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. All quarterly information in this Management's Discussion
and Analysis is unaudited. 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, 2021, 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:
•integration of Rasmussen University, or RU, and Graduate School USA, or GSUSA;
•changes to and expectations regarding our student enrollment, net course
registrations, and the composition of our student body, including the pace of
such changes;
•our expectations regarding the effects of and our response to the ongoing
COVID-19 pandemic, including the demand environment for online education or
nursing education as the pandemic abates and impacts on business operations and
our financial results;
•our ability to maintain, develop, and grow our technology infrastructure to
support our student body;
•our conversion of prospective students to enrolled students and our retention
of active students;
•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;
•our plans for, marketing of, and initiatives at, our institutions;
•our ability to leverage our investments in support of our initiatives,
students, and institutions;
•our maintenance and expansion of our relationships and partnerships and the
development of new relationships and partnerships;
•actions by the U.S. Department of Defense, or DoD, or branches of the U.S.
Armed Forces, including actions related to the disruption of DoD tuition
assistance programs, or TA, and ArmyIgnitED, and expectations regarding the
effects of those actions;
•changes in and our ability to comply with the extensive regulatory framework
applicable to our industry, as well as state law and regulations and accrediting
agency requirements;
•our ability to undertake initiatives to improve the learning experience and
attract students who are likely to persist;
•changes in enrollment in postsecondary degree-granting institutions and
workforce needs;
•the competitive environment in which we operate;
•our cash needs and expectations regarding cash flow from operations;
•our ability to recognize the benefits of our cost savings efforts;
•our ability to manage and influence our bad debt expense;
•our ability to manage, grow, and diversify our business and execute our
business initiatives and strategy; and
•our financial performance generally.
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:
•the impacts of inflation, increases in labor costs, and enrollment trends,
including on our operating margins;
•our dependence on the effectiveness of our ability to attract students who
persist in our institutions' programs;
•changing market demands;
•our inability to effectively market our programs;
•our inability to maintain strong relationships with the military and maintain
enrollments from military students;
•the loss of our ability to receive funds under TA programs or the reduction,
elimination, or suspension of TA;
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•the effects, duration and severity of the ongoing COVID-19 pandemic and the
adverse effects on demand for online education or nursing education as impacts
of the pandemic abate, and the actions we have taken or may take in response,
particularly at Hondros College of Nursing, or HCN, and RU;
•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;
•our need to successfully adjust to future market demands by updating existing
programs and developing new programs;
•our failure to comply with regulatory and accrediting agency requirements or to
maintain institutional accreditation;
•our loss of eligibility to participate in student financial aid programs
authorized under Title IV of the Higher Education Act of 1965, as amended, or
Title IV programs, or ability to process Title IV financial aid;
•risks related to business combinations and acquisitions, including integration
challenges, business disruption, dilution of stockholder value, and diversion of
management attention;
•risks related to the acquisition of RU, or the Rasmussen Acquisition, including
regulatory approvals, limitations on growth and expansion at RU, effective
integration of RU's business, and our ability to realize the expected benefits
of the acquisition;
•risks related to incurring substantial debt under the debt facilities that we
entered into in connection with financing the Rasmussen Acquisition, the cost of
servicing that debt, and our ability in the future to service that debt; and
•our dependence on and need to continue to invest in our technology
infrastructure.
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 campus-based postsecondary education, and with
the acquisition of GSUSA, career learning, to approximately 105,100 students
through four subsidiary institutions. Our subsidiary institutions offer
education programs and career learning designed to prepare individuals for
productive contributions to their professions and society, and to offer
opportunities designed to advance students in their current professions or to
help them prepare for their next career. Our subsidiary institutions are
licensed or otherwise authorized by state authorities to offer postsecondary
education programs to the extent the institutions believe such licenses or
authorizations are required, and American Public University System, Inc., or
APUS, RU, and HCN are certified by the United States Department of Education, or
ED, to participate in Title IV programs.
Acquisitions
On September 1, 2021, or the RU Closing Date, we completed the Rasmussen
Acquisition for an adjusted aggregate purchase price, subject to post-closing
working capital adjustments, of $325.5 million in cash, net of cash acquired.
Upon completion of the Rasmussen Acquisition, RU, became a wholly owned
subsidiary of APEI. On September 9, 2021, RU timely submitted a change in
ownership and control application to ED seeking approval to participate in the
Title IV programs under our ownership. ED and RU entered into a Temporary
Provisional Program Participation Agreement, effective as of October 14, 2021,
that allows RU to continue disbursing Title IV funds while ED reviews the change
in ownership application.
