American Public Education, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to Q1 2022 unless noted. APEI provides online and campus-based higher education through APUS, Rasmussen University (RU), and Hondros College of Nursing (HCN), plus career training through Graduate School USA (GSUSA). Financial statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $149.7 million | $154.7 million |
| Operating income (loss) | $(5.4) million | $5.2 million |
| Operating margin | (3.7)% | 3.4% |
| Net income (loss) | $(5.7) million | $5.3 million |
| Net income (loss) available to common stockholders | $(7.2) million | $5.3 million |
| Diluted earnings (loss) per share | $(0.38) | $0.28 |
| Operating cash flow | $12.8 million | $25.3 million |
| Capital expenditures | $3.2 million | $3.0 million |
Costs and expenses rose 3.7% to $155.1 million while revenue fell 3.3%. Expenses were 103.7% of revenue, versus 96.6% a year earlier. Instructional costs were 49.4% of revenue (46.3%); selling and promotional costs were 26.7% (25.4%); general and administrative costs were 22.4% (19.1%). Bad debt expense increased to $3.9 million, or 2.6% of revenue, from $2.8 million, or 1.8%.
Segment results
- APUS: Revenue increased 1.2% to $74.0 million; operating income increased to $17.1 million from $13.2 million, with margin improving to 23.1% from 18.0%. Net course registrations rose 2.4% to approximately 96,300, primarily from military students using tuition assistance.
- RU: Revenue declined 14.4% to $57.5 million; operating loss was $12.9 million versus operating income of $0.9 million. Enrollment fell 11.7% to approximately 14,300. Results included $2.4 million of transition-service fees tied to the Collegis marketing contract termination.
- HCN: Revenue increased 13.9% to $13.1 million; operating loss widened to $1.3 million from $1.0 million. Total enrollment grew 10.1% to approximately 2,700, and new-student enrollment rose 36.0% to approximately 730.
- Corporate and Other: Revenue was $5.1 million, up from $3.0 million, including GSUSA activity; operating loss was $8.3 million versus $7.9 million.
Financial position and liquidity
At March 31, 2023, cash, cash equivalents, and restricted cash totaled $136.2 million, compared with $129.5 million at year-end 2022. Total restricted cash was $27.2 million, including $24.2 million held to support a letter of credit for RU. Current assets were $195.9 million and current liabilities were $79.3 million. Total assets were $618.5 million and total liabilities were $275.6 million.
Long-term debt was $93.6 million net of financing fees; principal outstanding was $99.1 million. The revolving facility had no borrowings. The term loan’s stated rate was 10.13% at quarter-end, before the interest-rate-cap offset. Following $65.0 million of prepayments in December 2022, no further scheduled principal payments are required until maturity in September 2027. APEI reported compliance with its debt covenants. The interest-rate cap covers $87.5 million of principal through January 2025.
Operating cash flow decreased to $12.8 million, mainly because of the quarterly loss and working-capital timing. Cash rose partly due to Army payments received for prior-period APUS courses. Investing cash outflow was $3.2 million; financing cash outflow was $2.8 million, including preferred dividends and share repurchases.
Series A preferred stock carries a 14.88% annual dividend rate at March 31, 2023. APEI declared and paid $1.5 million of preferred dividends in the quarter. Its stated liquidation preference was $60.8 million. Preferred-stock terms constrain certain debt incurrences, common dividends, and repurchases without specified preferred-holder consent.
Changes, outlook, and key risks
- The year-over-year earnings decline reflected RU’s enrollment and revenue contraction, higher overall expenses, and the absence of the $4.5 million GSUSA acquisition gain recorded in Q1 2022. Lower interest expense, following debt prepayments, partly offset these factors.
- Management gave no specific consolidated revenue or earnings guidance in the supplied filing text. It expects quarterly results to fluctuate with enrollment and expense patterns. APUS implemented tuition and fee increases for non-military and veteran students in April; HCN’s 5% increase takes effect in Q2. RU implemented select-program increases in January.
- RU’s Bloomington, Minnesota ADN program faces accreditation and state regulatory scrutiny. A site-visit team was expected to recommend withdrawal of accreditation; RU may respond before the accreditor decides. State requirements include NCLEX pass-rate and faculty-ratio standards. Failure to retain or obtain accreditation or approval could require program closure and harm enrollment and results.
- APEI warned that APUS may find it more difficult to satisfy the 90/10 Rule for 2023, partly due to delayed Army payments and changes in funding mix. Failure could lead to provisional Title IV certification and heightened scrutiny. Army invoice processing improved in early 2023; approximately $19.2 million was due from the Army at quarter-end, including $10.0 million more than 60 days past course start.
- The Collegis marketing-services contract transition generated $6.3 million in total non-recurring transition fees across Q4 2022 and Q1 2023; RU completed the marketing transition in Q1. Collegis IT services continue through September 2024, with approximately $13.6 million in minimum remaining fees. Transition costs for bringing IT services in-house or moving them to another provider were not yet fully predictable.
- Management reported no goodwill or indefinite-lived intangible impairment in Q1, but future impairment could result if enrollment, revenue, margins, or other valuation assumptions weaken. The filing identifies regulatory compliance, Title IV eligibility, military tuition-assistance programs, staffing, competition, and variable-rate debt as material risk areas.
The filing reported no material legal proceedings pending and no material changes in internal controls; management concluded disclosure controls were effective as of March 31, 2023.
Important facts for investors to verify
- Updates and final decisions concerning accreditation, NCLEX performance, and state approval of RU’s Bloomington ADN program.
- APUS’s 2023 90/10 Rule position, Army payment timing, and any renewed ArmyIgnitED processing delays.
- Whether RU enrollment and operating performance recover, and the ongoing costs and effects of its Collegis IT transition.
- Cash generation and liquidity after restricted cash, preferred dividends, debt service, and planned investments are considered.
- The effect of the preferred stock’s high dividend rate and protective provisions on future capital allocation.