Lincoln Educational Services Corporation — Q2 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. Lincoln operated 23 career-oriented post-secondary schools in 14 states, serving 10,371 students at quarter-end. Reportable segments were Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional; all Transitional campuses had been closed by December 31, 2017.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Revenue | $61.1 million | $61.9 million | $123.0 million | $127.1 million |
| Operating loss | $(3.5) million | $(6.0) million | $(9.8) million | $(11.8) million |
| Net loss | $(4.1) million | $(6.8) million | $(11.0) million | $(17.7) million |
| Net loss per share | $(0.17) | $(0.28) | $(0.45) | $(0.74) |
| Operating margin | (5.8%) | (9.8%) | (7.9%) | (9.2%) |
| Net margin | (6.8%) | (11.0%) | (8.9%) | (13.9%) |
- Educational services and facilities expense declined to $30.2 million in the quarter and $60.7 million for six months; the related margins improved to 49.4% and 49.3%, respectively.
- Selling, general and administrative expense was $34.5 million in the quarter and $72.0 million for six months. The six-month ratio increased slightly to 58.5% of revenue from 58.1%.
- Net cash used in operating activities was $12.3 million for six months, improving from $19.5 million in 2017. Capital expenditures were $1.8 million, compared with $2.1 million.
- Cash, cash equivalents and restricted cash totaled $11.6 million at June 30, 2018, including $8.5 million of restricted cash. Unrestricted cash and cash equivalents were $3.1 million, compared with $14.6 million at December 31, 2017.
- Debt under the secured credit facility was $25.0 million, or $24.3 million net of deferred finance fees, versus $53.4 million, or $52.6 million net, at year-end 2017. Letters of credit increased to $8.5 million from $7.2 million.
- Total contractual cash obligations were $98.1 million, consisting of $25.0 million of credit-facility obligations and $73.1 million of operating leases.
Material changes versus the prior comparable period
- Reported revenue declined 1.2% in the quarter and 3.3% for six months, primarily because the Transitional segment contributed no revenue versus $2.6 million and $6.9 million, respectively, in 2017. Excluding Transitional revenue from the prior year, revenue increased 3.2% for the quarter and 2.3% for six months.
- Student starts increased 11.6% in the quarter and 4.2% for six months. Healthcare and Other Professions revenue increased 12.6% in the quarter and 9.8% for six months, while Transportation and Skilled Trades revenue was essentially flat.
- Operating loss improved by $2.5 million in the quarter and $2.0 million for six months, reflecting lower costs, the elimination of Transitional losses, and improved segment performance. Corporate expenses increased to $5.9 million for the quarter and $13.1 million for six months.
- Interest expense declined to $0.5 million in the quarter and $1.1 million for six months, principally because the prior-year term loan and an $8.0 million bridge loan had been repaid.
- Financing activities used $28.9 million of cash, primarily reflecting $32.8 million of debt repayments and $4.4 million of new borrowings.
Guidance, outlook, risks and unusual items
- Management did not provide specific numerical earnings or revenue guidance. It expects seasonal enrollment patterns, with lower first-half populations and greater dependence on third-quarter starts and the high-school recruiting season.
- Management stated that available cash sources should fund operations for the next twelve months and foreseeable future, while acknowledging significant historical operating losses and the need to align costs with student population.
- The company depends heavily on government-supported student aid; Title IV funds represented approximately 78% of cash receipts related to revenue in 2017. Changes to Title IV eligibility, gainful employment, cohort default rates, the 90/10 rule, borrower-defense rules, or other regulations could materially affect operations.
- The secured credit facility matures May 31, 2020, except Facility 3, which matures May 31, 2019. The facility is collateralized by substantially all personal property and certain real estate. The company was in compliance with all covenants at June 30, 2018.
- Lincoln College of New England’s Southington campus was placed on probation by its accreditor, which directed the school to show cause why accreditation should not be withdrawn. The school’s 2017 revenue, net loss and ending population were $8.4 million, $1.6 million and 397 students, respectively.
- Seven schools received initial accreditation from ACCSC following the loss and subsequent restoration of ACICS recognition.
- The company received a July 2018 administrative subpoena from the New Jersey Attorney General concerning matters related to a prior Massachusetts Attorney General investigation and stated that it intends to cooperate.
- The company agreed to sell a Florida property for $2.55 million, expected to produce a $0.4 million loss. Net proceeds are required to be deposited as additional collateral under the credit agreement.
- Outstanding institutional loan commitments to students were $54.3 million, up from $51.9 million at December 31, 2017, exposing the company to student credit and collection risk.
- The company maintained a full valuation allowance against net deferred tax assets because cumulative losses made realization not more likely than not.
Most important facts for investors to verify
- Whether improved student starts translate into sustained enrollment, revenue growth and positive operating cash flow in the second half of 2018.
- The company’s ability to meet credit-facility covenants and refinance or repay Facility 3 at its May 2019 maturity.
- The outcome of the Southington campus accreditation probation and September 2018 show-cause process, including any effect on Title IV eligibility.
- The financial impact of proposed borrower-defense and other Department of Education regulations.
- Collection performance and loss assumptions for the $54.3 million of institutional student loan commitments.
- Completion and collateral treatment of the Florida property sale and the company’s level of unrestricted liquidity after seasonal cash requirements.