American Public Education, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 9, 2016. APEI provides online and campus-based postsecondary education through APUS, serving primarily military and public-safety communities, and Hondros College of Nursing (HCON), operating in Ohio and online. The company reported approximately 99,700 students.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $84.0 million | $85.4 million | Down 1.6% |
| Operating income | $16.0 million | $14.5 million | Up 10.4% |
| Operating margin | 19.0% | 16.8% | Up 2.2 percentage points |
| Net income | $10.3 million | $8.8 million | Up 17.0% |
| Diluted EPS | $0.64 | $0.51 | Up |
| Operating cash flow | $20.1 million | $7.1 million | Up |
| Capital expenditures | $3.1 million | $5.3 million | Down |
Costs and expenses declined 4.2% to $68.0 million; as a share of revenue, they fell to 81.0% from 83.2%. General and administrative expense decreased 11.5%, mainly reflecting lower bad-debt expense ($2.1 million versus $4.1 million). Depreciation and amortization increased 6.5% to $4.9 million. The effective tax rate was 37.7%, compared with 39.1%.
Cash and cash equivalents were $120.0 million at March 31, up from $105.7 million at year-end 2015. Current assets were $141.2 million and current liabilities $51.0 million. The balance sheet reports no borrowings or other debt; liabilities consist principally of accounts payable, accruals, deferred revenue, and deferred taxes. Cash includes $3.6 million of restricted student funds. Management said cash and expected operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future.
Performance and material changes
- APUS / APEI segment: Revenue fell 1.5% to $76.3 million; net course registrations declined 3.8% to approximately 95,800. Segment operating income rose 14.3% to $15.2 million, with margin increasing to 20.0%, primarily due to lower bad-debt expense and compensation costs. Tuition increases partly offset lower registrations.
- HCON: Revenue declined 3.8% to $7.7 million; enrollment was down approximately 17% year over year. Segment operating income fell 36.5% to $0.7 million, and margin declined to 9.5%, as revenue weakened and expenses increased.
- Net income included $0.6 million of equity-investment income, primarily from a favorable deferred-tax-asset valuation-allowance adjustment at NWHW Holdings. APEI invested an additional $0.95 million in Fidelis Education, bringing its ownership to approximately 22%.
- Operating cash flow benefited from higher net income and working-capital timing. Investing cash outflow was $4.2 million; financing cash outflow was $1.6 million, including $0.6 million for share repurchases. The company made no program repurchases during the quarter.
Outlook, risks, and contingencies
No specific financial guidance was provided. Management expects to fund operations and planned capital expenditures from existing cash and operating cash flow, while noting possible higher spending on technology, facilities, and strategic investments. It is evaluating differentiated pricing for selected APUS programs; implementation and impact are uncertain. The company also expects ongoing technology investment and warned that enrollment declines could lead to future asset write-offs, accelerated depreciation, workforce actions, or other costs.
- Management attributed APUS registration pressure to competition, military-market challenges, and the admissions-assessment process. Army enrollment-system difficulties and planned U.S. military reductions could further affect registrations. A 2015 tuition increase was partly offset by grants covering an estimated 75% of APUS net course registrations; APUS eliminated its transfer-credit evaluation fee in late March 2016.
- HCON cited curriculum changes and recruiting challenges. Its Cleveland campus accreditation renewal remained under review, with additional information requested. HCON is accredited by ACICS; potential loss of ACICS federal recognition could threaten HCON’s Title IV eligibility. The filing also describes uncertainty around federal borrower-defense rulemaking and possible institutional liability.
- Revenue is exposed to changes in Title IV aid, Department of Defense tuition assistance, and veterans’ education benefits. In Q1, APUS revenue funding mix was 29% Title IV, 36% DoD, 22% VA, and 13% cash/other; approximately 85% of HCON revenue came from Title IV programs.
- The company reported no pending material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. It said there were no material changes to contractual commitments or market-risk exposure.
Investor verification priorities
- Track APUS registrations and whether admissions-process changes, military-market conditions, and tuition actions stabilize revenue.
- Monitor HCON enrollment, margins, curriculum-related recruiting, and the Cleveland campus accreditation decision.
- Assess the implications of ACICS recognition and federal borrower-defense rulemaking for Title IV access and potential liabilities.
- Separate recurring operating performance from the $0.6 million equity-investment gain and working-capital-driven cash-flow improvement.
- Review future technology and strategic-investment spending, share repurchases, and the effects of new lease and stock-compensation accounting standards, whose impact the company had not yet determined.