Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Quarterly Report on Form 10-Q, or Quarterly Report, “we,” “our,” “us,” “the Company” and similar terms refer to American Public Education, Inc., or “APEI,” and its subsidiary institutions collectively unless the context indicates otherwise. The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this Quarterly Report and the audited financial information and related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations and other disclosures, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, or our Annual Report.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements intended to be covered by the safe harbor provisions for forward-looking statements in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,”
“potentially,” “will,” or “may,” or other words that convey uncertainty of future events, conditions, circumstances, or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report include, without limitation, statements regarding:
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changes to and expectations regarding our student enrollments, net course registrations, and the composition of our student body;
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our ability to maintain, develop, and grow our technology infrastructure to support our student body;
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our conversion of prospective students to enrolled students and our retention of active students;
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our ability to update and expand the content of existing programs and develop new programs to meet emerging student needs and marketplace demands, and our ability to do so in a cost-effective manner or on a timely basis;
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our plans for, marketing of, and initiatives at, our institutions;
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our ability to leverage our investments in support of our initiatives, students, and institutions;
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our maintenance and expansion of our relationships and partnerships and the development of new relationships and partnerships;
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actions by the Department of Defense or branches of the United States Armed Forces;
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federal appropriations and other budgetary matters, including government shutdowns;
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our ability to comply with the extensive regulatory framework applicable to our industry, as well as state law and regulations and accrediting agency requirements;
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our ability to undertake initiatives to improve the learning experience and attract students who are likely to persist;
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the competitive environment in which we operate;
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our cash needs and expectations regarding cash flow from operations;
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our ability to manage and influence our bad debt expense;
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our ability to manage, grow, and diversify our business and execute our business initiatives and strategy;
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our expectations regarding the effects of and our response to the COVID-19 pandemic, including our ability to successfully shift to online learning at HCN, impacts on business operations and our financial results, and our ability to take advantage of emergency relief and to comply with related regulations; and
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our financial performance generally.
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Forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account information currently available to us and are not guarantees of future results. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. Risks and uncertainties involved in forward-looking statements include, among others:
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the effects, duration and severity of the ongoing COVID-19 pandemic and the actions we have taken or may take in response, particularly at HCN and as a result of working remotely;
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our dependence on the effectiveness of our ability to attract students who persist in our institutions’ programs;
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our inability to effectively market our programs;
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adverse effects of changes our institutions make to improve the student experience and enhance their ability to identify and enroll students who are likely to succeed;
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our inability to maintain strong relationships with the military and maintain enrollments from military students;
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our failure to comply with regulatory and accrediting agency requirements or to maintain institutional accreditation;
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our loss of eligibility to participate in Title IV programs or ability to process Title IV financial aid;
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our need to successfully adjust to future market demands by updating existing programs and developing new programs; and
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our dependence on and need to continue to invest in our technology infrastructure.
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Forward-looking statements should be considered in light of these factors and the factors described elsewhere in this Quarterly Report, including in the “Risk Factors” section, in the “Risk Factors” section of our Annual Report, and in our various filings with the Securities and Exchange Commission, or the SEC. It is important that you read these factors and the other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. If any of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. You should also read the more detailed description of our business in our Annual Report when considering forward-looking statements. We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update any forward-looking statements except as required by law.
Overview
Background
We are a provider of online and on-campus postsecondary education to approximately 84,400 students through two subsidiary institutions. Our subsidiary institutions offer programs designed to prepare individuals for productive contributions to their professions and society, and to offer opportunities that may advance students in their current professions or help them prepare for their next career. Our subsidiary institutions are licensed or otherwise authorized by state authorities, or are in the process of obtaining such licenses or authorizations, to offer postsecondary education programs to the extent the institutions believe such licenses or authorizations are required, and are certified by the United States Department of Education, or ED, to participate in student financial aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, or Title IV programs.
On March 11, 2020, the World Health Organization declared the novel coronavirus COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The pandemic did not materially impact our results of operations during the period ended March 31, 2020. However, the duration and intensity of the outbreak and therefore any future impact is uncertain. For example, in March 2020, in response to the pandemic, we implemented our business continuity plans and employees transitioned to a remote workforce. HCN temporarily closed all its campuses and shifted to online delivery. While not yet quantifiable, ongoing impacts may cause a disruption of educational services provided to our students, cause a disruption in revenue, lead to increased absenteeism in our workforce, increase costs for HCN to continue to deliver courses online, be considered a triggering event to evaluate the value of HCN goodwill, lead to an impairment of APEI investments, impact the recoverability of receivables, and lead to an increase in bad debt expense and cohort default rates, among other impacts. For more information on the potential risks related to COVID-19, please refer to the section entitled “Risk Factors” in this Quarterly Report.