We relied on debt financing pursuant to a Credit Agreement with Macquarie
Capital Funding LLC, or the Credit Agreement, as administrative agent and
collateral agent, Macquarie Capital USA Inc. and Truist Securities, Inc., as
lead arrangers and joint bookrunners, and certain lenders party thereto, or the
Lenders, to fund a portion of the consideration for the Rasmussen Acquisition.
For more information on this financing, please refer to "- Liquidity and Capital
Resources - Liquidity - Acquisition of Rasmussen University" below and "Note 8.
Long-Term Debt" included in the Notes to the Consolidated Financial Statements
in this Quarterly Report.
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On January 1, 2022, or the GSUSA Closing Date, our wholly owned subsidiary,
American Public Training, LLC, completed our acquisition of substantially all
the assets of GSUSA, or the Seller, for $1.0 million, subject to working capital
adjustments. At closing, the Company received approximately $1.9 million from
the Seller, which represents the estimated net working capital at closing net of
the initial cash payment to the Seller of $0.5 million, which is the purchase
price less $0.5 million retained by the Company to secure the indemnification
obligations of the Seller. The purchase price reflects the $0.5 million due to
the Seller post-closing and additional adjustments to the estimated net working
capital at closing.
Our financial results do not include the RU Segment or GSUSA results prior to
the respective acquisition closing dates. Therefore, our consolidated results
for the three and nine months ended September 30, 2021 include the operations of
RU for the month of September 2021 only, and the consolidated results do not
reflect the operations of GSUSA in the 2021 periods. Adjustments to reconcile
segment results to the Consolidated Financial Statements are included in
"Corporate and Other", which includes unallocated corporate activity and
eliminations, and for the three and nine months ended September 30, 2022, the
operational activities of GSUSA.
Our results for the three and nine months ended September 30, 2022 include
approximately $0.3 million and $1.6 million, respectively, of
acquisition-related expenses related to RU and GSUSA, and our results for the
three and nine months ended September 30, 2021 included approximately $1.5
million and $5.0 million, respectively, of acquisition-related expenses related
to RU. These expenses are included in general and administrative expenses on the
Consolidated Statements of Income.
For more information on the Rasmussen and GSUSA Acquisitions, please refer to,
"Note 3. Acquisition Activity" included in the Notes to the Consolidated
Financial Statements in this Quarterly Report.
We have continued to monitor the impact of the COVID-19 pandemic and adjust our
operations as appropriate in light of state and federal guidance. The COVID-19
pandemic did not materially impact our results of operations during the three
and nine months ended September 30, 2022. For more information on the potential
risks related to COVID-19, please refer to our Annual Report, "Results of
Operations" below, and the section of this Quarterly Report entitled "Risk
Factors".
Our wholly owned operating subsidiary institutions include the following:
•American Public University System, Inc., referred to herein as APUS, provides
online postsecondary education to approximately 87,700 adult learners, directed
primarily at the 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. As of September 30, 2022,
approximately 65% of APUS students self-reported that they served in the
military on active duty at the time of initial enrollment.
•Rasmussen College, LLC, referred to herein as Rasmussen University, or RU,
provides nursing- and health sciences-focused postsecondary education to over
15,000 students at its 23 campuses in six states and online. As of September 30,
2022, approximately 7,700 students are pursuing nursing degrees at RU,
approximately 90% of whom are enrolled in RU's pre-licensure degree programs.
•National Education Seminars, Inc., referred to herein as Hondros College of
Nursing, or HCN, provides nursing education to approximately 2,400 students at
six campuses in Ohio and a campus in Indianapolis, Indiana. A campus in suburban
Detroit, Michigan opened in October 2022, and HCN has received initial
regulatory approvals for the Diploma in Practical Nursing Program at the campus.
All of HCN's students are enrolled in its pre-licensure degree programs.
•American Public Training LLC, referred to herein as Graduate School USA, or
GSUSA, provides career learning to the federal government workforce through a
catalog of over 300 courses specializing in foundational and continuing
professional development, as well as leadership training to advance the
performance of government agencies through the competency and career advancement
of their employees. GSUSA operational activities are presented within "Corporate
and Other".
