Business context and reporting period
American Public Education, Inc. (APEI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. It provides online education through American Public University System (APUS) and campus-based and online nursing education through Hondros College of Nursing (HCON), acquired November 1, 2013. The prior-year comparison excludes HCON.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $85.5 million; +6% | $174.0 million; +6% |
| Operating income | $15.8 million; −8% | $32.6 million; −8% |
| Operating margin | 18.5%, versus 21.2% | 18.7%, versus 21.5% |
| Net income | $9.8 million; −9% | $20.2 million; −9% |
| Diluted EPS | $0.56, versus $0.60 | $1.15, versus $1.23 |
| Operating cash flow | $22.2 million, versus $34.6 million in the first half of 2013 |
For the six months, investing cash outflow was $12.2 million, including $9.2 million of capital expenditures and $1.6 million for an equity investment. Financing cash outflow was $15.1 million, primarily reflecting $15.8 million of share repurchases. Cash declined $5.0 million to $89.8 million from December 31, 2013. The balance sheet reports no debt; total liabilities were $58.0 million and current assets and current liabilities were $113.0 million and $44.1 million, respectively.
At June 30, total assets were $272.7 million, compared with $271.7 million at year-end. The allowance for doubtful accounts was $19.2 million, up from $13.2 million at year-end. Six-month bad debt expense rose to $10.0 million (5.7% of revenue) from $6.8 million (4.1%).
Material changes and operating drivers
- Consolidated revenue growth was driven by HCON, which contributed $7.2 million in Q2 and $14.4 million in the first half; its enrollment was reported up 17% year over year. HCON generated operating income of $0.8 million and $1.5 million, respectively.
- APEI revenue fell 3% in both periods to $78.3 million in Q2 and $159.6 million in the first half, with net course registrations down 3%. APEI operating income declined 12% to $15.1 million in Q2 and $31.1 million in the first half.
- Consolidated costs and expenses rose 9% in both periods, outpacing revenue growth. Management attributed margin pressure chiefly to HCON’s higher-cost campus delivery model, lower APEI registrations, and higher bad debt, technology, and marketing costs. Depreciation and amortization increased 20% for the first half.
- DoD tuition assistance provided approximately 35% of revenue in Q2 and the first half; Title IV aid accounted for approximately 35%, and veterans benefits approximately 18% in 2014. A reduction or change in these programs could significantly affect operations.
Outlook, risks and notable items
APEI provided no specific financial guidance. Management said cash from operations and other liquidity sources should fund ongoing operations and planned capital expenditures for the foreseeable future, barring significant investment opportunities. It expects to pursue strategic investments and noted future capital spending could increase, particularly for HCON facilities and technology. Results may fluctuate with enrollment, seasonality, student attrition and expenses.
- APUS was required to sign the DoD’s revised 2014 Memorandum of Understanding by September 5, 2014 to continue participating in tuition assistance programs. New requirements include student disclosures and support, withdrawal-related fund returns, and compliance obligations. Failure to comply could jeopardize participation and materially harm results.
- HCON remained under a Temporary Provisional Program Participation Agreement while the Education Department reviewed the change in ownership. The company submitted requested information in April and June 2014.
- A putative Ohio class action involving alleged misrepresentations about nursing-program accreditation was pending. APEI said it could not estimate the likelihood or range of loss, but did not believe an adverse outcome would materially affect its financial condition based on information then available.
- HCON entered a 15-year operating lease commencing July 1, 2014, with monthly base rent of $38,710 for years one through five, subject to escalators and a termination option after 10 years with a $263,923 fee.
- APEI repurchased 416,328 shares for $14.5 million under its program in the first half and had approximately $15.0 million of authorization remaining at June 30. A separate risk disclosure highlights planned expansion of APUS marketing internationally and associated regulatory, operational, and profitability risks.
Important facts for investors to verify
- Whether APUS met the revised DoD MOU requirements and retained access to tuition-assistance funding.
- HCON’s final Education Department approval status and any effects of provisional participation on operations.
- Trends in APEI registrations, bad debt expense, and the allowance for doubtful accounts.
- HCON’s enrollment, campus costs, operating performance, and long-term lease obligations.
- Developments in the HCON-related class action and any resulting financial exposure.
- Cash generation, planned investment and capital spending, and the pace of share repurchases.