Our wholly-owned operating subsidiary institutions include the following:
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American Public University System, Inc., or APUS, which provides online postsecondary education to approximately 82,800 adult learners. APUS is an accredited university system with a history of serving the academic needs of the military, military-affiliated, public service and service-minded communities through two brands: American Military University, or AMU, and American Public University, or APU.
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APUS offers 124 degree programs and 111 certificate programs in diverse fields of study, with a particular focus on those relevant to today’s job market and emerging fields. Fields of study include traditional academics, such as business administration, health science, technology, criminal justice, education and liberal arts, as well as public service-focused fields of study such as national security, military studies, intelligence, and homeland security. APUS has institutional accreditation from the Higher Learning Commission, or HLC, and several of its academic programs have specialized accreditation granted by industry governing organizations.
On April 7, 2020 APUS announced Momentum 2020, a $20.0 million scholarship initiative for undergraduate students of four-year, primarily campus-based institutions who may be experiencing disruptions at their home institutions due to the coronavirus pandemic. Momentum 2020 will enable students to continue their education by taking up to two undergraduate courses for transfer using a 50% tuition grant for each course started in May through August 2020. At this time, we cannot predict the impact this initiative will have on our revenue, operating margins, or income.
For more information on the potential risks associated with the above APUS initiatives, APUS more generally, and applicable accreditation matters, please refer to our Annual Report and the section entitled “Risk Factors” in this Quarterly Report.
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National Education Seminars, Inc., which we refer to as Hondros College of Nursing, or HCN, provides nursing education to approximately 1,600 students at five campuses in Ohio, and, beginning in April 2020, to students enrolled at a campus in Indianapolis, Indiana, to serve the needs of local nursing and healthcare communities that addresses the persistent supply-demand gap of nurses that is evident nation-wide. The Ohio campuses are located in the suburban areas of Cincinnati, Cleveland, Columbus, Dayton, and Toledo. In March 2020, in response to the COVID-19 global pandemic, HCN temporarily closed all its campuses and shifted to online delivery.
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HCN is institutionally accredited by the Accrediting Bureau for Health Education Schools, or ABHES, and HCN’s locations and programs are approved by the Ohio State Board of Career Colleges and Schools, or the Ohio State Board. HCN’s PN and ADN Programs are approved by the Ohio Board of Nursing, or OBN, and the PN Program is accredited by the National League for Nursing Commission for Nursing Education Accreditation, or NLN CNEA.
In April 2020, HCN began classes for the first cohort of students enrolled in the PN Program at HCN’s new campus in Indianapolis, Indiana. Classes began online as a result of the COVID-19 pandemic. The campus has been authorized by the Indiana Board for Proprietary Education/Indiana Commission for Higher Education to offer instruction in Indiana. The Indiana State Board of Nursing has voted to grant initial accreditation and authorized the admission of the first cohort of students. HCN has also notified NLN CNEA of the opening of the Indianapolis campus. While NLN CNEA approval is not required to begin classes, NLN CNEA may accept the notification or take other actions, such as requesting follow-up information or imposing conditions. NLN CNEA’s March 2020 Board of Commissioners meeting was canceled due to the COVID-19 pandemic. HCN has not received any additional requests or follow up communication.
Beginning January 1, 2020, HCN began offering an institutional grant to students demonstrating financial need to cover the difference between the total cost of tuition and fees and the amount of all eligible financial aid resources. The grant is designed to limit a student’s monthly payment to $200 through an award of up to $200 per month, or $600 per term after consideration of financial aid, employer tuition reimbursement, and other financial resources. HCN awarded approximately $24,000 of institutional grants during the three month period ended March 31, 2020.
In February 2020, ABHES notified HCN that it had taken additional actions with respect to certain HCN programs at certain locations related to those programs’ performance in relation to ABHES student achievement indicators. Specifically, ABHES: (i) placed the PN programs at the Dayton and Toledo campuses on program specific warning status because the programs have failed to meet the 70% retention rate threshold since HCN’s 2017-2018 annual report and informed HCN that those programs must meet the retention rate threshold by May 1, 2020; (ii) removed the ADN programs at the Cleveland and Toledo campuses from outcomes reporting status after placement rates for those programs at those locations met the 70% compliance threshold; (iii) continued outcomes reporting status for the PN program at the Columbus campus because it has not met the retention rate compliance threshold and reconfirmed that it has until May 1, 2021 to do so; and (iv) directed HCN to provide evidence to ABHES that the ADN programs at each of the Columbus, Cleveland, Cincinnati, Dayton, and Toledo campuses and the PN programs at the Cleveland and Cincinnati campuses met the retention rate compliance threshold for the period from July 1, 2019 through March 31, 2020 and informed HCN that those programs must meet the compliance threshold by May 1, 2021. On April 22, 2020, HCN notified ABHES that, as of March 31, 2020, HCN met the 70% retention rate threshold at each campus location. There can be no assurance that HCN will be able to continue to demonstrate compliance by the relevant deadlines in all cases.