Cost and Expense Reductions
On November 2, 2022, we completed a reduction in force that resulted in the
termination of 98 non-faculty employees and the elimination of 78 open positions
across a variety of roles and departments. The reductions represent
approximately 5.8% of our non-faculty workforce. We incurred an aggregate of
approximately $3.1 million of pre-tax cash expenses associated with employee
severance benefits, all of which we expect will be incurred in the fourth
quarter of 2022. The reduction in force is expected to result in pre-tax labor
and benefit savings in 2022 of approximately $2.3 million, and
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approximately $13.5 million on an annualized basis. These cost savings do not
include expenses associated with employee severance benefits.
The headcount reductions reflect ongoing efforts focused on realigning our
organizational structure, eliminating redundancies, and optimizing certain
functions. There can be no assurance that we will be successful or recognize the
benefits we anticipate. Furthermore, the savings anticipated in 2022 will be
offset in the short-term by severance and other related costs, and over the
long-term may be offset by increases to wages and salaries necessary to remain
competitive.
Regulatory and Legislative Activity
Rulemakings
ED recently engaged in negotiated rulemaking processes to develop proposed
regulations related to participation in the student financial aid programs
authorized under Title IV of the Higher Education Act of 1965, as amended, or
the HEA. Topics included modifications to what is commonly referred to as the
90/10 Rule, which imposes sanctions on for-profit institutions that derive more
than 90% of their total revenue on a cash accounting basis from Title IV
programs, as calculated under ED's regulations, gainful employment requirements,
public service student loan forgiveness programs, borrower defenses to
repayment, or BDTR, mandatory pre-dispute arbitration, prohibition of
class-action lawsuits, closed school discharges, ability to benefit provisions,
certification procedures for participation in Title IV programs, change in
ownership and change in control rules and procedures, financial responsibility
standards, and standards of administrative capability, among others. In October
2022, ED published final regulations relating to the 90/10 Rule, BDTR, mandatory
pre-dispute arbitration, prohibition of class-action lawsuits, and change in
ownership and change in control rules and procedures. ED has also published for
public notice and comment proposed regulations relating to some of the other
topics that were the subject of the negotiated rulemaking processes, and ED has
indicated that it will release other proposed regulations at later dates. Please
refer to "Risk Factors - Recent ED negotiated rulemakings could result in
regulations that materially and adversely affect our business."
Program Reviews
In July 2022, HCN received a final program review determination from ED closing
the previously disclosed open program review from July 2021, and in September
2022, RU received a program review report from ED with respect to the previously
disclosed open program review for the 2015-2016 and 2016-2017 award years.
Please refer to "Risk Factors - ED has conducted and may in the future conduct
compliance reviews of our institutions, which could disrupt our institutions'
operations and adversely affect their performance.
Cohort Default Rate
To remain eligible to participate in Title IV programs, an educational
institution's student loan cohort default rates must remain below certain
levels. Pursuant to requirements of the Higher Education Act, as amended, if the
cohort default rate for any year exceeds 40% in any single year, or exceeds 30%
for three consecutive years, an institution loses eligibility to participate in
Title IV programs. If an institution's cohort default rate is equal to or
greater than 30% in any year, it must establish a default prevention task force.
In September 2022, ED released final official cohort default rates for
institutions for federal fiscal year 2019, with ED reporting a 2.4% cohort
default rate for APUS, a 1.6% cohort default rate for RU, and a 1.1% cohort
default rate for HCN. Additional information regarding student loan default
rates, prior year default rates, and potential risks associated with them is
available in our Annual Report.
Reportable Segments
Our operations are organized into three reportable segments:
•American Public University System Segment, or APUS Segment. This segment
reflects the operational activities of APUS.
•Rasmussen University Segment, or RU Segment. This segment reflects the
operational activities of RU.
•Hondros College of Nursing Segment, or HCN Segment. This segment reflects the
operational activities of HCN.
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Prior to the Rasmussen Acquisition, we had two reportable segments: the American
Public Education, Inc. Segment, or APEI Segment, and the Hondros College of
Nursing Segment, or HCN Segment. Post-acquisition, we have three reportable
segments: the APUS Segment, which was previously included within the former APEI
Segment; the RU Segment; and the HCN Segment. The APEI Segment previously
reported the results of both APUS and unallocated Company expenses. GSUSA does
not meet the quantitative thresholds to qualify as a reportable segment;
therefore, its operational activities are presented below within "Corporate and
Other". Additionally, adjustments to reconcile segment results to the
Consolidated Financial Statements are included in "Corporate and Other", which
primarily includes unallocated corporate activity and eliminations, which
generally were previously reported within the former APEI Segment. Prior periods
have been updated to conform to the revised presentation.
