American Public Education, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. APEI provides online and campus-based postsecondary education through APUS, serving primarily military and public-safety communities, and Hondros College of Nursing (HCON), operating four Ohio campuses and online programs. The company reported approximately 105,950 students.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $80.3 million | $85.5 million | $165.7 million | $174.0 million |
| Operating income | $11.6 million | $15.8 million | $26.0 million | $32.6 million |
| Operating margin | 14.4% | 18.5% | 15.7% | 18.7% |
| Net income | $7.1 million | $9.8 million | $15.9 million | $20.2 million |
| Diluted EPS | $0.42 | $0.56 | $0.93 | $1.15 |
- Margins and costs: Q2 net margin was 8.8% versus 11.4% a year earlier; six-month net margin was 9.6% versus 11.6%. Six-month costs and expenses declined 1.3%, less than the 4.8% revenue decline. Depreciation and amortization rose 19.2% to $9.3 million for the six months.
- Cash flow: Six-month operating cash flow was $22.7 million, compared with $22.2 million. Investing used $14.0 million, including $12.8 million in capital expenditures; financing used $20.6 million, primarily for share repurchases. Cash fell $11.9 million from year-end to $103.7 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $103.7 million, current assets $123.5 million, and current liabilities $42.6 million. Total liabilities were $59.1 million; the reported balance sheet shows no debt. Cash includes $2.5 million of restricted student funds. Management said existing cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future.
Changes versus prior comparable periods
- Q2 revenue declined 6.1% and net income declined 27.6%; for the first half, revenue declined 4.8% and net income declined 21.3%.
- APUS/APEI Segment revenue fell 7.3% in Q2 and 6.0% for the first half. Net course registrations declined 7.4% and 6.6%, respectively; segment operating income fell 28.5% and 22.5%.
- HCON revenue increased 7.2% in Q2 and 9.0% for the first half, with enrollment up approximately 8.5% year over year at June 30. Segment operating income declined 2.8% in Q2 but rose 29.4% for the first half.
- Cash repurchases totaled $20.1 million in the first half, including $18.6 million under the authorized program; 663,820 shares were repurchased under the program.
Outlook, management commentary, and risks
- No quantified earnings or revenue guidance was provided. Management cited competition, military-market challenges, a new admissions assessment, and more targeted marketing as factors in lower APUS registrations, and said it cannot assure that strategic initiatives will reverse revenue and earnings declines.
- APUS tuition increases took effect July 1, 2015: undergraduate tuition rose to $270 and graduate tuition to $350 per credit hour. Grants keep tuition at prior levels for specified active-duty and military-affiliated students. The effect on registrations is unknown.
- APUS began transitioning financial-aid processing to a third-party provider, with completion expected by year-end 2015; management anticipated significant implementation costs and risks. The Army’s planned troop reductions and possible additional cuts tied to sequestration could adversely affect APUS enrollment.
- Regulatory exposure includes proposed cash-management rules, stricter potential penalties for incentive-compensation violations, possible federal student-loan discharge or repayment liability, and evolving Department of Education rules and consumer-comparison measures. The company said impacts were not predictable. HCON remained subject to provisional participation conditions related to its change of ownership.
- HCON’s night and weekend programs pressured Q2 margins and could continue to do so. The company reported no material pending legal proceedings and no material changes to contractual commitments outside the ordinary course.
- APUS changed its treatment of revenue for withdrawing students effective January 1, 2015, recognizing only reasonably collectible remaining non-refundable amounts. Management did not expect a material effect. The filing also describes a July 2015 FASB deferral of the new revenue standard, after the quarter-end.
Important facts for investors to verify
- Whether APUS course registrations stabilize following the admissions-process change, marketing adjustments, and tuition increases.
- The scale and timing of military-force reductions and any effects on APUS enrollment and revenue.
- Final Department of Education rules, Title IV compliance exposure, and the status of HCON’s provisional certification.
- Financial-aid vendor transition costs, capital spending, and the sustainability of operating cash flow amid continued share repurchases.
- Whether HCON enrollment growth and new program formats improve profitability without continued margin pressure.