Business context and reporting period
American Public Education, Inc. (APEI) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. It provides online and campus-based postsecondary education through APUS, focused primarily on military and public-safety communities, and Hondros College of Nursing (HCON), which operates four Ohio campuses and online programs. The company reported approximately 100,350 students.
Financial performance
| Metric | Three months ended September 30, 2015 | Year-over-year | Nine months ended September 30, 2015 | Year-over-year |
|---|---|---|---|---|
| Revenue | $76.3 million | Down 9.9% | $242.0 million | Down 6.5% |
| Operating income | $10.5 million | Down from $14.6 million | $36.6 million | Down from $47.2 million |
| Operating margin | 13.9% | Down from 17.2% | 15.1% | Down from 18.3% |
| Net income | $6.8 million | Down 22.7% | $22.6 million | Down 22.3% |
| Diluted EPS | $0.41 | Down from $0.51 | $1.33 | Down from $1.65 |
For the nine-month period, operating cash flow was $42.8 million, versus $47.2 million in 2014. Investing cash outflow was $21.1 million, including $19.6 million in capital expenditures; financing cash outflow was $23.5 million, principally reflecting share repurchases. Cash and cash equivalents were $113.8 million at September 30, 2015, compared with $115.6 million at year-end 2014. Current assets were $141.5 million and current liabilities $57.4 million. The balance sheet reports no debt.
Instructional costs and services were $89.1 million for the nine months; selling and promotional expense was $47.2 million; general and administrative expense was $54.9 million; and depreciation and amortization was $14.2 million. The nine-month net margin was 9.3%, versus 11.3% a year earlier. The effective tax rate was 38.2%, compared with 38.7%.
Material changes and segment results
- APEI Segment revenue fell 10.3% in Q3 and 7.4% year to date. Net course registrations declined 6.0% in Q3 and 6.4% year to date. Segment operating income before interest and taxes fell 28.6% in Q3 and 24.0% year to date.
- HCON revenue declined 6.1% in Q3 but increased 3.7% year to date. HCON operating income before interest and taxes fell 32.2% in Q3, but rose 10.0% year to date. Enrollment at HCON was up approximately 3.1% at quarter-end year over year.
- Management attributed APUS registration weakness to competition, challenges in the military market, the new admissions assessment process, and narrower, more targeted marketing. HCON’s Q3 revenue and margin pressure reflected lower ADN enrollment and more students taking fewer courses through night and weekend offerings.
- Costs and expenses declined more slowly than revenue, weighing on margins. Lower selling and promotional expense and lower bad-debt expense partly offset the revenue decline; depreciation and amortization increased with capital investment and a larger asset base.
- APEI repurchased 793,669 shares during the first nine months for $21.6 million under its authorized program; an additional $1.5 million was used for shares withheld for employee taxes.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management said cash from operations and existing cash should fund ongoing operations and planned capital expenditures for the foreseeable future, while noting that acquisitions or significant investments could require additional capital.
- Management anticipated a workforce realignment charge of approximately $1.8 million in Q4 2015, with approximately $3.0 million of expected savings in 2016, and an approximately $1.4 million write-off of APEI information-technology assets in Q4 2015.
- APUS tuition increases took effect July 1, 2015, while grants keep tuition at prior levels for certain military-affiliated students. The tuition change’s effect on registrations remained uncertain. APUS also began transitioning financial-aid processing to a third party, with completion anticipated by year-end and related implementation costs and risks.
- Key regulatory exposures include ED’s notice concerning gainful-employment reporting and its restriction on APUS applying for new programs pending resolution; the potential consequences of incentive-compensation violations; evolving borrower-defense and loan-discharge rules; and cash-management regulations effective July 1, 2016. Management said impacts were uncertain.
- APUS derives substantial revenue from military and federal student-aid programs. Potential military force reductions, federal budget pressure, or a government shutdown affecting DoD tuition assistance could hurt enrollment and results. APUS’s 2012 three-year cohort default rate was 23.3%; HCON’s was 11.8%.
- HCON remained subject to a Temporary Provisional Program Participation Agreement while awaiting ED’s change-in-ownership approval; delays could constrain program changes and affect costs, revenues, or goodwill. The filing reported no material pending legal proceedings and no material changes in contractual commitments outside the ordinary course.
Important facts for investors to verify
- Whether APUS course registrations stabilize and how its admissions process, marketing changes, and tuition pricing affect enrollment and revenue.
- Whether the Q4 restructuring charge and IT asset write-off occur as anticipated, and whether the expected 2016 savings are realized.
- The status and resolution of APUS’s gainful-employment reporting issue and HCON’s provisional Title IV certification.
- Any changes to DoD tuition assistance, federal student-aid rules, or borrower-defense exposure, and their effects on student funding and compliance costs.
- Whether operating cash flow remains sufficient to support capital spending and repurchases as revenue and margins face pressure.