Business Context and Reporting Period
Lincoln Educational Services Corporation provides career-oriented post-secondary education through 28 schools in 15 states, serving recent high-school graduates and working adults. Programs include transportation and skilled trades, healthcare, hospitality, business and information technology. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the same period in 2016.
The company operated three reportable segments: Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional. Transitional campuses are being taught out and are no longer enrolling new students. Management abandoned its prior plan to divest Healthcare and Other Professions and intends to retain the segment.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $65.3 million | $70.6 million | Down 7.6% |
| Operating loss | $5.7 million | $6.2 million | Improved $0.5 million |
| Loss before taxes | $10.9 million | $6.0 million | Worsened $4.9 million |
| Net loss | $10.9 million | $6.1 million | Worsened $4.9 million |
| Basic and diluted loss per share | $0.46 | $0.26 | Worsened $0.20 |
| Operating margin | (8.8%) | (8.8%) | Unchanged |
| Net margin | (16.7%) | (8.6%) | Worsened |
| Net cash used in operating activities | $11.5 million | $9.2 million | Use increased $2.3 million |
| Capital expenditures | $0.8 million | $0.5 million | Increased $0.3 million |
Educational services and facilities expense declined 11.9% to $32.7 million, while selling, general and administrative expense declined 4.6% to $38.3 million. Educational services and facilities expense improved to 50.1% of revenue from 52.5%; SG&A increased to 58.7% from 56.8%. Bad debt expense was 4.8% of revenue versus 5.0% in the prior-year quarter.
Interest expense increased to $5.2 million from $1.6 million, primarily because of a $2.2 million non-cash write-off of deferred finance fees and approximately $1.8 million of early termination costs related to the prior credit facility. The company reported no goodwill or long-lived asset impairment.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $8.7 million at March 31, 2017. Restricted cash was $11.2 million, resulting in total cash, cash equivalents and restricted cash of approximately $19.9 million.
- Total assets were $136.9 million versus $163.2 million at December 31, 2016. Stockholders’ equity was $44.1 million versus $54.9 million.
- Debt was $29.2 million, including $5.0 million current maturities, compared with $44.3 million under the prior term loan at year-end 2016.
- On March 31, 2017, the company replaced its prior term loan with a secured credit facility of up to $55 million from Sterling National Bank, maturing May 31, 2020. Amounts outstanding at quarter-end were $30 million, including $5 million held in a pledged account.
- The facility is secured by substantially all personal property and mortgages on four properties. It includes financial and other covenants; the company stated that it was in compliance as of March 31, 2017.
- Letters of credit outstanding totaled $6.2 million. The company also had approximately $14.3 million of surety bonds.
- Operating lease obligations totaled $92.7 million, and total contractual cash obligations were $122.7 million, including debt and operating leases.
Material Changes Versus the Prior Comparable Period
- Revenue declined $5.4 million, principally because Transitional campuses suspended new enrollment and continued their teach-outs. Transitional revenue fell 50.1% to $4.3 million.
- Total student starts declined 11.6% to 2,857. Transportation and Skilled Trades starts increased 3.9%, while Healthcare and Other Professions starts declined 10.1% and Transitional starts declined 71.2%.
- End-of-period student population declined 7.0% to 11,258. Transportation and Skilled Trades enrollment increased slightly, while Healthcare and Transitional enrollment declined.
- Transportation and Skilled Trades operating income fell 39.1% to $2.1 million, and Healthcare and Other Professions operating income fell 90.8% to $0.2 million. Transitional operating loss improved to $0.6 million from $3.6 million.
- Cost reductions from campus closures improved the operating loss, but higher interest expense and the absence of $1.8 million of other income recognized in Q1 2016 drove the larger net loss.
- Cash used in operating activities increased to $11.5 million, reflecting working-capital outflows, including accounts receivable, unearned tuition, accounts payable and accrued expenses.
Guidance, Outlook, Risks and Unusual Items
Management stated that available cash sources are expected to fund operations for the next twelve months and the foreseeable future, while acknowledging significant operating losses and declining student populations. The company is reducing its cost structure, increasing marketing and aligning staffing and facilities with enrollment.
Management expects capital expenditures to approximate 2% of 2017 revenue. Results are seasonal, with typically lower first- and second-quarter enrollment and larger starts in the second half of the year. Management cautioned that second-half results depend on the high-school recruiting season and that expenses may not decline proportionately if enrollment falls short.
- The company agreed to sell two West Palm Beach properties for $16.3 million and expected closing in the third quarter of 2017. On April 28, 2017, it obtained an $8 million secured bridge loan, repayable upon the earlier of the property sale or October 1, 2017.
- Planned or ongoing campus closures include Northeast Philadelphia, Center City Philadelphia, West Palm Beach, Brockton and Lowell. These closures may reduce future revenue but are intended to improve profitability and cash flow.
- Approximately 79% of 2016 revenue-related cash receipts came from Title IV programs. Changes to federal financial aid eligibility, regulatory requirements, gainful employment rules, cohort default rates or the 90/10 rule could materially affect enrollment, receivables and liquidity.
- The company maintains a full valuation allowance against net deferred tax assets because realization was not considered more likely than not.
- The company disclosed routine lawsuits and claims and a Massachusetts consumer-protection matter resolved through an $850,000 payment and forgiveness of $165,000 of student debt. Management does not believe pending proceedings will have a material adverse effect.
- The company will adopt the new revenue recognition standard effective January 1, 2018 and stated that the impact could be material, although it could not yet estimate the amount.
Investor Verification Priorities
- Verify completion, proceeds and timing of the West Palm Beach property sale and repayment of the $8 million bridge loan.
- Monitor operating cash burn, unrestricted cash, restricted cash availability and compliance with the Sterling National Bank credit covenants.
- Assess whether Transportation and Skilled Trades enrollment growth offsets continuing declines in Healthcare and Transitional populations.
- Review Title IV participation, regulatory developments and student receivable collections, including the 4.8% bad debt ratio.
- Track the execution and financial impact of the planned campus closures and related lease obligations.
- Evaluate the effect of elevated interest expense and the $25 million debt maturity scheduled for 2020.
- Confirm the company’s ability to maintain liquidity while funding student loan commitments of $41.1 million and contractual obligations of $122.7 million.