American Public Education, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial amounts below are in millions unless otherwise stated. APEI provides online and campus-based postsecondary education; its APUS online business serves primarily military and public-safety communities, while Hondros College of Nursing (HCON) operates nursing programs in Ohio. APEI acquired HCON on November 1, 2013, so prior-year comparisons exclude HCON.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $84.7 | $81.8 | $258.7 | $246.5 |
| Operating income | $14.6 | $17.5 | $47.2 | $52.9 |
| Operating margin | 17.2% | 21.4% | 18.3% | 21.4% |
| Net income | $8.8 | $10.9 | $29.1 | $33.0 |
| Diluted EPS | $0.51 | $0.61 | $1.65 | $1.84 |
| Net margin | 10.4% | 13.3% | 11.3% | 13.4% |
Revenue rose 3.5% in Q3 and 4.9% year to date, primarily because HCON was included in 2014. The legacy APEI segment’s revenue fell 5.6% in Q3 and 3.9% year to date. Its net course registrations declined 4.8% and 3.9%, respectively. HCON contributed Q3 revenue of $7.5 million and operating income before interest and taxes of $0.7 million; nine-month figures were $21.9 million and $2.2 million. HCON enrollment was 1,311, up 8.1% year over year.
Costs and expenses grew faster than revenue: 8.9% in Q3 and 9.2% year to date. Management attributed margin pressure mainly to HCON’s higher-cost, campus-based operations, lower APUS registrations, higher advertising, and elevated bad-debt expense. Bad-debt expense was $4.3 million (5.1% of revenue) in Q3 and $14.3 million (5.5%) year to date, versus 4.1% of revenue in each prior-year comparable period.
Cash, liquidity, and capital
- Cash and cash equivalents were $108.6 million at September 30, 2014, versus $94.8 million at December 31, 2013. Operating cash flow was $47.2 million for the nine months, down from $54.2 million.
- Investing activities used $18.3 million, including $15.3 million of capital expenditures and a $1.5 million investment in Second Avenue Software. Financing activities used $15.0 million, including $15.8 million in cash paid for share repurchases.
- Current assets were $130.3 million and current liabilities $53.0 million. Total liabilities were $67.6 million and stockholders’ equity $224.9 million.
- The balance sheet reports no borrowings or debt; the company stated that it assumed no debt in the HCON acquisition. Management said cash, operating cash flow, and other liquidity sources should fund ongoing operations and planned capital expenditures for the foreseeable future, absent significant new investment opportunities.
- APEI repurchased 416,328 shares for approximately $14.5 million under its authorization during the nine-month period; approximately $15.0 million remained authorized at September 30.
Material developments, outlook, and risks
- HCON acquisition and lease: The adjusted purchase price was revised to approximately $46.8 million, with goodwill of $38.6 million, following an increase in the estimated seller tax-election obligation. HCON entered a 15-year operating lease in July 2014, with monthly base rent beginning at $38,710.
- Regulation and funding: APEI depends materially on federal Title IV student aid and Department of Defense tuition assistance. For the APEI segment, Title IV represented 36% of Q3 revenue and DoD tuition assistance 34%; veterans’ benefits represented 18%. APUS signed the revised DoD MOU in August 2014. HCON was operating under a temporary provisional Title IV participation agreement pending Department of Education review.
- Gainful-employment rules: Final regulations were issued October 31, 2014, after quarter-end, and are effective July 1, 2015. Programs can lose Title IV eligibility after repeated failures of debt-to-earnings tests. The filing describes potential adverse effects on program eligibility, enrollment, and business results.
- Legal contingency: HCON is a defendant in a putative Ohio student class action alleging misleading statements about nursing-program accreditation. The company could not estimate the likelihood or range of loss; management did not believe, based on available information, that an adverse outcome would materially affect the company’s financial condition.
- Management outlook: The company expects enrollment-related and expense-related quarterly fluctuations to continue. It anticipates possible higher future capital expenditures, including for technology and HCON’s physical operations. No specific revenue or earnings guidance was provided.
- Other risks include lower APUS registrations, bad-debt expense, changes to federal or military education funding and compliance requirements, and risks from planned international marketing. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether APUS course registrations and segment revenue stabilize, and whether operating margins recover as HCON is integrated.
- Bad-debt trends and the adequacy of the receivables allowance, which increased to $19.4 million from $13.2 million at year-end 2013.
- HCON’s final Department of Education approval and Title IV status, and the outcome or potential exposure from the student litigation.
- How the new gainful-employment regulations and revised DoD MOU affect program eligibility, student demand, and revenue.
- Future capital spending, cash generation, and the effect of continued share repurchases or strategic investments on liquidity.