Lincoln Educational Services Corporation — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Lincoln Educational Services provides career-oriented post-secondary education to recent high school graduates and working adults. At December 31, 2019, it operated 22 campuses in 14 states under the Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute and Euphoria Institute brands. Programs primarily cover transportation and skilled trades, healthcare, hospitality and information technology.
The filing covers the fiscal year ended December 31, 2019, with comparative results for 2018 and 2017. The company reported two active operating segments: Transportation and Skilled Trades and Healthcare and Other Professions. The Transitional segment had no remaining campuses in 2019 after the completion of the Southington, Connecticut teach-out.
Average enrollment increased 3.7% to 10,985 students, while ending enrollment increased 7.2% to 11,285 students. The company had approximately 78% of revenue, calculated on a cash-receipts basis, indirectly derived from federal Title IV programs.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $273.3 million | $263.2 million | Up 3.9% |
| Operating income (loss) | $5.2 million | $(4.0) million | Improved by $9.2 million |
| Net income (loss) | $2.0 million | $(6.5) million | Improved by $8.6 million |
| Basic and diluted EPS | $0.08 | $(0.27) | Improved |
| Operating margin | 1.9% | (1.5%) | Improved 3.4 percentage points |
| Net margin | 0.7% | (2.5%) | Improved 3.2 percentage points |
| Net cash provided by operating activities | $1.0 million | $(1.7) million | Improved by $2.7 million |
| Capital expenditures | $5.4 million | $4.7 million | Increased |
| Credit facility balance | $34.8 million | $49.3 million | Decreased by $14.5 million |
Educational services and facilities expense decreased 1.5% to $123.5 million, representing 45.2% of revenue versus 47.6% in 2018. Selling, general and administrative expense increased 2.8% to $145.2 million but declined to 53.1% of revenue from 53.7%. Bad debt expense was 7.6% of revenue versus 6.7% in 2018, reflecting higher tuition, increased reserves and lower historical repayment rates.
Transportation and Skilled Trades revenue increased 4.6% to $193.7 million and operating income increased 24.4% to $22.0 million. Healthcare and Other Professions revenue increased 10.4% to $79.6 million and operating income increased 17.3% to $7.6 million. Corporate expenses increased to $24.3 million from $22.1 million, partly due to strategic initiatives.
Cash and cash equivalents were $23.6 million, and restricted cash was $15.0 million, at year-end. Management reported a net cash balance of approximately $4.6 million after considering cash, restricted cash and credit-facility borrowings. Accounts receivable, net of allowance, totaled $20.7 million; the allowance for uncollectible accounts was $20.4 million.
Total assets were $194.8 million and total liabilities were $139.6 million. The company had $32.0 million of long-term debt, $2.0 million of current debt maturities and $55.2 million of operating lease liabilities recorded following adoption of the new lease standard. Total contractual cash obligations were $118.4 million, including debt, lease obligations and interest.
Material changes versus the prior comparable period
- Revenue growth reflected a 3.8% increase in student starts, a 3.7% increase in average enrollment and improved retention. Excluding the Transitional segment, revenue increased 6.2%.
- The company returned to profitability, with operating income of $5.2 million and net income of $2.0 million compared with operating and net losses in 2018.
- Operating cash flow turned positive, increasing from an outflow of $1.7 million to an inflow of $1.0 million.
- The Transitional segment generated no 2019 revenue or operating loss, compared with $5.8 million of revenue and a $6.0 million operating loss in 2018.
- On November 14, 2019, the company issued 12,700 shares of Series A 9.6% convertible preferred stock for $12.7 million of gross proceeds and approximately $12.0 million of net proceeds.
- On the same date, the company replaced its prior credit facility with a new senior secured facility of up to $60 million, compared with aggregate availability of $47 million under the prior facility. The new facility increased liquidity by approximately $25 million and was expected to reduce annualized interest expense by approximately $1 million.
