Lincoln Educational Services Corporation: Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016. Lincoln operated 30 post-secondary career schools in 15 states, with 12,102 total students, including 6,806 in continuing operations. The company is restructuring around Transportation and Skilled Trades after approving the divestiture of 17 Healthcare and Other Professions campuses and the closure of its Hartford campus, scheduled for the fourth quarter of 2016. The 17 campuses are reported as discontinued operations.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $43.4 million | $47.7 million | Down 8.9% |
| Operating loss | $6.3 million | $4.8 million | Loss widened $1.5 million |
| Operating margin | (14.6%) | (10.1%) | Down 4.5 percentage points |
| Loss from continuing operations | $6.1 million | $6.1 million | Relatively unchanged |
| Net loss | $6.1 million | $6.9 million | Improved $0.8 million |
| Net loss per share | $0.26 | $0.30 | Improved $0.04 |
| Cash used in operating activities | $9.2 million | $6.3 million | Use increased $2.9 million |
Revenue declined primarily because average student population fell 12.0% to approximately 6,700, partly offset by a 3.4% increase in average revenue per student. Educational services and facilities expense increased 1.0% to $23.1 million, causing its revenue ratio to rise to 53.3% from 48.1%. Selling, general and administrative expense declined 8.9% to $27.0 million but remained 62.2% of revenue. Bad debt expense was 4.9% of revenue versus 4.8% in the prior-year quarter.
Transportation and Skilled Trades revenue decreased 5.7% to $42.3 million and operating income declined 32.4% to $3.4 million. Transitional revenue fell 58.6% to $1.2 million and its operating loss increased to $3.0 million. Corporate expenses improved 15.8% to $6.7 million.
Balance sheet, cash flow, debt and liquidity
- Cash and cash equivalents were $20.2 million at March 31, 2016, compared with $38.4 million at December 31, 2015. Including restricted cash, total cash was $47.8 million, of which $27.6 million was restricted.
- Total assets were $190.3 million versus $207.8 million at year-end 2015. Assets held for sale were $46.3 million.
- Total liabilities were $114.9 million and stockholders’ equity was $75.4 million, down from $81.0 million at December 31, 2015.
- Debt and lease obligations totaled $46.3 million, including a $41.3 million term loan and a $5.0 million finance obligation. The term loan bears interest at 11.0% as of March 31, 2016, matures July 31, 2019, and is secured by substantially all company assets. Management also reported approximately $44.3 million outstanding under the term loan, reflecting a different presentation of the balance.
- The company used $0.1 million in investing activities, including $0.5 million of capital expenditures and $0.4 million of asset-sale proceeds, and used $9.0 million in financing activities.
- Management expects capital expenditures to approximate 2% of 2016 revenue and believes available cash sources should fund operations for the next twelve months.
- The company expects to sell approximately $29.6 million of assets net of liabilities classified as held for sale; up to $10.0 million of sale proceeds must be used to repay debt.
Material changes, outlook and unusual items
- The company completed the Fern Park, Florida teach-out and closed that campus as of March 31, 2016. Hartford continues a teach-out expected to end in December 2016.
- A lease restructuring converted certain obligations to operating leases and produced a $1.7 million gain on capital lease termination. Lincoln also paid a $2.8 million Fern Park lease termination fee.
- The February 2016 term-loan amendment changed the loan structure and increased required cash collateral for Term Loan B to $20.3 million. The company paid a $0.5 million loan modification fee.
- Seasonality is significant: student populations and results are typically lower in the first half of the year, while larger class starts are expected in the third quarter. No formal earnings guidance was provided.
- Management cited slower enrollment declines but continued pressure from Department of Education regulations, admissions compensation restrictions, changes to Title IV eligibility, competition from community colleges, and improving employment conditions that may reduce demand for career training.
- Title IV programs represented approximately 80% of cash receipts related to revenue in 2015. Changes to federal aid eligibility or the company’s ability to participate could materially affect liquidity and operations.
- The company was in compliance with its financial covenants at March 31, 2016. The term loan includes minimum liquidity, EBITDA, financial responsibility, cohort default rate, 90/10 ratio and capital expenditure requirements, with lender remedies available upon default.
- Pending matters include a Maryland Attorney General administrative subpoena concerning the Columbia campus. A Massachusetts matter resulted in an $850,000 payment, forgiveness of $165,000 of graduate debt and continuing disclosure requirements.
- On April 12, 2016, the company entered a replacement letter-of-credit facility with up to $9.5 million of availability, fully cash collateralized, maturing April 1, 2017.
Important facts for investors to verify
- Whether enrollment stabilizes and whether third-quarter starts offset the 12.0% decline in average student population.
- The timing, proceeds and debt-paydown requirements associated with the planned asset sales.
- Availability of unrestricted cash after considering restricted cash, collateral requirements, lease obligations and term-loan covenants.
- Progress and costs of the Healthcare divestitures and Hartford teach-out.
- Continued compliance with Title IV participation standards, the 90/10 rule, cohort default requirements and other regulatory measures.
- The company’s ability to reduce its high fixed-cost base and return continuing operations to positive operating cash flow.