Item 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The following discussion may contain forward-looking statements regarding the Company, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the “SEC”) and in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.
The interim financial statements and related notes thereto filed in this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in our Form 10-K for the year ended December 31, 2016, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2016.
General
Lincoln Educational Services Corporation and its subsidiaries (collectively, the “Company”, “we”, “our” and “us”, as applicable) provide diversified career-oriented post-secondary education to recent high school graduates and working adults. The Company, which currently operates 25 schools in 15 states,
offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant, medical administrative assistant and pharmacy technician, among other programs), hospitality services (which include culinary, therapeutic massage, cosmetology and aesthetics) and business and information technology (which includes information technology and criminal justice programs). The schools operate under Lincoln Technical Institute, Lincoln College of Technology, Lincoln College of New England, Lincoln Culinary Institute, and Euphoria Institute of Beauty Arts and Sciences and associated brand names. Most of the campuses serve major metropolitan markets and each typically offers courses in multiple areas of study. Five of the campuses are destination schools, which attract students from across the United States and, in some cases, from abroad. The Company’s other campuses primarily attract students from their local communities and surrounding areas. All of the campuses are nationally or regionally accredited and are eligible to participate in federal financial aid programs by the U.S. Department of Education (the “DOE”) and applicable state education agencies and accrediting commissions which allow students to apply for and access federal student loans as well as other forms of financial aid.
In the first quarter of 2015, we reorganized our operations into three reportable business segments: (a) Transportation and Skilled Trades segment, (b) Healthcare and Other Professions (“HOPS”) segment, and (c) Transitional segment, which refers to businesses that have been or are currently being taught out. In November 2015, the Board of Directors approved a plan for the Company to divest the schools included in the HOPS segment due to a strategic shift in the Company’s business strategy. The Company underwent an exhaustive process to divest the HOPS schools which proved successful in attracting various purchasers but, ultimately, did not result in a transaction that our Board believed would enhance shareholder value. When the decision was first made by the Board of Directors to divest HOPS, 18 campuses were operating in this segment. By the end of 2017, we will have strategically closed seven underperforming campuses leaving a total of 11 campuses remaining under the HOPS segment. The Company believes that the closures and planned closures of the aforementioned campuses has positioned this segment and the Company to be more profitable going forward as well as maximizing returns for the Company’s shareholders.
The combination of several factors, including the inability of a prospective buyer of the HOPS segment to close on the purchase, the improvements the Company has implemented in the HOPS segment operations, the closure of seven underperforming campuses and the change in Federal government administration, resulted in the Board reevaluating its divestiture plan and the determination that shareholder value would more likely be enhanced by continuing to operate our HOPS segment as revitalized. Consequently, the Board of Directors has abandoned the plan to divest the HOPS segment and the Company now intends to retain the remaining campuses in the HOPS segment. The results of operations of the campuses included in the HOPS segment are reflected as continuing operations in the condensed consolidated financial statements.
In the fourth quarter of 2016, the Company completed the teach-out of its Hartford, Connecticut and Henderson (Green Valley), Nevada campuses which originally operated in the HOPS segment. Also in 2016, the Company announced the closing of its Northeast Philadelphia, Pennsylvania, Center City Philadelphia Pennsylvania and West Palm Beach, Florida facilities, which also were originally in our HOPS segment and which were fully taught out in 2017. In addition, in March 2017, the Board of Directors approved
a plan to not renew the leases at our schools located in Brockton, Massachusetts and Lowell, Massachusetts, which also were originally in our HOPS segment. These schools are being taught out with expected closure in December 2017 and are included in the Transitional segment as of September 30, 2017.
On August 14, 2017, New England Institute of Technology at Palm Beach, Inc., a wholly-owned subsidiary of the Company, consummated the anticipated sale of the real property located at 2400 and 2410 Metrocentre Boulevard East, West Palm Beach, Florida, including the improvements and other personal property located thereon (the “West Palm Beach Property”) to Tambone Companies, LLC (“Tambone”), pursuant to a previously disclosed purchase and sale agreement (the “West Palm Sale Agreement”) entered into on March 14, 2017. Pursuant to the terms of the West Palm Sale Agreement, as subsequently amended, the purchase price for the West Palm Beach Property was $15.8 million. As a result, the Company recorded a gain on the sale in the amount of $1.5 million. As previously disclosed, the West Palm Beach Property served as collateral for a short term loan in the principal amount of $8.0 million obtained by the Company from its lender, Sterling National Bank, on April 28, 2017, which loan matured upon the earlier of the sale of the West Palm Beach Property or October 1, 2017. Accordingly, on August 14, 2017, concurrently with the consummation of the sale of the West Palm Beach Property, the Company repaid the term loan in an aggregate amount of $8.0 million, consisting of principal and accrued interest.
On March 31, 2017, the Company entered into a
new revolving credit facility with
Sterling National Bank in the aggregate principal amount of up to $55 million, which consists of up to $50 million of revolving loans, including a $10 million sublimit for letters of credit, and an additional $5 million non-revolving loan. The new credit facility requires that revolving loans in excess of $25 million and all letters of credit issued thereunder be cash collateralized dollar for dollar. The proceeds of the $5 million non-revolving loan were held in a pledged account at Sterling National Bank as required by the terms of the new credit facility pending the completion of environmental studies undertaken at certain properties owned by the Company and mortgaged to Sterling National Bank. Upon the completion of environmental studies that revealed that no environmental issues existed at the properties, during the quarter ended June 30, 2017, the $5 million held in the pledged account at Sterling National Bank was released and used to repay the $5 million non-revolving loan. The new revolving credit facility replaces a term loan facility which was repaid and terminated concurrently with the effectiveness of the new revolving credit facility. The term of the new revolving credit facility is 38 months, maturing on May 31, 2020. The new revolving credit facility is discussed in further detail under the heading “Liquidity and Capital Resources” below and in Note 4 to the condensed consolidated financial statements included in this report.
