Business Context and Reporting Period
Lincoln Educational Services Corporation provides career-oriented post-secondary education through 23 schools in 14 states, serving recent high school graduates and working adults. Programs include transportation and skilled trades, healthcare, hospitality, business and information technology. The company reports Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional segments.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company had 11,732 students enrolled at September 30, 2018.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $70.1 million | $67.3 million | $193.1 million | $194.5 million |
| Operating income (loss) | $0.1 million | ($0.7 million) | ($9.7 million) | ($12.5 million) |
| Net loss | ($0.6 million) | ($1.5 million) | ($11.6 million) | ($19.2 million) |
| Net loss per share | ($0.02) | ($0.06) | ($0.47) | ($0.80) |
| Operating margin | 0.1% | (1.1%) | (5.0%) | (6.4%) |
| Net margin | (0.9%) | (2.2%) | (6.0%) | (9.9%) |
All dollar amounts are approximate and are presented in millions unless otherwise stated.
- Q3 revenue increased 4.1%; nine-month revenue decreased 0.7%, primarily because the Transitional segment generated $9.0 million less revenue year over year.
- Educational services and facilities expense decreased 1.7% in Q3 and 5.1% for the nine-month period. Selling, general and administrative expense increased 1.7% in Q3 and decreased 1.2% year to date.
- Bad debt expense increased by approximately $2.0 million in Q3 and $2.5 million for the nine-month period. Marketing expense increased by approximately $1.0 million in Q3 and $2.2 million year to date.
- Net interest expense declined to $0.6 million in Q3 and $1.7 million for the nine-month period, compared with $0.7 million and $6.6 million, respectively, in the prior-year periods.
- Cash, cash equivalents and restricted cash totaled $18.0 million at September 30, 2018, including $10.2 million of unrestricted cash and $7.8 million of restricted cash.
- Net cash used in operating activities was $5.8 million for the nine months, compared with $16.6 million in 2017. Capital expenditures were $4.2 million, and net cash used in investing activities was $1.9 million.
- Debt outstanding under the secured credit facility was $25.0 million, or $24.4 million net of deferred financing fees, compared with $53.4 million gross debt at December 31, 2017. The company reported net debt of approximately $7.0 million at September 30, 2018.
- Letters of credit outstanding totaled $5.5 million. Student loan commitments totaled $59.1 million gross, or $43.4 million net of interest due through maturity.
- Total stockholders’ equity was $34.9 million, down from $45.8 million at December 31, 2017, primarily reflecting the nine-month net loss.
Material Changes Versus Prior Comparable Period
- Student starts increased 4.7% in Q3 and 4.4% for the first nine months. Excluding Transitional operations, starts increased 7.5% in Q3 and 6.8% year to date.
- Transportation and Skilled Trades revenue increased 4.5% in Q3 and 1.2% year to date; Q3 operating income increased to $6.3 million from $6.1 million, while nine-month operating income was approximately flat at $8.7 million.
- Healthcare and Other Professions revenue increased 14.8% in Q3 and 13.1% year to date. Segment operating income increased to $0.8 million from $0.3 million in Q3 and to $2.7 million from $0.9 million year to date.
- Transitional revenue declined 68.7% in Q3 and 65.7% year to date as previously closed campuses completed teach-outs. The segment’s operating loss improved to $1.9 million in Q3 and $2.9 million year to date.
- The company recorded a $0.4 million loss on the sale of the Mangonia Park Property in 2018, compared with a $1.5 million gain on the sale of the West Palm Beach Property in 2017.
- Accounts receivable increased to $21.7 million from $15.8 million at December 31, 2017, while the allowance for doubtful accounts increased to $15.7 million from $12.8 million.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal revenue or earnings guidance. It expects capital expenditures to approximate 2% of 2018 revenue and believes available cash sources will fund operations for the next twelve months and the foreseeable future.
- Management attributed enrollment improvement to four consecutive quarters of start growth, marketing investments, enhanced high-school programs and an improved admissions process. It expects higher marketing investments to support start growth over the next several quarters.
- The company decided to cease operations at its Lincoln College of New England campus in Southington, Connecticut, by December 31, 2018, following accreditor probation. Expected 2018 closure costs are $3.5 million to $4.5 million, including approximately $2.0 million for lease termination and $0.7 million of severance.
- Management stated that increased Department of Education verification activity raised the average verification rate from approximately 25% historically to 25%–60%, delaying scheduled funding and increasing bad debt reserves. Management expected the issue to normalize in the fourth quarter of 2018.
- The credit facility has total availability of up to $65 million, matures May 31, 2020, and includes a Facility 3 maturity of May 31, 2019. Borrowings were subject to an interest rate of 8.1% at September 30, 2018. The company was in compliance with all covenants, but the facility includes minimum adjusted EBITDA, tangible net worth and future net-loss restrictions.
- The company depends heavily on Title IV funding, which represented approximately 78% of cash receipts related to revenue in 2017. Changes to student-aid eligibility, gainful-employment rules, cohort default rates, financial-responsibility standards or borrower-defense regulations could materially affect operations and liquidity.
- The Department of Education could require additional financial protection or letters of credit in connection with the Southington teach-out or other triggering events. The amount and duration of any such requirement are uncertain.
- The company received a subpoena from the New Jersey Attorney General concerning matters related to a prior Massachusetts Attorney General investigation and stated that it is cooperating. Management does not believe currently pending proceedings will have a material adverse effect, although the ultimate outcome is uncertain.
- Subsequent to quarter-end, the company entered into new employment agreements with its chief executive officer and chief financial officer and a change-in-control agreement with another executive, each generally extending through December 31, 2020.
Most Important Facts to Verify
- Whether enrollment and student-start growth continue after the 2018 high-school recruiting season and whether growth converts into positive full-year operating cash flow.
- The timing and total cost of the Southington campus teach-out and closure, including lease termination and severance payments.
- Whether Department of Education verification rates normalize and whether related receivable collections and bad debt reserves improve.
- Compliance with credit-facility covenants, Facility 3 maturity requirements and the availability of unrestricted liquidity.
- Whether the Department of Education imposes additional letters of credit or other financial-responsibility requirements.
- The effect of Title IV, borrower-defense and gainful-employment regulatory developments on institutional eligibility and student financing.
- The company’s ability to fund its $59.1 million of student loan commitments, contractual lease obligations and ongoing capital expenditures while continuing to report losses.