Lincoln Educational Services Corporation — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018. Lincoln provides career-oriented post-secondary education through 22 campuses in 14 states, serving recent high school graduates and working adults. Programs include transportation and skilled trades, healthcare, hospitality, cosmetology and information technology. The company reports Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional segments.
Enrollment was 10,525 students at year-end, with average enrollment of 10,591, down 1.7% from 2017. Approximately 78% of 2018 cash-basis revenue was derived indirectly from federal Title IV programs.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $263.2 million | $261.9 million | Up 0.5% |
| Operating loss | $4.0 million | $4.7 million | Improved 16.2% |
| Net loss | $6.5 million | $11.5 million | Improved $4.9 million |
| Net loss per share | $0.27 | $0.48 | Improved |
| Operating margin | -1.5% | -1.8% | Improved |
| Net margin | -2.5% | -4.4% | Improved |
| Cash flow from operations | $(1.7) million | $(11.3) million | Improved $9.6 million |
| Capital expenditures | $4.7 million | $4.8 million | Down slightly |
| Cash, equivalents and restricted cash | $45.9 million | $54.6 million | Down $8.6 million |
| Total debt | $48.8 million | $52.6 million | Down $3.8 million |
| Working capital | $(7.5) million | $(2.8) million | Deficit increased |
| Stockholders’ equity | $39.9 million | $45.8 million | Down $5.9 million |
Educational services and facilities expense declined to $125.4 million, or 47.6% of revenue, from 49.4%. Selling, general and administrative expense increased to $141.2 million, or 53.7% of revenue, from 53.0%, primarily because of higher bad debt and marketing expense. Bad debt expense rose to 6.7% of revenue from 5.2%.
Interest expense declined to $2.4 million from $7.1 million, primarily because the prior year included costs associated with the former term loan and bridge loan. No goodwill or long-lived asset impairment was recorded in 2018 or 2017; 2016 included a $21.4 million impairment charge.
Segment results and material changes
| Segment | 2018 revenue | 2017 revenue | 2018 operating income/(loss) |
|---|---|---|---|
| Transportation and Skilled Trades | $185.3 million | $181.3 million | $17.7 million |
| Healthcare and Other Professions | $72.1 million | $63.6 million | $6.5 million |
| Transitional | $5.8 million | $16.9 million | $(6.0) million |
- Total student starts increased 5.6%; excluding Transitional operations, starts increased 7.7%.
- Transportation and Skilled Trades starts increased 6.8%, while operating income was essentially flat because of higher books, tools, bad debt and marketing costs.
- Healthcare and Other Professions starts increased 9.5%, revenue increased 13.3%, and operating income increased 64.3%.
- The company completed the teach-out and closed the Lincoln College of New England campus in Southington, Connecticut on December 31, 2018. Closure-related costs were approximately $4.3 million, including lease termination, severance and operating losses.
- The company sold the Mangonia Park, Florida property for $2.55 million. Net proceeds were used to repay credit-facility borrowings, permanently reducing revolving availability.
Liquidity, debt and outlook
Operating cash usage improved but remained negative at $1.7 million. Investing activities used $2.3 million, including $4.7 million of capital expenditures, partly offset by proceeds from the Mangonia Park property sale. Financing activities used $4.6 million, primarily reflecting net debt repayment.
At December 31, 2018, the company had $48.8 million of debt, including $15.0 million classified as current, and $45.9 million of cash, cash equivalents and restricted cash. Restricted cash totaled approximately $28.4 million. Outstanding student loan commitments were $63.1 million, or $46.2 million net of interest.
Operating leases represented approximately $73.4 million of future payments, including $16.9 million due in 2019. Surety bonds totaled approximately $12.7 million. Management stated that expected cash sources should fund operations for the next twelve months and the foreseeable future, although liquidity remains constrained by losses, working-capital deficits, debt service and student financing commitments.
Capital expenditures are expected to approximate 2% of revenue in 2019. The filing does not provide a revenue or earnings forecast.
Guidance, risks, contingencies and unusual items
- The company calculated a 2018 DOE financial-responsibility composite score of 1.1, subject to DOE review; management expected the institutions likely to be placed in the “zone,” potentially requiring heightened cash monitoring or other financial protections.
- ACCSC continued the company’s schools on financial reporting, citing the net working-capital deficit, accumulated deficit and net loss. A subsequent review was scheduled for August 2019.
- Indianapolis was provisionally certified by the DOE and generated approximately 51% of company revenue. Provisional certification permits Title IV access but entails heightened scrutiny and prior approval requirements.
- The company submitted $0.5 million and $0.1 million letters of credit to the DOE related to return-of-Title-IV findings at its Columbia and Iselin institutions.
- 2018 90/10 Rule percentages for reporting entities ranged from 74% to 84%, below the 90% threshold, subject to DOE review. Draft 2016 cohort default rates ranged from 8.3% to 16.6%, with none at or above 30%.
- Gainful-employment programs included zone and failing programs. Management implemented program modifications, tuition reductions, appeals and teach-outs; the filing states that proposed DOE rule changes could eliminate the existing gainful-employment framework, but timing and final content were uncertain.
- Federal and state regulatory changes, accreditation, Title IV funding, cohort default rates, the 90/10 Rule, borrower-defense rules, financial-responsibility requirements and state authorization are significant risks.
- Student receivables and institutional lending are increasing. Accounts receivable, net of allowance, was $18.7 million current and $12.2 million noncurrent at year-end; the allowance for uncollectible accounts was approximately $17.0 million.
- The March 6, 2019 credit amendment converted Facility 1 into a $22.7 million term loan maturing in 2024, changed other facility maturities and permitted up to $5.0 million of additional unsecured revolver borrowings subject to lender discretion. The filing states that the company was compliant with covenants at December 31, 2018.
- The company adopted new revenue-recognition guidance in 2018 without a material effect. It adopted the new lease standard on January 1, 2019 and expected to recognize approximately $46 million to $49 million of lease liabilities and $42 million to $45 million of right-of-use assets.
Most important facts to verify
- Whether the DOE accepts the company’s 2018 composite score of 1.1 and what monitoring, letters of credit or other conditions result.
- The status of ACCSC financial reporting and reaccreditation matters, particularly for campuses with upcoming review dates.
- Actual 2019 enrollment starts, retention, bad debt expense and cash flow, given management’s reliance on recent start growth.
- Available borrowing capacity, required debt repayments and compliance with revised minimum EBITDA and maximum leverage covenants.
- The amount and timing of additional restricted cash and letters of credit required for state bonds and DOE matters.
- Collections on the $46.2 million net student loan commitments and the sustainability of the institutional lending program.
- The final impact and effective dates of DOE rules concerning gainful employment, borrower defense, accreditation and financial responsibility.