Lincoln Educational Services Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Lincoln Educational Services Corporation provides career-oriented post-secondary education in automotive technology, health sciences, skilled trades, hospitality services, and business and information technology. As of March 31, 2013, it operated 38 schools and five training sites in 17 states, with 15,872 diploma and degree students and 279 short-program students.
This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Seven campuses ceased operations on December 31, 2012, and their prior-year results are presented as discontinued operations.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $90.1 million | $101.2 million | Down 10.9% |
| Operating loss | $11.1 million | $2.6 million | Loss increased |
| Loss from continuing operations | $7.5 million | $2.2 million | Loss increased |
| Net loss | $7.5 million | $3.1 million | Loss increased |
| Net loss per share | $0.33 | $0.14 | Loss increased |
| Operating margin | (12.3%) | (2.6%) | Down 9.7 percentage points |
| Net cash from operating activities | $(4.2) million | $5.7 million | Declined $9.9 million |
Revenue declined primarily because average student population fell 13.6% to 16,317, partially offset by a 3.0% increase in average revenue per student. Student starts declined 25.7% year over year. Educational services and facilities expense decreased 5.7% to $46.2 million, while selling, general and administrative expense decreased 2.9% to $53.2 million; both expenses increased as a percentage of revenue because of the lower enrollment base and relatively high fixed costs.
The company recorded a $1.7 million pre-tax impairment charge for leasehold improvements at two campuses. Interest expense was $1.1 million, compared with $1.3 million in the prior-year quarter. An income tax benefit of $4.7 million produced a 38.4% effective tax benefit rate.
Cash and cash equivalents were $17.3 million at March 31, 2013, compared with $61.7 million at December 31, 2012. The decrease primarily reflected repayment of $37.5 million under the revolving credit facility on January 3, 2013. Capital expenditures were $0.6 million, compared with $2.7 million in Q1 2012. Total debt and lease obligations were $35.9 million, including $0.4 million of current maturities.
Material changes versus the prior comparable period
- Revenue decreased $11.1 million, or 10.9%, as enrollment contracted.
- Operating loss widened by $8.4 million, driven by lower revenue, unfavorable operating leverage, and the $1.7 million impairment charge.
- Net loss increased $4.4 million; the prior-year period included a $0.9 million loss from discontinued operations, while Q1 2013 had no discontinued-operations loss.
- Operating cash flow shifted from a $5.7 million source to a $4.2 million use, reflecting the lower earnings level and working-capital changes.
- Revolving-credit borrowings declined from $37.5 million at December 31, 2012 to zero at March 31, 2013.
- Stockholders’ equity decreased to $190.2 million from $198.5 million, primarily due to the quarterly net loss and a $1.7 million cash dividend.
Guidance, outlook, risks, contingencies and unusual items
Management expected 2013 capital expenditures to range from 2% to 3% of revenue and stated that cash, operating cash flow, and available credit were expected to fund operations and planned capital expenditures through 2013. The company had approximately $79.7 million of net borrowing capacity under its $85 million credit facility, including a $19.7 million letter-of-credit sublimit, and had $5.3 million of outstanding letters of credit. The facility matures April 5, 2015; the company was in compliance with its financial covenants at March 31, 2013.
Management attributed enrollment deterioration to the elimination of federal aid eligibility for newly enrolling ability-to-benefit students, the decision to stop enrolling fully online students, regulatory requirements related to student outcomes, 90/10 compliance and cohort default rates, and economic conditions that made prospective students more reluctant to incur debt. The company expected seasonal enrollment patterns, with lower first-half enrollment and larger starts generally occurring in the second half of the year.
Regulatory exposure is significant because Title IV programs represented approximately 81% of 2012 cash receipts related to revenue. For 2012, institutional 90/10 percentages ranged from 72.3% to 93.0%; the Dayton institution exceeded 90%, although management anticipated compliance in 2013. Draft 2011 two-year cohort default rates ranged from 13.5% to 25.2%, and draft 2010 three-year rates ranged from 19.5% to 38.9%; the company planned to appeal the draft rates. Several Department of Education program reviews were ongoing or recently completed.
Other risks include potential changes to Title IV eligibility, 90/10 compliance, cohort default rates, gainful-employment requirements, student bad-debt collections, enrollment and retention trends, fixed operating costs, long-term lease obligations, and possible additional asset impairments. Management stated that pending litigation and claims were not expected to have a material adverse effect, but actual outcomes could differ from estimates.
Facts investors should verify
- Whether enrollment and student starts stabilized or recovered after the 25.7% decline in Q1 2013.
- Whether the Dayton institution and other campuses remained compliant with the 90/10 rule.
- Final Department of Education cohort default rates and the outcome of the company’s planned appeals.
- The results and any required remediation arising from Department of Education program reviews.
- Whether operating cash flow improved sufficiently to support liquidity, dividends, capital expenditures, and contractual obligations.
- Potential additional impairment charges or effects from discontinued campuses and ongoing regulatory changes.
- The company’s continuing reliance on Title IV funding and its ability to maintain access to the revolving credit facility.