Lincoln Educational Services Corporation — FY2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016. Lincoln operates 28 career-oriented post-secondary schools in 15 states, with programs concentrated in automotive technology, skilled trades, healthcare, hospitality, and business and information technology. Management is strategically exiting the Healthcare and Other Professions segment and focusing primarily on Transportation and Skilled Trades.
Continuing operations consisted principally of Transportation and Skilled Trades and a Transitional segment comprising campuses being taught out. At year-end, continuing-operations enrollment was 7,295 students, while total enrollment including discontinued operations was 11,235.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Continuing-operations revenue | $196.9 million | $208.3 million | Down 5.4% |
| Total revenue including discontinued operations | $285.6 million | Not clearly provided in the filing text | Down 6.7% as disclosed |
| Operating income (loss) | $(5.2) million | $5.9 million | Declined by $11.1 million |
| Operating margin | (2.6%) | 2.9% | Down 5.5 percentage points |
| Income (loss) from continuing operations | $(4.5) million | $0.1 million | Declined by $4.6 million |
| Net loss | $(28.3) million | $(3.4) million | Loss increased by $25.0 million |
| Net loss per share | $(1.21) | $(0.14) | Declined by $1.07 |
| Cash flow from operating activities | $(6.1) million | $14.3 million | Decrease of $20.4 million |
| Capital expenditures | $3.6 million | $2.2 million | Increased by $1.4 million |
| Cash, cash equivalents and restricted cash | $47.7 million | $61.0 million | Down $13.3 million |
| Total debt | $42.0 million | $58.2 million | Down $16.3 million |
Transportation and Skilled Trades generated $177.9 million of revenue and $21.3 million of operating income, compared with $183.8 million and $26.8 million, respectively, in 2015. The Transitional segment generated $19.0 million of revenue and a $6.3 million operating loss. Corporate expenses were $20.1 million.
Average continuing-operations enrollment fell 8.0% to approximately 7,725 students, and total student starts declined 6.2% to 8,464. Average revenue per student increased 2.7% because of program mix. Educational services and facilities expense was essentially flat at $94.9 million, while selling, general and administrative expense declined 2.1% to $103.1 million. The resulting cost structure was less flexible than revenue, causing margins to contract. Bad debt expense was 5.1% of revenue versus 4.8% in 2015.
Material changes versus the prior comparable period
- Continuing-operations revenue declined $11.3 million, primarily because of lower enrollment and Transitional campus closures and teach-outs.
- Operating performance moved from a $5.9 million profit to a $5.2 million loss. The decline included a $3.9 million non-cash impairment charge for continuing-operations long-lived assets and a $1.4 million impairment charge related to a corporate property.
- Discontinued operations produced a $23.8 million loss, including approximately $17.5 million of goodwill and long-lived-asset impairments.
- The Company closed or approved the closure of several campuses and expected the Center City Philadelphia, Northeast Philadelphia, and West Palm Beach campuses to complete teach-outs in 2017.
- Cash flow from operations turned negative, largely because of timing-related decreases in deferred tuition and receivables, including a $15.7 million receivables-related cash outflow.
- Total debt declined primarily because finance obligations and capital lease obligations were eliminated or converted, while the term loan remained approximately $44.3 million.
- The quarterly cash dividend had been discontinued in February 2015, and no 2016 dividend was declared.
Debt, liquidity and other financial matters
The Company had a $45 million term loan maturing July 31, 2019. The loan carried an interest rate of 11.0% at December 31, 2016, is secured by substantially all Company assets, and had $44.3 million outstanding. Current maturities were $11.7 million. The Company was in compliance with its credit agreement covenants at year-end, including financial, liquidity, EBITDA, capital expenditure, 90/10 and regulatory requirements.
Of the $47.7 million of cash, cash equivalents and restricted cash, $26.7 million was restricted. Unrestricted cash and cash equivalents were $21.1 million. Working capital was negative $1.7 million, compared with positive working capital of $33.8 million in 2015. The Company expected to fund operations for the next twelve months through cash on hand, operations, asset sales and borrowing capacity, but acknowledged deteriorating earnings and reliance on asset monetization.
Assets held for sale totaled $24.8 million, with net assets held for sale of approximately $13.2 million. Management expected to sell these assets within one year, with up to $10 million of proceeds required to repay term-loan debt. Contractual obligations included $53.9 million of credit-agreement payments, including interest, and $97.2 million of operating lease payments.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific revenue or earnings guidance. The outlook emphasizes stabilizing enrollment, increasing employer partnerships and corporate training, expanding Transportation and Skilled Trades programs, improving facility utilization, and aligning costs with enrollment. Capital expenditures were expected to approximate 2% of revenue in 2017.
- Approximately 79% of 2016 cash-basis revenue was indirectly derived from Title IV programs, creating substantial dependence on federal student aid.
- The Company calculated a 2016 DOE financial-responsibility composite score of 1.5, subject to DOE review. Two institutions generating 71% of Company revenue were provisionally certified.
- ACICS lost DOE recognition in December 2016. The Company was applying for ACCSC accreditation for its affected institutions and could face loss of Title IV eligibility if accreditation efforts fail.
- Gainful-employment results included 60 passing programs, 13 programs in the zone, and five failing programs. One failure was being appealed, one program was being taught out, and three related to closed or closing schools.
- 2017 borrower-defense and expanded financial-responsibility regulations could result in additional disclosures, liabilities, monitoring, or letters of credit.
- 2016 90/10 percentages for individual institutions ranged from 55% to 84%, and 2013 cohort default rates ranged from 10.5% to 15.4%; none exceeded the stated regulatory thresholds.
- Net student loan commitments were approximately $30.0 million, exposing the Company to student credit and liquidity risk.
- The Company posted approximately $14.3 million of surety bonds and had approximately $6.1 million of letters of credit outstanding under its letter-of-credit facility.
- Material unusual items included $21.4 million of total impairment charges reflected in operating cash-flow adjustments, $11.5 million of campus closing costs, a $0.7 million loan-modification fee, and $0.7 million of severance payments.
- Pending matters included a Maryland Attorney General administrative subpoena and routine litigation and regulatory reviews. Management did not expect currently pending proceedings to have a material financial effect.
Most important facts for investors to verify
- Whether enrollment and student starts stabilize or continue to decline, particularly in Transportation and Skilled Trades.
- The timing and proceeds of planned sales of held-for-sale schools and properties, and the resulting debt repayment.
- DOE determinations regarding the 2016 composite score, provisional certifications, ACICS replacement accreditation and gainful-employment appeals.
- Compliance with the term-loan covenants and the Company’s ability to meet $11.7 million of current debt maturities and high-interest obligations.
- Whether unrestricted liquidity is sufficient given negative operating cash flow, negative working capital, restricted cash and ongoing lease commitments.
- The recoverability of student receivables, the $30.0 million of net student loan commitments and the adequacy of bad-debt reserves.
- The final outcome of the HOPS divestiture and campus teach-outs, including additional closure costs and impairment charges.
- Future Title IV funding, regulatory changes, accreditation status, cohort default rates and 90/10 compliance.