To apply for licensure to practice nursing in Ohio, an applicant must have successfully completed a nursing education program approved by the OBN. The OBN requires that nursing education programs have a pass rate on the relevant National Council Licensure Examination, or NCLEX, that is at least 95% of the national average for first-time candidates in a calendar year. If a program does not attain this pass rate, the program may face various consequences. In March 2017, the OBN placed HCN’s ADN Program on provisional approval because the ADN Program had not met the pass rate standard for four consecutive years. The OBN will consider restoring a program to Full Approval status if the program meets the pass rate standard for at least two consecutive years. If a program on provisional approval fails to meet OBN requirements at the end of the time period established for provisional approval, the OBN may propose to continue provisional approval for a set time period or may propose to withdraw approval. In March 2020, the OBN found that HCN’s ADN Program did not meet the OBN pass rate standard in 2019 for a seventh consecutive year. HCN has been implementing changes, including curriculum, admissions, and academic achievement and course retake policy changes that are designed to improve NCLEX scores over time, but there is no assurance that these changes will be successful or will not have negative effects on HCN’s enrollment.
For more information on the potential risks associated with these HCN initiatives and HCN more generally, please refer to our Annual Report and the section entitled “Risk Factors” in this Quarterly Report.
Regulatory and Legislative Activity
In October 2018, ED announced that a negotiated rulemaking committee broadly focused on accreditation and innovation, or the Accreditation and Innovation Committee, would prepare proposed regulations related to, among other things, courses offered through distance education. ED published a notice of proposed rulemaking on April 2, 2020 based on consensus language agreed to by the Accreditation and Innovation Committee and accepted public comments on the proposal until May 4, 2020. The proposed rulemaking on distance education provides institutions additional flexibility in offering distance education and competency-based education programs. For example, the proposed rulemaking clarifies and simplifies requirements related to direct assessment programs, including with respect to eligibility requirements and subscription-based programs. The
proposed rulemaking also provides new definitions for “academic engagement,” “distance education,” and “regular and substantive interaction” in order to provide further clarity regarding the instructional requirements for distance education programs. ED announced that it plans to release a final rule before November 1, 2020, which would allow the rule to go into effect on July 1, 2021.
The COVID-19 pandemic has resulted in widespread disruptions in higher education, particularly with respect to institutions that engage in on-ground delivery of education, and a number of related regulatory developments. The pandemic has led to the temporary closure of HCN’s campuses and the shifting of courses online. HCN’s next comprehensive evaluation for renewal of accreditation by ABHES had been scheduled for April 2020, but has been postponed due to the pandemic and related disruptions. In addition, ED has issued numerous statements that provide guidance on how institutions are permitted to handle certain federal student financial aid requirements under certain circumstances related to responses to the COVID-19 pandemic.
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, in response to COVID-19 and its related effects. Due to the COVID-19 pandemic, many higher education institutions shifted to distance learning as campuses shut down as a result of the public health emergency. The CARES Act includes provisions designed to provide relief to higher education institutions in connection with the COVID-19 pandemic. The CARES Act created the Higher Education Emergency Relief Fund, or HEERF, that includes $12.6 billion for direct grants to higher education institutions. The CARES Act authorizes ED to allocate those grants based on a statutory formula that accounts for the relative share of full-time students who are Pell Grant recipients. Students who were enrolled exclusively in distance education courses prior to the COVID-19 emergency are excluded from this calculation. Wholly online institutions will receive no allocation of direct grants under the HEERF given the allocation formula’s exclusion of students enrolled exclusively in distance education courses prior to the onset of the COVID-19 emergency. On April 9, 2020, ED published a table indicating $3.1 million in allocations for HCN and no allocation for APUS. HCN has taken the required steps to receive its HEERF allocation. As part of the process, HCN signed a funding certification and agreement setting forth terms and conditions, including compliance with relevant CARES Act provisions and applicable law.
