American Public Education, Inc. — Q3 2020 Form 10-Q
Business and period: APEI provides online and campus-based postsecondary education to approximately 88,300 students through American Public University System (APUS) and Hondros College of Nursing (HCN). This unaudited report covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. Financial amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $79.1 | $67.9 | $235.9 | $211.9 |
| Operating income (loss) | $3.3 | $(2.9) | $15.0 | $4.1 |
| Operating margin | 4.2% | (4.3)% | 6.4% | 2.0% |
| Net income (loss) | $2.6 | $(1.6) | $11.8 | $4.3 |
| Diluted EPS | $0.18 | $(0.10) | $0.78 | $0.26 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $44.7 | $31.9 |
- Q3 revenue rose 16.6%; nine-month revenue rose 11.3%. Q3 net income improved by $4.2 million year over year. Nine-month net income increased $7.5 million.
- APUS/APEI segment revenue increased 13.7% in Q3 and 10.4% for nine months. APUS net course registrations grew 17.7% in Q3 and 11.7% year to date, driven principally by increased military registrations, which generate lower revenue per registration than other funding sources.
- HCN revenue rose 42.5% in Q3 and 19.0% for nine months. Q3 new-student enrollment grew 88.1%, and total enrollment increased 38.6%. HCN recorded $0.5 million of operating income in Q3, versus a $3.2 million loss; its nine-month operating loss narrowed to $0.5 million from $10.2 million.
- Q3 costs and expenses increased 7.1%, slower than revenue growth. Nine-month selling and promotional expense rose 19.5%, faster than revenue, reflecting higher marketing and advertising spending. Interest income fell to $0.1 million in Q3 and $1.0 million for nine months, from $1.0 million and $3.2 million, respectively, due to lower rates.
- At September 30, cash, cash equivalents and restricted cash were $228.0 million, versus $202.7 million at year-end 2019; restricted cash was $1.6 million. Current assets were $247.6 million and current liabilities $59.8 million. The company reported no borrowings in the balance sheet; operating lease liabilities totaled $9.5 million.
- Nine-month investing cash use was $3.8 million, including $4.2 million of capital expenditures and $0.4 million of real-property sale proceeds. Financing cash use was $15.7 million, including $13.6 million for share repurchases. The company repurchased no shares through its public program in Q3 and had $8.4 million remaining under its authorization.
Material changes, outlook and management commentary
- Management said COVID-19 had not materially adversely affected results through September 30, 2020, but future effects remained uncertain. HCN reopened campuses with smaller in-person classes and continued virtual course options; it also began leasing additional lab space in October to accommodate demand under public-health restrictions.
- Management expected adequate liquidity for ongoing operations and planned capital expenditures based on current operations. It anticipated higher future spending on technology modernization, marketing and other initiatives. The company had incurred $3.7 million of its expected $6 million–$8 million 2020 technology-transformation spending through September, including $0.4 million of capital costs. Professional fees for strategic growth opportunities could increase in Q4 2020.
- No quantitative earnings or revenue guidance was provided. Management cautioned that quarterly results fluctuate with enrollment and expenses and that interim results are not necessarily indicative of full-year results.
- Rasmussen acquisition: On October 28, 2020, APEI agreed to acquire Rasmussen University for $300 million cash plus $29 million in non-voting preferred shares, with an option to pay up to that additional $29 million in cash. Closing was expected in Q3 2021, subject to regulatory, accreditor and other conditions. APEI had a commitment for a $175 million senior secured term loan and a $20 million revolver, and expected to use up to $175 million of facility proceeds toward the cash purchase price. Financing and closing were not assured.
- Regulatory and operating risks: APUS received provisional Title IV certification through June 30, 2023 while an Education Department program review remained open. HCN’s ADN program had missed Ohio’s NCLEX pass-rate standard for seven consecutive years and remained on provisional approval. HCN also faced accreditation-related monitoring; it reported meeting ABHES achievement thresholds for the July 2019–June 2020 reporting year. Failure to maintain approvals, accreditation or Title IV eligibility could materially affect operations.
- Other risks include COVID-related interruptions and costs, HCN student outcomes and licensure, reliance on government tuition-assistance and federal aid programs, enrollment and retention, regulatory changes, and acquisition financing, integration, costs and liabilities. The filing reported no material legal proceedings. Management stated disclosure controls were effective and no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- Progress, financing terms, regulatory approvals and closing conditions for the Rasmussen acquisition, including potential debt-service obligations and integration costs.
- Status and outcome of the open APUS Education Department review and the terms and continuing requirements of its provisional certification.
- HCN’s NCLEX pass rates, accreditation standing, student outcomes and ability to sustain enrollment growth while complying with COVID-related capacity constraints.
- Whether APUS registration growth translates into revenue and margins given the greater share of lower-revenue-per-registration DoD tuition-assistance activity.
- Cash-flow sustainability and planned spending on technology, marketing, expansion and acquisition activity; note that reported cash includes restricted funds.
- Exposure to federal and military funding sources: DoD tuition assistance represented 42% of APEI segment revenue for the first nine months; Title IV programs represented 82% of HCN segment revenue.