American Public Education, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; interim financial statements are unaudited. The company provides online and campus-based postsecondary education through American Public University System (APUS) and Hondros College of Nursing (HCON), serving approximately 92,200 students.
Financial performance and liquidity
Amounts below are in millions, except per-share data.
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $73.8 | $76.3 | $234.5 | $242.0 |
| Operating income | $0.4 | $10.5 | $27.0 | $36.6 |
| Operating margin | 0.5% | 13.9% | 11.5% | 15.1% |
| Net income | $0.3 | $6.8 | $17.3 | $22.6 |
| Diluted EPS | $0.02 | $0.41 | $1.07 | $1.33 |
- Cash and liquidity: Cash and cash equivalents were $137.7 million at September 30, 2016, up from $105.7 million at December 31, 2015. This includes $2.4 million of restricted student funds. Current assets were $155.1 million and current liabilities $44.0 million.
- Cash flow, nine months: Operating activities provided $42.7 million; investing activities used $9.1 million; financing activities used $1.6 million. Capital expenditures were $9.7 million. Cash increased $32.0 million during the period.
- Debt: The balance sheet reports no debt balance. Total liabilities were $56.5 million, including deferred income taxes.
- Segment trends: Q3 APUS-segment revenue declined 3.1% to $67.1 million; HCON revenue declined 4.5% to $6.7 million. HCON recorded a $5.3 million operating loss in Q3, including a $4.7 million goodwill impairment.
Material changes versus comparable periods
- Revenue declined 3.3% in Q3 and 3.1% for the first nine months. APUS net course registrations fell 10.2% in Q3 and 7.2% year to date; management cited competition, military-market challenges, and the admissions process. HCON enrollment at September 30 was down approximately 11.1% year over year.
- Net income declined to $0.3 million in Q3 and $17.3 million for nine months. Operating margin contracted sharply, reflecting lower revenue and unusual charges.
- Q3 included $4.7 million of goodwill impairment, $4.3 million of long-lived-asset disposal losses, and $0.8 million of losses related to property held for sale. The disposal loss primarily reflected abandoning a student course registration engine after development problems; the project-related loss was $4.0 million.
- Year-to-date capital expenditures fell to $9.7 million from $19.6 million. Cash used for share repurchases was $0.6 million for nine months versus $23.1 million in the prior year; no shares were repurchased in Q3.
Outlook, commentary and risks
- No quantified financial guidance is provided. Management expects operating cash flow and existing cash to fund ongoing operations and planned capital expenditures for the foreseeable future, while noting potential for higher investment spending, including technology and HCON campus expansion.
- Management cautions that declining enrollments and revenue, competitive pressures, and strategic initiatives could continue to affect results; it cannot assure a reversal of the revenue decline.
- Accreditation: ED terminated ACICS’s recognition as a recognized accreditor in September 2016; ACICS appealed. If the decision stands and HCON cannot secure alternative recognized accreditation or other ED authorization, HCON could lose Title IV eligibility, with potentially material effects. HCON is pursuing ABHES accreditation.
- HCON program risk: HCON’s ADN NCLEX pass rate had missed the Ohio standard for three years. Management did not expect the 2016 rate to meet the standard; another miss could lead to provisional approval and further consequences.
- Regulatory and operational risks: APUS’s ED Title IV program review remained open. The HLC requested review of APUS’s organizational realignment. New federal borrower-defense and financial-responsibility rules generally take effect July 1, 2017 and could result in institutional liability or a required letter of credit. A potential federal funding lapse could also suspend DoD tuition assistance.
- There were no material pending legal proceedings. Management reported effective disclosure controls as of September 30, 2016.
Investor verification priorities
- Track APUS registrations and HCON enrollment, revenue, and operating performance for evidence of stabilization or further deterioration.
- Verify ACICS’s appeal outcome, HCON’s progress toward alternative accreditation, and the resulting effect on Title IV eligibility.
- Monitor HCON’s 2016 ADN NCLEX results and any Ohio Board of Nursing action.
- Assess whether the HCON impairment assumptions remain supportable and whether further goodwill impairment or other unusual charges arise.
- Review the outcome of APUS’s ED program review, HLC review of the organizational realignment, and implementation of borrower-defense and financial-responsibility regulations.
- Confirm cash generation, planned technology/campus spending, and the extent to which reported cash is restricted or otherwise unavailable.