Lincoln Educational Services Corporation: Q2 2015 Form 10-Q Summary
Business context and reporting period
Lincoln Educational Services Corporation provides career-oriented post-secondary education through 31 campuses in 15 states. Its 12,462 students are served through three reportable segments: Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional. The filing covers the three and six months ended June 30, 2015; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $72.4 million | $76.4 million | $149.1 million | $155.6 million |
| Operating loss | $(6.2) million | $(9.4) million | $(11.6) million | $(18.0) million |
| Loss from continuing operations | $(7.6) million | $(10.9) million | $(14.5) million | $(21.2) million |
| Net loss | $(7.6) million | $(11.6) million | $(14.5) million | $(22.7) million |
| Net loss per share | $(0.33) | $(0.51) | $(0.63) | $(1.00) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(11.6) million | $(14.9) million |
Operating margin improved to negative 8.6% from negative 12.3% in the second quarter and to negative 7.8% from negative 11.6% for the six-month period. Educational services and facilities expense was 51.6% of revenue in the quarter and 50.7% for the six months, compared with 53.3% and 53.0%, respectively, in the prior-year periods. Selling, general and administrative expense was 57.0% of quarterly revenue and 57.2% for the six months, compared with 59.0% and 58.6%.
At June 30, 2015, cash and cash equivalents were $4.9 million, compared with $12.3 million at December 31, 2014. Assets held for sale totaled $52.4 million. Total liabilities were $105.9 million and stockholders’ equity was $69.7 million. Debt and lease obligations totaled $41.0 million, including $6.0 million outstanding under the revolving credit agreement, $9.7 million of finance obligations and $25.3 million of capital lease obligations.
Capital expenditures were $1.3 million in the first six months, compared with $2.6 million in the prior-year period. Cash used in investing activities was $1.2 million. Financing activities provided $5.4 million, including $8.5 million of borrowings and $32.5 million of borrowing repayments, partially offset by a $30.0 million reclassification of payments funded from restricted cash.
Material changes versus the prior comparable period
- Second-quarter revenue declined 5.2% and six-month revenue declined 4.2%, primarily because average student population fell 6.6% and 5.2%, respectively.
- End-of-period student population declined 7.2% to 12,462; total second-quarter starts declined 12.4% to 3,116.
- Expense reductions exceeded the revenue decline, improving the quarterly operating loss by $3.2 million and the six-month operating loss by $6.3 million. Savings reflected workforce restructuring, lower instructional and facilities costs, reduced sales staffing, and campus consolidation.
- Transportation and Skilled Trades remained profitable, with operating income of $2.8 million in the quarter and $7.8 million for the six months. Healthcare and Other Professions remained loss-making, with operating losses of $2.0 million and $2.6 million, respectively.
- Net interest expense increased by $0.6 million in the quarter and $0.9 million for the six months because of higher borrowing rates and financing fees.
- The five Florida training sites ceased operations at December 31, 2014 and are presented as discontinued operations in the 2014 comparative results. They contributed a $0.7 million quarterly operating loss and a $1.4 million six-month operating loss in 2014.
Guidance, outlook, risks and unusual items
Management expected capital expenditures to approximate 2% of 2015 revenue and planned to fund them through operating cash flow and real-estate monetization. Management stated that available cash sources were expected to fund operations for the next twelve months, but identified significant operating losses, declining enrollment, regulatory pressure, Title IV dependence, and the need to sell assets or pursue strategic alternatives as liquidity considerations.
On July 31, 2015, after the reporting date, the Company replaced its revolving credit facility with a $45.0 million term loan maturing July 31, 2019. The loan bears interest at the greater of 11% or 90-day LIBOR plus 9%. Approximately $6.3 million was used to repay the prior facility, $15.3 million funded collateral, approximately $7.4 million secured outstanding letters of credit, and approximately $13.8 million remained available for permitted corporate purposes. The new agreement includes minimum liquidity, capital expenditure, fixed-charge coverage, EBITDA, financial-responsibility and cohort-default-rate requirements.
The Company had $7.0 million of letters of credit outstanding at June 30, 2015, primarily for Department of Education matters and real-estate leases. It also had $32.2 million of gross outstanding student loan commitments, or $22.7 million net of future interest. The Company reported compliance with all financial covenants at June 30, 2015.
Management cited countercyclical enrollment pressure from low unemployment, government regulation affecting student financing and eligibility, gainful-employment and cohort-default requirements, and reliance on Title IV programs, which represented approximately 80% of 2014 cash receipts related to revenue. The Hartford campus generated a $1.6 million net loss before taxes in the second quarter and $2.9 million for the six months; management continued exploring alternatives to exit its high-cost facility lease.
Unusual or material items included the Massachusetts Attorney General settlement entered July 13, 2015, requiring an $850,000 payment and forgiveness of $165,000 of previously accrued graduate balances. The Company also maintained a full valuation allowance on deferred tax assets and recorded no goodwill impairment in the period, although a June 30 market-capitalization decline triggered a goodwill impairment test.
Investor verification points
- Verify whether enrollment, starts and revenue stabilize or continue to decline, particularly in Healthcare and Other Professions.
- Assess liquidity under the new high-cost term loan, including the 11% minimum interest rate, collateral restrictions, mandatory prepayments and covenant requirements.
- Confirm the timing and proceeds of the planned sale of approximately $52.4 million of assets held for sale.
- Monitor Title IV regulatory developments, cohort default rates, financial-responsibility standards and the Company’s continued eligibility for federal student-aid programs.
- Evaluate the Hartford lease strategy and the expected completion of the Fern Park, Florida teach-out by March 2016.
- Reconcile operating cash usage, student loan commitments, letters of credit and contractual obligations, which totaled $148.3 million as of June 30, 2015.