The CARES Act limits use of HEERF funds. Recipient institutions must use at least 50% of HEERF funds to provide emergency financial aid grants to students for expenses related to the disruption of campus operations due to COVID-19. Institutions may use remaining funds to cover any costs associated with significant changes to the delivery of instruction due to COVID-19, so long as such costs do not include payment to contractors for the provision of pre-enrollment recruitment activities, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship. ED has announced that it will first make available to institutions the portion of the allocation that must be used for emergency financial aid grants to students.
The CARES Act also includes waivers of certain Higher Education Act provisions related to the federal student financial aid programs in order to provide regulatory flexibility to institutions in connection with COVID-19-related disruptions. The CARES Act modifies processes related to the return of unearned Title IV funds in connection with student withdrawals during the COVID-19 pandemic, extends time limits for Pell Grants and Direct Loans as a result of withdrawals during this period, allows for flexibility in measuring the satisfactory academic progress of students, and permits institutions to continue making federal work study payments to students who can no longer meet work study obligations during the period. Additionally, the CARES Act suspends payments for Federal Family Education Loans and Direct Loans until September 30, 2020. During this period, these loans will not accrue interest and ED will suspend involuntary collection practices. However, borrowers may choose to make payments towards principal on these loans voluntarily.
On March 27, 2020, Ohio enacted a COVID-19 emergency relief law that allows individuals who have successfully completed a nursing education program approved by OBN to receive a temporary license to practice as an RN or LPN before taking the NCLEX. Graduates of OBN-approved nursing education programs, such as HCN’s programs, may apply for a temporary license that would be valid until the earlier of March 1, 2021 and 90 days after the period of emergency ends.
We cannot predict the extent to which the aforementioned regulatory activity or any other potential regulatory or legislative activity, including as a result of COVID-19, may impact us or our institutions, nor can we predict the possible associated burdens and costs. Additional information regarding the regulatory and legislative environment and potential risks associated with it is available in our Annual Report and the section entitled “Risk Factors” in this Quarterly Report.
Reportable Segments
Our operations are organized into two reportable segments:
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American Public Education Segment, or APEI Segment. This segment reflects the operational activities of APUS, other corporate activities, and minority investments; and
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Hondros College of Nursing Segment, or HCN Segment. This segment reflects the operational activities of HCN.
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Summary of Results
For the three month period ended March 31, 2020, our consolidated revenue increased to $74.6 million from $73.4 million, or by 1.6%, compared to the comparable prior year period. Our operating margins increased to 3.6% from 1.8% for the three month period ended March 31, 2020, compared to the comparable prior year period. The three month period ended March 31, 2020 includes a $2.5 million increase in advertising costs as compared to the prior year period and $0.9 million in information technology costs related to replacements or upgrades to our information technology and learning management systems. The three month period ended March 31, 2019 includes a $5.9 million pretax, non-cash impairment of goodwill in our HCN Segment.
For the three month period ended March 31, 2020, APEI Segment revenue increased to $67.1 million from $65.7 million, or by 2.1%, compared to the comparable prior year period. APEI Segment operating margins decreased to 5.3% from 11.4% for the three month period ended March 31, 2020, compared to the comparable prior year period. For the three month period ended March 31, 2020, APEI Segment expenses include a $2.3 million increase in advertising costs as compared to the prior year period and $0.9 million in information technology costs related to replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems. APUS signed a contract for a replacement customer relationship management system in the first quarter of 2020 and began its first cohort of students in a new learning management system in March 2020. Net course registrations at APUS for the three month period ended March 31, 2020 increased to approximately 84,800 from approximately 84,300, or approximately 0.6%, compared to the comparable prior year period, primarily due to an increase in military-related registrations from students utilizing DoD tuition assistance. Net course registrations represent the total number of courses for which students remain enrolled after the date by which they may drop a course without financial penalty.
For the three month period ended March 31, 2020, HCN Segment revenue decreased to $7.5 million from $7.7 million, or by 2.7%, compared to the comparable prior year period. HCN Segment operating margins increased to negative 11.7% from negative 79.3% for the three month period ended March 31, 2020 compared to the comparable prior year period. The three month period ended March 31, 2019 includes a $5.9 million pretax, non-cash impairment of goodwill. Total enrollment at HCN for the three month period ended March 31, 2020 decreased to approximately 1,600 from approximately 1,700, or approximately 9.3%, as compared to the comparable prior year period. New student enrollment at HCN for the three month period ended March 31, 2020 increased to 444 from 339, or approximately 31.0%, as compared to the comparable prior year period. The increase in new student enrollment was primarily attributable to continued remediation of factors that we believe had been negatively impacting enrollment, new initiatives implemented in 2019 such as extending the hours of HCN’s customer service team, offering a direct entry ADN Program, and the impact of increased marketing expenditures. HCN total student enrollment represents the total number of students enrolled in a course immediately after the date by which students may drop a course without financial penalty.
