Lincoln Educational Services Corporation: FY2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015. Lincoln operated 31 career-oriented post-secondary schools in 15 states, offering automotive, transportation, skilled trades, healthcare, hospitality, business and information technology programs. Average enrollment declined 7.1% in continuing operations to 7,553 students; year-end enrollment was 6,811 students.
In late 2015, the company approved a strategic shift to focus primarily on Transportation and Skilled Trades. Results from 17 Healthcare and Other Professions campuses planned for divestiture are presented as discontinued operations. The remaining Hartford, Connecticut campus is being taught out and is scheduled to close in the fourth quarter of 2016.
Financial performance and key metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Continuing-operations revenue | $193.2 million | $202.9 million | Down 4.8% |
| Total revenue, including discontinued operations | $306.1 million | $325.0 million | Down 5.8% |
| Operating income from continuing operations | $0.8 million | $(11.5) million | Improved $12.3 million |
| Operating margin | 0.4% | (5.7%) | Improved |
| Loss from continuing operations | $(2.7) million | $(14.8) million | Improved |
| Net loss | $(3.4) million | $(56.1) million | Improved |
| Net loss per share | $(0.14) | $(2.46) | Improved |
| Cash flow from operating activities | $14.3 million | $12.0 million | Increased $2.3 million |
| Capital expenditures | $2.2 million | $7.5 million | Down $5.3 million |
| Cash, cash equivalents and restricted cash | $61.0 million | $42.3 million | Increased $18.7 million |
| Total debt | $58.2 million | $65.2 million | Down $7.0 million |
Continuing-operations cost reductions were substantial: educational services and facilities expense declined 8.1% to $92.2 million, while selling, general and administrative expense declined 11.3% to $98.3 million. SG&A represented 50.9% of continuing-operations revenue versus 54.7% in 2014. Bad debt expense improved to 4.8% of revenue from 5.5%.
Transportation and Skilled Trades generated $183.8 million of revenue and $26.8 million of operating income. Transitional operations generated $9.4 million of revenue and an operating loss of $6.9 million. The company reported a $0.2 million non-cash goodwill impairment charge in 2015, compared with $39.0 million in 2014, substantially of which was related to discontinued operations.
Liquidity, debt and capital resources
- Cash and cash equivalents were $38.4 million; restricted cash was $22.6 million, including $15.3 million classified as noncurrent.
- Operating cash flow was $14.3 million, investing cash use was $1.8 million, and financing cash flow was $13.6 million.
- On July 31, 2015, Lincoln replaced its prior revolving credit facility with a $45 million term loan. The loan carried an 11% interest rate at year-end, matures July 31, 2019 and had $44.7 million outstanding at December 31, 2015.
- Total debt included the term loan, a $9.7 million finance obligation and $3.9 million of capital lease obligations. Current debt maturities were $10.1 million.
- The credit agreement is secured by substantially all company assets and includes minimum liquidity, EBITDA, financial responsibility, cohort default rate, capital expenditure and 90/10 covenants. The company reported compliance with all covenants at year-end.
- Net student loan commitments were approximately $24.8 million at December 31, 2015. Total contractual cash obligations were $161.2 million, including operating leases, capital leases and debt payments.
Material changes versus the prior comparable period
- Enrollment, new student starts and revenue declined, primarily due to regulatory changes, competition, lower unemployment and fewer prospective students seeking training.
- Cost restructuring, lower staffing levels, a centralized destination-campus call center and improved collections reduced operating expenses and returned continuing operations to positive operating income.
- The company raised new debt, discontinued its quarterly cash dividend in February 2015 and reduced capital expenditures.
- Seventeen Healthcare and Other Professions campuses were classified as discontinued operations and planned for divestiture. Those campuses generated $112.9 million of revenue and a $0.6 million net loss in 2015, compared with $122.1 million of revenue and a $34.7 million net loss in 2014.
- Assets held for sale, net of related liabilities, totaled approximately $31.7 million. Management expected sales within one year, with up to $10 million of proceeds required to repay debt.
- The company changed its revenue-recognition approach for certain withdrawn students beginning in the fourth quarter. A correction reduced 2015 revenue by $0.3 million and increased the loss from continuing operations by $0.1 million; prior periods were not restated.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash sources were expected to be sufficient to fund operations for the next twelve months, relying on operating cash flow, cash balances, the term loan and planned real-estate monetization. Capital expenditures were expected to approximate 2% of revenue in 2016. No specific revenue or earnings guidance was provided.
Management expects continued seasonal volatility, with lower enrollment generally in the first half of the year and larger class starts in the third quarter. It identified employer demand, corporate training and industry partnerships as potential growth opportunities, but noted that student demand had not yet improved despite stronger employer demand.
- Approximately 80% of 2015 revenue on a cash-receipts basis was derived indirectly from Title IV programs, creating significant exposure to federal funding, eligibility and regulatory changes.
- The company operated under the Department of Education’s Heightened Cash Monitoring 1 process after reporting composite scores of 1.3 and 1.4 for 2014 and 2013. Management calculated a 2015 composite score of 1.9, subject to DOE review.
- Gainful-employment regulations became effective July 1, 2015. Future program debt-to-earnings results could affect program eligibility, enrollment and revenue.
- The 2015 90/10 percentages for the company’s institutions ranged from 77% to 85%. Final cohort default rates for 2012 ranged from 11.9% to 18.8%; none exceeded the 30% threshold.
- Fern Park, Florida was scheduled to close in the first quarter of 2016 following a teach-out. Hartford was scheduled to close in the fourth quarter of 2016.
- The company paid $850,000 under a Massachusetts Attorney General consent judgment and agreed to forgive $165,000 of certain graduate receivables. A Maryland Attorney General subpoena concerning the Columbia campus remained under review.
- Risks include declining enrollment, competition from community colleges and other schools, student-credit losses, regulatory or accreditation actions, loss of Title IV eligibility, debt covenant breaches, high interest expense, asset-sale execution and liquidity constraints.
Most important facts for investors to verify
- Whether the planned divestiture of the 17 Healthcare and Other Professions campuses occurred on the expected terms and generated the anticipated cash proceeds.
- Whether the DOE accepted the company’s calculated 2015 composite score of 1.9 and whether HCM1 requirements were removed or continued.
- Enrollment trends, new student starts, retention, average revenue per student and operating performance in Transportation and Skilled Trades.
- Compliance with the term-loan covenants, required debt repayments and the effect of asset-sale proceeds on debt reduction.
- Availability and timing of the projected $31.7 million of net assets held for sale and the amount restricted for debt repayment.
- Future Title IV, gainful-employment, accreditation and state regulatory outcomes, including the Columbia, Fern Park, Hartford and Philadelphia matters.
- The company’s ability to maintain positive operating cash flow while servicing approximately $58.2 million of debt and substantial lease obligations.