American Public Education, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. APEI provides online and campus-based postsecondary education through American Public University System (APUS) and Hondros College of Nursing (HCN), serving approximately 86,500 students.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $73.3m | $73.8m | $221.2m | $234.5m |
| Operating income | $7.6m | $0.4m | $22.2m | $27.0m |
| Operating margin | 10.4% | 0.5% | 10.1% | 11.5% |
| Net income | $4.4m | $0.3m | $12.7m | $17.3m |
| Diluted EPS | $0.27 | $0.02 | $0.78 | $1.07 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $29.3m | $42.7m |
At September 30, cash and cash equivalents were $166.3m, versus $146.4m at December 31, 2016; current assets were $180.1m and current liabilities $40.6m. Total liabilities were $49.9m and stockholders’ equity $280.0m. The balance sheet presents no debt balance. Nine-month capital expenditures were $6.5m; cash used in investing and financing activities was $8.0m and $1.3m, respectively.
Changes and segment performance
- Q3 revenue decreased 0.7% year over year; nine-month revenue fell 5.7%. APUS/APEI segment revenue declined 3.3% in Q3 and 7.3% year to date, primarily as net course registrations fell 4.3% and 6.7%, respectively.
- HCN revenue rose 24.6% in Q3 and 10.1% year to date. Q3 enrollment increased 11.2% to about 1,790; nine-month enrollment was unchanged. HCN reported operating income of $0.7m in Q3 and $1.8m year to date, compared with operating losses in 2016.
- Q3 consolidated operating margin improved mainly because the prior-year quarter included a $4.7m HCN goodwill impairment and $5.1m of long-lived-asset disposal losses. Year-to-date margin declined as revenue contracted faster than costs; APEI segment operating income decreased 34.5%.
- Year-to-date net income declined 26.4%. The 2016 comparison included $0.7m of equity-method income, while 2017 tax expense reflected a higher effective tax rate, including about $0.5m from adoption of stock-compensation accounting guidance.
Outlook, commentary and risks
- Management gave no specific revenue or earnings guidance. It expects operating cash flow and existing cash to fund ongoing operations and planned capital expenditures for the foreseeable future, while noting future investment and capital needs could increase.
- APUS faces competitive and military-market challenges and continuing registration declines. New admissions-verification measures may also affect enrollment. Two applied doctoral programs are scheduled to begin in January 2018; expected 2017 start-up costs were $0.4m–$0.6m.
- APUS’s shared-services organizational realignment remained under Higher Learning Commission review; management said a decision was not expected before February 2018. ED’s Title IV program review of APUS remained open.
- HCN faced accreditation and student-outcome risks: ED had withdrawn recognition of ACICS, HCN was seeking ABHES accreditation, and HCN’s ADN program was on provisional Ohio Board of Nursing approval for below-standard NCLEX results. The Ohio State Board also initiated disciplinary proceedings concerning a Cincinnati campus curriculum change.
- A Massachusetts Attorney General investigative demand concerns alleged unfair or deceptive AMU recruitment, retention and education-financing practices. The company is cooperating and could not estimate the investigation’s outcome or potential loss.
- Unusual items included approximately $1.3m of costs related to the APUS president’s retirement and a Q3 $0.4m benefit from reducing accrued cash incentive awards. The company sold excess real property in May 2017 and recorded a $0.6m loss.
- APUS revenue depended materially on government education funding: for Q3, 36.3% was from DoD tuition assistance, 27.4% from Title IV and 22.8% from VA benefits. HCN derived approximately 83.5% of nine-month revenue from Title IV programs.
Important facts for investors to verify
- Whether APUS registration declines stabilize and the new admissions measures and programs support enrollment.
- Progress and outcomes of HCN’s ABHES accreditation application, ACICS-related transition, NCLEX performance and Ohio proceedings.
- Any material developments in the Massachusetts investigation, APUS’s ED program review or HLC’s review of the shared-services structure.
- How much of the Q3 earnings improvement reflects lower prior-year impairment and disposal charges rather than underlying operating growth, and whether cash generation remains resilient.