As of September 30, 2017, we had 11,515 students enrolled at 25 campuses in our programs.
Critical Accounting Policies and Estimates
Our discussions of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, impairments, income taxes, benefit plans and certain accruals. Actual results could differ from those estimates. The critical accounting policies discussed herein are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not result in significant management judgment in the application of such principles. We believe that the following accounting policies are most critical to us in that they represent the primary areas where financial information is subject to the application of management’s estimates, assumptions and judgment in the preparation of our condensed consolidated financial statements.
Revenue Recognition
.
Revenues are derived primarily from programs taught at our schools. Tuition revenues, textbook sales and one-time fees, such as
nonrefundable application fees and course material fees, are recognized on a straight-line basis over the length of the applicable program as the student proceeds through the program, which is the period of time from a student’s start date through his or her graduation date, including internships or externships that take place prior to graduation, and we complete the performance of teaching the student which entitles us to the revenue.
Other revenues, such as tool sales and contract training revenues are recognized as services are performed or goods are delivered. On an individual student basis, tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as unearned tuition.
We evaluate whether collectability of revenue is reasonably assured prior to the student attending class and reassess collectability of tuition and fees when a student withdraws from a course. We calculate the amount to be returned under Title IV and its stated refund policy to determine eligible charges and, if there is a balance due from the student after this calculation, we expect payment from the student and we have a process to pursue uncollected accounts whereby, based upon the student’s financial means and ability to pay, a payment plan is established with the student to ensure that collectability is reasonable. We continuously monitor our historical collections to identify potential trends that may impact our determination that collectability of receivables for withdrawn students is realizable.
If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded. Refunds are calculated and paid in accordance with federal, state and accrediting agency standards. Generally, the amount to be refunded to a student is calculated based upon the period of time the student has attended classes and the amount of tuition and fees paid by the student as of his or her withdrawal date. These refunds typically reduce deferred tuition revenue and cash on our consolidated balance sheets as we generally do not recognize tuition revenue in our consolidated statements of income (loss) until the related refund provisions have lapsed. Based on the application of our refund policies, we may be entitled to incremental revenue on the day the student withdraws from one of our schools. We record revenue for students who withdraw from one of our schools when payment is received because collectability on an individual student basis is not reasonably assured.
Allowance for uncollectible accounts
. Based upon our experience and judgment, we establish an allowance for uncollectible accounts with respect to tuition receivables. We use an internal group of collectors, augmented by third-party collectors as deemed appropriate, in our collection efforts. In addition, we periodically sell written-off receivables to third parties. In establishing our allowance for uncollectible accounts, we consider, among other things, current and expected economic conditions, a student’s status (in-school or out-of-school), whether or not a student is currently making payments and overall collection history. Changes in trends in any of these areas may impact the allowance for uncollectible accounts. The receivables balances of withdrawn students with delinquent obligations are reserved based on our collection history. Although we believe that our reserves are adequate, if the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.
Our bad debt expense as a percentage of revenue for the three months ended September 30, 2017 and 2016 was 4.7% and 4.8%, respectively. Our bad debt expense as a percentage of revenue for the nine months ended September 30, 2017 and 2016 was 5.3% and 4.7%, respectively. Our exposure to changes in our bad debt expense could impact our operations. A 1% increase in our bad debt expense as a percentage of revenues for each of the three months ended September 30, 2017 and 2016 would have resulted in an increase in bad debt expense of $0.7 million and $0.7 million, respectively. A 1% increase in our bad debt expense as a percentage of revenues for each of the nine months ended September 30, 2017 and 2016 would have resulted in an increase in bad debt expense of $1.9 million and $2.1 million, respectively.
We do not believe that there is any direct correlation between tuition increases, the credit we extend to students, and our loan commitments. Our loan commitments to our students are made on a student-by-student basis and are predominantly a function of the specific student’s financial condition. We only extend credit to the extent there is a financing gap between the tuition charged for the program and the amount of grants, student loans and parental loans that each student receives and the availability of family contributions. Each student’s funding requirements are unique. Factors that determine the amount of aid available to a student are student status (whether they are dependent or independent students), Pell Grants awarded, Plus Loans awarded or denied to parents, and family contributions. As a result, it is extremely difficult to predict the number of students that will need us to extend credit to them. Our tuition increases have ranged historically from 2% to 5% annually and have not meaningfully impacted overall funding requirements.
Because a substantial portion of our revenue is derived from Title IV programs, any legislative or regulatory action that significantly reduces the funding available under Title IV programs or the ability of our students or schools to participate in Title IV programs could have a material effect on the realizability of our receivables.
Goodwill
. We test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact these judgments in the future and require an adjustment to the recorded balances.
There was no goodwill impairment for the three and nine months ended September 30, 2017 and 2016.
Long-lived assets
. We review the carrying value of our long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. We evaluate long-lived assets for impairment by examining estimated future cash flows. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made.
There was no long-lived asset impairment during the three and nine months ended September 30 2017 and 2016.
Bonus costs
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We accrue the estimated cost of our bonus programs using current financial information as compared to target financial achievements and key performance objectives. Although our recorded liability for bonuses is based on our best estimate of the obligation, actual results could differ and require adjustment of the recorded balance.
Income taxes.
