Business context and reporting period
American Public Education, Inc. (APEI) provides online and campus-based postsecondary education through APUS, serving primarily military and public-safety communities, and Hondros College of Nursing (HCN), with five Ohio campuses and online programs. This Form 10-Q covers the three months ended March 31, 2017; comparisons are with the first quarter of 2016 unless stated otherwise.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $75.7 million | $84.0 million; down 9.9% |
| Operating income before interest and taxes | $8.3 million; 11.0% margin | $16.0 million; 19.0% margin |
| Net income | $4.5 million; $0.28 diluted EPS | $10.3 million; $0.64 diluted EPS |
| Operating cash flow | $5.1 million | $20.1 million |
| Capital expenditures | $1.7 million | $3.1 million |
| Cash and cash equivalents | $147.8 million at March 31, 2017 | $146.4 million at December 31, 2016 |
| Total assets / total liabilities | $320.3 million / $51.2 million | $315.6 million / $51.0 million at December 31, 2016 |
No debt is separately reported on the balance sheet. Working capital was $125.8 million. Cash increased $1.5 million during the quarter. Management said existing cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future.
Material changes and operating performance
- APEI segment revenue fell 10.7% to $68.1 million; APUS net course registrations declined 9.4%, which management attributed primarily to competition and challenges in the military market. Segment operating margin declined to 11.6% from 20.0%.
- HCN revenue declined 1.8% to $7.6 million, while enrollment fell approximately 7.5% to 1,710. Segment operating margin decreased to 5.0% from 9.5%. Management cited prior curriculum changes and lower enrollment.
- Total costs and expenses declined just 0.9% to $67.4 million, less than the revenue decline. General and administrative costs rose 6.5%, including higher professional fees and employee benefits; lower advertising, compensation, and bad-debt costs partly offset increases.
- Operating cash flow decreased mainly due to lower net income and working-capital timing, including payroll, receipts, and additional compensation payments.
- The effective tax rate rose to 46.1% from 37.7%. Adoption of stock-compensation accounting guidance increased Q1 2017 tax expense by approximately $0.5 million. Equity investment income was $0.04 million versus $0.6 million, which included a prior-year favorable tax valuation adjustment at an investee.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management warned that enrollment and quarterly results may fluctuate, and said it cannot guarantee a reversal of the revenue decline.
- HCN’s accreditor, ACICS, received notice that its recognition by the U.S. Department of Education had been terminated. HCN is provisionally permitted to participate in Title IV programs while it seeks accreditation from another recognized agency; it has an application pending with ABHES. Loss of Title IV eligibility would materially harm HCN.
- ACICS issued compliance warnings for HCN’s Cleveland campus and ADN program and placed the Cleveland and Dayton campuses on student-achievement review status. The PN program’s show-cause directive was vacated after supplemental data showed a 60% placement rate. HCN’s ADN program was also placed on provisional approval by Ohio’s nursing board for not meeting NCLEX pass-rate standards for four consecutive years.
- APUS’s shared-services organizational change remained under Higher Learning Commission review. The Department of Education’s review of APUS’s Title IV administration remained open. APUS was selected for the Department of Defense’s new institutional compliance review program.
- Coast Guard tuition-assistance funding was expected to run out in mid-to-late May 2017. Approximately 3% of APUS course starts funded through DoD tuition assistance from June through September 2016 were by active-duty Coast Guard members; the effect of the suspension was uncertain.
- APUS admissions screening changes may improve student readiness but could adversely affect enrollment. HCN’s new Toledo campus began operating in January 2017, with startup costs; its success was uncertain.
- The company reported no material pending legal proceedings, no material changes to contractual commitments outside the ordinary course, and no material off-balance-sheet financing arrangements.
Important facts for investors to verify
- Whether APUS registration declines stabilize and whether admissions initiatives affect enrollment or student outcomes.
- Whether HCN obtains ABHES accreditation and retains access to Title IV funding during the transition from ACICS; track related deadlines and regulatory decisions.
- HCN campus placement, retention, and NCLEX pass-rate progress, and the outcomes of ACICS and Ohio nursing-board reviews.
- The impact of DoD compliance reviews and any tuition-assistance funding reductions on APUS enrollments.
- Whether revenue and margins recover, and whether working-capital movements and lower operating cash flow persist.
- The effect of stock-compensation tax accounting, including management’s stated expectation of potential additional tax expense of $0.6–$0.9 million in Q1 2018 from expiring underwater options.