Lincoln Educational Services Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly period ended September 30, 2015. Lincoln provides career-oriented post-secondary education through 31 campuses in 15 states, with 13,840 students at period-end. The company reorganized into Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional segments.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $79.0 million | $84.0 million | $228.2 million | $239.6 million |
| Operating income (loss) | $4.6 million | $(39.5) million | $(7.0) million | $(57.5) million |
| Operating margin | 5.9% | (47.0%) | (3.1%) | (24.0%) |
| Net income (loss) | $2.6 million | $(38.1) million | $(11.9) million | $(60.8) million |
| Net margin | 3.3% | (45.3%) | (5.2%) | (25.4%) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.5 million | $1.3 million |
Q3 revenue declined 5.9%, primarily because average student population fell 9.5% to 12,815; average revenue per student increased 3.8% due to improved retention and program mix. Nine-month revenue declined 4.8% as average population decreased 6.7% to 12,969.
- Educational services and facilities expense declined 8.0% in Q3 and 8.3% for nine months.
- Selling, general and administrative expense declined 16.2% in Q3 and 9.6% for nine months, reflecting restructuring, lower sales costs, and reduced student services expense.
- Bad debt expense was 4.3% of Q3 revenue and 4.8% for nine months, versus 5.2% and 4.9%, respectively, in the prior comparable periods.
- Q3 results included a $0.2 million noncash goodwill impairment charge, compared with $39.0 million of goodwill impairment and $2.4 million of long-lived asset and intangible impairments in Q3 2014.
- Cash and cash equivalents were $32.4 million at September 30, 2015, compared with $12.3 million at December 31, 2014. Restricted cash totaled $22.6 million, including $15.3 million securing part of the term loan and approximately $7.4 million securing outstanding letters of credit.
- Total debt and lease obligations were $79.5 million, including $44.7 million under the new term loan, $25.2 million of capital leases, and a $9.7 million finance obligation. Total liabilities were $149.3 million and stockholders’ equity was $72.6 million.
Material changes versus the prior comparable period
- The company substantially improved reported profitability, moving from a Q3 2014 net loss of $38.1 million to Q3 2015 net income of $2.6 million, largely because the prior-year period included significant impairment charges.
- Transportation and Skilled Trades Q3 operating income increased to $10.6 million from $6.2 million despite a 3.1% revenue decline. Healthcare and Other Professions reduced its operating loss to $0.9 million from $38.6 million, primarily reflecting the absence of prior-year impairment charges.
- On July 31, 2015, Lincoln replaced its prior revolving credit facility with a $45 million term loan maturing July 31, 2019. The loan bears interest at the greater of 11% or 90-day LIBOR plus 9% and is secured by company assets and cash collateral.
- The company paid no dividend during the first nine months of 2015, compared with $3.8 million paid in the prior-year period.
- Operating cash flow increased to $2.5 million from $1.3 million, while capital expenditures declined to $1.6 million from $4.8 million.
Guidance, outlook, risks and unusual items
Management stated that available cash sources are expected to fund operations for the next twelve months, although the company has experienced significant operating losses and declining enrollment. Management plans to sell approximately $44.8 million of assets classified as held for sale and continues cost-reduction efforts aligned with student population. Capital expenditures were expected to approximate 1% of 2015 revenue.
- On November 3, 2015, after the quarter-end, the board approved a plan to divest the Healthcare and Other Professions segment. Beginning in Q4 2015, the segment was expected to be classified as discontinued operations and held for sale. The decision may result in a noncash impairment charge.
- The company remains highly dependent on federal Title IV funding, which represented approximately 80% of cash receipts relating to revenue in 2014. Regulatory changes affecting Title IV eligibility, gainful employment, cohort default rates, the 90/10 rule, or admissions practices could materially affect enrollment and liquidity.
- The term loan contains minimum liquidity, fixed-charge coverage, EBITDA, financial responsibility, cohort default rate, and 90/10 covenants. The company reported compliance with all covenants at September 30, 2015.
- Interest expense increased because of higher debt and financing fees. Management estimated that a 1% change in interest rates would change annual interest expense by approximately $0.5 million.
- Seasonality is significant: enrollment and revenue generally increase in the second half of the year, while many costs remain relatively fixed. Actual starts may fall short of expectations.
- The company agreed to pay $850,000 and forgive $165,000 of previously accrued graduate balances under a Massachusetts Attorney General consent judgment, while denying wrongdoing.
Important facts for investors to verify
- Execution and timing of the planned Healthcare and Other Professions divestiture, including classification as discontinued operations and any related impairment.
- Cash proceeds, timing, and restrictions associated with the planned sale of approximately $44.8 million of held-for-sale assets.
- Enrollment trends, student starts, retention, average revenue per student, and the performance of the Transportation and Skilled Trades segment.
- Compliance with the term loan’s financial and education-sector covenants, including minimum liquidity and minimum EBITDA requirements.
- Sustainability of positive quarterly earnings and operating cash flow after excluding prior-year impairment comparisons.
- Continued access to Title IV programs, regulatory developments, student receivable collectability, and the company’s full valuation allowance on deferred tax assets.