American Public Education, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. APEI provides online and campus-based postsecondary education through APUS, Rasmussen University (RU), and Hondros College of Nursing (HCN). RU was acquired on September 1, 2021; its results are included only from that date, so consolidated comparisons are not directly comparable.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $98.2 million | $79.1 million | $264.8 million | $235.9 million |
| Operating income | $1.3 million | $3.3 million | $13.9 million | $15.0 million |
| Operating margin | 1.2% | 4.2% | 5.3% | 6.4% |
| Net income (loss) | $(0.3) million | $2.6 million | $8.4 million | $11.8 million |
| Diluted EPS | $(0.01) | $0.18 | $0.46 | $0.78 |
| Operating cash flow | Not separately presented for the quarter | $0.6 million | $44.7 million |
- Q3 revenue rose 24.2%, largely because RU contributed $21.1 million after closing, and HCN revenue increased 17.8%; APUS revenue fell 5.4%. Nine-month revenue rose 12.3%, including RU’s post-acquisition contribution and HCN growth.
- Higher instructional costs, acquisition-related expenses, and interest on new acquisition debt weighed on earnings. Q3 interest expense was $1.3 million versus $0.1 million of interest income a year earlier.
- At September 30, cash, cash equivalents, and restricted cash were $141.5 million, down from $227.7 million at year-end 2020. This includes $26.6 million of restricted cash, including $24.2 million securing RU’s letter of credit.
- Accounts receivable was $29.4 million, net of an $11.0 million allowance. Current assets were $189.9 million and current liabilities were $90.1 million.
- Gross term-loan principal was $175.0 million; reported debt was $162.1 million net of financing fees, including $8.8 million current and $153.3 million long-term. The $20 million revolving facility had no borrowings outstanding.
Material changes and business developments
- APEI acquired RU for approximately $325.5 million in cash, net of cash acquired. The preliminary purchase accounting recorded $217.2 million of goodwill and $86.5 million of identifiable intangible assets. The allocation remained subject to measurement-period adjustments.
- The acquisition was funded in part by a $175 million term loan and by $86.2 million of net proceeds from a March public stock offering of 3.68 million shares. The offering increased shares outstanding; 18.7 million shares were outstanding as of November 5, 2021.
- For the quarter, APUS revenue was $65.9 million, RU revenue $21.1 million, and HCN revenue $11.2 million. RU reported a $1.0 million operating loss for the period included. APUS Q3 net course registrations declined 8.0%; HCN enrollment increased 18.9%.
- For the nine-month period, HCN revenue increased 30.5% and its operating result improved to $1.3 million income from a $0.5 million loss. APUS revenue was essentially flat, while net course registrations declined 2.3%.
- Operating cash flow fell sharply year over year, reflecting acquisition-related timing and funding needs, working-capital movements, higher tax payments, and delayed Army tuition-assistance invoicing. Investing cash use was $331.3 million, primarily for the RU acquisition.
Outlook, risks, and unusual items
- Management gave no specific numerical earnings or revenue guidance. It expects APUS enrollment and revenue to remain affected through Q4 2021 by moderating online-education demand and Army tuition-assistance system disruption. Management expects existing cash and operating cash flow to cover foreseeable operating needs, debt service, and planned capital expenditures, while noting future spending may increase for technology, advertising, campuses, and integration.
- The Army’s ArmyIgnitED transition disrupted tuition-assistance processing and APUS registrations, revenue, invoicing, and collections. At September 30, $18.7 million was due from the Army, including $11.6 million more than 60 days past the course start date. Management could not predict when the disruption or collection delays would be resolved.
- RU’s Department of Education composite score was 1.4, below the 1.5 threshold; a $24.2 million restricted deposit supports its letter of credit. RU’s October 2021 temporary provisional participation agreement continued enrollment and growth restrictions while ED reviews its ownership-change application. RU must also use heightened cash monitoring for Title IV disbursements.
- Several HCN programs had 2021 retention rates of 55%–69%, below ABHES’s 70% benchmark. HCN submitted an action plan; the regulator’s response was not known. Failure to meet accreditation standards could affect enrollment and revenue.
- Key regulatory exposures include changes to the federal 90/10 rule, Title IV participation and ownership approvals, and heightened enforcement. The FTC sent informational notices about marketing practices to APUS and RU; the filing says receipt alone does not indicate wrongdoing.
- APEI reported $5.0 million of acquisition-related expenses for the nine months and a $0.8 million non-cash investment impairment. A workforce reduction generated about $1.0 million of severance expense and was expected to produce $2.6–$3.6 million in annualized pre-tax savings; actual benefits were uncertain.
- The term loan bears variable interest at LIBOR (with a 0.75% floor) plus 5.50%, with quarterly principal payments beginning December 2021. A cap covering $87.5 million of principal, effective October 1, 2021, protects against LIBOR above 2% through January 2025.
- Management stated disclosure controls were effective. RU was excluded from the control-effectiveness assessments because of the timing of the acquisition. No material legal proceedings were pending.
Important facts for investors to verify
- Whether ArmyIgnitED operations stabilize and the $18.7 million Army receivable, particularly the $11.6 million aged balance, is collected.
- ED’s decision on RU’s ownership-change application, the duration and impact of growth limits and heightened cash monitoring, and whether its financial-responsibility status improves.
- ABHES’s response to HCN’s retention-rate action plan and future performance against accreditation benchmarks.
- Post-acquisition RU performance and integration costs, including the final purchase-price allocation and whether expected synergies materialize.
- Operating cash generation, liquidity after restricted funds and debt service, and the effect of variable-rate borrowing despite the interest-rate cap.
- Potential effects of federal funding, 90/10 rulemaking, and other regulatory or enforcement developments on student demand and institutional eligibility.