LINCOLN EDUCATIONAL SERVICES CORP quarterly report, Q3 FY2020

Lincoln Educational Services Corporation — Q3 2020 Form 10-Q Summary

Business Context and Reporting Period

Lincoln 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 filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.

All schools had reopened by September 30, 2020 following phased COVID-19 closures. Programs continued to use a combination of online instruction and in-person laboratory training.

Financial Performance and Key Metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Revenue	$78.8 million	$72.6 million	$211.3 million	$199.4 million
Operating income (loss)	$3.8 million	$2.1 million	$3.7 million	$(4.8) million
Operating margin	4.8%	3.0%	1.7%	(2.4)%
Net income (loss)	$3.5 million	$1.3 million	$2.5 million	$(7.2) million
Income available to common shareholders	$2.4 million	$1.3 million	$1.5 million	$(7.2) million
Diluted EPS	$0.08	$0.05	$0.05	$(0.29)
Net cash provided by operating activities	Not separately provided	Not separately provided	$10.2 million	$(4.9) million

Q3 revenue increased 8.5%, driven primarily by an 8.1% increase in average student population and a 15.3% increase in student starts. Nine-month revenue increased 6.0%, supported by a 5.9% increase in average population and a 9.8% increase in starts.

Q3 educational services and facilities expense increased 3.1% to $34.3 million, while selling, general and administrative expense increased 8.5% to $40.7 million. The latter increase reflected higher bad-debt expense and marketing investment, partly offset by lower sales and student-services costs. Nine-month bad-debt expense included a $21.7 million provision, compared with $15.2 million in the prior-year period.

Accounts receivable increased to $33.6 million at September 30, 2020 from $20.7 million at December 31, 2019, while the allowance for doubtful accounts increased to $24.5 million from $18.1 million.

Liquidity, Debt and Balance Sheet

Cash, cash equivalents and restricted cash totaled $27.6 million at September 30, 2020, including $11.5 million of CARES Act funds.
Management reported net cash of $9.9 million after deducting credit-facility borrowings; excluding CARES Act deposits, the company reported net debt of $1.5 million.
The company had approximately $21.0 million of additional borrowing capacity under its credit facility.
Credit-facility principal outstanding was $18.3 million, compared with $34.8 million at December 31, 2019. Current maturities were $2.0 million.
Total assets were $205.8 million and total liabilities were $148.5 million at September 30, 2020.
Operating lease liabilities totaled approximately $63.6 million on a present-value basis. Total contractual cash obligations were $111.8 million, including $90.2 million of operating lease payments.
The company was in compliance with all debt covenants at September 30, 2020.

Material Changes Versus the Prior Comparable Period

Revenue increased $6.2 million in Q3 and $11.9 million for the first nine months.
Operating results improved materially, with nine-month operating income of $3.7 million versus a $4.8 million operating loss in 2019.
Transportation and Skilled Trades Q3 revenue increased 7.9% and segment operating income increased to $9.1 million from $6.8 million.
Healthcare and Other Professions Q3 revenue increased 10.1% and segment operating income increased to $1.7 million from $1.4 million.
Nine-month operating income improved in both operating segments, but corporate expenses increased to $21.6 million from $20.1 million.
Net interest expense declined to $0.3 million in Q3 and $1.0 million for the first nine months, primarily due to refinancing and lower debt balances.
Operating cash flow improved to $10.2 million from an operating cash outflow of $4.9 million, although management stated that operating cash flow excluding CARES Act funds would have been an outflow of approximately $1.2 million.
The company paid a $1.1 million cash dividend on its Series A convertible preferred stock. Common stock dividends remained discontinued.

Guidance, Outlook, Risks and Unusual Items

Management stated that available cash sources should fund operations for the next twelve months and the foreseeable future, but warned that a significant worsening of COVID-19 could materially adversely affect liquidity.
COVID-19 caused transitions to remote learning, delayed externships and laboratory work, reversed certain dormitory and meal-plan charges, increased bad-debt risk and deferred approximately $0.4 million of revenue into the fourth quarter.
Students on COVID-related leave declined to 104 at September 30, 2020 from nearly 700 at June 30, 2020. Management expected most affected students to return or complete externships by year-end.
The Department of Education allocated $27.4 million of CARES Act higher-education relief. The company received $13.7 million for student grants and $13.7 million for institutional costs and additional student grants. Unused or improperly documented funds may have to be returned or could result in sanctions.
The company deferred $3.0 million of FICA payroll taxes, with repayment scheduled in 2021 and 2022.
Management identified increased student financial hardship and potential higher forbearance, delinquency and default rates on institutional student loans.
The company’s recalculated 2019 Department of Education composite score was 1.3, but the final score remained subject to Department determination. A score below 1.0 could require additional financial protection or other restrictions for Title IV participation.
The company received final audit determination letters concerning potential closed-school loan-discharge liabilities. The ultimate amount and timing remained uncertain, and the company was pursuing reductions and retained appeal rights.
No material goodwill or long-lived-asset impairment was identified during the period, but future adverse changes in cash flows or market assumptions could result in impairment.
On November 10, 2020, the credit agreement was amended to extend delayed-draw availability to May 31, 2022 and increase the permitted preferred-stock dividend limit from $1.7 million to $2.3 million during the initial 24-month period.

Important Facts for Investors to Verify

Whether student starts, enrollment and revenue growth continue after the temporary COVID-19 reopening benefit.
Collections performance, accounts-receivable aging and the adequacy of the $24.5 million allowance for doubtful accounts.
The extent to which operating cash flow depends on CARES Act funds and whether all relief funds satisfy Department of Education requirements.
The Department of Education’s final composite-score determination and any resulting financial-protection requirements.
The potential exposure from closed-school loan discharges and related administrative appeals.
Compliance with credit-facility covenants, debt maturities and the company’s ability to manage substantial lease obligations.
The effect of preferred-stock dividends, conversion rights and potential dilution of common shareholders.