Lincoln Educational Services Corporation — Q2 2019 Form 10-Q Summary
Business context and reporting period
Lincoln provides career-oriented post-secondary education through 22 schools in 14 states, offering transportation and skilled trades, healthcare, hospitality, business and information technology programs. The filing covers the three and six months ended June 30, 2019, with comparisons to the same periods in 2018. The company reported 10,777 students at June 30, 2019 and operated through Transportation and Skilled Trades and Healthcare and Other Professions segments; no campuses remained in the Transitional segment after the completed teach-out of Lincoln College of New England.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $63.6 million, up 4.0% | $126.8 million, up 3.1% |
| Operating loss | $2.1 million, versus $3.5 million loss | $7.0 million, versus $9.8 million loss |
| Operating margin | (3.3%), versus (5.8%) | (5.5%), versus (7.9%) |
| Net loss | $3.1 million, versus $4.1 million loss | $8.5 million, versus $11.0 million loss |
| Net loss per share | $0.12 basic and diluted loss | $0.35 basic and diluted loss |
| Net margin | (4.8%), versus (6.8%) | (6.7%), versus (8.9%) |
| Net cash used in operating activities | Not separately reported | $10.8 million, versus $12.3 million |
| Capital expenditures | Not separately reported | $1.2 million, versus $1.8 million |
Second-quarter revenue growth reflected a 5.8% increase in average student population, a 2.5% increase in total student starts and the absence of $1.5 million of prior-year Transitional revenue. Excluding Transitional, revenue increased 6.6%. Six-month average student population increased 6.9%, while starts increased 2.5%, or 4.6% excluding Transitional.
Educational services and facilities expense declined 1.4% in the quarter and 1.6% year to date, improving to 46.8% and 47.1% of revenue, respectively. Selling, general and administrative expense increased 4.2% in the quarter and 2.9% year to date, primarily due to bad debt, marketing and corporate strategic initiative costs. Bad debt expense was $8.9 million year to date, compared with $7.6 million in the prior-year period.
Liquidity, debt and balance sheet
- Cash, cash equivalents and restricted cash totaled $11.0 million at June 30, 2019, including $4.5 million of restricted cash. Unrestricted cash and cash equivalents were $6.5 million.
- Net debt was $15.5 million at June 30, 2019, compared with $3.4 million at December 31, 2018.
- Credit facility and term-loan principal totaled $26.5 million, net of $0.4 million of deferred financing fees; $4.6 million was classified as current debt.
- Debt outstanding declined from $49.3 million at December 31, 2018, primarily due to $26.6 million of repayments, but cash also declined materially because of operating losses and seasonal working-capital needs.
- The March 2019 amendment converted Facility 1 into a $22.7 million term loan maturing March 31, 2024. Facility 2 matures April 30, 2020. Facility 3 matured unused on May 31, 2019.
- Facility 2 borrowings of $5.0 million were required to be repaid on November 1, 2019. The company also had $4.5 million of outstanding letters of credit at June 30, 2019.
- The company stated that it was in compliance with credit agreement covenants as of June 30, 2019. Management believes available cash and other expected sources are sufficient to fund operations for the next twelve months and the foreseeable future.
- Operating lease liabilities totaled $44.3 million on a present-value basis at June 30, 2019 following adoption of ASC 842. Total contractual cash obligations were $92.8 million, including $66.4 million of operating leases.
Material changes versus the prior comparable period
- Revenue increased $2.5 million in the quarter and $3.8 million year to date, driven by higher enrollment and student starts.
- Operating and net losses narrowed despite increased corporate and marketing costs.
- Transportation and Skilled Trades revenue increased 4.6% in the quarter and 4.2% year to date; Healthcare and Other Professions revenue increased 11.3% and 12.2%, respectively.
- Segment operating income improved to $2.5 million for Transportation and Skilled Trades and $1.8 million for Healthcare and Other Professions in the quarter.
- The Transitional segment generated no revenue or loss in 2019, compared with $1.5 million of revenue and a $0.9 million operating loss in the second quarter of 2018, reflecting completion of the LCNE teach-out.
- The company adopted the new lease standard on January 1, 2019, recognizing a $38.0 million operating lease right-of-use asset and related lease liabilities at adoption. This was primarily a balance-sheet presentation change.
- Accounts receivable increased to $22.1 million from $18.7 million at year-end, while the allowance for doubtful accounts increased to $16.2 million from $15.6 million.
Outlook, commentary, risks and unusual items
Management cited seven consecutive quarters of student-start growth and expects marketing, industry partnerships and differentiated career programs to support continued enrollment growth. The company expects capital expenditures to approximate 2% of 2019 revenue. Results remain seasonal, with larger class starts generally expected in the second half of the year; expenses do not decline proportionately if enrollment or revenue falls short.
The company remains highly dependent on government-sponsored student aid, particularly Title IV programs, which represented approximately 78% of cash receipts relating to revenue in 2018. Changes to eligibility, disbursement timing, borrower-defense rules, financial responsibility requirements or other Department of Education regulations could materially affect enrollment, cash receipts and operations. The company elected to implement the rescission of gainful-employment regulations early.
Management reported a full valuation allowance on most deferred tax assets because of cumulative losses. The company is also subject to ongoing inquiries from the New Jersey Attorney General and a compliance examination by the Colorado Department of Law. Management does not believe currently pending proceedings will have a material adverse effect, but the ultimate outcomes are uncertain.
Borrowings carried an interest rate of 8.35% at June 30, 2019. Management estimated that a one-percentage-point rate change would affect annual interest expense by approximately $0.2 million. The credit facility is secured by substantially all personal property and mortgages on specified real estate.
Important facts for investors to verify
- Whether enrollment and student-start growth continues through the high-recruiting second half of 2019.
- Whether increased bad debt expense and accounts receivable are contained as enrollment expands.
- The company’s ability to repay the $5.0 million Facility 2 borrowings due November 1, 2019 and meet subsequent debt amortization requirements.
- Compliance with minimum adjusted EBITDA, maximum funded-debt-to-adjusted-EBITDA and other credit agreement covenants.
- Availability and timing of unrestricted cash, Title IV receipts and other funding sources given continuing operating cash outflows.
- The financial impact of federal and state regulatory developments, including borrower defense, gainful employment and Department of Education financial-responsibility requirements.
- The status and potential exposure from the New Jersey Attorney General subpoena and Colorado compliance examination.
- Whether management’s expected cost alignment and marketing investments produce sustainable profitability rather than only higher enrollment.