American Public Education, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly figures below are for the three months ended December 31, 2014. APEI provides online education through American Public University System (APUS) and nursing education through Hondros College of Nursing (HCON), acquired November 1, 2013. The company reported approximately 112,470 students across both institutions.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Revenue | $350.0 million | $329.5 million | Up 6.2%; chiefly reflects HCON included for the full year in 2014 |
| Operating income before interest and taxes | $65.8 million | $67.4 million | Down 2.4%; operating margin 18.8%, versus 20.5% |
| Net income | $40.9 million | $42.0 million | Down about 2.6%; net margin about 11.7%, versus 12.8% |
| Diluted EPS | $2.33 | $2.35 | Down slightly |
| Cash from operations | $61.0 million | $59.4 million | Up modestly |
| Capital expenditures | $24.6 million | $20.6 million | Operating cash flow less capex was approximately $36.4 million |
| Cash and cash equivalents | $115.6 million | $94.8 million | Includes $3.9 million of restricted cash at year-end |
| Working capital | $88.0 million | $62.3 million | Current assets were $136.2 million; current liabilities were $48.3 million |
Debt: The balance sheet reports no borrowings or long-term debt. Total liabilities were $63.7 million, including deferred taxes. A $6.0 million note receivable from New Horizons was repaid in December 2014. The company said existing cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future.
Fourth quarter: Revenue was $91.3 million and net income was $11.8 million, compared with $82.9 million and $9.0 million, respectively, in Q4 2013. Diluted EPS was $0.68, compared with $0.51.
Segments and material changes
- APEI segment: Revenue was $319.9 million, down 1.8%; income before interest and taxes was $62.5 million, down 6.9%. APUS net course registrations declined approximately 1.4% to 403,920.
- HCON segment: Revenue was $30.1 million and income before interest and taxes was $3.3 million. FY2013 included only two months of HCON results, so year-over-year consolidated growth is not directly comparable.
- Consolidated costs and expenses rose 8.4% to $284.2 million, faster than revenue. Their share of revenue increased to 81.1% from 79.5%, reflecting HCON’s higher-cost campus model and increased company expenses.
- Bad debt expense rose to $19.2 million, about 5.5% of revenue, from $14.3 million, about 4.3%. Management attributed the increase mainly to non-military APUS students using Title IV aid who did not complete their academic period.
- APEI repurchased 530,962 shares for $18.5 million during 2014. Year-end stockholders’ equity was $234.2 million, up from $207.1 million.
Outlook, commentary, and key risks
- APEI planned a 5%–8% tuition increase for undergraduate and graduate programs in the second half of 2015, while providing active-duty military students grants intended to keep their tuition cost approximately unchanged. It expected to evaluate differentiated pricing for selected programs in 2016.
- Management planned a free, non-credit admissions course for certain prospective APUS students beginning in Q2 2015, and multiple Title IV disbursements for first-time undergraduate students in the second half of 2015. These steps may reduce enrollment; management hoped the disbursement change would help lower bad debt, but gave no assurance of success.
- APEI expected continued investment in technology and financial-aid processing. APUS had experienced processing delays, software errors, manual workarounds, and some delayed or unavailable student aid; it was working toward a transition back to its former third-party processor, with implementation costs and risks.
- Federal funding and regulatory exposure are significant. For APUS in 2014, revenue by primary funding source was 36% Title IV, 35% DoD tuition assistance, 18% VA benefits, and 11% cash and other. HCON derived approximately 83% of revenue from students receiving federal student aid. Disruptions or changes to these programs could materially affect enrollment and results.
- HCON’s change-of-ownership application remained pending with the Department of Education; it operated under a month-to-month temporary provisional agreement, which restricted expansion of Title IV-funded locations and programs. HCON also had a $128,290 letter of credit related to a prior audit finding on timely Title IV refunds.
- The 2015 gainful-employment regulations, state authorization requirements, accreditation, and the 90/10 rule pose continuing risks. The filing reports 2013 90/10 ratios of 46% for APUS and 81% for HCON; it does not provide 2014 ratios.
- A putative HCON class action concerning alleged past accreditation representations was settled for a de minimis payment, with no admission of wrongdoing, and dismissed with prejudice. The company reported no material legal proceedings pending.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether APUS registrations and segment profitability stabilize after the 2014 decline, and whether HCON’s performance improves on a full-year basis.
- Current bad-debt trends, receivable quality, and the results and cost of planned financial-aid processing and disbursement changes.
- HCON’s pending Department of Education ownership approval, associated operating restrictions, and resolution of the prior refund-compliance matter.
- Updated 90/10 calculations and the sensitivity of both institutions to changes in Title IV, DoD tuition assistance, and VA benefits.
- Enrollment, retention, and student-outcome effects of APUS’s admissions changes, planned tuition increases, and ongoing technology investments.
- Cash available for operations and investment after restricted balances, share repurchases, planned capital spending, and contractual commitments.