Lincoln Educational Services Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Lincoln Educational Services Corporation provides career-oriented post-secondary education in automotive technology, health sciences, skilled trades, hospitality services, and business and information technology. As of March 31, 2014, it operated 33 campuses and five training sites in 15 states, serving 14,311 diploma and degree students and 247 short-program students. The filing covers the three months ended March 31, 2014; financial statements are unaudited.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $80.0 million | $86.3 million | Down 7.3% |
| Operating loss | $9.4 million | $7.4 million | Worsened $2.0 million |
| Operating margin | (11.8%) | (8.6%) | Down 3.2 percentage points |
| Loss from continuing operations | $11.1 million | $5.3 million | Worsened $5.8 million |
| Net loss | $11.1 million | $7.5 million | Worsened $3.6 million |
| Net loss per share | $0.49 | $0.33 | Worsened $0.16 |
| Cash flow from operations | $(8.4) million | $(4.2) million | Outflow increased $4.2 million |
Educational services and facilities expense declined 2.0% to $42.7 million, but increased to 53.4% of revenue from 50.5% because of the revenue decline and the relatively fixed cost structure. Selling, general and administrative expense declined 6.6% to $46.7 million, while its revenue ratio increased slightly to 58.4% from 58.0%. Bad debt expense was 3.9% of revenue, compared with 4.0% in the prior-year quarter.
Cash and cash equivalents were $7.1 million at March 31, 2014, compared with $12.9 million at December 31, 2013. Total current assets were $44.5 million, including $17.7 million of accounts receivable and $6.3 million of assets held for sale. Total liabilities were $108.6 million and stockholders’ equity was $133.5 million.
Total debt and lease obligations were $40.5 million, including $5.0 million outstanding under the secured revolving credit facility, a $9.7 million finance obligation, and $25.8 million of capital-lease obligations. The company had $5.3 million of outstanding letters of credit. The credit facility’s borrowing capacity was reduced from $60 million to $40 million effective January 16, 2014 and matures April 5, 2015. The company reported compliance with all financial covenants.
Capital expenditures were $0.6 million. Management expects 2014 capital expenditures to approximate 1% to 3% of revenue. A quarterly cash dividend of $0.07 per share was paid on March 31, 2014.
Material changes versus the prior comparable period
- Revenue declined $6.3 million, primarily because average student population fell 9.0% to 14,165 from 15,569. Average revenue per student increased 1.9% due to tuition increases and improved retention.
- Enrollment pressure was attributed to the elimination of federal aid eligibility for ability-to-benefit students and the company’s decision to stop enrolling fully online students.
- Operating performance deteriorated despite lower educational and administrative spending because expenses did not decline proportionately with enrollment.
- Interest expense increased to $1.3 million from $1.1 million, attributed to borrowings under the credit facility.
- The company recorded a $0.4 million tax provision in Q1 2014 versus a $3.2 million tax benefit in Q1 2013. No federal or state tax benefit was recognized for the current-period loss because of a full valuation allowance on deferred tax assets.
- Q1 2013 included a $2.2 million loss from discontinued operations related to five Ohio and Kentucky campuses that ceased operations on December 31, 2013. Those campuses generated $3.8 million of revenue and a $3.7 million operating loss in Q1 2013.
- No long-lived asset impairment was recorded in Q1 2014, compared with a $1.7 million pre-tax impairment charge in Q1 2013, $1.6 million of which related to discontinued operations.
- The company repaid $54.5 million of borrowings using restricted cash, borrowed $5.0 million during the quarter, and ended the period with $5.0 million outstanding under the credit facility.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that student starts appeared to have stabilized, particularly at automotive and skilled-trades campuses, although other programs remained challenged. Management expects negative operating margins to reverse in the near future but provided no specific earnings or revenue guidance. It expects to fund operations and obligations beyond the next twelve months with operating cash flow, existing cash, and credit-facility borrowings.
The business is highly dependent on government-sponsored student aid, particularly Title IV programs, which represented approximately 80% of cash receipts relating to revenue in 2013. Key regulatory risks include the 90/10 revenue test, student-loan cohort default rates, gainful-employment regulations, restrictions on ability-to-benefit students, and potential changes to Department of Education requirements. A proposed gainful-employment rule published March 25, 2014 could impose debt, earnings, default-rate, reporting, and disclosure requirements and could affect program eligibility.
The company reported 2013 90/10 percentages of 69% to 85% across its institutions. Existing institutions’ 2011 two-year cohort default rates ranged from 13.2% to 21.5%; 2010 three-year rates ranged from 19.0% to 34.0%, with two institutions at or above 30%. Draft 2011 three-year rates released in February 2014 did not show any existing institution at or above 30%, but final rates were expected in September 2014.
Student financing gaps, reluctance by students and parents to incur debt, enrollment declines, bad-debt exposure, and the seasonal concentration of larger class starts in the second half of the year remain material risks. The company had $33.7 million of outstanding student loan commitments, or $23.9 million net of interest through maturity, at March 31, 2014.
The company disclosed routine litigation and investigations and stated that pending proceedings were not expected to have a material adverse effect. A Massachusetts Attorney General investigation, initiated through Civil Investigation Demands beginning in November 2012 and followed up in July 2013 and January 2014, concerns compliance with state consumer protection and finance laws. The company is cooperating.
Important facts for investors to verify
- Whether enrollment and student starts actually stabilized and whether second-half recruiting targets were achieved.
- Remaining availability, maturity terms, covenant headroom, and refinancing plans for the credit facility, which matures in April 2015.
- Whether continuing operating cash outflows can be reversed and whether the company can maintain adequate liquidity with only $7.1 million of cash at quarter-end.
- Final Department of Education cohort default rates and the effect of gainful-employment or other regulatory changes on program eligibility.
- Trends in Title IV dependence, 90/10 compliance, student financing gaps, receivable collections, and bad-debt expense.
- Potential outcomes of the Massachusetts Attorney General investigation and other legal or regulatory matters.
- The filing text contains an apparent date inconsistency: the report identifies the quarter ended March 31, 2014 but the signature section states May 9, 2013; investors should verify the filed SEC version and signature date.