We believe the changes in revenue and operating margins are primarily due to the factors discussed below in the “Results of Operations” section of this Management’s Discussion and Analysis.
Critical Accounting Policies and Use of Estimates
For information regarding our Critical Accounting Policies and Use of Estimates, see the “Critical Accounting Policies and Use of Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
Results of Operations
Below we have included a discussion of our operating results and material changes in our operating results during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Our revenue and operating results normally fluctuate as a result of seasonal or other variations in our enrollments and the level of expenses in our APEI and HCN Segments. Our student population varies as a result of new enrollments, graduations, student attrition, the success of our marketing programs, and other reasons that we cannot always anticipate. We expect quarterly fluctuations in operating results to continue as a result of various enrollment patterns and changes in expenses.
COVID-19 did not materially impact our results of operations during the period ended March 31, 2020. However, the duration and intensity of the outbreak and therefore any future impact is uncertain. For example, in March 2020, in response to the pandemic, HCN temporarily closed all its campuses and shifted to online delivery. While not yet quantifiable, ongoing impacts may cause a disruption of educational services provided to students, increase costs for HCN to continue to deliver courses online, and could be considered a triggering event to evaluate the value of HCN goodwill, impairment of investments, and recoverability of receivables. For more information on the potential risks related to COVID-19, please refer to the section entitled “Risk Factors” in this Quarterly Report. In addition, during the period ended March 31, 2020 and thereafter, we have experienced a significant decrease in interest rates, including in connection with the COVID-19 pandemic, and we expect to continue to reduce interest income earned on our invested funds.
Enrollment challenges at HCN moderated for the period ended March 31, 2020 as compared to the comparable prior year period, as total enrollment decreased by a smaller amount than it did in the prior year period and new student enrollment increased 31.0%. We continue to review and refine our academic and admissions standards, including changes implemented during 2019, and to work to improve negative perceptions from current and prospective student cohorts, and to implement new initiatives to improve the current and prospective student experiences. Examples of these initiatives implemented in 2019 include extending the hours of the customer service team, launching a direct-entry ADN program, and implementing an institutional affordability grant for new students during the first quarter of 2020. We cannot predict whether our initiatives and efforts will be successful over the long term and cannot guarantee that we will be able to reverse the total enrollment and revenue declines in our HCN Segment or return to our prior level of total enrollments. The success of these efforts could also be adversely affected by future impacts of the COVID-19 pandemic. Although we cannot predict what adjustments may be necessary or costs may be incurred as a result of the decline in total enrollment at HCN, any such adjustments and costs may have an adverse impact on our results of operations or financial condition.
For more information on the initiatives discussed above, our operations, and related risk factors, please refer to the “Overview” section of this Management’s Discussion and Analysis and our Annual Report.
Our consolidated results for the three months ended March 31, 2020 and 2019 reflect the operations of our APEI and HCN Segments. For a more detailed discussion of our results by reportable segment, refer to our Analysis of Operating Results by Reportable Segment.
Analysis of Consolidated Statements of Income
For the Consolidated Statements of Income, refer to our Financial Statements: Consolidated Statements of Income. The following table sets forth statements of income data as a percentage of revenue for each of the periods indicated:
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Three Months Ended March 31,
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2020
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2019
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(Unaudited)
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Revenue
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100.0
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%
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100.0
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%
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Costs and expenses:
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Instructional costs and services
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39.2
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38.0
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Selling and promotional
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24.4
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20.5
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General and administrative
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28.1
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26.0
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Loss on disposals of long-lived assets
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0.2
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0.2
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Impairment of goodwill
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—
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8.0
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Depreciation and amortization
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4.5
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5.5
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Total costs and expenses
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96.4
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98.2
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Income from operations before interest income and income taxes
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3.6
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1.8
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Interest income, net
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0.9
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1.4
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Income from operations before income taxes
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4.5
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3.2
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Income tax expense (benefit)
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1.3
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(0.1
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Equity investment loss
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—
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(2.0
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Net income
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3.2
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%
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1.3
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%
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Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Revenue. Our consolidated revenue for the three months ended March 31, 2020 was $74.6 million, an increase of $1.2 million, or 1.6%, compared to $73.4 million for the three months ended March 31, 2019. The increase in revenue was due to a $1.4 million, or 2.1%, increase in revenue in our APEI Segment partially offset by a $0.2 million, or 2.7% decrease in revenue in our HCN Segment.