We
account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Code (“ASC”) Topic 740, “
Income Taxes
”. This statement requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
In accordance with ASC 740, we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In accordance with ASC 740, our assessment considers whether there has been sufficient income in recent years and whether sufficient income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, we considered, among other things, historical levels of income, expected future income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Significant judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial position or results of operations. Changes in, among other things, income tax legislation, statutory income tax rates, or future income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
On the basis of this evaluation the realization of our deferred tax assets was not deemed to be more likely than not and thus we have provided a valuation allowance on our net deferred tax assets.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the three and nine months ended September 30, 2017 and 2016, there were no interest and penalties expense associated with uncertain tax positions.
Effect of Inflation
Inflation has not had a material effect on our operations.
Results of Continuing Operations
Certain reported amounts in our analysis have been rounded for presentation purposes. The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2017
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2016
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2017
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2016
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Revenue
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Costs and expenses:
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Educational services and facilities
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50.6
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%
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50.6
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%
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51.0
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%
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51.8
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%
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Selling, general and administrative
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52.7
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%
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50.3
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%
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56.2
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%
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53.1
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%
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Gain on sale of assets
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-2.3
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%
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0.0
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%
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-0.8
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%
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-0.2
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%
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Total costs and expenses
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101.0
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%
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100.9
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%
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106.4
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%
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104.7
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%
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Operating loss
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-1.0
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%
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-0.9
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%
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-6.4
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%
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-4.7
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%
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Interest expense, net
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-1.1
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%
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-1.9
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%
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-3.4
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%
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-2.1
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%
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Other income
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0.0
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%
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2.3
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%
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0.0
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%
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2.4
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%
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Loss from operations before income taxes
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-2.1
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%
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-0.5
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%
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-9.8
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%
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-4.4
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%
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Provision for income taxes
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0.1
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%
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0.1
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%
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0.1
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%
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0.1
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%
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Net Loss
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-2.2
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%
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-0.6
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%
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-9.9
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%
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-4.5
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%
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Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Consolidated Results of Operations
Revenue.
Revenue decreased by $7.0 million, or 9.4%, to $67.3 million for the three months ended September 30, 2017 from $74.3 million in the prior year comparable period. The decrease in revenue is mainly attributable to the suspension of new student starts at campuses in our Transitional segment which have closed or will be closed at year-end. This segment accounted for approximately 95% of the total revenue decline.
Total student starts decreased by 10.9% to approximately 4,400 from 5,000 for the three months ended September 30, 2017 as compared to the prior year comparable period. Approximately 82% of the overall decrease was due to the Transitional segment noted above. The remaining decrease resulted from start underperformance at one campus in the Transportation and Skilled Trades segment and two campuses in the Healthcare and Other Professions segment.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense.
Our educational services and facilities expense decreased by $3.5 million, or 9.3%, to $34.1 million for the three months ended September 30, 2017 from $37.5 million in the prior year comparable quarter. This decrease is mainly attributable to the Transitional segment which accounted for $3.2 million in cost reductions as three campuses in the segment have closed during the three months ended September 30, 2017 and the remaining two campuses are preparing to close by the end of the current calendar year.
Educational services and facilities expenses, as a percentage of revenue remained essentially flat at 50.6% for the three months ended September 30, 2017 and 2016.
Selling, general and administrative expense.
Our selling, general and administrative expense decreased by $1.9 million, or 5.1%, to $35.5 million for the three months ended September 30, 2017 from $37.4 million in the comparable quarter of 2016. This decrease also was primarily due to the Transitional segment, which accounted for approximately $2.9 million in cost reductions. Partially offsetting the cost reductions was $0.6 million of corporate and other costs related to the closure of the of the Hartford, Connecticut campus on December 31, 2016.
As a percentage of revenues, selling, general and administrative expense increased to 52.7% for the three months ended September 30, 2017 from 50.3% in the comparable prior year period.
Our selling, general and administrative expenses contain a high fixed cost component and are not as scalable as some of our other expenses. As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population.
Gain on Sale of Assets.
For the three months ended September 30, 2017, gain on sale of assets increased to $1.5 million from less than $0.1 million in the prior year comparable period. The increase was due to the sale of two properties located in West Palm Beach, Florida.
Net interest expense.
For the three months ended September 30, 2017, net interest expense decreased by $0.7 million, or 50% to $0.7 million from $1.4 million in the prior year comparable period. The expense reductions were attributable to lower debt outstanding in combination with more favorable terms under our new credit facility with Sterling National Bank effective March 31, 2017.
Other Income.
For the three months ended September 30, 2017, other income decreased by $1.7 million from the prior year comparable period. The $1.7 million of other income in 2016 reflected the amortization of a one-time gain from the modification of a lease at three of the Company’s campuses which were previously accounted for as finance obligations in the prior year.
Income taxes.
Our provision for income taxes was $0.1 million, or 3.5% of pretax loss, for the three months ended September 30, 2017, compared to $0.1 million, or 11.9% of pretax loss, in the prior year comparable period. No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance. Income tax expense resulted from various minimal state tax expenses.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Consolidated Results of Operations
Revenue.
Revenue decreased by $18.5 million, or 8.7%, to $194.5 million for the nine months ended September 30, 2017 from $213.0 million for the prior year comparable period. The decrease in revenue is primarily attributable to the suspension of new student enrollments at campuses in our Transitional segment which have closed or will be closed by year end. This segment accounted for approximately 90% of the total revenue decline. The remaining decline was due to our HOPS segment which decreased by $1.8 million for the nine months ended September 30, 2017 due to average population down approximately 30 students.
Total student starts decreased by 12.5% to approximately 9,900 from 11,300 for the nine months ended September 30, 2017 as compared to the prior year comparable period. The decrease was largely due to the suspension of new student starts for the Transitional segment which accounted for approximately 79% of the decline. The Transportation and Skilled Trades segment starts were down 2.8% and the HOPS segment starts were down 3.4% for the nine months ended September 30, 2017 as compared to the prior year comparable period.
