Lincoln Educational Services Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Lincoln provides career-oriented post-secondary education through 22 schools in 14 states, primarily in transportation and skilled trades, healthcare, hospitality, business and information technology. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Operations were materially affected by COVID-19. The Company shifted instruction to remote learning, placed some students on leave, extended certain programs and gradually reopened all schools beginning in May 2020. No campuses were classified in the Transitional segment at June 30, 2020.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $62.5 million | $63.6 million | $132.5 million | $126.8 million |
| Operating income (loss) | $1.2 million | $(2.1) million | $(0.2) million | $(7.0) million |
| Net income (loss) | $0.8 million | $(3.1) million | $(1.0) million | $(8.5) million |
| Net income (loss) per diluted share | $0.02 | $(0.12) | $(0.06) | $(0.35) |
| Operating margin | 1.9% | (3.3%) | (0.1%) | (5.5%) |
| Net margin | 1.3% | (4.8%) | (0.7%) | (6.8%) |
- Second-quarter revenue declined 1.7%, despite an 11.0% increase in average student population. Six-month revenue increased 4.5%, driven by higher enrollment and student starts.
- Educational services and facilities expense decreased 11.8% in the quarter and 5.4% year to date, reflecting facility closures, rent concessions and lower instructional costs from remote learning.
- Selling, general and administrative expense decreased 2.1% in the quarter but increased 3.0% year to date. Higher bad-debt expense and salaries and benefits partly offset savings in sales, student services and marketing.
- Interest expense declined to $0.3 million in the quarter and $0.7 million year to date, primarily because of lower borrowings and refinancing terms.
- Transportation and Skilled Trades generated $42.9 million of quarterly revenue and $4.9 million of operating income. Healthcare and Other Professions generated $19.6 million of revenue and $2.7 million of operating income.
- Average student population increased 8.8% year to date, while total student starts increased 5.3%. End-of-period population increased 14.0%, or 7.5% excluding students on COVID-19 leave.
Cash flow, balance sheet, debt and liquidity
- Net cash provided by operating activities was $6.5 million for the six months ended June 30, 2020, compared with $10.8 million used in operating activities in the prior year. The 2020 amount included $14.5 million of CARES Act funds; excluding those funds, operating cash flow was approximately $8.0 million negative.
- Cash used in investing activities was $3.0 million, including $3.1 million of capital expenditures. Capital expenditures are expected to approximate 2% of 2020 revenue.
- Cash used in financing activities was $16.2 million, including $27.0 million of borrowing repayments and $11.0 million of new borrowings.
- Cash, cash equivalents and restricted cash totaled $26.0 million at June 30, 2020, including $14.5 million of CARES Act funds. Unrestricted cash and cash equivalents were $23.3 million.
- Credit Facility borrowings totaled $18.8 million before deferred financing fees, compared with $34.8 million at December 31, 2019. The Company repaid the $15.0 million Line of Credit Loan in January 2020 and terminated that facility in April.
- Management reported net cash of $7.8 million after debt, but net debt of $6.6 million excluding CARES Act cash. Approximately $21.0 million remained available under the Credit Facility. The Company was in compliance with debt covenants at June 30, 2020.
- Operating lease liabilities totaled approximately $59.4 million on a present-value basis. The Company withheld or deferred approximately $1.2 million of landlord payments and recognized $0.5 million of negative lease expense from rent abatements during the quarter.
- Stockholders’ equity was $42.1 million at June 30, 2020. Series A convertible preferred stock had a carrying amount of $12.0 million and an initial dividend rate of 9.6%; approximately $0.8 million of cumulative preferred dividends were undeclared.
Material changes versus the prior comparable periods
- The Company moved from a quarterly operating loss of $2.1 million in 2019 to operating income of $1.2 million in 2020, and from a net loss of $3.1 million to net income of $0.8 million.
- For the first six months, the operating loss narrowed from $7.0 million to $0.2 million and the net loss narrowed from $8.5 million to $1.0 million.
- Revenue increased year to date but declined in the second quarter because COVID-19 deferred approximately $0.9 million of revenue related to restricted externships and labs and reduced non-tuition revenue by approximately $0.8 million from dorm and meal credits.
- Accounts receivable increased to $27.9 million from $20.7 million at year-end, while the allowance for doubtful accounts increased to $20.7 million from $18.1 million.
- Unearned tuition decreased to $17.6 million from $23.4 million at December 31, 2019.
- The Company adopted the 2020 Incentive Compensation Plan, authorizing 2.0 million shares plus remaining shares under the prior plan; 111,376 restricted shares had been issued to non-employee directors by June 30, 2020.
Guidance, outlook, management commentary and risks
- Management expects most of the 696 students on COVID-19 leave as of June 30, 2020 to return to school or externships by year-end, with revenue recognition resuming when students return. Four programs were extended because they could not be substantially delivered remotely.
- Management expects the majority of deferred revenue to be earned in the second half of 2020 as schools and externship sites reopen. The filing does not provide formal full-year revenue or earnings guidance.
- The Company believes available cash and borrowing capacity should fund operations for at least the next twelve months and the foreseeable future, but warns that a materially adverse evolution of COVID-19 could significantly impair liquidity.
- The Department of Education allocated $27.4 million of CARES Act funds. The Company received $13.7 million for student grants and had distributed $11.1 million by June 30, 2020; it also received $13.2 million of the institutional installment by that date. Improper use or accounting could require repayment or result in sanctions.
- Student financial hardship may increase forbearance, delinquency, defaults and bad-debt expense on institutional student loans. Title IV programs represented approximately 78% of 2019 cash receipts related to revenue, making regulatory eligibility and funding material risks.
- Other risks include renewed campus closures, inability to deliver hands-on instruction, enrollment weakness, labor and technology disruptions, changing Department of Education rules, lease obligations, debt covenant compliance, and possible future asset impairments.
- The Company deferred $1.5 million of FICA payroll taxes under the CARES Act, with repayment scheduled in 2021 and 2022. It also had $71.6 million of outstanding loan commitments to students and approximately $11.8 million of surety bonds.
Most important facts for investors to verify
- Whether students on leave and deferred programs return as expected and whether the approximately $0.9 million of deferred revenue is realized in the second half of 2020.
- The sustainability of enrollment growth and student starts after the COVID-19 reopening period, particularly excluding students temporarily on leave.
- Collections, allowance adequacy and bad-debt expense given higher accounts receivable and expected student financial hardship.
- The availability and permitted use of CARES Act funds, including the $2.6 million of student funds remaining to be distributed and the risk of repayment or sanctions.
- Liquidity excluding restricted government funds, remaining Credit Facility availability, debt covenant compliance and the ability to meet lease, debt and student-loan commitments.
- Exposure to renewed COVID-19 disruptions, Department of Education regulatory changes and the Company’s continued eligibility for Title IV funding.