Costs and expenses. Costs and expenses for the three months ended March 31, 2020 were $71.9 million, a decrease of $0.1 million, or 0.2%, compared to $72.1 million for the three months ended March 31, 2019. The results for the three months ended March 31, 2019 include a $5.9 million pretax, non-cash impairment of goodwill in our HCN Segment. The decrease in costs and expenses for the three months ended March 31, 2020 as compared to the prior period was primarily due to no goodwill impairment in our HCN Segment in the current year period partially offset by increased advertising costs and information technology costs related to the replacements and upgrades to our information technology systems in our APEI segment, including replacements of our learning management and customer relationship management systems. Costs and expenses as a percentage of revenue decreased to 96.4% for the three months ended March 31, 2020, from 98.1% for the three months ended March 31, 2019. The decrease in costs and expenses as a percentage of revenue was primarily due to a decrease in costs and expenses during a period when consolidated revenue increased.
Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended March 31, 2020 were $29.2 million, an increase of $1.3 million, or 4.7%, from $27.9 million for the three months ended March 31, 2019. The increase in instructional costs and services expenses was primarily due to an increase in employee compensation costs in our APEI Segment. Instructional costs and services expenses as a percentage of revenue increased to 39.2% for the three months ended March 31, 2020, from 38.0% for the three months ended March 31, 2019. The increase in instructional costs and services expenses as a percentage of revenue was primarily due to instructional costs and service expenses increasing at a rate greater than the increase in our consolidated revenue.
Selling and promotional expenses. Our selling and promotional expenses for the three months ended March 31, 2020 were $18.2 million, an increase of $3.2 million, or 20.9%, from $15.0 million for the three months ended March 31, 2019. The increase in selling and promotional expenses was primarily the result of an increase in employee compensation costs in our APEI Segment and advertising costs in our APEI and HCN Segments. Advertising costs increased $2.3 million in our APEI
Segment and $0.2 million in our HCN Segment as compared to the prior year period. Selling and promotional expenses as a percentage of revenue increased to 24.4% for the three months ended March 31, 2020, from 20.5% for the three months ended March 31, 2019. The increase in selling and promotional expenses as a percentage of revenue was primarily due to selling and promotional expenses increasing at a rate greater than the increase in our consolidated revenue.
General and administrative expenses. Our general and administrative expenses for the three months ended March 31, 2020 were $21.0 million, an increase of $1.9 million, or 10.2%, from $19.1 million for the three months ended March 31, 2019. The increase in general and administrative expenses for the three months ended March 31, 2020 as compared to the prior year period was primarily the result of an increase in employee compensation costs and professional fees in our APEI Segment. For the three months ended March 31, 2020, general and administrative expenses include approximately $0.9 million of information technology costs related to replacements and upgrades to our information technology systems in our APEI Segment, including replacements of our learning management and customer relationship management systems. Consolidated bad debt expense for the three months ended March 31, 2020 was $1.0 million, or 1.3% of revenue, compared to $1.0 million, or 1.4% of revenue in the prior year period. General and administrative expenses as a percentage of revenue increased to 28.1% for the three months ended March 31, 2020, from 26.0% for the three months ended March 31, 2019. The increase in general and administrative expenses as a percentage of revenue was primarily due to general and administrative expenses increasing at a rate greater than the increase in our consolidated revenue.
Loss on disposals of long-lived assets. The loss on disposals of long-lived assets for the three months ended March 31, 2020 increased to $0.2 million, compared to $0.1 million for the three months ended March 31, 2019.
Impairment of goodwill. The $5.9 million pretax non-cash impairment of goodwill for the three months ended March 31, 2019 resulted from the reduction of the carrying value of goodwill in our HCN Segment. There was no impairment of goodwill for the three months ended March 31, 2020.
Depreciation and amortization expenses. Depreciation and amortization expenses were $3.3 million and $4.1 million for the three months ended March 31, 2020 and 2019, respectively. Depreciation and amortization expenses as a percentage of revenue decreased to 4.5% for the three months ended March 31, 2020, from 5.5% for the three months ended March 31, 2019. The decrease in depreciation and amortization expenses as a percentage of revenue was primarily due to a decrease in depreciation and amortization expenses during a period when consolidated revenue increased.
Stock-based compensation expenses. Stock-based compensation expenses included in instructional costs and services, selling and promotional, and general and administrative expenses were $1.8 million and $1.7 million for the three months ended March 31, 2020 and 2019, respectively.
