Lincoln Educational Services Corporation — Q1 2015 Form 10-Q Summary
Business context and reporting period
Lincoln Educational Services provides career-oriented post-secondary education through 31 campuses in 15 states. The filing covers the three months ended March 31, 2015. The company reported 13,404 average students during the quarter, compared with 13,943 in the prior-year period.
Operations were reorganized into three reportable segments: Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional. The Transitional segment consists primarily of the Fern Park, Florida campus, which is being taught out and is expected to complete the process by March 2016.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $76.7 million | $79.2 million | Down 3.1% |
| Operating loss | $5.4 million | $8.6 million | Improved $3.2 million |
| Loss from continuing operations | $6.9 million | $10.3 million | Improved $3.4 million |
| Net loss | $6.9 million | $11.1 million | Improved $4.2 million |
| Net loss per share | $0.30 | $0.49 | Improved $0.19 |
| Net cash used in operating activities | $6.3 million | $8.4 million | Improved $2.1 million |
Operating margin improved to negative 7.1% from negative 10.9%. Educational services and facilities expense declined 8.5% to $38.2 million, while selling, general and administrative expense declined 4.6% to $44.0 million. Bad debt expense increased to 4.3% of revenue from 3.9%.
Cash and cash equivalents were $5.2 million at March 31, 2015, compared with $12.3 million at December 31, 2014. Capital expenditures were $0.8 million. Total assets were $176.9 million and stockholders’ equity was $76.7 million.
The company had no borrowings outstanding under its revolving credit facility at quarter-end, compared with $30.0 million at December 31, 2014. Total debt and lease obligations were $35.1 million, including $9.7 million of finance obligations and $25.4 million of capital lease obligations. The facility provides total commitments of up to $20.0 million, but availability for uses other than letters of credit is limited to $12.0 million; outstanding letters of credit totaled $7.1 million.
Material changes versus the prior comparable period
- Revenue decreased $2.5 million, primarily because average student population declined 3.9% and scholarship discounts increased by approximately $0.9 million.
- Transportation and Skilled Trades revenue increased 0.7% to $44.8 million and operating income more than doubled to $5.0 million.
- Healthcare and Other Professions revenue declined 7.6% to $31.3 million, while its operating loss improved modestly to $0.5 million.
- Transitional revenue declined 27.3% to $0.6 million, and its operating loss increased to $0.7 million.
- Corporate expenses declined 6.4% to $9.2 million as a result of restructuring efforts.
- Five Florida training sites ceased operations at December 31, 2014. The prior-year quarter included $0.8 million of revenue and a $0.8 million operating loss from those discontinued operations; no comparable discontinued-operations loss was reported in Q1 2015.
- The company repaid the $30.0 million outstanding under its credit facility on January 3, 2015. The facility was amended and extended to April 5, 2016, with materially higher borrowing margins and unused-commitment fees.
Guidance, outlook, risks and unusual items
Management stated that available liquidity is expected to be sufficient to fund operations for the next twelve months, based on cash on hand, operating cash flow, potential revolver availability, real-estate financing and planned asset sales. Approximately $51.7 million of assets were classified as held for sale and are expected to be sold within one year. The company has no commitments for additional financing, and stated that additional funding may not be available on acceptable terms or at all.
Management expects 2015 capital expenditures of approximately 1% to 3% of revenue. Results are seasonal, with historically lower student populations in the first half of the year and greater reliance on third-quarter starts and the high-school recruiting season.
Key risks include continued enrollment declines, dependence on government-sponsored financial aid programs, changes to Title IV eligibility and funding, regulatory requirements including gainful employment and cohort default-rate rules, student credit quality and bad debt, high fixed facility costs, and the ability to sell held-for-sale assets or obtain additional financing. Title IV programs represented approximately 80% of cash receipts relating to revenue in 2014.
The company maintained a valuation allowance against its deferred tax assets because realization was not considered more likely than not. It also reported a $39.0 million goodwill impairment charge for 2014, although no goodwill or long-lived-asset impairment was recorded in Q1 2015. The company was in compliance with all credit-facility financial covenants at March 31, 2015.
A Massachusetts Attorney General investigation concerning compliance with state consumer protection and finance laws remains pending. Management does not believe currently pending proceedings will have a material adverse effect, but the ultimate outcome is uncertain.
Important facts for investors to verify
- Whether enrollment stabilizes or continues to decline, particularly in Healthcare and Other Professions.
- Progress and realized proceeds from the planned approximately $51.7 million of asset sales.
- Actual revolver availability after the $7.1 million of letters of credit and the facility’s increasingly high interest and commitment fees.
- Compliance with credit-facility covenants, DOE financial-responsibility standards and Title IV requirements.
- Whether operating cash flow turns positive and whether the company can fund lease, debt, capital-expenditure and student-loan commitments.
- Developments involving the high-cost Hartford facility and the Fern Park teach-out.
- Bad debt trends, scholarship discounting and the recoverability of receivables and deferred tax assets.