American Public Education, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company provides online and campus-based postsecondary education through APUS and Hondros College of Nursing (HCN), serving approximately 83,100 students. Figures below are unaudited.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $72.8 million | $72.2 million | $147.8 million | $147.9 million |
| Operating income | $8.0 million | $6.3 million | $14.2 million | $14.6 million |
| Operating margin | 11.0% | 8.8% | 9.6% | 9.8% |
| Net income | $6.5 million | $3.8 million | $11.0 million | $8.3 million |
| Diluted EPS | $0.39 | $0.23 | $0.67 | $0.51 |
- Q2 revenue rose 0.8%; six-month revenue was essentially flat, down 0.1%. Net income increased in both periods, supported in part by lower effective tax rates following the federal corporate tax-rate reduction.
- Q2 costs and expenses declined 1.7% to $64.8 million; for the six months they increased 0.2% to $133.6 million. Six-month operating results included $1.7 million of severance expense from a voluntary reduction in force.
- Operating cash flow was $19.6 million for the six months, versus $16.3 million a year earlier. Capital expenditures were $3.0 million; investing cash outflow was $3.6 million and financing cash outflow was $1.6 million.
- Cash and cash equivalents were $193.6 million at June 30, up from $179.2 million at year-end 2017. Total assets were $351.7 million and total liabilities $48.6 million. The balance sheet lists no borrowings or other interest-bearing debt.
- Management said existing cash and expected operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future. No specific earnings or revenue guidance was provided.
Business trends and changes versus prior year
- APUS revenue declined 1.0% in Q2 and 2.3% for the first half; net course registrations fell 0.3% and 2.2%, respectively. Management cited competition, challenges in military markets, and continuing effects of prior registration declines.
- HCN revenue increased 15.4% in Q2 and 19.1% for the first half, with enrollment up 16.9% in Q2 to approximately 2,010 students. Growth in HCN partly offset APUS weakness.
- Q2 consolidated operating margin improved to 11.0%, while the first-half margin slipped to 9.6%. APUS’s first-half operating income declined 9.5%, including severance costs; HCN’s increased 84.6%.
- Adoption of ASC 606 on January 1, 2018 had an immaterial impact on ongoing revenue and net income; prior-period results were not restated. Adoption reduced opening retained earnings by $278,000 after tax.
Outlook, risks, contingencies, and unusual items
- APUS’s voluntary workforce reduction eliminated 48 employees, about 5% of its non-faculty workforce. Management estimated pre-tax savings of $1.7–$2.1 million in 2018 and $2.1–$2.8 million annually, but cautioned that actual savings and effects may differ.
- Walmart announced it would not renew its APUS partnership after June 2019. Students enrolling through the partnership represented approximately 1.3% of 2017 consolidated revenue; the company said it could not estimate the effect of the non-renewal or transition.
- After quarter-end, APUS agreed to an August 6, 2018 Massachusetts Assurance of Discontinuance, without admission or finding of wrongdoing, including a $270,000 payment and compliance with applicable state regulations. HLC’s related governmental-investigation designation and review of APUS’s shared-services application remained unresolved in the filing.
- APUS posted a required approximately $700,000 irrevocable letter of credit following an ED audit finding involving timely return of Title IV funds. An ED program review remained open.
- HCN’s ADN program remained on provisional approval after failing Ohio’s NCLEX pass-rate standard for 2017. ACICS had placed certain HCN programs and campuses on reporting status for placement rates; HCN also received initial ABHES institutional accreditation through February 2021 and sought ED approval to designate ABHES for Title IV purposes.
- HCN began offering student payment plans on July 1, 2018. The company noted limited experience with student lending and risks from applicable consumer-credit laws. HCN also planned a new medical laboratory technician program, subject to regulatory approvals.
- Other notable items: a $0.5 million non-cash impairment of the RallyPoint investment in the first quarter; and $0.9 million of accelerated stock-compensation expense in Q2 related to retirement-eligible employees. The filing warns that changes to DoD tuition assistance, Title IV funding, accreditation, licensing, or regulatory requirements could materially affect operations.
Important facts for investors to verify
- Whether APUS course registrations and revenue stabilize, and whether workforce savings are realized without harming operations.
- Developments in APUS’s HLC shared-services review, governmental-investigation designation, and ED Title IV program review.
- HCN’s NCLEX performance, campus and program placement outcomes, accreditation status, and ED recertification.
- The financial and enrollment impact of Walmart’s partnership ending, and the performance and compliance costs of HCN’s student payment plans.
- Future cash generation, planned investment needs, and any additional impairment of the RallyPoint investment.