Lincoln Educational Services Corporation — FY2014 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2014, filed March 16, 2015. Lincoln provides career-oriented post-secondary education through 31 campuses in 15 states, offering automotive technology, health sciences, skilled trades, hospitality services, and business and information technology programs.
- Students enrolled at December 31, 2014: 13,278; average enrollment: 14,010, down 5.4% from 14,804 in 2013.
- Automotive technology and health sciences represented approximately 42% and 29% of average enrollment, respectively.
- Approximately 80% of 2014 revenue, measured on a cash-receipts basis, was derived indirectly from federal Title IV programs.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $325.0 million | $341.5 million | Down 4.8% |
| Operating income (loss) | $(48.5) million | $(6.9) million | Operating margin from (2.0%) to (14.9%) |
| Loss from continuing operations | $(49.5) million | $(31.1) million | Margin from (9.1%) to (15.2%) |
| Net loss | $(56.1) million | $(51.3) million | Net margin from (15.0%) to (17.3%) |
| Basic and diluted loss per share | $(2.46) | $(2.28) | Worsened |
| Cash flow from operations | $12.0 million | $3.2 million | Improved $8.8 million |
| Capital expenditures | $7.5 million | $6.5 million | Increased $0.9 million |
- Educational services and facilities expense declined 2.8% to $164.4 million, but increased to 50.6% of revenue from 49.5% because of the high fixed-cost structure.
- Selling, general and administrative expense declined 4.3% to $168.4 million, but increased to 51.8% of revenue from 51.5%.
- Bad debt expense was 4.7% of revenue, up from 4.1% in 2013.
- Impairment charges totaled $40.8 million in continuing operations, including a $39.0 million goodwill impairment charge and $1.5 million of long-lived asset impairment. Total impairment charges including discontinued operations were approximately $43.0 million.
- Cash and cash equivalents were $12.3 million at year-end; total cash, cash equivalents, and restricted cash were $42.3 million, including $30.0 million of restricted cash.
- Total debt was $65.2 million, consisting primarily of $30.0 million under the credit agreement, $25.5 million of capital lease obligations, and a $9.7 million finance obligation.
- Working capital was $29.6 million, down from $47.0 million in 2013. Assets held for sale totaled $50.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because average enrollment fell 5.4%; average revenue per student increased 0.6%, but higher scholarships reduced revenue by approximately $3.4 million.
- Management reduced instructional, administrative, sales, marketing, and student-services costs in response to lower enrollment. Destination-school sales personnel were restructured and partially replaced with centralized call-center representatives.
- Five Florida training sites were closed at December 31, 2014 and reported as discontinued operations. They generated $2.1 million of revenue and a $6.6 million net loss in 2014.
- Goodwill declined to $22.2 million from $62.5 million following the 2014 impairment charge. Total assets declined to $213.7 million from $305.9 million, while stockholders’ equity declined to $83.0 million from $145.2 million.
- Operating cash flow improved to $12.0 million, aided in part by tax refunds and working-capital changes, despite the reported net loss.
- Borrowings under the credit facility declined from $54.5 million to $30.0 million at year-end. The credit facility was subsequently extended to April 5, 2016, with availability reduced to $20 million effective January 15, 2015; the year-end balance was repaid on January 14, 2015.
- The quarterly dividend was reduced from $0.07 to $0.02 per share during 2014 and discontinued on February 27, 2015.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that enrollment declines appeared to be stabilizing, with student starts declining approximately 3% in 2014, but provided no specific revenue, earnings, or enrollment guidance.
- Management expects 2015 capital expenditures to be approximately 1% to 3% of revenue and plans to fund them with operating cash flow and real-estate monetization.
- Management expects available liquidity to fund operations for the next twelve months, based on operating cash flow, $12.3 million of cash, remaining revolver capacity, potential real-estate financing, and planned sales of approximately $50.9 million of held-for-sale assets. No additional financing commitments had been obtained.
- The company’s calculated DOE financial-responsibility composite score declined to 1.3 for 2014 from 1.4 in 2013, subject to DOE review. Lincoln operates under the Zone Alternative and Heightened Cash Monitoring 1 payment method.
- If the composite score falls below 1.0, or remains in the 1.0-to-1.4 range for three or more consecutive years, the company could face additional monitoring, reimbursement requirements, or letters of credit. Management cautioned that failure to monetize assets or obtain financing could cause the 2015 score to fall below 1.0.
- 2014 final cohort default rates for existing institutions ranged from 16.6% to 26.5%; no institution exceeded the 30% threshold. Draft 2012 rates also did not exceed 30%.
- New gainful-employment regulations generally take effect July 1, 2015. Management preliminarily expected most programs to comply and described the anticipated impact as small, but the regulations could affect program eligibility and enrollment.
- Fern Park, Florida received a February 2015 accreditation show-cause notice from ABHES. The board approved a plan to cease operations there, with closure scheduled for the first quarter of 2016.
- The company recorded a $1.0 million litigation and regulatory loss contingency related to an ongoing Massachusetts Attorney General investigation. Management did not believe currently pending proceedings would materially affect the company, but acknowledged potential exposure above accrued amounts.
- Additional principal risks include dependence on Title IV funding, regulatory and accreditation compliance, competition, enrollment and retention trends, student receivables and bad debt, liquidity, debt covenants, asset-sale execution, pension obligations, and cybersecurity.
Important Facts for Investors to Verify
- Whether the company can sell the $50.9 million of held-for-sale assets and maintain sufficient liquidity after repayment of the revolver.
- The DOE’s final determination of the 2014 composite score and whether continued participation under the Zone Alternative remains available.
- Compliance with gainful-employment regulations, the 90/10 rule, cohort default-rate requirements, and all accreditation and state authorization requirements.
- Enrollment, student starts, retention, scholarship levels, bad debt, and revenue per student during 2015.
- The status and potential financial impact of the Massachusetts investigation and other regulatory matters.
- The financial and operating consequences of the Florida closures, including the planned Fern Park closure.
- The company’s ability to sustain positive operating cash flow despite continuing net losses, fixed costs, debt obligations, lease commitments, and pension liabilities.
- Whether the reported impairment charges and reduced goodwill indicate further risk of asset impairments if operating performance does not improve.