American Public Education, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. APEI provides online and campus-based postsecondary education through APUS, serving primarily military and public-safety communities, and Hondros College of Nursing (HCN), operating nursing programs in Ohio. The company reported approximately 86,000 students.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $72.2 million | $76.7 million | $147.9 million | $160.7 million |
| Operating income | $6.3 million | $10.7 million | $14.6 million | $26.6 million |
| Operating margin | 8.8% | 13.9% | 9.9% | 16.6% |
| Net income | $3.8 million | $6.6 million | $8.3 million | $16.9 million |
| Diluted EPS | $0.23 | $0.41 | $0.51 | $1.05 |
| Operating cash flow | Not separately provided for Q2 | $16.3 million | $28.8 million |
- At June 30, cash and cash equivalents were $157.1 million, versus $146.4 million at year-end 2016. Current assets were $173.7 million and current liabilities $39.7 million. Total liabilities were $50.6 million; the filing reports no debt balance.
- Six-month investing cash outflow was $4.2 million, including $3.8 million of capital expenditures; financing cash outflow was $1.3 million. Cash increased $10.8 million during the half.
- Management said cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future. No formal earnings or revenue guidance was provided.
Changes and operating trends
- Q2 revenue declined 5.9% and six-month revenue declined 8.0% year over year. Net income fell 41.9% in Q2 and 50.8% for the first half.
- APUS/APEI segment revenue fell 7.5% in Q2 and 9.2% in the first half, primarily as net course registrations declined 6.1% and 7.9%, respectively. Segment operating income fell 45.1% in Q2 and 46.8% for the first half. Management cited competition, military-market challenges, and fewer new registrations feeding through to returning-student registrations.
- HCN revenue rose 9.4% in Q2 and 3.6% in the first half, despite enrollment declines of 2.8% and 5.2%. Higher revenue per student, including changes in student mix, supported revenue. First-half segment operating income decreased about 4%, partly due to Toledo campus start-up costs.
- Consolidated costs declined only 0.3% in Q2 and 0.6% in the first half, slower than revenue. Instructional costs rose, while lower advertising, Title IV fees and bad-debt expense partly offset increases in compensation and professional fees. Bad-debt expense declined to $0.9 million in Q2 from $1.8 million and to $2.3 million for the half from $3.9 million.
Outlook, risks and unusual items
- Management expected to increase selling and promotional spending in Q3 2017 to test marketing channels. APUS expected $0.8–$1.1 million of start-up costs in the second half of 2017 for doctoral programs beginning in January 2018; their success is uncertain.
- APUS’s shared-services organizational change remains under Higher Learning Commission review. The HLC was developing an accreditation framework, with a proposed framework expected for consideration in November 2017 and the application decision anticipated after that, scheduled for February 2018. The outcome and any conditions are uncertain.
- ED’s Title IV program review of APUS, covering the 2014–2015 and 2015–2016 award years, remained open. APUS was selected for the DoD’s new compliance review program and had submitted its initial self-assessment.
- HCN faces accreditation and program-performance risks. ED had withdrawn recognition of HCN’s accreditor, ACICS; HCN was provisionally permitted to participate in Title IV programs while pursuing accreditation from ABHES. HCN’s ADN program was on provisional approval by Ohio’s Board of Nursing after missing its NCLEX pass-rate standard for four consecutive years. Several HCN campuses or programs also received ACICS reporting status or compliance warnings.
- On August 3, 2017, APEI received a Massachusetts Attorney General Civil Investigative Demand concerning alleged unfair or deceptive practices involving AMU recruitment, retention and education financing. The company said it would cooperate and could not predict the investigation’s outcome or financial impact.
- The sale of excess real property generated $1.5 million net proceeds and a $0.6 million loss in Q2. Adoption of stock-compensation accounting guidance increased first-quarter tax expense by about $0.5 million; no impact occurred in Q2. The six-month effective tax rate rose to 43.3% from 38.1%.
Important facts for investors to verify
- Whether APUS registrations and revenue stabilize, and whether planned marketing spending improves enrollment economically.
- Progress and outcomes of APUS’s HLC review, ED Title IV review, and DoD compliance assessment.
- HCN’s ABHES accreditation progress, ACICS status and any further campus/program actions; also ADN NCLEX results and provisional approval status.
- Developments in the Massachusetts investigation and any resulting costs, restrictions or reputational effects.
- Whether operating cash generation remains adequate as revenue declines and the company funds new programs, campus operations and other investments.