Lincoln Educational Services Corporation — Q3 2013 Form 10-Q Summary
Business context and reporting period
The company provides career-oriented post-secondary education in automotive technology, health sciences, skilled trades, hospitality services, and business and information technology. As of September 30, 2013, it operated 38 campuses and five training sites across 17 states, serving 16,105 diploma- and degree-program students and 467 short-program students.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company approved the closure of five campuses in Ohio and Kentucky, stopped admitting new students at those locations, and expected operations to cease by December 31, 2013.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $88.5 million | $102.1 million | $263.8 million | $300.2 million |
| Operating income (loss) | $(2.7) million | $1.8 million | $(28.2) million | $(17.5) million |
| Continuing operations income (loss) | $(2.3) million | $1.1 million | $(19.1) million | $(14.9) million |
| Net income (loss) | $(2.3) million | $(1.5) million | $(19.1) million | $(25.2) million |
| Net loss per share | $(0.10) | $(0.07) | $(0.85) | $(1.14) |
| Operating margin | (3.0%) | 1.8% | (10.7%) | (5.8%) |
Q3 revenue declined 13.3%, while nine-month revenue declined 12.1%. Excluding the closing campuses, average student population fell 11.3% in the quarter and 12.6% year to date; average revenue per student increased 2.1% and 2.7%, respectively, primarily due to tuition increases.
Educational services and facilities expense declined in dollars but increased to 52.9% of quarterly revenue from 48.4% and to 52.3% year to date from 48.5%, reflecting the high fixed-cost structure. Selling, general and administrative expense decreased to $44.5 million in Q3 and $147.3 million year to date, but increased as a percentage of revenue to 50.2% and 55.8%, respectively. Bad debt expense improved to 4.5% of quarterly revenue and 4.4% year to date, compared with 6.0% and 5.2% in the prior-year periods.
Cash and cash equivalents were $6.3 million at September 30, 2013, compared with $61.7 million at December 31, 2012. Total assets were $290.3 million, and stockholders’ equity was $176.4 million. Accounts receivable increased to $26.0 million from $17.4 million, while prepaid income taxes and income taxes receivable increased to $18.5 million from $7.1 million.
Net cash used in operating activities was $9.3 million for the first nine months of 2013, compared with $8.1 million provided in the prior-year period. Investing cash outflow was $2.8 million, including $3.5 million of capital expenditures. Financing cash outflow was $43.3 million, primarily due to repayment of $37.5 million of credit-facility borrowings and $5.0 million of dividends.
Total debt and lease obligations were $35.7 million at September 30, 2013, compared with $73.5 million at December 31, 2012. The company had no outstanding revolving credit borrowings at quarter-end, approximately $54.7 million of net availability under the amended facility, and $5.3 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Revenue and enrollment continued to decline, primarily because of the loss of ability-to-benefit students, the discontinuation of fully online enrollment, economic conditions, and student reluctance to incur additional debt.
- Operating performance deteriorated despite lower expenses because costs did not decline proportionately with revenue. The nine-month operating loss increased by $10.7 million.
- Net loss improved year to date because 2012 included $10.3 million of loss from discontinued operations, while 2013 had no such reported loss for the previously closed campuses.
- 2013 included $6.2 million of goodwill and long-lived-asset impairment charges and $1.2 million of school-closing costs. No impairment was recorded in the third quarter.
- The amended credit agreement reduced total availability from $85 million to $60 million and revised certain covenant calculations. The company stated that it was in compliance with all financial covenants.
- The company paid a quarterly dividend of $0.07 per share, or approximately $5.0 million for the first nine months.
Guidance, outlook, risks, contingencies and unusual items
Management stated that student starts for continuing operations declined 5.2% in Q3 2013 versus Q3 2012, but believed starts had begun to stabilize, particularly in automotive and skilled-trades programs. Management continued to face challenges in other programs, financing gaps, and students’ inability or unwillingness to assume debt.
The five closing campuses were expected to generate approximately $24.0 million of 2013 revenue and 1,800 student starts. Management expected approximately $12.5 million of additional pre-tax closure expenses after the announcement date, partly offset by potential subleases and student transfers. Expected fiscal 2013 losses attributable to these campuses, including closure costs, were $(0.60) to $(0.65) per share.
Management expected negative operating cash flow to reverse in the near future and believed cash, operating cash flow, and available credit would fund operations and obligations beyond the next 12 months. The filing cautions that additional financing may not be available on favorable terms, or at all. Planned 2013 capital expenditures were expected to equal 2% to 3% of revenue.
Title IV programs represented approximately 81% of 2012 cash receipts related to revenue. Risks include changes to Title IV eligibility, the 90/10 rule, student-loan cohort default rates, gainful-employment regulations, accreditation, regulatory investigations, enrollment trends, student receivable collectability, and further asset impairments.
For 2010 three-year cohort default rates, six institutions had rates of at least 30%, the weighted average was 31.4%, and four institutions had exceeded the 30% threshold for two consecutive years. The Fern Park, Florida campus was subject to an accreditation show-cause directive; continued accreditation was stated through February 28, 2014, with potential withdrawal posing a risk to Title IV eligibility and campus operations.
The company reported $28.4 million of net deferred tax assets, excluding indefinite-lived intangibles, and had not recorded a valuation allowance. Continued losses could require a valuation allowance and materially affect results. The Massachusetts Attorney General also issued civil investigative demands concerning compliance with state consumer-protection and finance laws; the company stated that it was cooperating.
Most important facts for investors to verify
- Whether enrollment and student starts stabilize and whether operating cash flow turns positive as management expects.
- The timing and total cash cost of closing the five Ohio and Kentucky campuses, including the projected $12.5 million of additional pre-tax expenses.
- Compliance with the amended credit agreement’s financial, cohort-default-rate, and other covenants through its April 2015 maturity.
- The accreditation outcome for the Fern Park campus and its continued eligibility for Title IV funding.
- Exposure to Title IV concentration, 90/10 compliance, cohort default rates, and final gainful-employment regulations.
- Recoverability of the $28.4 million deferred tax asset and the $62.5 million goodwill balance if operating losses continue.
- Whether the company can maintain dividends and meet contractual obligations given only $6.3 million of cash and negative year-to-date operating cash flow.