Interest income. Interest income was $0.7 million for the three months ended March 31, 2020, compared to interest income of $1.1 million for the three months ended March 31, 2019. The decrease was related to a decrease in interest rates and average invested balances in cash and cash equivalents.
Income tax expense (benefit). We recognized income tax expense for the three months ended March 31, 2020 of $1.0 million and a benefit of $0.1 million for the three months ended March 31, 2019, or effective tax rates of 28.7% and (6.6)%, respectively. The effective tax rate for the three months ended March 31, 2020 includes a higher amount of non-deductible expenses in our APEI Segment as compared to the prior period. There was no material impact to our effective tax rate for the three months ended March 31, 2020 as a result of the effects of the COVID-19 pandemic and related programs.
Equity investment loss. Equity investment loss was $1,000 for the three months ended March 31, 2020 compared to a loss of $1.5 million for the three months ended March 31, 2019.
Net income. Our net income was $2.4 million for the three months ended March 31, 2020, compared to net income of $1.0 million for the three months ended March 31, 2019, an increase of $1.4 million. This increase was related to the factors discussed above.
Analysis of Operating Results by Reportable Segment
The following table provides details on our operating results by reportable segment for the respective periods (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Unaudited)
|
Revenue:
|
|
|
|
American Public Education Segment
|
$
|
67,094
|
|
|
$
|
65,721
|
|
Hondros College of Nursing Segment
|
7,539
|
|
|
7,747
|
|
Intersegment elimination
|
(17
|
)
|
|
(27
|
)
|
Total Revenue
|
$
|
74,616
|
|
|
$
|
73,441
|
|
Income (loss) from operations before interest income and income taxes:
|
|
|
|
American Public Education Segment
|
$
|
3,577
|
|
|
$
|
7,522
|
|
Hondros College of Nursing Segment
|
(885
|
)
|
|
(6,146
|
)
|
Intersegment elimination
|
1
|
|
|
6
|
|
Total income from operations before interest income and income taxes
|
$
|
2,693
|
|
|
$
|
1,382
|
|
APEI Segment
For the three months ended March 31, 2020, the $1.4 million, or 2.1%, increase to approximately $67.1 million in revenue in our APEI Segment was attributable to higher net course registrations primarily as a result of additional military registrations from students utilizing DoD tuition assistance, and the impact of the January 1, 2020 tuition increase. Net course registrations at APUS increased 0.6% to approximately 84,800 from approximately 84,300 during the three months ended March 31, 2020 compared to the same period in 2019. Income from operations before interest income and income taxes was $3.6 million during the three months ended March 31, 2020, a decrease of 52.4% compared to the same period in 2019, as a result of increases in costs and expenses including higher compensation costs, advertising costs, and increased information technology costs related to replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship management systems.
HCN Segment
For the three months ended March 31, 2020, the $0.2 million, or 2.7%, decrease to approximately $7.5 million in revenue in our HCN Segment was attributable to a decrease in total student enrollment. HCN total student enrollment decreased 9.3% to approximately 1,600 from approximately 1,700 students during the three months ended March 31, 2020 compared to the same period in 2019. New student enrollment at HCN for the three month period ended March 31, 2020 increased to 444 from 339, or approximately 31.0%, as compared to the comparable prior year period. We believe that the decrease in HCN’s total student enrollment for the three months ended March 31, 2020 was primarily attributable to the impact of changes in academic standards and admissions policies instituted in 2018 and 2019. The increase to new student enrollment was primarily attributable to continued remediation of factors that we believe had been negatively impacting enrollment, new initiatives implemented in 2019 such as extending the hours of HCN’s customer service team and offering a direct entry ADN Program, and the impact of increased marketing expenditures. The loss from operations before interest income and income taxes in our HCN Segment was $0.9 million during the three months ended March 31, 2020, compared to a loss of $6.1 million in the same period in 2019, primarily as a result of the pretax non-cash goodwill impairment of $5.9 million during the three months ended March 31, 2019.
Liquidity and Capital Resources
Liquidity
We financed operating activities and capital expenditures during the three months ended March 31, 2020 and 2019 with cash provided by operating activities. Cash and cash equivalents were $196.8 million and $202.7 million at March 31, 2020 and December 31, 2019, respectively, representing a decrease of $5.9 million, or 2.9%. Cash and cash equivalents at March 31, 2020 decreased by $19.1 million from $215.9 million, or 8.8%, as compared to March 31, 2019.