Summary of Results
As discussed above, we completed the Rasmussen and GSUSA Acquisitions on
September 1, 2021, and January 1, 2022, respectively. Our financial results do
not include the financial results of these companies prior to their respective
acquisition closing dates. Accordingly, the financial results for the three and
nine months ended September 30, 2021 include results of operations of RU for the
month of September 2021 and do not include the results of operations of GSUSA.
Therefore, the prior year period presented is not directly comparable to the
current period.
For the three months ended September 30, 2022, our consolidated revenue
increased to $149.5 million from $98.2 million, or by 52.2%, compared to the
prior year period. Our operating margins decreased to negative 0.7% for the
three months ended September 30, 2022 from 1.2% in the prior year period. The
net loss for the three months ended September 30, 2022 was $3.8 million compared
to net loss of $0.3 million during the three months ended September 30, 2021.
For the nine months ended September 30, 2022, our consolidated revenue increased
to $453.9 million from $264.8 million, or 71.4%, compared to the prior year
period. Our operating margins decreased to negative 30.1% for the nine months
ended September 30, 2022 from 5.3% in the prior year period. The net loss for
the nine months ended September 30, 2022 was $108.5 million compared to net
income of $8.4 million during the nine months ended September 30, 2021. Results
for the nine months ended September 30, 2022 include a non-cash impairment
charge of $144.9 million in our RU Segment to reduce the carrying value of RU
Segment goodwill and intangible assets and the corresponding tax impact.
Excluding the non-cash impairment charge for the nine months ended September 30,
2022, our operating margin was 1.7% and our net income was $0.4 million.
Excluding the impact of the impairment charge, we expect our operating margins
to remain below prior year levels for the remainder of 2022, including as a
result of the impacts of inflation, increases in labor costs, particularly at RU
and HCN, and enrollment trends, particularly at RU. Even to the extent that we
take efforts to control our labor costs, we expect to continue to evaluate and
may implement increases to wages and salaries to be more competitive with the
market.
For the three months ended September 30, 2022, net course registrations at APUS
increased to approximately 85,800 from approximately 83,100, or approximately
3.2%, compared to the prior year period. APUS Segment revenue increased to $68.7
million from $65.9 million, or by 4.3%, compared to the prior year period. For
the nine months ended September 30, 2022, net course registrations at APUS
increased to approximately 263,200 from approximately 258,700, or approximately
1.7%, compared to the prior year period, and APUS Segment revenue increased to
$211.7 million from $210.3 million, or by 0.7%, compared to the prior year
period. We believe the difference in the change in net course registrations as
compared to the change in APUS Segment revenue for the nine months ended
September 30, 2022, was primarily due to an increase in military related
registrations from students utilizing TA, which generate a lower revenue per
registration. 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 months ended September 30, 2022, APUS Segment operating margins
increased to 18.2% from 11.9% in the prior year period. For the nine months
ended September 30, 2022, APUS Segment operating margins increased to 18.6% from
14.7% in the prior year period. The increase in the operating margin was due to
decreases in professional fees and employee compensation costs during the three
months ended September 30, 2022. For the nine months ended September 30, 2022,
the increase in the operating margin was due to decreases in professional fees,
employee compensation costs, and advertising costs, partially offset by
increases in graduation event costs after returning to an in-person graduation
ceremony.
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For the three months ended September 30, 2022, HCN Segment revenue increased to
$11.4 million from $11.2 million, or by 1.5%, compared to the prior year period.
Total enrollment at HCN increased to approximately 2,400 from approximately
2,300, or approximately 3.7%, compared to prior year period. For the nine months
ended September 30, 2022, HCN Segment revenue increased to $34.4 million from
$33.5 million, or by 2.8%, compared to the prior year period. Total enrollment
at HCN for the nine months ended September 30, 2022 increased approximately 4.8%
as compared to the prior year period. We believe that the increase in total
student enrollment at HCN was due primarily to the opening of the Akron campus
in April 2021 and to the Indiana State Board of Nursing, or IBN, action to
increase maximum enrollment at the Indianapolis campus, which effective for the
2022 calendar year can enroll up to 200 students per calendar year compared to
30 students in 2021. 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.
