Lincoln Educational Services Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 10, 2019. Lincoln operated 22 career-oriented post-secondary schools in 14 states, serving 10,680 students at quarter-end. Reportable segments were Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $63.3 million | $61.9 million | +2.2% |
| Operating loss | $(4.9) million | $(6.3) million | Improved $1.4 million |
| Net loss | $(5.5) million | $(6.9) million | Improved $1.4 million |
| Basic and diluted loss per share | $(0.22) | $(0.28) | Improved $0.06 |
| Net cash used in operating activities | $(10.9) million | $(10.0) million | Use increased $0.9 million |
| Capital expenditures | $0.6 million | $0.5 million | Use increased $0.2 million |
Revenue grew despite the completion of the Lincoln College of New England teach-out. Excluding the Transitional segment, revenue increased 6.4%. Operating margin improved to negative 7.7% from negative 10.1%, while net margin improved to negative 8.7% from negative 11.1%.
- Transportation and Skilled Trades revenue increased 3.7% to $44.3 million; operating income increased to $1.8 million from $0.7 million.
- Healthcare and Other Professions revenue increased 13.1% to $18.9 million; operating income increased to $1.0 million from $0.4 million.
- Corporate expense increased to $7.7 million from $7.2 million, primarily due to costs related to strategic initiatives.
- Student starts increased 2.6% overall, or 5.6% excluding Transitional. Average student population increased 3.7% to 10,589.
Liquidity, Debt and Balance Sheet
- Cash, cash equivalents and restricted cash totaled $10.2 million at March 31, 2019, including $4.5 million of restricted cash; unrestricted cash and cash equivalents were $5.7 million.
- Net debt was $15.0 million, compared with $3.4 million at December 31, 2018. Gross credit facility and term-loan borrowings were $25.2 million, net of $0.6 million of deferred financing fees.
- Total debt declined from $49.3 million at December 31, 2018, primarily because of $26.6 million of borrowing repayments. The company also borrowed $2.5 million under Facility 2.
- Current maturities of debt were $3.6 million. The term loan matures March 31, 2024; the $2.5 million uncollateralized Facility 2 borrowing is due November 1, 2019. Facility 3 matures May 31, 2019 and Facility 2 matures April 30, 2020.
- Operating lease right-of-use assets and lease liabilities were recognized upon adoption of ASC 842. The March 31, 2019 operating lease liability totaled approximately $45.9 million on a present-value basis.
- Total contractual obligations were $95.3 million, including $25.2 million of debt and $70.1 million of operating lease obligations.
- Management stated that expected cash sources should fund operations for the next twelve months and the foreseeable future, while acknowledging continuing operating losses and industry challenges.
Material Changes and Unusual Items
- The March 6, 2019 Fourth Amendment converted Facility 1 into a $22.7 million term loan, modified EBITDA covenants, eliminated the minimum funded-debt-to-adjusted-EBITDA covenant and added a maximum funded-debt-to-adjusted-EBITDA covenant.
- The company adopted ASC 842 on January 1, 2019, adding a $39.3 million operating lease right-of-use asset at March 31, 2019 and related lease liabilities.
- Lincoln College of New England ceased operations on December 31, 2018 after completing its teach-out; no campuses were in the Transitional segment during the quarter.
- Accounts receivable increased to $22.6 million from $18.7 million at year-end, while unearned tuition declined to $18.3 million from $22.5 million.
- The company maintained a full valuation allowance against deferred tax assets and recognized a minimal tax provision despite its pretax loss.
- No long-lived asset or goodwill impairment was recorded during the quarter.
Outlook, Risks and Contingencies
Management reported improving enrollment trends, including four consecutive quarters of start growth, but expects seasonal volatility, with historically lower first-half enrollment and greater dependence on the high-school recruiting season for second-half growth. Expenses are relatively fixed and may not decline proportionately if enrollment or revenue underperforms.
- The company is highly dependent on federal Title IV financial aid, which represented approximately 78% of cash receipts relating to revenue in 2018. Changes to eligibility, disbursement timing, gainful-employment rules, borrower-defense regulations, the 90/10 rule or cohort-default requirements could materially affect operations.
- The Department of Education’s borrower-defense regulations and negotiated rulemaking remained subject to further changes. The company could not predict the timing or impact of final regulations.
- The Department of Education stated that it could not calculate 2019 gainful-employment rates because its data-sharing memorandum with the Social Security Administration had expired.
- The New Jersey Attorney General issued a supplemental subpoena concerning prior matters, and the company was preparing a response and cooperating. The Colorado Department of Law also initiated a compliance examination of a subsidiary.
- Management stated that it was in compliance with credit agreement covenants at March 31, 2019. Borrowings were secured by substantially all personal property and mortgages on specified real estate.
- Outstanding letters of credit totaled $4.5 million, and the company had approximately $12.7 million of surety bonds.
Investor Verification Points
- Verify whether enrollment and student-start growth continues, particularly in the high-school recruiting season and the Healthcare and Other Professions segment.
- Monitor operating cash burn, accounts receivable collections, unrestricted cash and the availability or renewal of credit facilities approaching maturity.
- Review compliance with adjusted EBITDA and maximum leverage covenants, including the November 1, 2019 repayment requirement for uncollateralized Facility 2 borrowings.
- Assess the company’s ability to fund approximately $20.999 million of contractual obligations due within one year, including debt and operating leases.
- Track Title IV funding, borrower-defense and gainful-employment rule changes, as well as the New Jersey and Colorado regulatory matters.
- Evaluate whether the stated liquidity outlook remains supportable given recurring losses, negative operating cash flow and substantial lease obligations.