American Public Education, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing was signed February 27, 2014. APEI provides online postsecondary education through APUS and, following its November 1 acquisition, campus-based and online nursing education through Hondros College, Nursing Programs (HCON).
Business context and performance
APEI reported more than 113,730 students across its institutions at year-end: approximately 112,400 at APUS and 1,330 at HCON. APUS serves military, public safety, veteran and other working-adult students; HCON operates four Ohio campuses and an online RN-to-BSN program. HCON results are consolidated only from the acquisition date.
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $329.5 million | $313.5 million | +5% |
| Operating income before interest and taxes | $67.4 million | $68.8 million | -2% |
| Operating margin | 20.5% | 21.9% | -1.4 percentage points |
| Net income | $42.0 million | $42.3 million | -1% |
| Diluted earnings per share | $2.35 | $2.35 | Flat |
| Operating cash flow | $59.4 million | $52.9 million | +12% |
| Capital expenditures | $20.6 million | $35.0 million | -41% |
Financial position and liquidity
- Year-end cash and cash equivalents were $94.8 million, down from $114.9 million. Working capital was $62.3 million, versus $86.0 million.
- Total assets were $271.7 million and total liabilities were $64.6 million; stockholders’ equity was $207.1 million. The balance sheet presents no interest-bearing borrowings. A separate $6.0 million subordinated note receivable from New Horizons is an asset, not company debt.
- Cash used in investing activities was $69.2 million, including $44.4 million net cash paid for HCON and a $4.0 million Fidelis investment. Financing activities used $10.2 million, including $14.4 million for share repurchases.
- Management said operating cash flow and other liquidity sources were adequate for ongoing operations and planned capital expenditures for the foreseeable future. The company reported $13.8 million of contractual obligations, primarily operating leases.
Material changes and unusual items
- APUS net course registrations increased 2% to approximately 409,700, while APEI segment revenue rose 4% to $325.7 million. Total revenue growth also included $3.8 million from HCON after acquisition.
- APEI acquired HCON for an adjusted purchase price of approximately $46.3 million. The purchase accounting recorded $38.1 million of goodwill and $8.1 million of identifiable intangible assets. HCON contributed $276,000 of operating income before interest and taxes during the consolidated period.
- Costs and expenses rose 7%, faster than revenue. Selling and promotional costs increased 10% to $65.7 million, and general and administrative costs increased 10% to $70.1 million. Management cited higher advertising and technology spending, costs of serving a growing non-military student population, and slower revenue growth.
- Bad debt expense was $14.3 million, approximately 4.3% of revenue, compared with $13.6 million in 2012. Management linked the exposure in part to Title IV students who leave before completing an academic period.
- Fourth-quarter revenue was $82.9 million, versus $86.0 million in Q4 2012; net income was $9.0 million, versus $13.2 million. Management cited enrollment and revenue effects from DoD tuition-assistance suspensions, including the October 2013 government shutdown.
Outlook, risks and contingencies
- The filing gives no specific numerical revenue, earnings or enrollment guidance. Management does not expect historical growth rates to be sustainable and anticipates continued investment in technology and financial-aid processing in 2014, increasing spending.
- DoD tuition assistance represented 34% of 2013 adjusted net course registrations and 34% of APEI revenue; Title IV-funded students generated 38% of revenue. Funding changes, restrictions or suspensions could materially affect enrollment and results. APUS October registrations fell by approximately 20% year over year after about 13,100 registrations were dropped during the shutdown period.
- APEI reported financial-aid processing delays and errors after moving APUS processing in-house using third-party software. Some issues remained; management said manual processing and related costs would continue until software improvements were made, with no completion date stated.
- HCON’s Title IV participation was under temporary, month-to-month provisional certification pending ED review of the change in ownership. Its 2012 compliance audit identified a deficiency involving timely return of Title IV funds; the ED review was to address the matter. ACICS reinstated HCON accreditation through December 31, 2016, subject to an on-site visit due by May 31, 2014.
- HLC’s recognition as an accreditor was under further federal review, with a spring 2014 review scheduled. Proposed gainful-employment, distance-education authorization and other regulatory changes could affect Title IV eligibility and compliance costs.
- A putative Ohio class action alleges misleading statements concerning accreditation of HCON’s ADN program. HCON was added as a defendant in an amended complaint; the company could not estimate a probable loss, but did not expect an adverse outcome to materially affect its financial condition based on information then available.
- The independent auditor issued unqualified opinions on the financial statements and on internal control over financial reporting. HCON was excluded from the 2013 internal-control assessment because of acquisition timing.
Key facts for investors to verify
- Whether APUS enrollment, registrations and revenue recover from military tuition-assistance disruptions, and whether non-military student growth remains profitable.
- Progress in resolving financial-aid processing problems and any resulting effects on student persistence, bad debt, cash receipts or regulatory compliance.
- ED’s final decision on HCON’s change-of-ownership application, the Title IV refund finding, and the required accreditation follow-up visit.
- HCON integration and performance, including whether acquisition goodwill and intangible assets remain recoverable.
- Future federal funding and regulatory developments, particularly DoD tuition assistance, Title IV rules, accreditor recognition and distance-education authorization.
- Whether planned technology and compliance investment can be funded while preserving margins, cash and the company’s repurchase capacity.