We derive a significant portion of our revenue from tuition assistance programs from the Department of Defense, or DoD. Generally, these funds are received within 60 days of the start of the courses to which they relate. We also participate in programs from the U.S. Department of Veterans Affairs, or VA. Generally, these funds are received within 60 days of the start of the courses to which they relate. Another significant source of revenue is derived from our participation in ED’s Title IV programs, for which disbursements are governed by federal regulations. We have typically received disbursements under Title IV programs within 30 days of the start of the applicable course or term.
We expect to continue to fund our costs and expenses through cash generated from operations. Based on our current level of operations, we believe that our cash flow from operations and our existing cash and cash equivalents will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. We expect operating expenditures to increase in future periods as we accelerate the investment in and modernization of our information technology systems and increase marketing and other expenditures. In 2019 we incurred approximately $2.1 million to evaluate and invest in replacements and upgrades to our information technology systems, including replacements of our learning management and customer relationship systems, and to inform the scope and duration of the larger overall information technology transformation program. We anticipate spending between approximately $6.0 million and $8.0 million in 2020, focusing on specific information technology projects, including replacements of our learning management and customer relationship management systems. APUS signed a contract for a replacement customer relationship management system in the first quarter of 2020 and began its first cohort of students in a new learning management system in March 2020. We will continue to evaluate our PAD system for possible changes and upgrades and anticipate that we will eventually make significant changes to that system, as well. Capital expenditures could be higher in the future as a result of, among other things, additional expenditures for technology or other business capabilities, the opening of new campuses at HCN, the acquisition or lease of existing structures or potential new construction projects, and necessary tenant improvements that arise as a result of our ongoing evaluation of our space needs and opportunities for physical growth. We also expect that we will continue to make expenditures to invest in strategic opportunities and to enhance our business capabilities. We will continue to explore opportunities to invest in the education industry, which could include purchasing or investing in other education-related companies or companies developing new technologies. We may need additional capital in connection with any change in our current level of operations, including if we were to pursue significant business acquisitions or investment opportunities, or determine to make other significant investments in our business.
We currently believe that the Company has and will continue to have adequate liquidity for its operating needs notwithstanding the risks associated with COVID-19. However, the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change.
Share Repurchase Program
On May 2, 2019, our Board of Directors authorized the repurchase of up to $35.0 million of our common stock, and on December 5, 2019, the Board approved an additional authorization of up to $25.0 million of shares. We may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price and general business and market conditions. We have no obligation to repurchase shares and may modify, suspend or discontinue the repurchase program at any time. The authorization under this program is in addition to our repurchase program under which we may annually purchase up to the cumulative number of shares issued or deemed issued in that year under our equity incentive and stock purchase plan.
During the three months ended March 31, 2020, we repurchased 547,563 shares of common stock for approximately $13.6 million. At March 31, 2020, there remains $8.4 million available under our share repurchase authorization.
For additional information on our repurchases of our common stock, please refer to “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of Part II of our Annual Report and “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Repurchases” of Part II of this Quarterly Report.
Operating Activities
Net cash provided by operating activities was $11.5 million and $7.9 million for the three months ended March 31, 2020 and 2019, respectively. The increase in cash from operating activities is primarily due to changes in working capital due to the timing of receipts and payments. Accounts receivable at March 31, 2020, was approximately $4.8 million lower than December 31, 2019 primarily due to faster payment processing by DoD tuition assistance programs. Accounts payable, accrued compensation and benefits, and accrued liabilities at March 31, 2020 were approximately $1.4 million lower than December 31, 2019 primarily due to the timing of expenditures and the processing of payments.
Investing Activities
Net cash used in investing activities was $1.9 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively. This increase was primarily related to an increase in technology-related capital expenditures.
Financing Activities
Net cash used in financing activities was $15.6 million and $2.5 million for the three months ended March 31, 2020 and 2019, respectively. The increase in cash used in financing activities for the three months ended March 31, 2020 was related to $13.6 million used to repurchase our common stock in accordance with our share repurchase program, and increased cash used for the deemed repurchase of our common stock to satisfy minimum tax-withholding requirements in connection with the vesting of restricted stock grants.
Off-Balance Sheet Arrangements
We do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Contractual Commitments
We have various contractual obligations consisting of operating leases and purchase obligations. Purchase obligations include agreements with consultants, contracts with third-party service providers, and other future contracts or agreements.
In February 2020, APUS entered into a 48 month agreement with a customer relationship management platform provider. The total value of the contract over that 48 month period is approximately $3.5 million. Other than this agreement, there were no material changes to our contractual commitments outside of the ordinary course of our business during the three months ended March 31, 2020.