American Public Education, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. APEI provides online and campus-based higher education through APUS, Rasmussen University (RU), and Hondros College of Nursing (HCN), and career training through Graduate School USA (GSUSA).
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $147.2m | $149.6m | $296.9m | $304.4m |
| Operating loss | $65.3m | $141.3m | $70.6m | $136.1m |
| Net loss | $51.2m | $110.0m | $57.0m | $104.7m |
| Operating margin | (44.3%) | (94.4%) | (23.8%) | (44.7%) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $28.5m | $45.4m |
Q2 diluted loss per share was $2.93; six-month diluted loss per share was $3.23. Results included non-cash RU goodwill and intangible impairment charges of $64.0m in 2023, versus $144.9m in Q2 2022. Excluding impairment, management reported Q2 2023 operating margin of (0.9%) and net loss of $3.0m, versus a 2.4% margin and $1.1m net loss a year earlier. For the first half, the comparable adjusted figures were a (2.2%) margin and $8.8m net loss in 2023, versus a 2.9% margin and $4.2m net income in 2022.
Instructional costs rose to $75.0m in Q2 (up 4.0%) and $148.9m for six months (up 3.5%). Six-month G&A increased 10.9% to $66.0m; bad-debt expense rose to $7.8m from $5.7m. Interest expense declined to $2.9m for six months from $6.7m, primarily following debt prepayments.
Segments and material changes
- APUS: Q2 revenue increased 5.2% to $73.6m; net course registrations rose 5.7%. Six-month revenue rose 3.2% to $147.5m. Operating margins improved to 25.8% in Q2 and 24.4% for six months, supported by revenue growth and lower advertising and compensation costs. Growth was driven in part by military tuition-assistance registrations.
- RU: Q2 revenue fell 18.7% to $52.0m; enrollment declined 12.6%, with nursing enrollment down 22.0%. Six-month revenue fell 16.5% to $109.4m; enrollment declined 12.1%. Excluding impairment, RU operating margin was (25.5%) in Q2 versus (2.6%) and (23.9%) for six months versus (0.6%). Management cited enrollment weakness, prior leadership departures, enrollment caps at some campuses, higher compensation and marketing costs.
- HCN: Q2 revenue increased 24.2% to $14.3m and enrollment rose 22.3%; six-month revenue rose 19.0% to $27.4m. Growth included recently opened campuses and a 5% Q2 tuition increase. Segment losses narrowed modestly.
- GSUSA and Corporate and Other: Q2 revenue was $7.4m versus $4.3m; six-month revenue was $12.5m versus $7.3m.
Liquidity, debt, and capital
- Cash, cash equivalents, and restricted cash were $139.4m at June 30, including $112.8m unrestricted cash and $26.6m restricted cash. Current assets were $189.0m and current liabilities $79.2m.
- Long-term debt was $93.9m net of financing fees ($99.1m principal); no revolver borrowings were outstanding. No scheduled term-loan principal payments are due until 2027. The floating borrowing rate was 10.65% at June 30; an interest-rate cap covers $87.5m of principal through December 2024.
- Six-month capital expenditures were $6.6m. Financing cash outflows included $9.0m of common-stock repurchases and $2.9m of preferred dividends. APEI reported compliance with debt covenants.
- Series A preferred stock carried a 15.23% dividend rate at June 30; its liquidation preference was $59.0m. The preferred stock imposes restrictions on certain debt, dividends, and repurchases.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management expects operating results to fluctuate with enrollment patterns and expenses. It expects additional costs related to technology and business-capability improvements.
- On August 1, 2023, APEI reduced its workforce by 35 employees and eliminated 46 open positions. It recorded approximately $1.7m in severance costs and expects $3.8m in 2023 labor and benefit savings and $8.1m annualized savings. It also planned $0.8m–$1.1m of non-labor cost reductions beginning in Q3.
- APUS faces risk of failing the 90/10 Rule for fiscal 2023, partly due to delayed Army payments, funding mix, and rule changes. Failure could trigger provisional Title IV certification and heightened scrutiny. Army receivables declined to $10.6m from $26.0m at year-end, but $6.1m remained more than 60 days past course start.
- Regulatory and accreditation issues remain significant. ACEN’s site team recommended denial of continuing accreditation for RU’s Bloomington, Minnesota ADN program; a board decision was expected in August or September 2023. RU’s Illinois ADN program also faces probation and accreditation risks. These programs could face enrollment restrictions or closure.
- ED’s proposed gainful-employment rules could affect Title IV eligibility; the filing says six RU and three APUS programs failed one or more proposed measures in ED’s preliminary data. ED also began a Title IV review of APUS, including 90/10 compliance. A prior RU review was finalized with approximately $4,200 liability and findings reported resolved.
- Management warned that additional impairment charges may occur if enrollment, financial forecasts, or valuation assumptions deteriorate. The filing reports no material legal proceedings pending. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether RU enrollment and nursing outcomes recover, and whether further impairment is required.
- Outcomes of the Minnesota and Illinois nursing accreditation and regulatory matters.
- APUS’s fiscal 2023 90/10 calculation and the outcome of ED’s APUS program review.
- Cash generation and the capacity to service variable-rate debt and high-cost preferred dividends.
- Whether announced cost savings materialize and offset transition, technology, and other operating costs.