For a general discussion of trends in our student enrollment, see “Seasonality and Outlook” below.
Educational services and facilities expense.
Our educational services and facilities expense decreased by $11.1 million, or 10%, to $99.2 million for the nine months ended September 30, 2017 from $110.2 million in the prior year comparable period. This decrease is mainly attributable to the Transitional segment which accounted for $10.4 million in cost reductions as three campuses in the segment have closed during the nine months ended September 30, 2017 and the remaining two campuses that are preparing to close by the end of the current calendar year. The remainder of the decrease was due to a $1.4 million decrease in depreciation expense resulting from fully depreciated assets.
Educational services and facilities expenses, as a percentage of revenue decreased to 51.0% for the nine months ended September 30, 2017 from 51.8% in the prior year comparable period.
Selling, general and administrative expense.
Our selling, general and administrative expense decreased by $3.9 million, or 3.5%, to $109.4 million for the nine months ended September 30, 2017 from $113.3 million in the comparable period of 2016. The decrease also was primarily due to the Transitional segment, which accounted for approximately $9.5 million in cost reductions. Partially offsetting these costs reductions are $3.3 million in increased administrative expense; and $2.5 million in additional sales and marketing expense.
Administrative expense increased primarily due to a $1.8 million increase in bad debt expense as a result of higher past due student accounts, higher account write-offs, and timing of Title IV funds receipts and $1.1 million in additional closed school expenses which relates directly to the closure of the Hartford, Connecticut campus in December 31, 2016. T
he additional expenses relating to the Hartford Connecticut campus will terminate with the apartment lease which ends in September 2019.
Sales and marketing expense increased by $2.5 million, or 6.6%, primarily as a result of $2.1 million in increased marketing expense.
Increased marketing spend was part of a strategic marketing initiatives intended to reach more students. These initiatives resulted in a slight improvement in starts in the adult demographic for the nine months ended September 30, 2017 as compared to the prior comparable period
.
As a percentage of revenues, selling, general and administrative expense increased to 56.2% for the nine months ended September 30, 2017 from 53.1% in the comparable prior year period.
As of September 30, 2017, we had total outstanding loan commitments to our students of $46.9 million, as compared to $40.0 million at December 31, 2016. Loan commitments, net of interest that would be due on the loans through maturity, were $34.9 million at September 30, 2017, as compared to $30.0 million at December 31, 2016. The increase in loan commitments was due in part to the seasonality of the Company’s operations.
Gain on sale of assets.
For the nine months ended September 30, 2017, gain on sale of assets increased to $1.6 million from $0.4 million in the prior year comparable period. The increase was due to the sale of two properties located in West Palm Beach, Florida.
Net interest expense.
For the nine months ended September 30, 2017 net interest expense increased by 2.1 million, or 46% to $6.6 million from $4.5 million in the prior year comparable period. The increase was mainly attributable to a $2.2 million non-cash write-off of previously capitalized deferred financing fees. These costs were incurred at March 31, 2017 when the Company entered into a new revolving credit facility with Sterling National Bank. Partially offsetting these increases were reductions in interest expense resulting from lower debt outstanding in combination with more favorable terms under the current Credit Facility compared to our prior Term Loan.
Other Income.
For the nine months ended September 30, 2017 other income decreased by $5.1 million from the prior year comparable period. The $5.1 million in 2016 reflected the amortization of a one-time gain from the modification of a lease at three of the Company’s campuses which were previously accounted for as finance obligations in the prior year.
Income taxes.
Our provision for income taxes was $0.2 million, or 0.8% of pretax loss, for the nine months ended September 30, 2017, compared to $0.2 million, or 1.6% of pretax loss, in the prior year comparable period. No federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance. Income tax expense resulted from various minimal state tax expenses.
Segment Results of Operations
The for-profit education industry has been impacted by numerous regulatory changes, the changing economy and an onslaught of negative media attention. As a result of these challenges, student populations have declined and operating costs have increased. Over the past few years, the Company has closed over ten locations and exited its online business. In 2016, the Company ceased operations in Hartford, Connecticut; Fern Park, Florida; and Henderson (Green Valley), Nevada. In the fourth quarter of 2016, the Board of Directors approved plans to cease operations at our schools in Center City Philadelphia, Pennsylvania; Northeast Philadelphia, Pennsylvania; and West Palm Beach, Florida which were fully taught out in 2017. In addition, in March 2017, the Board of Directors approved plans to cease operations at our schools in Brockton, Massachusetts and Lowell, Massachusetts, which are expected to close in the fourth quarter of 2017. These schools, which were previously included in our HOPS segment, are now included in the Transitional segment.
In the past, we offered any combination of programs at any campus. We have shifted our focus to program offerings that create greater differentiation among campuses and attain excellence to attract more students and gain market share. Also, strategically, we began offering continuing education training to select employers who hire our students and this is best achieved at campuses focused on their profession.
As a result of the regulatory environment, market forces and strategic decisions, we now operate our business in three reportable segments: (a) Transportation and Skilled Trades segment; (b) Healthcare and Other Professions segment; and (c) Transitional segment.
Our reportable segments have been determined based on a method by which we now evaluate performance and allocate resources. Each reportable segment represents a group of post-secondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key market segments to enhance operational alignment within each segment to more effectively execute our strategic plan. Each of the Company’s schools is a reporting unit and an operating segment. Our operating segments are segments described below.
Transportation and Skilled Trades –
Transportation and Skilled Trades segment offers academic programs mainly in the career-oriented disciplines of transportation and skilled trades (e.g. automotive, diesel, HVAC, welding and manufacturing).
