American Public Education, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. APEI provides online and campus-based postsecondary education through American Public University System (APUS) and Hondros College of Nursing (HCN), serving approximately 91,500 students.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $78.0 million | $82.1 million | $166.6 million | $156.7 million |
| Operating income | $2.0 million | $9.0 million | $12.6 million | $11.7 million |
| Operating margin | 2.6% | 11.0% | 7.5% | 7.5% |
| Net income | $0.5 million | $6.7 million | $8.6 million | $9.1 million |
| Diluted EPS | $0.03 | $0.45 | $0.49 | $0.61 |
| Operating cash flow | Not separately provided for the quarter | $8.9 million | $31.7 million |
Q2 costs and expenses rose 4.0% to $76.0 million despite lower revenue. General and administrative expense increased 17.1% to $25.5 million, including acquisition-related professional fees and technology-transformation costs. Q2 results also included a $0.8 million noncash impairment loss on an investment. For the first half, costs and expenses increased 6.2% to $153.9 million.
Segments and material changes
- APUS/APEI segment: Q2 revenue fell 9.0% to $66.9 million; APUS net course registrations declined 7.8% to approximately 82,600. Segment operating income fell to $1.9 million from $9.1 million. For the six months, revenue increased 2.6% to $144.3 million, while operating income decreased 7.4% to $11.7 million.
- HCN: Q2 revenue increased 29.4% to $11.1 million, with enrollment up 35.8% to approximately 2,400; segment operating income was $0.1 million versus a small loss a year earlier. First-half revenue rose 37.9% to $22.3 million, and the segment recorded $0.9 million of operating income versus a $0.9 million loss.
- Management attributed APUS’s Q2 weakness partly to disruption in the Army’s transition from GoArmyEd to ArmyIgnitED and moderating online-education demand as the pandemic abates. ArmyIgnitED became available for APUS courses on July 19, but the company expected disruption to continue affecting Q3 registrations and revenue.
Liquidity, capital and debt
Cash, cash equivalents and restricted cash were $317.0 million at June 30, 2021, up from $227.7 million at year-end. The increase principally reflected $86.2 million of net proceeds from a March stock offering. Current assets were $350.5 million and current liabilities $54.3 million. No debt balance is reported on the June 30 balance sheet. Operating cash flow declined year over year, partly due to working-capital timing, higher tax payments and delayed Army receivables. The Army owed approximately $14.9 million at June 30, of which $10.6 million was more than 60 days past the course start date.
For the planned Rasmussen University acquisition, APEI had a commitment for a $175 million senior secured term loan and a $20 million revolving facility; these were planned financing, not reported borrowings at June 30. The commitment contemplated interest at LIBOR, subject to a 0.75% floor, plus 5.50%. The company expected the acquisition to close in Q3 2021, subject to conditions, for $300 million cash plus $29 million of non-voting preferred stock (or, at APEI’s election, additional cash), subject to customary adjustments.
Six-month capital expenditures were $3.0 million. Management said existing cash and operating cash flow were expected to fund ongoing operations and planned capital expenditures for the foreseeable future, while noting possible higher spending on technology, campuses and acquisitions.
Outlook, risks and unusual items
- APEI expected ArmyIgnitED transition effects to continue into Q3 2021; successful system operation and collection of outstanding Army receivables remain uncertain. Possible nonpayment by students awaiting tuition assistance could increase bad-debt expense.
- Management said near-term demand for online programs could moderate as COVID-19 abates. HCN’s growth also depends on continued nursing-program demand and the effectiveness of its enrollment initiatives.
- Rasmussen received HLC change-in-control approval, but the Department of Education imposed temporary growth restrictions related to its 2019 ownership change, including an enrollment cap and existing limitations on new programs and locations, pending review of audited statements and compliance audits. Completion, integration, regulatory approvals and acquisition financing are risks.
- Potential regulatory exposure includes changes to the 90/10 rule. APEI could not predict the impact of the amended rule or whether tuition assistance and veterans’ benefits would count as federal education assistance funds.
- After quarter-end, APEI initiated a workforce reduction affecting 44 employees. It estimated approximately $1.1 million of pretax severance costs, expected in Q3, and projected 2021 labor and benefit savings of $0.5 million–$2.5 million plus other cost reductions of $4.3 million–$6.3 million. Management cautioned that savings and outcomes were uncertain.
- APUS’s HLC review had a preliminary recommendation for reaffirmation; an Institutional Actions Council vote was expected in August 2021. HCN had an ED Title IV program review scheduled for August 9, 2021.
Important facts for investors to verify
- Whether ArmyIgnitED operates reliably, APUS registrations recover, and the $14.9 million Army receivable is collected.
- Whether Q2 APUS enrollment weakness and moderating demand persist, and whether HCN can sustain enrollment growth and profitability.
- Whether Rasmussen closes on the anticipated terms and timing, how its temporary growth restrictions affect operations, and the final acquisition debt terms and leverage.
- Whether the announced cost reductions deliver savings without impairing staffing, operations or student outcomes.
- How future implementation of the amended 90/10 rule and other regulatory reviews affect eligibility, funding sources and institutional operations.