Lincoln Educational Services Corporation: 2016 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The company operated 30 schools in 15 states and had 11,417 total students, including 7,041 in continuing operations. Its strategy is to divest 17 Healthcare and Other Professions schools and focus primarily on Transportation and Skilled Trades; those 17 schools are reported as discontinued operations.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $41.9 million, down 6.4% | $85.3 million, down 7.7% |
| Operating loss | $2.8 million, versus $4.4 million | $9.2 million, versus $9.2 million |
| Loss from continuing operations | $2.7 million, versus $5.6 million | $8.9 million, versus $11.7 million |
| Net loss | $3.1 million, versus $7.6 million | $9.2 million, versus $14.5 million |
| Net loss per share | $0.13, versus $0.33 | $0.39, versus $0.63 |
| Net cash used in operating activities | Not provided for the quarter | $18.1 million, versus $11.6 million |
- Continuing-operations operating margin was approximately negative 6.8% in the second quarter and negative 10.7% for the first half, compared with negative 9.8% and negative 10.0%, respectively, in 2015.
- Second-quarter revenue reflected a 9.6% decline in average student population to approximately 6,600, partly offset by a 3.5% increase in average revenue per student. First-half average population declined 10.8%, while average revenue per student increased 3.4%.
- Educational services and facilities expense declined 3.7% in the quarter and 1.3% for the first half, but increased as a percentage of revenue to 51.7% and 52.5%, respectively, due to the relatively fixed cost structure.
- Selling, general and administrative expense declined 13.2% in the quarter and 10.9% for the first half, reflecting lower salaries, marketing and student-service costs and improved bad-debt experience.
- Bad debt expense was 5.2% of revenue in the quarter and 5.1% for the first half, compared with 6.3% and 5.6% in the prior-year periods.
- Other income was $1.7 million in the quarter and $3.4 million for the first half, compared with $0.4 million and $0.6 million in 2015. The filing does not provide a clear single explanation for the entire increase.
- At June 30, cash and cash equivalents were $11.0 million, restricted cash was $6.6 million, and noncurrent restricted cash was $20.3 million, for total cash and restricted cash of approximately $37.8 million.
- Total assets were $179.0 million and stockholders’ equity was $72.8 million, compared with $207.8 million and $81.0 million at December 31, 2015.
Debt, Liquidity and Cash Flow
- Total debt and lease obligations were $44.9 million at June 30, 2016, including $41.5 million of term-loan obligations and $3.4 million of finance obligations. Net long-term debt after current maturities was $31.5 million.
- The term loan bears interest at the greater of 11% or 90-day LIBOR plus 9%, matures July 31, 2019, and is secured by substantially all company assets. Approximately $44.3 million was outstanding before deferred finance fees.
- The company used $18.1 million in operating cash, $0.3 million in investing cash, and $9.0 million in financing cash during the first half. Cash and cash equivalents declined by $27.5 million to $11.0 million.
- Management stated that expected cash sources should fund operations for the next 12 months. Liquidity depends substantially on operating cash flow, restricted cash, asset sales and continued access to student financial-aid funding.
- Capital expenditures were $1.6 million in the first half, and management expected 2016 capital expenditures to approximate 2% of revenue.
- The company had $31.7 million of outstanding student loan commitments, or $23.6 million net of interest, at June 30, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue and student population continued to decline, although new student starts stabilized in the second quarter. Continuing-operations starts increased slightly to 1,936 from 1,930 in the prior-year quarter, but first-half starts declined 3.3%.
- Transportation and Skilled Trades revenue declined 3.3% in the quarter and 4.6% for the first half; operating income declined 12.2% and 25.2%, respectively.
- The Transitional segment’s revenue fell 62.4% in the quarter and 60.3% for the first half as the Fern Park campus completed its teach-out and Hartford stopped enrolling new students. Hartford was expected to complete its teach-out in December 2016.
- Corporate costs declined 21.0% in the quarter and 17.9% for the first half.
- Debt declined from $55.7 million at December 31, 2015 to $44.9 million, primarily because capital-lease and finance-obligation arrangements were terminated or converted to operating leases.
- The company paid approximately $2.8 million for termination of the Fern Park lease, $0.5 million in loan-modification fees and approximately $0.7 million in severance during the first half.
Outlook, Risks and Unusual Items
- On July 1, 2016, the company agreed to sell its West Palm Beach, Florida property for approximately $15.9 million and lease it back through March 31, 2017, with an option to extend through June 30, 2017. The company expected closing in the third quarter, subject to conditions.
- At closing, approximately $10.0 million of sale proceeds must be applied to the term loan, together with a $0.5 million prepayment premium and accrued interest.
- The company was in compliance with all term-loan covenants at June 30, 2016. The credit agreement includes minimum liquidity, EBITDA, financial-responsibility, cohort-default-rate and 90/10 requirements, as well as restrictions and lender remedies upon default.
- Key operating risks include declining enrollment, competition from community colleges and other providers, low unemployment, regulatory changes affecting admissions compensation and Title IV eligibility, student loan availability, cohort default rates, gainful-employment requirements and reliance on federal financial aid. Title IV programs represented approximately 80% of 2015 cash receipts related to revenue.
- Results are seasonal, with stronger enrollment generally expected in the second half of the year. Management cautioned that actual starts may fall short of expectations while expenses remain relatively fixed.
- The company maintains a valuation allowance against its deferred tax assets because realization was not considered more likely than not. It also received a subpoena from the Maryland Attorney General concerning its Columbia, Maryland campus and stated that it was cooperating.
- No goodwill or long-lived-asset impairment was recorded during the reported periods. Management stated that pending legal proceedings were not expected to have a material adverse effect, although outcomes remain uncertain.
Investor Verification Points
- Verify completion, proceeds and net cash impact of the West Palm Beach property sale and the required $10 million debt repayment.
- Monitor unrestricted cash, restricted-cash release conditions, operating cash burn and compliance with term-loan covenants.
- Assess whether student starts and enrollment stabilize sufficiently to offset the company’s fixed educational and facilities cost base.
- Review the progress and costs of the Healthcare and Other Professions divestitures and the Hartford teach-out.
- Evaluate exposure to Title IV funding, regulatory changes, cohort default rates, 90/10 compliance and the Maryland Attorney General inquiry.
- Reconcile reported liquidity using unrestricted versus restricted cash and consider the company’s $162.5 million of total contractual cash obligations, including debt and operating leases.