American Public Education, Inc. — Q2 2022 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2022. APEI operates APUS, Rasmussen University (RU), Hondros College of Nursing (HCN), and Graduate School USA (GSUSA). Comparisons with 2021 are not like-for-like: RU was acquired in September 2021 and GSUSA in January 2022, so neither contributed to the comparable 2021 periods.
Financial performance and liquidity
- Revenue: Q2 revenue was $149.6 million, up 91.8% year over year; first-half revenue was $304.4 million, up 82.7%. Most of the increase reflected acquired RU and GSUSA revenue.
- Profitability: Q2 operating loss was $141.3 million and net loss was $110.0 million ($5.83 per diluted share), versus net income of $0.5 million a year earlier. First-half operating loss was $136.1 million and net loss was $104.7 million ($5.54 per diluted share), versus net income of $8.6 million.
- Impairment-adjusted results: Management reported Q2 operating margin of 2.4% and net loss of $1.1 million excluding the impairment charge; for the first half, operating margin was 2.9% and net income was $4.2 million excluding the charge. These are management-presented exclusions, not reported GAAP results.
- Cash flow: First-half operating cash flow was $45.4 million, compared with $8.9 million in 2021. Investing activities used $4.6 million and financing activities used $5.9 million. Capital expenditures were $7.3 million.
- Liquidity and debt: Cash, cash equivalents, and restricted cash totaled $184.5 million at June 30, including $26.8 million restricted. Current assets were $230.7 million and current liabilities $95.1 million. Debt was $168.4 million principal, or $157.4 million net of financing fees; the $20 million revolver was undrawn. The variable-rate loan rate was 6.56%, and APEI was in compliance with debt covenants.
Material changes and unusual items
- A non-cash $144.9 million RU goodwill and intangible-asset impairment drove the reported loss. It comprised a $131.4 million goodwill impairment and a $13.5 million impairment of RU accreditation, licensing, and Title IV intangible assets. The quarter included a related $36.0 million tax benefit.
- RU goodwill fell to $86.0 million from $216.9 million at year-end 2021. Management said the impairment reflected RU performance against internal targets and financial results to date; further impairment remains possible if valuation assumptions weaken.
- GSUSA acquisition accounting produced a $3.8 million gain in the first half, subject to a subsequent $0.7 million working-capital adjustment in Q2.
- Operating results included $6.7 million of first-half interest expense, mainly related to the acquisition term loan. Lease liabilities totaled approximately $117.1 million.
Outlook, management commentary, and risks
- Management expects operating margins, excluding impairment, to remain below prior-year levels for the rest of 2022, citing inflation, higher labor costs—particularly at RU and HCN—and RU enrollment trends. It expects cash and operating cash flow to cover needs for at least the next 12 months.
- RU enrollment was approximately 15,900 in Q2, down from 17,000 a year earlier; management cited moderating demand, low unemployment in RU markets, and difficulty recruiting nursing faculty. HCN enrollment increased, but higher faculty and marketing costs contributed to operating losses.
- APUS net course registrations rose 1.1% in Q2, while first-half revenue declined 1.0%, partly reflecting a higher share of lower-revenue military registrations. ArmyIgnitED disruption left $12.5 million due from the Army at quarter-end, including $6.9 million more than 60 days past course start. The Army’s transition to ArmyIgnitED 2.0 and changes to invoice processing could further delay collections and affect enrollments or bad debt.
- APEI expects its next Department of Education composite score may be 1.0–1.4, in the “zone,” potentially requiring heightened cash monitoring or reimbursement methods for Title IV funds. Proposed federal 90/10 changes could count military tuition assistance and veterans’ benefits on the 90% side of the test, potentially increasing APEI institutions’ ratios, especially APUS. Proposed gainful-employment metrics also identified eight RU and three APUS programs as failing one or both measures in preliminary data; the company cautioned that methodology and final rules may differ.
- RU’s Bloomington, Minnesota ADN program faces state requirements on NCLEX pass rates and faculty-to-student ratios; Illinois’ ADN program is on probation with a temporary enrollment reduction. Failure to satisfy applicable requirements could constrain enrollment or threaten program approval. APEI also plans to transition RU services from Collegis by September 2024; remaining minimum contract value is approximately $43.1 million, and transition costs and effects are uncertain.
- Management is pursuing cost-saving efforts for implementation by year-end 2022, but did not assure success; severance costs and wage increases may offset savings. No material legal proceedings were pending. Management reported effective disclosure controls.
Important facts for investors to verify
- Whether RU enrollment and operating performance stabilize, and whether additional impairment charges are required.
- Army receivable collection progress and the operational rollout of ArmyIgnitED 2.0.
- The final Title IV rules, APEI’s composite score and any resulting cash-monitoring conditions, and program-level gainful-employment outcomes.
- NCLEX pass rates, state compliance, and faculty availability at RU and HCN, including enrollment constraints.
- Cash generation, variable-rate debt servicing, and the cost and execution of the Collegis transition and announced cost reductions.