American Public Education, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. APEI provides online education through American Public University System (APUS) and campus-based nursing education through Hondros College of Nursing (HCN), serving approximately 83,500 students.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $297.7 million | $299.2 million | Down 0.5% |
| Operating income before interest and taxes | $32.5 million | $34.9 million | Down 6.7% |
| Net income | $25.6 million | $21.1 million | Up 21.3% |
| Diluted earnings per share | $1.54 | $1.29 | Up |
| Cash from operating activities | $44.2 million | $47.9 million | Down $3.8 million |
| Capital expenditures | $9.4 million | $14.8 million | Down |
| Cash, cash equivalents and restricted cash | $212.1 million | $179.2 million | Up $32.9 million |
- Operating margin was 11.0%, versus 11.6% in 2017; net margin was approximately 8.6%.
- Year-end working capital was $188.2 million. The balance sheet reports no borrowings or other debt; total liabilities were $49.7 million, primarily current liabilities and deferred income taxes.
- Cash flow less capital expenditures was approximately $34.7 million, calculated from reported figures.
- Q4 revenue was $76.9 million versus $78.1 million in Q4 2017; net income was $9.1 million versus $8.4 million. Q4 operating income before interest and taxes was $11.4 million versus $12.6 million.
Changes and segment performance
- APUS segment revenue declined 2.0% to $260.1 million, while operating income fell 7.5% to $28.6 million. APUS net course registrations decreased 1.4% to approximately 320,300.
- HCN revenue increased 10.7% to $37.6 million, principally reflecting the Toledo campus; operating income was approximately $4.0 million, essentially unchanged. Year-end student enrollment was approximately 2,100.
- Consolidated net income improved despite lower revenue and operating income. The lower effective tax rate (26.6% versus 35.2%) and higher interest income ($2.9 million versus $0.2 million) contributed to the improvement. The tax-rate decline primarily reflected the federal corporate tax rate reduction.
- General and administrative expense rose 8.0% to $74.5 million; selling and promotional expense fell 2.2% to $57.0 million. Bad debt expense was $4.6 million, or about 1.5% of revenue, versus $4.7 million, or 1.6%, in 2017.
Outlook, risks and unusual items
- Management provided no specific financial guidance and stated that enrollment, revenue and margins are difficult to forecast. It expects to fund operations and planned capital expenditures from operating cash flow and existing cash for the foreseeable future.
- Key operating priorities include stabilizing APUS enrollment, improving student persistence and outcomes, expanding job-aligned programs and partnerships, and pursuing HCN program and campus growth.
- HCN faces significant accreditation and licensure risks: several programs had 2017–2018 retention or placement rates of 63%–69%, below ABHES’s 70% threshold. Management expected the relevant rates would not meet the standards for the applicable review periods. HCN’s ADN program also remained on provisional approval after repeated NCLEX pass-rate shortfalls; January 2019 enrollment was significantly below expectations following admissions changes.
- APUS’s Department of Education Title IV program review remained open. A 2016 compliance audit finding concerning untimely or incorrect return-of-funds calculations resulted in an approximately $700,000 letter of credit; potential program-review outcomes were not clear.
- APUS’s Massachusetts inquiry was resolved in August 2018 through an Assurance of Discontinuance and a $270,000 payment, without an admission or finding of wrongdoing. The filing reports no material legal proceedings pending.
- APUS discontinued new RN-to-BSN enrollments at HCN after the July 2018 term. HCN expected to begin enrolling students in its new Medical Laboratory Technology program in April 2019. Walmart’s partnership with APUS was scheduled to end in June 2019; associated students represented 1.1% of 2018 consolidated revenue.
- Other items included $1.7 million of severance expense from an APUS workforce reduction, $0.5 million of non-cash impairment charges on minority investments, and $0.9 million of losses on disposal of long-lived assets. HCN’s annual goodwill test showed fair value approximately 10%, or $4.5 million, above carrying value.
- APEI adopted ASC 606 in 2018; its reported revenue impact was immaterial. The filing states adoption of the new lease standard in January 2019 increased reported assets and liabilities by approximately $12.0 million.
Important facts for investors to verify
- Progress against APUS registration declines and the revenue and earnings contribution from HCN.
- ABHES retention and placement compliance, HCN’s NCLEX results and the status of its ADN program approval.
- Outcome of APUS’s open Department of Education review, including any repayment, monitoring or letter-of-credit requirements.
- Cash conversion and receivables: operating cash flow declined, while year-end accounts receivable rose approximately $6.9 million, partly due to delayed DoD and VA payments.
- Whether the loss of the Walmart partnership and changes in admissions, programs and marketing affect enrollment, retention and student acquisition costs.