American Public Education, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. APEI provides online and campus-based postsecondary education through APUS, serving primarily military and public-service communities, and Hondros College of Nursing (HCN), which operates nursing campuses. The company reported approximately 85,400 students.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $82.1 million | $70.6 million | $156.7 million | $144.0 million |
| Operating income | $9.0 million | $5.7 million | $11.7 million | $7.1 million |
| Operating margin | 11.0% | 8.0% | 7.5% | 4.9% |
| Net income | $6.7 million | $4.9 million | $9.1 million | $5.9 million |
| Diluted EPS | $0.45 | $0.30 | $0.61 | $0.36 |
- Q2 revenue increased 16.4%; six-month revenue increased 8.8%. Net income rose 35.9% in Q2 and 53.6% for the first half.
- For the first half, cash provided by operations was $31.7 million, versus $23.7 million a year earlier. Capital expenditures were $2.9 million; cash used in financing was $15.6 million, primarily reflecting share repurchases and tax withholding.
- Cash, cash equivalents and restricted cash totaled $216.0 million at June 30, 2020, up from $202.7 million at December 31, 2019. Restricted cash was approximately $1.3 million.
- The filing reports no borrowings; operating lease liabilities totaled $10.7 million, including $2.4 million current. Current assets were $235.0 million and current liabilities $53.9 million.
- First-half share repurchases were approximately 547,600 shares. The company reported $8.4 million remaining under its authorization at June 30.
Material changes and segment performance
- APUS/APEI Segment revenue rose 15.9% in Q2 and 8.9% for the first half. APUS net course registrations increased 18.1% in Q2 and 8.9% for the first half, driven mainly by military-related registrations using DoD tuition assistance, which generate lower revenue per registration than other funding sources.
- APEI Segment operating margin improved to 12.3% in Q2 from 10.4%, but declined to 9.0% for the first half from 10.9%, as compensation, advertising, professional-fee and technology costs increased.
- HCN revenue grew 20.5% in Q2 and 8.4% for the first half. Q2 total enrollment rose 13.7%, and new-student enrollment rose 56.7%. HCN’s operating loss narrowed to $35,000 in Q2 from $910,000; the first-half operating loss was $921,000 versus $7.1 million.
- Consolidated first-half results benefited from the absence of the prior-year $5.9 million non-cash goodwill impairment and $1.5 million equity-investment loss. In contrast, net interest income declined to $0.9 million from $2.2 million due to lower interest rates.
- Selling and promotional expense increased 21.0% for the first half, faster than revenue growth. Management cited $4.6 million of higher advertising costs, $1.9 million in growth-related professional fees and $1.9 million in IT-system costs for the period.
Outlook, commentary and risks
- The filing provides no formal revenue or earnings guidance. Management said existing cash and operating cash flow should fund ongoing operations and planned capital expenditures for the foreseeable future.
- Management expected 2020 IT transformation spending of approximately $6–8 million; approximately $2.1 million had been incurred through June 30, including $0.2 million of capital costs. Professional fees related to evaluating strategic growth opportunities were expected to increase in Q3 2020.
- Management said COVID-19 had not materially affected results through June 30. HCN reopened campuses with smaller classes and safety protocols while continuing virtual instruction. Future closures, operating disruption, increased delivery costs, student persistence effects and receivable or goodwill impairment remain possible.
- APUS launched Momentum 2020, a $20 million scholarship initiative offering eligible students from other institutions a 50% tuition grant for up to two undergraduate courses started May through August 2020. Management said the effects on revenue, margins and income could not yet be predicted.
- HCN received $3.1 million in CARES Act higher-education relief funds and distributed the full allocation to eligible students. APUS received no allocation.
- HCN faces accreditation and licensure risks: its ADN program remained on provisional approval after missing Ohio NCLEX pass-rate standards for a seventh consecutive year. HCN reported meeting ABHES student-achievement thresholds for the July 2019–June 2020 reporting year, but ongoing compliance is not assured. The new Indianapolis campus and program also remain subject to approval and performance requirements.
- Other material exposures include dependence on DoD, VA and Title IV funding; student enrollment and persistence; education regulation and accreditation; and the uncertain duration and effects of the pandemic. The company reported no material pending legal proceedings.
Investor verification points
- Verify whether APUS registration growth, especially lower-revenue DoD-funded registrations, translates into sustained revenue and margins.
- Track HCN enrollment, operating performance, NCLEX outcomes and continued compliance with ABHES, Ohio and Indiana requirements.
- Assess the cost, timing and benefits of the IT transformation and growth initiatives, including the Momentum 2020 scholarship program.
- Monitor COVID-19 effects on HCN campus operations, student outcomes, bad debt and potential goodwill impairment.
- Review the impact of lower interest rates and future capital allocation, including any additional share repurchases.