Lincoln Educational Services Corporation — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended March 31, 2018. Lincoln operated 23 career-oriented post-secondary schools in 14 states, serving recent high school graduates and working adults across transportation and skilled trades, healthcare, hospitality, business, and information technology programs. Enrollment at March 31, 2018 was 10,484 students.
The company reported two active operating segments: Transportation and Skilled Trades and Healthcare and Other Professions (HOPS). Formerly closing campuses were fully taught out by December 31, 2017, leaving no revenue or operating activity in the Transitional segment during the quarter.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $61.9 million | $65.3 million | Down 5.2% |
| Operating loss | $6.3 million | $5.7 million | Loss increased $0.5 million |
| Operating margin | (10.1%) | (8.8%) | Down 1.3 percentage points |
| Net loss | $6.9 million | $10.9 million | Improved $4.1 million |
| Net loss per share | $0.28 | $0.46 | Improved |
| Cash used in operating activities | $10.0 million | $11.5 million | Improved $1.4 million |
| Capital expenditures | $0.5 million | $0.8 million | Down $0.3 million |
Educational services and facilities expense declined 6.8% to $30.5 million, representing 49.3% of revenue versus 50.1% in the prior-year quarter. Selling, general and administrative expense declined 2.1% to $37.5 million, but increased to 60.6% of revenue from 58.7%, reflecting higher marketing and bad-debt expense. Total costs and expenses exceeded revenue by 10.1%.
Interest expense fell to $0.6 million from $5.2 million, primarily because the prior term loan and associated early-termination costs were eliminated. Management expects approximately $3 million of annual interest savings from the current financing structure.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $4.9 million at March 31, 2018; restricted cash was $8.5 million, for total cash, cash equivalents, and restricted cash of $13.4 million.
- Total assets declined to $116.9 million from $155.2 million at December 31, 2017, primarily reflecting the use of restricted cash to repay borrowings.
- Debt outstanding under the secured credit facility was $23.1 million, net of $0.8 million of deferred financing fees, compared with $53.4 million gross debt at year-end 2017.
- The company repaid $32.8 million of borrowings during the quarter and had $1.9 million of stated availability under its revolving facility.
- Letters of credit totaled $8.5 million and were primarily cash collateralized. The credit facility is secured by substantially all personal property and mortgages on specified real estate.
- Management stated that available cash sources should be sufficient to fund operations for the next twelve months and the foreseeable future. The company was in compliance with all debt covenants at March 31, 2018.
- Total contractual cash obligations were $99.3 million, including $76.2 million of operating lease obligations and $23.1 million of credit-facility debt.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $3.4 million because the Transitional segment generated no revenue in 2018 versus $4.3 million in Q1 2017. Excluding that segment, revenue increased approximately 1.5%.
- Total student starts declined 2.5%, but starts increased 2.2% excluding the Transitional segment. HOPS starts rose 5.5%, while Transportation and Skilled Trades starts increased 0.6%.
- End-of-period student population declined 6.9% to 10,484, principally because 774 students remained in the prior-year Transitional segment.
- Transportation and Skilled Trades revenue declined 1.0% to $42.7 million and operating income declined to $0.7 million from $1.9 million, reflecting lower average population and higher marketing and program costs.
- HOPS revenue increased 7.3% to $19.1 million, while operating income declined to $0.2 million from $0.3 million because of higher instructional, facilities, marketing, and bad-debt expenses.
- Accounts receivable increased to $19.6 million from $15.8 million at year-end, and the company recorded $3.8 million of doubtful-account provision during the quarter.
- Revenue recognition and restricted-cash cash-flow presentation standards adopted January 1, 2018 had no material impact on reported results.
Outlook, Commentary, Risks, and Unusual Items
Management described the business as seasonal, with typically lower student populations in the first half of the year and larger starts in the third quarter. The company expects capital expenditures to approximate 2% of 2018 revenue and anticipates higher asset spending in the second quarter. No formal numerical revenue or earnings guidance was provided.
The company continues to face enrollment pressure from economic conditions, regulatory changes, student-loan eligibility requirements, gainful-employment rules, cohort-default-rate requirements, and other changes affecting Title IV funding. Approximately 78% of 2017 cash receipts relating to revenue came from Title IV programs, making continued eligibility and timely disbursement of federal aid material to liquidity and operations.
The credit agreement requires minimum adjusted EBITDA and tangible-net-worth thresholds, restricts capital expenditures, and prohibits a net loss for any fiscal year beginning with 2019. Interest-rate exposure remains material: borrowings carried an interest rate of 7.60% at March 31, 2018, and a one-percentage-point rate change would affect annual interest expense by approximately $0.2 million.
Seven schools were subsequently notified that they received initial accreditation grants from ACCSC as part of a transition from ACICS accreditation. Separately, the Southington, Connecticut campus received a show-cause directive from NEASC regarding potential compliance with accreditation standards and was scheduled to respond and attend a hearing. Loss of accreditation or Title IV eligibility could materially affect enrollment, revenue, and liquidity.
The company maintained a full valuation allowance against net deferred tax assets because cumulative losses made realization not more likely than not. Pending lawsuits, investigations, and claims were not expected by management to have a material adverse effect, although outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Whether enrollment, student starts, and average population improve during the high-school recruiting and third-quarter start seasons.
- Whether operating cash burn declines sufficiently to support operations while cash and unrestricted liquidity remain limited.
- Compliance with the credit facility’s financial covenants and the company’s ability to refinance or repay debt due in 2020, with Facility 3 due in 2019.
- The status of ACCSC accreditation for the seven transitioning schools and the outcome of the Southington campus’s NEASC show-cause process.
- Bad-debt trends, student receivables, institutional loan commitments, and the collectability of tuition-related balances.
- The company’s continued eligibility for Title IV funding and the effect of future federal or state regulatory changes.
- Whether planned marketing and program investments generate sufficient enrollment growth to offset the company’s largely fixed cost structure.