pretax impairment of the RallyPoint investment contributed to the reported equity-investment loss; further impairment could occur if valuation assumptions are not realized.
- Regulatory and accreditation matters remain material uncertainties. These include a Massachusetts Attorney General investigation into alleged unfair or deceptive practices by AMU; an ongoing ED Title IV program review; and HLC’s governmental-investigation designation for APUS. HLC postponed consideration of APUS’s shared-services application until November 2018.
- APUS posted an approximately $0.7 million irrevocable letter of credit after ED confirmed an audit finding involving untimely Title IV fund returns. APUS also submitted a corrective action plan addressing two DoD review findings; failure to resolve findings could threaten participation in DoD tuition assistance.
- HCN’s ADN nursing program did not meet Ohio’s NCLEX pass-rate standard in 2017 and remains on provisional approval. HCN’s Toledo campus received accreditation-related findings and a compliance warning; its campus inclusion was extended through September 10, 2018. ACICS’s federal recognition was restored pending a new ED decision, and HCN’s ABHES application remained under consideration.
- The company adopted ASC 606 using the modified-retrospective method. Q1 2018 revenue was $44,000 lower under the new standard than it would have been without adoption; prior-year figures were not restated. The adoption also reduced opening retained earnings by $278,000 after tax.
Important facts for investors to verify
- Subsequent enrollment, course-registration, and revenue trends at APUS and HCN, particularly whether APUS registration declines continue.
- Progress and outcomes of the Massachusetts investigation, ED program review, HLC designation and shared-services application, and DoD corrective actions.
- HCN’s NCLEX results, Ohio approval status, Toledo campus compliance, and ACICS and ABHES accreditation developments.
- Whether expected workforce savings materialize and whether Q1 operating cash flow is sustainable after tax and severance payments.
- Future RallyPoint valuation and any additional investment impairment.