Lincoln Educational Services Corporation — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
Lincoln provides career-oriented post-secondary education through 28 schools in 15 states, serving approximately 10,400 students at June 30, 2017. Programs include transportation and skilled trades, healthcare, hospitality, business and information technology. The filing covers the three and six months ended June 30, 2017, compared with the same periods in 2016.
The company reports three segments: Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional. The Transitional segment consists of campuses being taught out or closed. Management abandoned its planned divestiture of Healthcare and Other Professions and intends to retain that segment.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Revenue | $61.9 million | $68.1 million | $127.1 million | $138.7 million |
| Operating loss | $(6.0) million | $(3.2) million | $(11.8) million | $(9.5) million |
| Net loss | $(6.8) million | $(3.1) million | $(17.7) million | $(9.2) million |
| Loss per diluted share | $(0.28) | $(0.13) | $(0.74) | $(0.39) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(19.5) million | $(18.1) million |
- Q2 revenue declined 9.1%; six-month revenue declined 8.3%.
- Q2 operating margin was approximately negative 9.8%, compared with negative 4.7% in the prior-year quarter. The six-month operating margin was approximately negative 9.2%, compared with negative 6.8%.
- Q2 net loss margin was approximately negative 10.9%, compared with negative 4.6%. The six-month net loss margin was approximately negative 13.9%, compared with negative 6.6%.
- Educational services and facilities expense fell 8.9% in Q2 and 10.4% for the six months, primarily because of Transitional campus closures. Selling, general and administrative expense fell only 0.6% in Q2 and 2.7% for the six months, increasing as a percentage of revenue.
- Bad debt expense was 6.6% of Q2 revenue and 5.7% of six-month revenue, up from 4.8% and 4.7%, respectively, in the comparable periods.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $7.2 million at June 30, 2017. Restricted cash was $6.2 million, for total cash, cash equivalents and restricted cash of approximately $13.4 million, compared with $47.7 million at December 31, 2016.
- Six-month cash use included $19.5 million from operating activities and $1.8 million from investing activities. Capital expenditures were $2.1 million.
- Financing activities provided $7.4 million, including new borrowings and refinancing transactions. The company repaid $49.3 million of borrowings and obtained $38.0 million of new borrowings during the six months.
- Debt outstanding was $33.0 million at June 30, 2017, including an $8.0 million short-term bridge loan; $8.0 million was classified as current and $25.0 million was scheduled for 2020 maturity. Deferred finance fees reduced the carrying amount by approximately $1.0 million.
- The March 2017 Sterling National Bank credit facility has aggregate capacity of up to $55 million, subject to collateral and other conditions, and matures May 31, 2020. The company reported compliance with all debt covenants at June 30, 2017.
- The $8.0 million bridge loan is secured by West Palm Beach property and is due upon the earlier of its sale or October 1, 2017. The company expects to sell two West Palm Beach properties for $15.7 million in the third quarter of 2017.
- Contractual obligations included $33.0 million of credit-facility payments and $90.9 million of operating lease obligations. Student loan commitments totaled $42.2 million, or $31.4 million net of future interest.
Material Changes Versus the Prior Comparable Period
- Total student starts fell 16.1% in Q2 and 13.8% for the six months. End-of-period enrollment declined 9.6% to 10,400 students.
- Transportation and Skilled Trades revenue increased slightly, but operating income fell 65.0% in Q2 and 50.0% for the six months because of higher bad debt, sales and marketing, and other costs.
- Healthcare and Other Professions revenue fell 3.9% in Q2 and 4.4% for the six months, and the segment shifted from operating income to operating loss.
- Transitional revenue fell 68.7% in Q2 and 59.3% for the six months as new starts were suspended at campuses scheduled for closure. Its operating loss improved because of lower staffing and operating costs.
- Interest expense declined in Q2 because of more favorable new-facility terms, but increased for the six months to $5.9 million from $3.1 million. The increase included a $2.2 million write-off of deferred financing fees and approximately $1.8 million of early termination costs related to the prior term loan.
- Prior-year other income included a one-time $1.7 million quarterly gain and $3.4 million six-month gain from a lease modification; no comparable gain was recorded in 2017.
- Stockholders’ equity declined to $37.9 million from $54.9 million at December 31, 2016, primarily reflecting the six-month net loss.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management expects continued seasonal volatility, with stronger enrollment activity typically occurring in the second half of the year, but noted that high-school recruiting and starts may fall short of expectations.
- Management believes available cash sources, borrowings and planned asset sales should fund operations for the next twelve months and foreseeable future. This assessment depends materially on improving cash flow, maintaining financing access and completing the West Palm Beach sale.
- Approximately 79% of 2016 revenue-related cash receipts came from Title IV programs. Changes to federal aid eligibility, regulatory requirements, gainful employment rules, cohort default rates, the 90/10 rule or other education regulations could materially affect enrollment, receivables and liquidity.
- Low unemployment and higher wages are reducing demand from potential students who may enter the workforce rather than pursue training. Affordability, scholarship reductions, student engagement and program mix also affected starts.
- The company maintains a full valuation allowance against net deferred tax assets because cumulative losses make realization uncertain.
- The Department of Education scheduled an August 2017 program review of the Indianapolis campus. For the Columbia, Maryland campus, the DOE closed five prior findings for program-review purposes, while reserving the right to impose administrative action or additional corrective measures concerning a Clery Act finding; no financial liability was imposed in the determination.
- The company reported no material pending legal proceeding expected to adversely affect its business, financial condition, results or cash flows. It also reported approximately $14.3 million of surety bonds and $6.2 million of cash-collateralized letters of credit.
- The company adopted the simplified goodwill impairment standard early, with no impact, and expects to adopt the new revenue-recognition standard on January 1, 2018 using a modified retrospective approach. The potential effect on book and contract-asset accounting remained under review.
Important Facts for Investors to Verify
- Whether the West Palm Beach property sale closed on schedule and generated sufficient proceeds to repay the $8.0 million bridge loan.
- Whether operating cash burn and enrollment trends improved in the second half of 2017.
- Compliance with the Sterling credit facility’s liquidity, EBITDA, tangible-net-worth and other covenants.
- Results of the Indianapolis DOE program review and any subsequent action related to the Columbia Clery Act finding.
- The sustainability of bad debt expense, student receivables and Title IV cash collections.
- The effect of campus closures, retained Healthcare and Other Professions operations, and the 2018 revenue-recognition adoption on reported results.