Healthcare and Other Professions –
The Healthcare and Other Professions segment offers academic programs in the career-oriented disciplines of health sciences, hospitality and business and information technology (e.g. dental assistant, medical assistant, practical nursing, culinary arts and cosmetology).
Transitional –
Transitional segment refers to operations that are being phased out or closed and consists of our campuses that are currently being taught out. These schools are employing a gradual teach-out process that enables the schools to continue to operate while current students complete their course of study. These schools are no longer enrolling new students.
In addition, in March 2017, the Board of Directors of the Company approved
a plan to cease operations at our schools in Brockton, Massachusetts and Lowell, Massachusetts. These schools are being taught out and are expected to be closed in December 2017. During the year ended December 31, 2016, the Company announced the closing of our Northeast Philadelphia, Pennsylvania, Center City Philadelphia, Pennsylvania and West Palm Beach, Florida facilities which were fully taught out in 2017. In the first quarter of 2016, we completed the teach-out of our Fern Park, Florida campus. In addition, in the fourth quarter of 2016, we completed the teach-out of our Hartford, Connecticut and Henderson (Green Valley), Nevada campuses.
The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation takes several factors into consideration, including the campus’ geographic location and program offerings, as well as skillsets required of our students by their potential employers. The purpose of this evaluation is to ensure that our programs provide our students with the best possible opportunity to succeed in the marketplace with the goals of attracting more students to our programs and, ultimately, to provide our shareholders with the maximum return on their investment. Campuses in the Transitional segment have been subject to this process and have been strategically identified for closure.
We evaluate segment performance based on operating results. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
The following table present results for our three reportable segments for the three months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
47,694
|
|
|
$
|
47,939
|
|
|
|
-0.5
|
%
|
HOPS
|
|
|
18,428
|
|
|
|
18,559
|
|
|
|
-0.7
|
%
|
Transitional
|
|
|
1,186
|
|
|
|
7,769
|
|
|
|
-84.7
|
%
|
Total
|
|
$
|
67,308
|
|
|
$
|
74,267
|
|
|
|
-9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
6,061
|
|
|
$
|
6,120
|
|
|
|
-1.0
|
%
|
Healthcare and Other Professions
|
|
|
(574
|
)
|
|
|
(41
|
)
|
|
|
1300.0
|
%
|
Transitional
|
|
|
(2,495
|
)
|
|
|
(2,029
|
)
|
|
|
-23.0
|
%
|
Corporate
|
|
|
(3,723
|
)
|
|
|
(4,721
|
)
|
|
|
21.1
|
%
|
Total
|
|
$
|
(731
|
)
|
|
$
|
(671
|
)
|
|
|
-8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
3,016
|
|
|
|
3,090
|
|
|
|
-2.4
|
%
|
Healthcare and Other Professions
|
|
|
1,429
|
|
|
|
1,453
|
|
|
|
-1.7
|
%
|
Transitional
|
|
|
-
|
|
|
|
448
|
|
|
|
-100.0
|
%
|
Total
|
|
|
4,445
|
|
|
|
4,991
|
|
|
|
-10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
6,977
|
|
|
|
7,128
|
|
|
|
-2.1
|
%
|
Healthcare and Other Professions
|
|
|
3,327
|
|
|
|
3,286
|
|
|
|
1.2
|
%
|
Transitional
|
|
|
259
|
|
|
|
1,429
|
|
|
|
-81.9
|
%
|
Total
|
|
|
10,563
|
|
|
|
11,843
|
|
|
|
-10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,403
|
|
|
|
7,667
|
|
|
|
-3.4
|
%
|
Healthcare and Other Professions
|
|
|
3,957
|
|
|
|
3,826
|
|
|
|
3.4
|
%
|
Transitional
|
|
|
155
|
|
|
|
1,362
|
|
|
|
-88.6
|
%
|
Total
|
|
|
11,515
|
|
|
|
12,855
|
|
|
|
-10.4
|
%
|
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Transportation and Skilled Trades
Student starts for the quarter decreased by 74 students, or 2.4%, compared to the prior year comparable period. The decline in student starts is mainly the result of the underperformance of one campus, which decreased by 98 students. Excluding this campus, student starts for the quarter would have grown over the prior year comparable period. In addition, as previously reported in the second quarter, there was a decline in starts as a result of a lower than expected high school start rate. High school students make up approximately 30% of the segment’s population. In an effort to increase high school enrollments, the Company made various changes to its processes and organizational structure.
Operating income remained essentially flat at $6.1 million, for the three months ended September 30, 2017 as compared to the prior year comparable period. Changes in revenue and expense allocations were impacted as follows:
|
·
|
Revenue decreased by $0.2 million, or 0.5% to $47.7 million for the three months ended September 30, 2017 from $47.9 million in the prior year comparable period. The decrease in revenue was primarily driven by a 2.1% decrease in average student population due to a decline in the number of student starts slightly offset by a 1.6% increase in average revenue per student compared to the prior year comparable period.
|
|
·
|
Educational services and facilities expense decreased by $0.4 million, or 1.9%, to $22.4 million for the three months ended September 30, 2017 from $22.8 million in the prior year comparable quarter. This decrease was primarily due to reductions in facilities expense resulting from more favorable lease terms at one of our campuses and reductions in depreciation expense due to fully depreciated assets.
|
|
·
|
Selling, general and administrative expenses were essentially flat. Our selling, general and administrative expenses contain a high fixed cost component and are not as scalable as some of our other expenses. As our student population decreases, we typically experience a reduction in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population.
|
Healthcare and Other Professions
Student starts in the Healthcare and Other Professions segment decreased by 24 students, or 1.7%, for the three months ended September 30, 2017 as compared to the prior year comparable period. This segment consists of 11 campuses and, despite the overall decrease in student starts, for the three months ended September 30, 2017, seven of the 11 campuses in this segment showed an increase in student starts. Of the remaining four campuses, one remained flat, two demonstrated less starts as a result of underperformance, and the last campus had a shift in start dates lowering starts compared to the prior year comparable period.
