American Public Education, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. APEI provides online and campus-based postsecondary education through American Public University System (APUS) and Hondros College of Nursing (HCN), serving approximately 84,400 students. Comparisons below are with Q1 2019 unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $74.6 million | $73.4 million |
| Operating income | $2.7 million | $1.4 million |
| Operating margin | 3.6% | 1.8% |
| Net income | $2.4 million | $1.0 million |
| Diluted EPS | $0.16 | $0.06 |
| Operating cash flow | $11.5 million | $7.9 million |
| Capital expenditures | $1.9 million | $1.6 million |
Revenue increased 1.6%. Costs and expenses were $71.9 million, down 0.2%; the prior-year quarter included a $5.9 million non-cash HCN goodwill impairment. Q1 2020 expenses included higher advertising and compensation costs and approximately $0.9 million of IT-system costs. Interest income declined to $0.7 million from $1.1 million, reflecting lower interest rates and average invested cash balances.
APEI segment revenue rose 2.1% to $67.1 million, while operating income fell to $3.6 million from $7.5 million, primarily due to compensation, advertising and technology costs. APUS net course registrations increased approximately 0.6% to 84,800. HCN revenue declined 2.7% to $7.5 million; enrollment fell 9.3% to approximately 1,600, although new student enrollment increased 31% to 444. HCN’s operating loss narrowed to $0.9 million from $6.1 million, largely because Q1 2019 included the goodwill impairment.
Financial position and liquidity
At March 31, 2020, cash, cash equivalents and restricted cash were $196.8 million, versus $202.7 million at December 31, 2019. The balance includes $1.6 million of restricted cash. Total assets were $345.3 million and stockholders’ equity was $285.3 million. The filing’s balance sheet reports no borrowings; operating lease liabilities totaled $11.2 million, including $2.3 million current.
Cash declined $5.9 million during the quarter: $11.5 million generated from operations and $1.9 million used for capital expenditures were more than offset by $15.6 million used in financing, including share repurchases. APEI repurchased 547,563 shares for approximately $13.6 million; $8.4 million remained under the authorization. Management said existing cash and operating cash flows should fund operations and planned capital expenditures for the foreseeable future.
Outlook, risks and notable developments
- No specific earnings or revenue guidance was provided. Management expected increased operating expenditures as it modernizes IT systems and expands marketing. It anticipated $6 million to $8 million of 2020 spending on specified IT projects.
- Management said COVID-19 did not materially affect Q1 results, but future effects were uncertain. HCN closed its campuses in March and moved instruction online; the company also shifted nearly all employees to remote work. Potential effects include delivery costs and disruption, student outcomes and enrollment, receivable collectability, and possible impairment.
- HCN’s ADN program did not meet Ohio’s NCLEX pass-rate standard for a seventh consecutive year and remained on provisional approval. Accreditation-related retention requirements also applied to certain HCN programs. HCN reported meeting the 70% retention threshold at each campus as of March 31, but future compliance is not assured.
- ED’s CARES Act allocation table indicated $3.1 million for HCN and no allocation for wholly online APUS. HCN had taken steps to receive its allocation; at least half must be used for emergency student grants, subject to applicable terms.
- APUS announced a $20 million scholarship initiative in April 2020; management said its impact on revenue, margins and income could not yet be predicted. HCN also began classes at its Indianapolis campus in April.
- There were no material legal proceedings pending. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether APUS enrollment and HCN’s improved new-student intake translate into sustained enrollment, revenue and operating performance.
- COVID-19’s effects on HCN’s online instruction, student outcomes, costs, campus operations and the company’s liquidity.
- HCN’s progress on NCLEX pass rates, program retention requirements, accreditation and Indiana campus approvals.
- Actual 2020 IT and marketing spending compared with management’s expectations, and the effect of the scholarship initiative and HEERF funds.
- Whether cash generation remains adequate as interest income declines and share repurchases and planned investments continue.