Lincoln Educational Services Corporation — FY2017 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017. Lincoln operated 23 career-oriented post-secondary schools in 14 states, offering transportation, skilled trades, healthcare, hospitality, business and information technology programs. Average enrollment was 10,772 students, with 10,159 students enrolled at year-end.
The company reports Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional segments. The Transitional segment consists of campuses being taught out and closed. Management abandoned its prior plan to divest the HOPS segment and intends to retain the remaining 11 HOPS campuses.
Financial and operating metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $261.9 million | $285.6 million | Down 8.3% |
| Operating income (loss) | $(4.7) million | $(28.9) million | Improved by $24.2 million |
| Net loss | $(11.5) million | $(28.3) million | Improved by $16.8 million |
| Net loss per share | $(0.48) | $(1.21) | Improved |
| Average enrollment | 10,772 | 11,864 | Down 9.2% |
| Operating cash flow | $(11.3) million | $(6.1) million | More cash used |
| Capital expenditures | $4.8 million | $3.6 million | Up $1.2 million |
| Cash, cash equivalents and restricted cash | $54.6 million | $47.7 million | Up $6.8 million |
| Total debt | $52.6 million | $42.0 million | Up $10.6 million |
Revenue declined primarily because Transitional campuses were closed; that segment accounted for approximately $22.1 million, or 93.1%, of the revenue decline. Educational services and facilities expense fell 10.4% to $129.4 million, while selling, general and administrative expense fell 6.5% to $138.8 million. The resulting operating margin improved to approximately negative 1.8% from negative 10.2%, partly because 2016 included a $21.4 million impairment charge.
Transportation and Skilled Trades generated $177.1 million of revenue and $17.9 million of operating income. HOPS generated $76.3 million of revenue and $2.3 million of operating income, compared with a $10.9 million operating loss in 2016. Transitional revenue fell to $8.4 million from $30.5 million, while its operating loss narrowed to $5.4 million from $15.2 million.
Cash used in operating activities was $11.3 million. Investing activities generated $9.9 million, including $15.5 million of proceeds from the sale of two West Palm Beach properties. Financing activities used $5.1 million. Of total cash and restricted cash, approximately $40.0 million was restricted at year-end.
Material changes versus the prior comparable period
- Average enrollment fell 9.2%, and total student starts fell 10.8% to approximately 11,800.
- Transportation and Skilled Trades revenue was broadly stable, but operating income declined 16.1% because of higher marketing and bad debt expenses.
- HOPS returned to operating profitability after campus closures, operating improvements and cost actions; starts were essentially flat.
- Five additional HOPS campuses were taught out and closed during 2017. Seven underperforming campuses had been closed by year-end.
- The company recorded no goodwill or long-lived asset impairment in 2017, compared with a $21.4 million pre-tax impairment charge in 2016.
- The company replaced its prior term loan with a Sterling National Bank secured revolving credit facility. Availability increased to $65 million after a November 2017 amendment; $53.4 million was outstanding at year-end.
- A $1.5 million gain was recorded on the West Palm Beach property sale, and the related $8.0 million short-term loan was repaid.
- The company adopted provisional accounting for the Tax Cuts and Jobs Act, including a $17.7 million reduction in deferred tax assets offset by a valuation allowance release and a $0.4 million tax benefit related to AMT credits.
Guidance, outlook, risks and unusual items
Management expects 2018 capital expenditures to approximate 2% of revenue and states that available cash sources should fund operations for the next twelve months and the foreseeable future. Management is pursuing enrollment growth through increased marketing, adult-student recruitment, program expansion, employer partnerships and better facility utilization. No specific revenue, earnings or enrollment guidance was provided.
- Title IV programs represented approximately 78% of 2017 revenue on a cash basis, creating substantial regulatory and funding concentration.
- The company calculated a 2017 DOE financial responsibility composite score of 1.1, versus 1.5 in 2016. The score had not yet been finalized by the DOE and management expected the company to fall into the “zone,” potentially requiring heightened cash monitoring or other conditions.
- Iselin and Indianapolis institutions were provisionally certified and together generated approximately 66% of company revenue. Iselin was required to obtain ACCSC accreditation by June 12, 2018 following ACICS’s loss of DOE recognition. ACCSC requested additional information regarding the company’s financial structure.
- The DOE required letters of credit related to the return of Title IV funds. The company posted letters of credit of $0.5 million for Columbia and $0.1 million for Iselin, expected to remain outstanding for at least two years.
- Gainful-employment results included 60 passing programs, 13 programs in the “zone” and five failing programs based on the cited measurement year. Remaining failing programs were being taught out or appealed.
- The company had $51.9 million of outstanding student loan commitments, or $38.5 million net of interest, increasing credit and liquidity exposure.
- The credit facility is secured by substantially all personal property and mortgages on specified real estate. It matures in 2020, except that the additional Facility 3 matures in May 2019. The company was in compliance with covenants at December 31, 2017, but the facility includes a restriction against incurring a net loss beginning December 31, 2018.
- Operating lease commitments totaled $78.4 million, including $19.3 million due within one year. Surety bonds totaled approximately $12.7 million.
- Management states that no currently pending legal proceeding is expected to have a material effect, but the company remains subject to regulatory reviews, audits, litigation and claims.
Important facts for investors to verify
- Whether the DOE finalizes the 2017 composite score at 1.1 and what monitoring, collateral or funding restrictions result.
- Whether Iselin and its branches obtain ACCSC accreditation and retain Title IV eligibility by the applicable deadline.
- Enrollment, student starts and operating trends in Transportation and Skilled Trades and HOPS after the 2017 closures.
- Whether negative operating cash flow improves and whether restricted cash remains available for general corporate needs.
- Compliance with credit-facility covenants, Facility 3 maturity requirements and the prohibition on net losses beginning December 31, 2018.
- Collection performance on student receivables and the $51.9 million of institutional loan commitments.
- Final accounting effects of the Tax Cuts and Jobs Act and the realizability of the company’s deferred tax assets and net operating losses.