Operating loss for the three months ended September 30, 2017 was $0.6 million compared to $0.1 million in the prior year comparable period. The $0.5 million change was mainly driven by the following factors:
|
·
|
Revenue decreased to $18.4 million for the three months ended September 30, 2017, as compared to $18.6 million in the prior year comparable quarter. The decrease in revenue is mainly attributable to a 2.0% decline in average revenue per student due to tuition decreases at certain campuses and shifts in program mix.
|
|
·
|
Educational services and facilities expense increased by $0.2 million, or 1.9%, to $10.2 million for the three months ended September 30, 2017 from $10.0 million in the prior year comparable quarter.
|
|
·
|
Selling, general and administrative expense increased by $0.2, or 2.4%, to $8.8 million for the three months ended September 30, 2017 from $8.6 million in the prior year comparable quarter due to increases in sales and marketing expense.
|
Transitional
The following table lists the schools that are categorized in the Transitional segment and their status as of September 30, 2017:
Campus
|
|
Date Closed
|
|
Date Scheduled to Close
|
Northeast Philadelphia, Pennsylvania
|
|
August 31, 2017
|
|
N/A
|
Center City Philadelphia, Pennsylvania
|
|
August 31, 2017
|
|
N/A
|
West Palm Beach, Florida
|
|
September 30, 2017
|
|
N/A
|
Brockton, Massachusetts
|
|
N/A
|
|
December 31, 2017
|
Lowell, Massachusetts
|
|
N/A
|
|
December 31, 2017
|
Fern Park, Florida
|
|
March 31, 2016
|
|
N/A
|
Hartford, Connecticut
|
|
December 31, 2016
|
|
N/A
|
Henderson (Green Valley), Nevada
|
|
December 31, 2016
|
|
N/A
|
**Revenue for the campuses in the above table have been classified in the Transitional segment for comparability for the three months ended September 30, 2017 and 2016.
Revenue was $1.2 million for the three months ended September 30, 2017 as compared to $7.8 million in the prior year comparable period mainly due to the campus closures.
Operating loss increased by $0.5 million to $2.5 million for the three months ended September 30, 2017 from $2.0 million in the prior year comparable period. The decrease was due to campus closures.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and Other expenses decreased by $1.0 million, or 21.1%, to $3.7 million from $4.7 million, in the prior year comparable period. The decrease was primarily driven by a $1.5 million gain resulting from the sale of two properties located in West Palm Beach, Florida on August 14, 2017 and a decrease in salaries expense of approximately $0.9 million. Partially offsetting these reductions was a $0.9 million increase in benefits expense and $0.6 million of additional closed school costs. The decrease in benefits was attributable to historically lower medical claims in 2016 and the additional closed school costs related to the closure of the Hartford, Connecticut campus on December 31, 2016. T
he additional expenses relating to the Hartford Connecticut campus will terminate with the apartment lease which ends in September 2019.
The following table presents results for our three reportable segments for the nine months ended September 30, 2017 and 2016:
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
131,169
|
|
|
$
|
131,243
|
|
|
|
-0.1
|
%
|
HOPS
|
|
|
55,199
|
|
|
|
57,030
|
|
|
|
-3.2
|
%
|
Transitional
|
|
|
8,084
|
|
|
|
24,718
|
|
|
|
-67.3
|
%
|
Total
|
|
$
|
194,452
|
|
|
$
|
212,991
|
|
|
|
-8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
8,960
|
|
|
$
|
11,916
|
|
|
|
-24.8
|
%
|
Healthcare and Other Professions
|
|
|
(1,047
|
)
|
|
|
2,634
|
|
|
|
-139.7
|
%
|
Transitional
|
|
|
(3,900
|
)
|
|
|
(7,132
|
)
|
|
|
45.3
|
%
|
Corporate
|
|
|
(16,503
|
)
|
|
|
(17,566
|
)
|
|
|
6.1
|
%
|
Total
|
|
$
|
(12,490
|
)
|
|
$
|
(10,148
|
)
|
|
|
-23.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
6,502
|
|
|
|
6,686
|
|
|
|
-2.8
|
%
|
Healthcare and Other Professions
|
|
|
3,272
|
|
|
|
3,386
|
|
|
|
-3.4
|
%
|
Transitional
|
|
|
132
|
|
|
|
1,254
|
|
|
|
-89.5
|
%
|
Total
|
|
|
9,906
|
|
|
|
11,326
|
|
|
|
-12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
6,694
|
|
|
|
6,723
|
|
|
|
-0.4
|
%
|
Healthcare and Other Professions
|
|
|
3,477
|
|
|
|
3,508
|
|
|
|
-0.9
|
%
|
Transitional
|
|
|
574
|
|
|
|
1,519
|
|
|
|
-62.2
|
%
|
Total
|
|
|
10,745
|
|
|
|
11,750
|
|
|
|
-8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,403
|
|
|
|
7,667
|
|
|
|
-3.4
|
%
|
Healthcare and Other Professions
|
|
|
3,957
|
|
|
|
3,826
|
|
|
|
3.4
|
%
|
Transitional
|
|
|
155
|
|
|
|
1,362
|
|
|
|
-88.6
|
%
|
Total
|
|
|
11,515
|
|
|
|
12,855
|
|
|
|
-10.4
|
%
|
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Transportation and Skilled Trades
Student start results decreased by 2.8% to 6,502 from 6,686 for the nine months ended September 30, 2017 as compared to the prior year comparable period.