- The company adopted the lease accounting standard on January 1, 2019, recognizing a $38.0 million right-of-use asset and a $42.3 million lease liability at adoption. Year-end operating lease liabilities totaled $55.2 million.
- Bad debt expense increased, and outstanding net student loan commitments rose to $54.7 million from $46.2 million, increasing credit and liquidity exposure.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance. Management expects to continue investing in marketing, admissions, high-demand programs, employer partnerships, training equipment and potential strategic acquisitions. Management believes the skills gap, employer demand for technically trained workers and potential workforce displacement could support enrollment growth.
The business is seasonal: enrollment is generally lower in the first half of the year, while larger class starts typically occur in the third quarter. Expenses are relatively less flexible than enrollment and revenue, creating downside risk if second-half enrollment falls short of expectations.
- Title IV and regulatory dependence: Approximately 78% of cash-basis revenue was indirectly derived from Title IV programs. Loss of eligibility, reduced funding, regulatory changes, adverse audits or noncompliance could materially reduce enrollment, revenue and liquidity.
- Financial responsibility: The DOE determined in January 2020 that the company was “in the zone” based on 2017 and 2018 composite scores of 1.1, requiring Heightened Cash Monitoring 1, additional reporting and other Zone Alternative requirements. Management calculated a 2019 composite score of 1.6, but the DOE had not yet made its determination.
- Provisional certification: The Indianapolis, Columbia and New Britain institutions were provisionally certified and represented approximately 72% of 2019 revenue. These institutions face heightened DOE scrutiny and approval requirements.
- Accreditation: ACCSC continued the company’s schools on financial reporting status because of the net working capital deficit, accumulated deficit and prior net losses. The company had submitted additional information and had not received a response as of the filing.
- Letters of credit and surety bonds: The company maintained $0.6 million of DOE letters of credit related to late returns of Title IV funds and approximately $12.8 million of state-required surety bonds. Future regulatory events could require additional financial protection.
- Debt and liquidity: The new credit facility is secured by substantially all company assets and includes minimum tangible net worth, fixed-charge coverage, leverage, capital expenditure and deposit-balance covenants. The company reported compliance at year-end. The facility includes variable-rate debt, although the term loan was hedged at a fixed rate of 5.36%.
- Preferred stock dilution and control: Series A preferred stock carries a 9.6% dividend, conversion rights, voting rights subject to a 19.99% cap, a director appointment right and approval rights over certain corporate actions. Dividends may be paid in additional conversion shares, potentially diluting common shareholders.
- Student receivables: Higher tuition, institutional lending and lower repayment rates contributed to increased bad debt expense. The company had $75.5 million of gross outstanding student loan commitments at year-end.
- Legal and regulatory matters: The company was cooperating with subpoenas from the New Jersey Attorney General. A Colorado compliance examination concluded in December 2019 with no violations reported. Management did not believe pending proceedings would have a material effect, but outcomes remain uncertain.
- COVID-19: The filing identified the emerging coronavirus outbreak as a potential risk to enrollment, instructor availability and campus operations; the financial impact was not quantifiable at the filing date.
Important facts for investors to verify
- Confirm the DOE’s final 2019 composite-score determination and whether Zone Alternative and HCM1 requirements were removed or retained.
- Monitor the provisional certification status of Indianapolis, Columbia and New Britain and any related DOE audit findings or financial-protection requirements.
- Assess whether enrollment growth and retention continue to offset higher bad debt, marketing costs and other relatively fixed operating expenses.
- Review cash conversion, student-receivable collections and the company’s $54.7 million of net student loan commitments.
- Track compliance with the new credit agreement, including debt maturities, minimum liquidity or deposit requirements and fixed-charge coverage.
- Evaluate the dilution, dividend accrual and governance implications of the Series A preferred stock.
- Review the effect of COVID-19 and subsequent public-health or economic disruptions on campus operations, enrollment and Title IV funding.
- Verify lease obligations, regulatory letters of credit, surety bonds and other contingent commitments when assessing liquidity.