For the three months ended September 30, 2022, HCN Segment operating margins
decreased to negative 12.2% from 4.0% in the prior year period. For the nine
months ended September 30, 2022, HCN Segment operating margins decreased to
negative 8.8% from 4.0% in the prior year period. The decrease in the operating
margin is due to increases in nursing faculty compensation costs and other
employee compensation costs, technology costs, advertising costs, and Title IV
costs, as compared to the prior year period.
RU Segment revenue totaled approximately $61.5 million and $192.5 million for
the three and nine months ended September 30, 2022, respectively. RU full-term
enrollment was approximately 15,000 during the three months ended September 30,
2022, which compares to 16,300 during the three months ended September 30, 2021.
We believe this decline in enrollment, which reflects year-over-year declines in
total nursing enrollment and enrollment from new nursing students, as well as
enrollment declines in non-nursing programs including online enrollments, may
have been caused, in part, due to a moderation in near-term demand for RU's
programs due to the abatement of the COVID-19 pandemic, record low unemployment
in some RU markets, and increasing pay for nurses resulting in fewer available
nursing faculty to educate and oversee clinicals. Further, in February 2022, the
Illinois ADN Program was placed on probationary status by the Illinois
Department of Professional Regulation, or IDPR, as a result of which RU is
required to temporarily reduce enrollment in the program by 25% and has two
years to demonstrate evidence of implementing strategies to correct deficiencies
and satisfy the required NCLEX pass rate. Additionally, in July 2022, we
implemented a voluntary enrollment reduction in RU's Bloomington, Minnesota ADN
Program as part of an effort to meet desired faculty to student ratios and
improve student performance. As described in "Risk Factors" below, RU is now
required to maintain a specified faculty to student ratio in 2023 for the
Bloomington ADN Program, which constrains our ability to increase enrollments
for that program based on our ability to attract and retain qualified faculty.
Finally, based on the first-time NCLEX pass rate in the Bloomington ADN Program
in the third quarter of 2022, RU has informed the Minnesota Board of Nursing, or
MBN, that RU will voluntarily further reduce enrollments in the program starting
with the quarterly cohort in January. The various factors adversely impacting RU
enrollments, including nursing enrollments, are expected to continue to
negatively impact RU's results.
Critical Accounting Policies and Use of Estimates
Goodwill and indefinite-lived intangible assets. Goodwill represents the excess
of the purchase price of an acquired business over the amount assigned to the
assets acquired and liabilities assumed. Goodwill is not amortized.
The process of evaluating goodwill and indefinite-lived intangibles for
impairment is subjective and requires significant judgment and estimates at many
points during the analysis. When performing an optional qualitative analysis, we
consider many factors including: general economic conditions, industry and
market conditions, certain cost factors, financial performance and key business
drivers, long-term operating plans, and potential changes to significant
assumptions and estimates used in the most recent fair value analysis.
Unanticipated events and circumstances may occur that may affect the accuracy or
validity of such assumptions and estimates. Actual results may differ and have a
material impact or our results of operations and financial position, and
subsequent events are not necessarily indicative of the reasonableness of the
original assumptions or estimates.
In the second quarter of 2022, the Company completed a qualitative assessment to
determine if an interim goodwill impairment test was necessary. The Company
concluded it was more likely than not the fair value of the Company's RU Segment
was less than its carrying amount as a result of RU's under performance in the
second quarter of 2022 compared to projections at the time of acquisition, along
with the decline in market value of the Company and comparable companies.
Therefore, the Company proceeded with a quantitative impairment test of RU
Segment goodwill as of May 31, 2022. The implied fair value of RU Segment
goodwill was calculated and compared to the recorded goodwill. As a result, the
Company recorded a non-cash impairment charge of $131.4 million, and to reflect
the corresponding tax impact of $36.0 million, to reduce the carrying value of
RU Segment goodwill. There were no indicators of goodwill impairment at HCN.
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In the second quarter of 2022, the Company also evaluated events and
circumstances related to the valuation of its intangibles recorded within the RU
and HCN Segments to determine if there were indicators of impairment. This
evaluation included consideration of enrollment trends and financial
performance, as well as industry and market conditions, and the impact of the
COVID-19 pandemic. These evaluations concluded there were indicators of
impairment during the three months ended June 30, 2022 of the RU Segment
accreditation, licensing and Title IV indefinite-lived intangible asset. The
Company determined the fair value of the intangible asset was $11.0 million, or
$13.5 million less than its carrying value. As a result, the Company recorded a
non-cash impairment charge of $13.5 million to reduce the carrying value of RU
Segment indefinite-lived intangible assets. There we no indicators of intangible
asset impairment at HCN.