Operating income decreased by $3.0 million, or 24.8%, to $9.0 million for the nine months ended September 30, 2017 from $11.9 million in the prior year comparable period mainly driven by the following factors:
|
·
|
Revenue remained essentially flat at $131.2 million for the nine months ended September 30, 2017 as compared to the prior year comparable period mainly due to a higher carry in population compared to the prior year quarter in addition to a slight increase in revenue per student. Partially offsetting the increases was a decline in average population of approximately 30 students.
|
|
·
|
Educational services and facilities expense decreased by $0.6 million, or 0.9% primarily due to a $1.2 million decrease in facilities expense, partially offset by a $0.6 million increase in instructional and books and tools expense. Reductions in facilities expense were primarily driven by reduced depreciation expense resulting from fully depreciated assets. Increases in instructional expenses were due to the launch of a new program at one of our campuses in combination with increased materials costs; and increased expenses for books and tools were due to the timing of the distribution of materials for students starting classes in combination with implementing the use of laptop computers for more of our program curriculums during the quarter.
|
|
·
|
Selling, general and administrative expense increased by $3.6 million due to (a)
$1.3 million of additional bad debt expense resulting from higher past due student accounts, higher account write-offs, and timing of Title IV fund receipts;
and (b)
$1.4 million increase in sales and marketing expenses.
The increased spending in sales and marketing was part of a strategic effort to attract student enrollments and increase brand awareness.
|
Healthcare and Other Professions
Student start results decreased by 3.4% to 3,272 from 3,386 for the nine months ended September 30, 2017 as compared to the prior year comparable period.
Operating loss for the nine months ended September 30, 2017 was $1.1 million compared to operating income of $2.6 million in the prior year comparable period. The $3.7 million change was mainly driven by the following factors:
|
·
|
Revenue decreased to $55.2 million for the nine months ended September 30, 2017, as compared to $57.0 million in the prior year comparable quarter. The decrease in revenue is mainly attributable to two main factors, a decline in average population of approximately 30 students in combination with a 2.4% decline in average revenue per student due tuition decreases at certain campuses and shifts in our program mix.
|
|
·
|
Educational services and facilities expense remained essentially flat at $29.9 million for the nine months ended September 30, 2017 as compared to the prior year comparable period.
|
|
·
|
Selling, general and administrative expense increased by $1.9 million primarily resulting from a $1.1 million increase
in sales and marketing expense. The increased marketing initiatives has resulted in a slight improvement in student starts in the adult demographic for the nine months ended September 30, 2017 as compared to the prior comparable period; and a $0.6 million increase in administrative expenses mainly the result of bad debt expense which increased due to higher past due student accounts, higher account write-offs, and timing of Title IV fund receipts.
|
Transitional
Revenue was $8.1 million for the nine months ended September 30, 2017 as compared to $24.7 million in the prior year comparable period mainly attributable to the closing of campuses within this segment.
Operating loss decreased by $3.2 million to $3.9 million for the nine months ended September 30, 2017 from $7.1 million in the prior year comparable period. The decrease is primarily attributable to the closing of campuses within this segment
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and Other expense decreased by $1.1 million, or 6.0%, to $16.5 million from $17.6 million in the prior year comparable period. The decrease in corporate expenses was primarily driven by a $1.5 million gain resulting from the sale of two properties located in West Palm Beach, Florida on August 14, 2017 and a decrease in salaries expense of approximately $2.7 million. Partially offsetting these reductions was a $2.1 million increase in benefits expense and $1.2 million of additional closed school costs. The increase in benefits was attributable to historically lower medical claims in 2016 and the additional closed school costs related to the closure of the Hartford, Connecticut campus on December 31, 2016. T
he additional expenses relating to the Hartford Connecticut campus will terminate with the apartment lease which ends in September 2019.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for facilities expansion and maintenance and the development of new programs. Our principal sources of liquidity have been cash provided by borrowings under our credit facility. The following chart summarizes the principal elements of our cash flow:
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities
|
|
$
|
(16,607
|
)
|
|
$
|
(9,513
|
)
|
Net cash provided by (used in) investing activities
|
|
|
10,897
|
|
|
|
(643
|
)
|
Net cash used in financing activities
|
|
|
(8,077
|
)
|
|
|
(9,024
|
)
|
At September 30, 2017, the Company had $14.5 million of cash, cash equivalents and restricted cash (which includes $7.2 million of restricted cash) as compared to $47.7 million of cash, cash equivalents and restricted cash (which included $26.7 million of restricted cash) as of December 31, 2016.
This decrease is primarily the result of a net loss during the nine months ended September 30, 2017; repayment of $44.3 million under our previous term loan facility and seasonality of the business.
For the last several years, the Company and the proprietary school sector generally have faced deteriorating earnings growth. Government regulations have negatively impacted earnings by making it more difficult for prospective students to obtain loans, which when coupled with the overall economic environment have hindered prospective students from enrolling in our schools. In light of these factors, we have incurred significant operating losses as a result of lower student population. Despite these events, we believe that our likely sources of cash should be sufficient to fund operations for the next twelve months and thereafter for the foreseeable future.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures and principal and interest payments on borrowings, we leveraged our owned real estate. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
Our primary source of cash is tuition collected from our students. The majority of students enrolled at our schools rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses. The most significant source of student financing is Title IV programs which represented approximately 79% of our cash receipts relating to revenues in 2016. Pursuant to applicable regulations, students must apply for a new loan for each academic period. Federal regulations dictate the timing of disbursements of funds under Title IV programs and loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received approximately 31 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student's academic year. Certain types of grants and other funding are not subject to a 31-day delay. In certain instances, if a student withdraws from a program prior to a specified date, any paid but unearned tuition or prorated Title IV financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significant amount of Title IV funds received by our students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any restriction on our eligibility to receive Title IV funds would have a significant impact on our operations and our financial condition. See “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.
