Lincoln Educational Services Corporation — 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 June 30, 2014, it operated 31 campuses and five training sites in 15 states, with 13,648 students in diploma and degree programs and 150 students in short programs.
This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the prior-year comparable periods. Five Ohio and Kentucky campuses ceased operations on December 31, 2013; their 2013 results are presented as discontinued operations.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $77.2 million, down 5.6% | $157.1 million, down 6.5% |
| Operating loss | $10.0 million | $19.4 million |
| Loss from continuing operations | $11.6 million | $22.7 million |
| Net loss | $11.6 million, or $0.51 per share | $22.7 million, or $1.00 per share |
| Operating margin | (12.9%) | (12.4%) |
| Interest expense | $1.2 million | $2.5 million |
- Educational services and facilities expense was $41.5 million for the quarter and $84.2 million year to date, representing 53.8% and 53.6% of revenue, respectively.
- Selling, general and administrative expense was $45.6 million for the quarter and $92.4 million year to date, representing 59.1% and 58.8% of revenue.
- Bad debt expense increased to 5.7% of quarterly revenue and 4.8% of year-to-date revenue, compared with 3.3% and 3.7% in the prior-year periods.
- No goodwill or long-lived asset impairment was recorded in 2014. The company recorded approximately $4.5 million of related impairment charges in the second quarter of 2013 and approximately $6.2 million for the first six months of 2013.
- Cash used in operating activities was $14.9 million for the first six months of 2014, compared with $14.3 million in 2013. Capital expenditures were $2.6 million.
- Cash and cash equivalents were $6.8 million at June 30, 2014, compared with $12.9 million at December 31, 2013. Restricted cash declined from $54.5 million to zero, primarily reflecting repayment of borrowings.
- Total debt and lease obligations were $50.4 million, including $15.0 million drawn under the revolving credit facility. Current maturities were $15.5 million, and noncurrent debt and lease obligations were $35.0 million.
- The company had $5.3 million of outstanding letters of credit and stated that it was in compliance with all credit agreement covenants.
- Stockholders’ equity was $121.0 million at June 30, 2014, down from $145.2 million at December 31, 2013, primarily due to the year-to-date net loss and a $3.4 million dividend.
Material changes versus the prior comparable period
- Quarterly revenue declined $4.6 million, primarily due to a 4.8% decrease in average student population to 13,803 and a 0.9% decline in average revenue per student.
- Year-to-date revenue declined $10.9 million, reflecting a 7.0% decrease in average student population to 13,984. Average revenue per student increased 0.6% year to date, partly due to improved retention.
- Expense reductions did not keep pace with revenue declines because educational expenses include a high fixed-cost component. Educational services expense as a percentage of revenue increased from 51.9% to 53.8% for the quarter and from 51.2% to 53.6% year to date.
- Quarterly SG&A was essentially flat despite lower revenue. Higher bad debt expense and campus-consolidation costs offset lower compensation, benefits, marketing, and admissions costs.
- The 2014 tax provision was $0.4 million for the quarter and $0.9 million year to date, compared with tax benefits of $4.4 million and $7.6 million in the respective 2013 periods. The company maintained a full valuation allowance on net deferred tax assets.
- The company repaid $54.5 million of borrowings in January 2014 and subsequently borrowed $15.0 million. The revolving credit facility’s aggregate availability was reduced from $60 million to $40 million effective January 16, 2014.
Guidance, outlook, risks and unusual items
- Management reported that student starts stabilized and were positive in the first and second quarters, particularly in automotive and skilled-trades programs. However, it expects industry disruption, negative publicity, economic conditions, and continued student and parent reluctance to incur debt to delay the recovery in starts expected for 2014.
- Management expects negative operating margins to reverse in the near future but provided no specific earnings or revenue guidance. It expects to meet short-term and next-twelve-month liquidity needs through operating cash flow, existing cash, credit-facility borrowings, and potential use of owned real estate.
- Capital expenditures are expected to approximate 1% to 3% of 2014 revenue, compared with 1.9% in 2013.
- Approximately 80% of 2013 cash receipts relating to revenue came from Title IV programs. Changes to Title IV eligibility, the 90/10 rule, cohort default rates, gainful-employment regulations, or other Department of Education requirements could materially affect enrollment, receivables, liquidity, and operations.
- The company’s 2013 90/10 percentages ranged from 69% to 85%. 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%. Final 2011 three-year rates were expected in September 2014.
- Outstanding student loan commitments were $31.3 million, or $22.5 million net of interest, at June 30, 2014.
- The Massachusetts Attorney General continued an investigation concerning compliance with state consumer protection and finance laws. The company stated that pending legal proceedings were not expected to have a material adverse effect, but the ultimate outcome of the investigation was not provided.
- Contractual cash obligations totaled $178.3 million, including $15.0 million of credit agreement borrowings, $48.8 million of capital leases, $110.6 million of operating leases, and $3.9 million of rent on a finance obligation.
Important facts for investors to verify
- Whether enrollment and student starts improve sufficiently to support management’s expected margin recovery.
- The company’s ability to generate positive operating cash flow while cash balances remain low and current debt maturities are significant.
- Renewal, refinancing, or amendment of the revolving credit facility, which matures April 5, 2015, and continued compliance with its financial covenants.
- Trends in bad debt, collections, institutional scholarships, and student loan commitments.
- Final Department of Education cohort default rates, future gainful-employment regulations, and continued Title IV eligibility.
- The potential impact of the Massachusetts investigation and other regulatory or legal matters.
- The filing contains an apparent date inconsistency: the report covers June 30, 2014 and the exhibit index references an August 8, 2014 filing, while the signature page states August 8, 2013.