Lincoln Educational Services Corporation — 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Lincoln Educational Services provides career-oriented post-secondary education through 22 schools in 14 states, offering transportation and skilled trades, healthcare, hospitality, business and information technology programs. The company reported results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Enrollment at September 30, 2019 was 12,015 students, up 2.4% from 11,732.
The company operates through Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional segments. The Lincoln College of New England campus was fully taught out and closed at December 31, 2018; no campuses remained in the Transitional segment at September 30, 2019.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30, 2019 | Three Months Ended Sept. 30, 2018 | Nine Months Ended Sept. 30, 2019 | Nine Months Ended Sept. 30, 2018 |
|---|---|---|---|---|
| Revenue | $72.6 million | $70.1 million | $199.4 million | $193.1 million |
| Operating income (loss) | $2.1 million | $0.1 million | $(4.8) million | $(9.7) million |
| Net income (loss) | $1.3 million | $(0.6) million | $(7.2) million | $(11.6) million |
| Net income (loss) per diluted share | $0.05 | $(0.02) | $(0.29) | $(0.47) |
| Operating margin | 3.0% | 0.1% | (2.4)% | (5.0)% |
| Net margin | 1.8% | (0.9)% | (3.6)% | (6.0)% |
Educational services and facilities expense was $33.2 million in the quarter and $92.9 million year to date. Selling, general and administrative expense was $37.5 million in the quarter and $111.5 million year to date. The allowance-related provision for doubtful accounts was $15.2 million year to date, reflecting higher student population and somewhat weaker historical repayment rates.
- Transportation and Skilled Trades revenue increased 3.2% in the quarter and 3.8% year to date; operating income increased to $6.8 million and $11.1 million, respectively.
- Healthcare and Other Professions revenue increased 9.3% in the quarter and 11.2% year to date; operating income increased to $1.4 million and $4.2 million, respectively.
- Average student population increased 3.3% in both the quarter and year-to-date periods. Total student starts increased 2.7% in the quarter and 2.6% year to date.
Cash Flow, Liquidity, Debt and Balance Sheet
- Net cash used in operating activities was $4.9 million for the nine months ended September 30, 2019, compared with $5.8 million in 2018.
- Net cash used in investing activities was $3.1 million, including $3.3 million of capital expenditures.
- Net cash used in financing activities was $22.2 million, principally reflecting $27.2 million of debt repayments and $5.0 million of borrowings.
- Cash, cash equivalents and restricted cash totaled $15.8 million at September 30, 2019, including $4.0 million of restricted cash. Unrestricted cash and cash equivalents were $11.8 million.
- Total debt, net of deferred financing fees, was $26.9 million, compared with $48.8 million at December 31, 2018. The company reported net debt of $11.4 million at September 30, 2019, compared with $3.4 million at year-end 2018.
- Operating lease right-of-use assets were $38.8 million and operating lease liabilities totaled $45.0 million at September 30, 2019 following adoption of the new lease accounting standard.
- Total contractual cash obligations were $93.5 million, comprising $27.1 million of debt and $66.3 million of operating lease obligations.
- Accounts receivable, net of allowances, were $22.1 million, with a total allowance for doubtful accounts of $17.3 million for current receivables and $2.2 million for noncurrent receivables.
At September 30, 2019, the company was in compliance with its credit agreement covenants. The existing facility had $27.1 million outstanding and $4.0 million of letters of credit. Borrowings bore interest at 7.85% at quarter-end.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 3.6%, while year-to-date revenue increased 3.3%; excluding the discontinued Transitional segment, increases were 4.8% and 5.9%, respectively.
- The company moved from a small quarterly operating profit in 2018 to $2.1 million of operating income in 2019 and reduced the year-to-date operating loss by $4.9 million.
- Quarterly net income improved from a $0.6 million loss to $1.3 million of income; the year-to-date net loss narrowed by $4.4 million.
- Educational services and facilities expense declined as a percentage of revenue to 45.7% from 49.4% in the quarter and to 46.6% from 49.3% year to date.
- SG&A increased 3.8% in the quarter and 3.2% year to date, primarily because of higher bad debt, salaries and benefits, and sales and marketing costs.
- Interest expense increased to $2.1 million year to date from $1.7 million, reflecting interest rates, debt balances and the write-off of certain deferred finance fees.
Outlook, Commentary, Risks and Unusual Items
Management stated that recent enrollment growth continued despite low unemployment and attributed the improvement to marketing and admissions processes, industry partnerships and demand for shorter, career-focused programs. The company expects sales and marketing investments to support continued start growth over the next several quarters. Capital expenditures were expected to approximate 2% of 2019 revenue.
Management believes available cash sources will be sufficient to fund operations for the next twelve months and the foreseeable future, while continuing to align costs with student population. Results remain seasonal, with larger starts generally occurring in the third quarter and expenses that do not decline proportionately when enrollment falls.
- The company is highly dependent on Title IV federal student aid, which represented approximately 78% of cash receipts relating to revenue in 2018. Changes to eligibility, disbursement timing, regulatory requirements or student access to financing could materially affect operations.
- Bad debt and repayment rates remain important risks. The company recorded a full valuation allowance against most deferred tax assets because of cumulative losses.
- The New Jersey Attorney General is continuing an investigation and has requested additional records relating to prior Massachusetts Attorney General matters. Management does not believe pending proceedings will have a material adverse effect, but the ultimate outcome is uncertain.
- The Department of Education issued preliminary audit determination letters for the Columbia and Indianapolis institutions and requested additional student-file reviews. Potential liabilities or sanctions have not yet been determined.
- The Department of Education asserted $62,848 of liabilities related to federal loan discharges for former Lincoln College of New England students. Additional liabilities could arise from future closed-school loan discharges, although timing and amount cannot be predicted.
- New borrower-defense and financial-responsibility regulations generally become effective July 1, 2020. Management was evaluating their potential impact.
Subsequent to quarter-end, on November 14, 2019, the company raised $12.7 million of gross proceeds through Series A Convertible Preferred Stock and entered into a new $60 million senior secured credit facility. The new facility replaced the prior facility and includes a $20 million term loan, a $10 million delayed-draw term loan, a $15 million revolving line and a $15 million non-restoring line of credit. The preferred stock carries an initial 9.6% annual dividend, payable in cash or additional conversion shares at the company’s option, and includes conversion, redemption, voting and board-designation rights.
Important Facts for Investors to Verify
- Whether enrollment and student-start growth continues and converts into sustainable cash flow and profitability.
- The magnitude and collectability of student accounts receivable, including the $17.3 million current allowance for doubtful accounts.
- Compliance with the new credit facility’s leverage, fixed-charge coverage, tangible-net-worth and minimum cash-balance covenants.
- The company’s ability to meet debt, lease and other contractual obligations while operating cash flow remains negative.
- The financial effect of the 9.6% preferred-stock dividend, potential payment in additional shares, conversion dilution and preferred-holder governance rights.
- Results of the Department of Education audits, potential closed-school or borrower-defense liabilities, and the continuing New Jersey Attorney General investigation.
- The effect of regulatory changes governing Title IV funding, borrower defense, financial responsibility and student loan eligibility.