Business Context and Reporting Period
Lincoln Educational Services Corporation provides career-oriented post-secondary education through 22 schools in 14 states, serving recent high school graduates and working adults. Its programs include transportation and skilled trades, healthcare, hospitality, and information technology. The company reports Transportation and Skilled Trades and Healthcare and Other Professions segments; no campuses were classified as Transitional.
This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The quarter was materially affected by the COVID-19 pandemic, including the transition from in-person instruction to distance learning.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $70.0 million | $63.3 million | Up 10.7% |
| Operating loss | $1.3 million | $4.9 million | Improved by $3.5 million |
| Operating margin | (1.9%) | (7.7%) | Improved 5.8 percentage points |
| Net loss | $1.8 million | $5.5 million | Improved by $3.7 million |
| Basic and diluted loss per share | $0.08 loss | $0.22 loss | Improved |
| Net cash used in operating activities | $11.9 million | $10.9 million | Use increased by $1.0 million |
| Capital expenditures | $1.3 million | $0.6 million | Use increased by $0.6 million |
Revenue growth reflected a 6.6% increase in average student population and a 3.7% increase in average revenue per student. Student starts declined 5.0%, primarily because of the pandemic in March. Average student population was 11,292 versus 10,589 in the prior-year quarter.
Educational services and facilities expense was $30.2 million, or 43.2% of revenue, compared with 47.4% in the prior year. Selling, general and administrative expense increased to $41.1 million, or 58.7% of revenue, from $38.1 million, or 60.3%. The company recorded approximately $0.7 million of COVID-19-related costs and higher bad debt expense.
At March 31, 2020, cash and cash equivalents were $9.7 million versus $23.6 million at December 31, 2019. The company reported net debt of $8.8 million, compared with net cash of $4.6 million at year-end 2019, using its stated calculation of cash and restricted cash less credit-facility borrowings.
Credit-facility borrowings were $19.3 million, net of $0.8 million of deferred financing fees, compared with $34.8 million at December 31, 2019. The company had $21.0 million of additional borrowing availability at March 31, 2020 and $4.0 million of outstanding letters of credit. Operating lease liabilities totaled $53.1 million on a present-value basis.
Material Changes Versus the Prior Comparable Period
- Transportation and Skilled Trades revenue increased 10.7% to $49.1 million, while operating income increased to $4.8 million from $1.8 million.
- Healthcare and Other Professions revenue increased 10.8% to $21.0 million, while operating income increased to $2.0 million from $1.0 million.
- Corporate expense increased to $8.2 million from $7.7 million, primarily because of higher employee costs and COVID-19 response costs.
- Bad debt expense increased, partly because of delayed Title IV disbursements associated with Heightened Cash Monitoring 1 procedures and operational disruption from COVID-19.
- Accounts receivable increased to $26.5 million from $20.7 million at year-end, while the allowance for doubtful accounts increased to $19.7 million from $18.1 million.
- Cash used in operating activities increased despite the lower net loss, reflecting weaker collections, delayed Title IV disbursements, lower advanced tuition payments, and higher payments of accounts payable and accrued expenses.
- The company repaid $15.0 million outstanding under its fully cash-collateralized line of credit in January 2020 and terminated that line in April 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects capital expenditures to approximate 2% of revenue in 2020 and believes available liquidity should fund operations for the next twelve months and the foreseeable future, although it cautioned that a significantly adverse COVID-19 outcome could materially impair liquidity.
The company moved all programs to distance learning, obtained applicable regulatory approvals, distributed or arranged access to devices, and enhanced its online platform. As of March 31, 2020, 324 students were on COVID-19-related leave, primarily because externships could not be completed or students did not elect distance learning. Certain program start dates were delayed into the second quarter, resulting in 143 fewer starts than in the prior-year quarter. Dormitory and meal-plan charges were largely reversed for students who returned home.
The Department of Education allocated $27.4 million to the company’s schools under the CARES Act Higher Education Emergency Relief Fund, in two equal installments. At least half is intended for student emergency grants, and the remaining funds may be used for permitted institutional costs or additional student grants. Funds must be used and reported in accordance with applicable requirements; otherwise, repayment or sanctions could result.
Key risks include the uncertain duration and severity of COVID-19, continued enrollment and start-date disruption, student collections and loan defaults, delayed or reduced Title IV funding, regulatory compliance, reliance on federal financial aid, and the company’s ability to operate effectively through distance learning. The company expects higher student forbearance, delinquency, and default levels as a result of pandemic-related economic hardship.
The company was in compliance with all debt covenants at March 31, 2020. Its secured credit facility is backed by substantially all personal property, subsidiary equity, and mortgages on certain real estate. Outstanding student loan commitments were $71.9 million, and surety bonds totaled approximately $12.4 million. Management reported no material pending litigation, asset impairments, or goodwill impairment indicators.
Series A convertible preferred stock totaled $12.0 million on the balance sheet and carries a 9.6% annual dividend rate; approximately $0.5 million of cumulative dividends were undeclared at March 31, 2020. The preferred stock is convertible subject to contractual limitations and is classified as mezzanine equity.
Facts Investors Should Verify
- Whether student starts, enrollment, externship completion, and collections recovered after the March 2020 disruption.
- The timing, permitted uses, accounting treatment, and compliance requirements associated with the $27.4 million CARES Act allocation.
- Whether COVID-19-related bad debt, student loan defaults, and Title IV disbursement delays continued to pressure cash flow.
- Actual cash availability after the April 2020 termination of the line of credit and compliance with all credit-facility covenants.
- Whether future periods require impairment charges, additional valuation allowances, or changes to revenue estimates as pandemic-related assumptions evolve.
- The company’s ability to fund its $18.4 million of contractual cash obligations due within one year, including debt, lease payments, and term-loan interest.