In total, the Company recorded non-cash impairment charges of $144.9 million
during the three months ended June 30, 2022 related to RU Segment goodwill and
intangible assets, and the corresponding tax impact of $36.0 million.
The goodwill impairment charge recorded in the quarter ended June 30, 2022
eliminated the difference between the fair value of RU Segment goodwill and the
book value of goodwill. Future changes, including minor changes in revenue,
operating income, valuation multiples, discount rates, and other inputs to the
valuation process may result in future impairment charges, and those charges
could be material. Our October 31, 2021 annual assessment concluded that the
fair value of HCN exceeded the carrying value by approximately $20.1 million, or
51.8%.
We evaluated events and circumstances related to the valuation of goodwill and
intangible assets of RU and HCN for the three months ended September 30, 2022
and determined there were no indicators of impairment. This evaluation included
consideration of enrollment trends and financial performance, as well as
industry and market conditions, and the impact of the COVID-19 pandemic.
Determining fair value of goodwill and intangible assets requires judgment and
the use of significant estimates and assumptions, including, but not limited to,
fluctuations in enrollments, revenue growth rates, operating margins, discount
rates, changes in the regulatory environment, and future market conditions.
Given the current competitive and regulatory environment, the impact of
COVID-19, and the uncertainties regarding the related impact on the business, as
well as the market price for our stock, there can be no assurance that the
estimates and assumptions made for purposes of the Company's interim and annual
goodwill and intangible asset impairment tests will prove to be accurate
predictions of the future. If the Company's assumptions are not realized, the
Company may record goodwill and intangible asset impairment charges in future
periods. It is not possible at this time to determine if any such future
impairment charge would result or whether such charge would be material.
Estimates are subjective and are not intended to predict actual future events,
and subsequent events are not indicative of the reasonableness of the original
estimates of fair value.
For more 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.
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Results of Operations
Below we have included a discussion of our operating results and material
changes in our operating results during the three and nine months ended
September 30, 2022 compared to the three and nine months ended September 30,
2021. 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
reportable 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 revenue and expenses, including as a result
of the Rasmussen and GSUSA acquisitions.
We believe the increase in net registrations at APUS for the three and nine
months ended September 30, 2022 was due to increases in military-related
registrations from students utilizing TA and as a result of improvements made by
the Army to the ArmyIgnitED system. For information on the impacts of the recent
Army TA program disruption on the Company and the risks related to these
impacts, please refer to "Liquidity and Capital Resources - Liquidity" in this
Management's Discussion and Analysis of Financial Condition and Results of
Operation and the section entitled "Risk Factors".
We believe that the increase in enrollment at HCN for the nine months ended
September 30, 2022 as compared to the prior year period is due primarily to the
opening of the Akron campus in April 2021 and to IBN action to increase maximum
enrollment at the Indianapolis campus, which effective for the 2022 calendar
year can enroll up to 200 students per calendar year compared to 30 students in
2021.
RU full-term enrollment was approximately 15,000 during the three months ended
September 30, 2022, which compares to 16,300 during the three months ended
September 30, 2021. We believe this decline in enrollment may have been caused,
in part, due to a moderation in near-term demand for RU's programs due to the
abatement of the COVID-19 pandemic, record low unemployment, and challenges in
filling open nursing faculty positions. Further, in February 2022, the Illinois
ADN Program was placed on probationary status by the Illinois Department of
Professional Regulation, or IDPR, as a result of which RU is required to
temporarily reduce enrollment in the program by 25% and has two years to
demonstrate evidence of implementing strategies to correct deficiencies and
satisfy the required NCLEX pass rate. Additionally, in July 2022, we implemented
a voluntary enrollment reduction in RU's Bloomington, Minnesota ADN Program as
part of an effort to meet desired faculty to student ratios and improve student
performance. As described in "Risk Factors" below, RU is now required to
maintain a specified faculty to student ratio in 2023 for the Bloomington ADN
Program, which constrains our ability to increase enrollments for that program
based on our ability to attract and retain qualified faculty. Finally, based on
the first-time NCLEX pass rate in the Bloomington ADN Program in the third
quarter of 2022, RU has informed the MBN that RU will voluntarily further reduce
enrollments in the program starting with the quarterly cohort in January.
For a more detailed discussion of our results by reportable segment, refer to
"Analysis of Operating Results by Reportable Segment" below.
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