Lincoln Educational Services Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013, filed August 9, 2013. Lincoln provides career-oriented post-secondary education through 38 schools and five training sites in 17 states, primarily in automotive technology, health sciences, skilled trades, hospitality services, and business and information technology. Enrollment at June 30, 2013 was 14,460 students in diploma and degree programs and 280 students in short programs.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $85.2 million, down 12.2% | $175.3 million, down 11.5% |
| Operating loss | $14.4 million | $25.5 million |
| Loss from continuing operations | $9.4 million | $16.9 million |
| Net loss | $9.4 million, or $0.42 per share | $16.9 million, or $0.75 per share |
| Operating margin | (16.8%) | (14.5%) |
| Continuing-operations net margin | (11.0%) | (9.6%) |
| Operating cash flow | Not separately provided | $(14.3) million |
Prior-year net loss was $20.7 million for the quarter and $23.8 million for the first six months, including discontinued-operation losses of $6.9 million and $7.7 million, respectively. Interest expense was $1.2 million in the second quarter and $2.3 million year to date. Income-tax benefits were $6.2 million and $10.9 million, respectively.
Cash and cash equivalents declined to $4.3 million at June 30, 2013 from $61.7 million at December 31, 2012. The decrease primarily reflected repayment of $37.5 million of revolving-credit borrowings, negative operating cash flow, capital expenditures of $1.9 million, and dividends of $3.3 million.
Total debt and lease obligations were $35.8 million, including $35.4 million noncurrent, compared with $73.5 million at December 31, 2012. The revolving credit facility had no borrowings at June 30, 2013, approximately $54.7 million of net availability, and $5.3 million of outstanding letters of credit. In July 2013, the Company borrowed $5.0 million for working capital. The amended facility reduced total commitments from $85 million to $60 million and matures April 5, 2015. Management reported compliance with all financial covenants.
Material changes versus the prior comparable period
- Average student population declined 15.4% in the quarter and 14.5% year to date; average revenue per student increased 3.9% and 3.4%, respectively.
- Educational services and facilities expense fell 5.1% for the quarter and 5.4% year to date, but increased as a percentage of revenue to 52.6% and 51.9% from 48.6% and 48.5%.
- Selling, general and administrative expense declined 5.3% for the quarter and 4.1% year to date, while increasing as a percentage of revenue to 58.0% and 58.6%.
- Bad-debt expense improved to 4.7% of quarterly revenue and 4.3% year-to-date revenue, compared with 5.9% and 4.8% in the prior-year periods.
- Impairment charges decreased to $4.5 million for the quarter and $6.2 million year to date from $23.7 million in the prior-year quarter and year-to-date period, respectively, based on the filing’s continuing and discontinued-operation presentation.
- Operating cash flow deteriorated from $4.0 million provided in the first half of 2012 to $14.3 million used in the first half of 2013.
Guidance, outlook, risks, contingencies, and unusual items
On June 18, 2013, the Company approved closure of four Ohio campuses and one Kentucky campus. New admissions stopped, and operations were expected to cease by December 31, 2013. The campuses generated $7.3 million of revenue and an $8.1 million operating loss in the first half of 2013, including $2.3 million of impairment charges. Management expected approximately $12.5 million of additional pretax closure expenses and fiscal-year 2013 losses attributable to these campuses of approximately $0.60 to $0.65 per share. Potential offsets include property subleasing and student transfers.
The Company stated that student-start declines continued but that the rate of decline had improved after excluding the effects of discontinued online enrollment, the elimination of new ATB students, and the campus closures. Management observed stabilization in automotive and skilled-trade programs but continued challenges in other programs, financing gaps, and students’ reluctance or inability to incur additional debt.
Capital expenditures were expected to be approximately 2% to 3% of 2013 revenue. Management believed cash from operations, existing cash, and available credit would meet operating and capital needs beyond the next twelve months, although first-half operating cash flow was negative.
- Title IV programs represented approximately 81% of 2012 cash receipts relating to revenue, creating substantial exposure to changes in federal funding, eligibility, the 90/10 rule, cohort default rates, and other Department of Education requirements.
- For 2012, institutional 90/10 percentages ranged from 72.3% to 93.0%; the Dayton institution was at 93.0% and was scheduled to close.
- Draft 2011 two-year cohort default rates ranged from 13.5% to 25.1%, and draft 2010 three-year rates ranged from 19.5% to 38.9%; the Company appealed all draft rates.
- Goodwill was $62.5 million, or 21.8% of total assets, and remained exposed to further impairment from operating losses, enrollment declines, regulatory changes, or weaker projected cash flows.
- Outstanding student loan commitments were $33.4 million, or $24.2 million net of interest through maturity.
- The Massachusetts Attorney General issued Civil Investigative Demands concerning compliance with state consumer-protection and finance laws; the Company stated it was cooperating.
- Management reported no pending legal proceeding expected to have a material adverse effect, but actual outcomes of investigations, claims, and contingencies could differ from current estimates.
Most important facts for investors to verify
- Whether enrollment and student starts stabilize during the second half of 2013 and whether seasonal recruiting meets management expectations.
- The timing, cash cost, and accounting treatment of the five-campus closure, including the expected $12.5 million of additional pretax expenses.
- Liquidity after the July 2013 $5.0 million borrowing, including compliance with amended credit-facility covenants and the April 2015 maturity.
- Final Department of Education determinations on 90/10 compliance, cohort default rates, Title IV eligibility, and related credit-facility consequences.
- Whether further goodwill or long-lived-asset impairments are required given continuing losses and reduced student populations.
- The resolution and potential financial or regulatory impact of the Massachusetts Attorney General investigation.