American Public Education, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. APEI provides online education through American Public University System (APUS) and campus-based nursing education through Hondros College of Nursing (HCN).
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $286.3 million | $297.7 million | Down 3.8% |
| Operating income | $12.8 million | $32.5 million | Down 60.8% |
| Operating margin | 4.5% | 11.0% | Down 6.5 percentage points |
| Net income | $10.0 million | $25.6 million | Down 60.9% |
| Diluted EPS | $0.62 | $1.54 | Down 59.7% |
| Operating cash flow | $38.4 million | $44.2 million | Down $5.8 million |
- Fourth-quarter revenue was $74.4 million versus $76.9 million a year earlier; net income was $5.7 million versus $9.1 million.
- Cash, cash equivalents and restricted cash totaled $202.7 million at year-end, down $9.4 million. Working capital was $177.6 million.
- The balance sheet reports no borrowings or other debt; operating lease liabilities were $11.8 million, including $2.3 million current.
- Capital expenditures were $7.3 million. Financing activities used $40.5 million, principally reflecting $39.0 million of common-stock repurchases.
Material changes and unusual items
- APUS segment revenue declined 1.2% to $256.9 million; net course registrations fell 1.1% to approximately 316,700. HCN revenue declined 21.7% to $29.5 million as average enrollment fell 23.1%.
- HCN recorded a $7.3 million non-cash goodwill impairment after underperforming internal targets; its segment reported a $10.8 million operating loss, compared with $4.0 million operating income in 2018.
- Costs rose 3.1% despite lower revenue. Notable FY 2019 costs included $3.5 million of higher advertising, $2.8 million of post-employment benefits for the APUS president, $2.1 million of IT evaluation and upgrade costs, and $1.4 million of acquisition-related professional fees.
- Operating cash flow declined, partly due to working-capital timing. The company repurchased 1.42 million shares for approximately $38.0 million, reducing year-end shares outstanding.
Outlook, management commentary and risks
- APEI gave no formal quantitative earnings or revenue guidance. Management warned that revenue may continue to decline and expenses may rise as the institutions invest in student experience, marketing and technology.
- Management expects 2020 selling and promotional expense as a percentage of revenue to increase, following an approved increase in marketing spending. Planned 2020 IT spending is approximately $6 million to $8 million; the company stated that existing cash and operating cash flow should fund ongoing operations and planned capital expenditures.
- APUS increased undergraduate and master’s tuition and its technology fee effective January 1, 2020. It increased grants to keep eligible active-duty military students’ net tuition at $250 per credit hour. HCN began a need-based grant program and plans to open an Indianapolis campus in Q2 2020.
- Key regulatory risks include HCN’s retention-rate shortfalls and ABHES monitoring/warnings, and HCN’s ADN program’s prolonged failure to meet Ohio nursing licensure exam pass-rate standards. Failure to meet required thresholds could threaten program approvals or accreditation and constrain enrollment.
- APUS’s ED Title IV program review remains open; its Title IV certification runs through September 30, 2020. The filing says unresolved review findings could lead to provisional recertification. Loss of Title IV eligibility could also affect DoD tuition-assistance participation.
- Funding concentration remains significant: APUS revenue sources in 2019 included DoD tuition assistance (39%), Title IV (25%) and VA benefits (23%); HCN derived 80% from Title IV. Changes to these programs, government funding interruptions, competition, enrollment and bad debt are material risks.
- CEO Angela Selden took office in September 2019; APUS President Wallace Boston expected to retire in June 2020. The filing reports no material legal proceedings pending. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether APUS renews Title IV certification on time and what conclusions or liabilities result from the still-open ED review.
- Whether HCN meets ABHES retention-rate deadlines and improves ADN licensure-exam outcomes, and the resulting effect on enrollment and accreditation.
- Whether APUS course registrations stabilize and HCN reverses its enrollment decline; monitor segment revenue and operating performance.
- Whether planned marketing and IT investments deliver enrollment and operating benefits, and whether HCN’s goodwill requires further impairment.
- Whether cash generation remains sufficient to fund investments and repurchases; confirm the company’s reported debt position and lease commitments in subsequent filings.