Operating Activities
Net cash used in operating activities was $16.6 million for the nine months September 30, 2017 compared to $9.5 million for the comparable period of 2016. The increase in cash used in operating activities in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 is primarily due to an increased net loss as well as changes in other working capital such as accounts receivable, accounts payable, accrued expenses and unearned tuition.
Investing Activities
Net cash provided by investing activities was $10.9 million for the nine months ended September 30, 2017 compared to cash used of $0.6 million in the prior year comparable period. Our primary use of cash in investing activities was capital expenditures associated with investments in training technology, classroom furniture, and new program buildouts.
We currently lease a majority of our campuses. We own our schools in Grand Prairie, Texas; Nashville, Tennessee; and Denver, Colorado and our buildings in West Palm Beach, Florida; and Suffield, Connecticut.
On August 14, 2017, the Company completed the sale of two of three properties located in West Palm Beach Florida resulting in cash inflows of $15.5 million.
Capital expenditures are expected to approximate 2% of revenues in 2017. We expect to fund future capital expenditures with cash generated from operating activities, borrowings under our revolving credit facility, and cash from our real estate monetization.
Financing Activities
Net cash used in financing activities was $8.1 million as compared to net cash used of $9.0 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease of $0.9 million was primarily due to three main factors: (a) net payments on borrowing of $6.5 million; (b) $2.9 million in lease termination fees paid in the prior year; and (c) the reclassification of $5 million in restricted cash in the prior year.
Net borrowings consisted of: (a) total borrowing to date under our secured revolving credit facility of $38.0 million; (b) reclassification of payments of borrowing from restricted cash of $20.3 million; and (c) $64.8 million in total repayments made by the Company.
Credit Agreement
On March 31, 2017, the Company entered into a secured revolving credit agreement (the “Credit Agreement”) with Sterling National Bank (the “Bank”) pursuant to which the Company obtained a credit facility in the aggregate principal amount of up to $55 million (the “Credit Facility”). The Credit Facility consists of (a) a $30 million loan facility (“Facility 1”), which is comprised of a $25 million revolving loan designated as “Tranche A” and a $5 million non-revolving loan designated as “Tranche B,” which Tranche B was repaid during the quarter ended June 30, 2017 and (b) a $25 million revolving loan facility (“Facility 2”), which includes a sublimit amount for letters of credit of $10 million. The Credit Facility replaces a term loan facility (the “Prior Credit Facility”) which was repaid and terminated concurrently with the effectiveness of the Credit Facility. The term of the Credit Facility is 38 months, maturing on May 31, 2020.
The Credit Facility is secured by a first priority lien in favor of the Bank on substantially all of the personal property owned by the Company as well as mortgages on four parcels of real property owned by the Company in Connecticut, Colorado, Tennessee and Texas at which four of the Company’s schools are located.
At the closing of the Credit Facility, the Company drew $25 million under Tranche A of Facility 1, which, pursuant to the terms of the Credit Agreement, was used to repay the Prior Credit Facility and to pay transaction costs associated with closing the Credit Facility. After the disbursements of such amounts, the Company retained approximately $1.8 million of the borrowed amount for working capital purposes.
Also, at closing, $5 million was drawn under Tranche B and, pursuant to the terms of the Credit Agreement, was deposited into an interest-bearing pledged account (the “Pledged Account”) in the name of the Company maintained at the Bank in order to secure payment obligations of the Company with respect to the costs of remediation of any environmental contamination discovered at certain of the mortgaged properties based upon environmental studies undertaken at such properties. During the quarter ended June 30, 2017, the environmental studies were completed and revealed no environmental issues existing at the properties. Accordingly, pursuant to the terms of the Credit Agreement, the $5 million in the Pledged Account was released and used to repay the non-revolving loan outstanding under Tranche B. Upon the repayment of Tranche B, the maximum principal amount of Facility 1 was permanently reduced to $25 million.
Pursuant to the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans must be secured by cash collateral in an amount equal to 100% of the aggregate stated amount of the letters of credit issued and revolving loans outstanding through draws from Facility 1 or other available cash of the Company.
Accrued interest on each revolving loan will be payable monthly in arrears. Revolving loans under Tranche A of Facility 1 will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%. The amount borrowed under Tranche B of Facility 1 and revolving loans under Facility 2 will bear interest at a rate per annum equal to the greater of (x) the Bank’s prime rate and (y) 3.50%.
Each issuance of a letter of credit under Facility 2 will require the payment of a letter of credit fee to the Bank equal to a rate per annum of 1.75% on the daily amount available to be drawn under the letter of credit, which fee shall be payable in quarterly installments in arrears. Letters of credit totaling $7.2 million that were outstanding under a $9.5 million letter of credit facility previously provided to the Company by the Bank, which letter of credit facility was set to mature on April 1, 2017, are treated as letters of credit under Facility 2.
The terms of the Credit Agreement provide that the Bank be paid an unused facility fee on the average daily unused balance of Facility 1 at a rate per annum equal to 0.50%, which fee is payable quarterly in arrears. In addition, the Company is required to maintain, on deposit in one or more non-interest bearing accounts, a minimum of $5 million in quarterly average aggregate balances. If in any quarter the required average aggregate account balance is not maintained, the Company is required to pay the Bank a fee of $12,500 for that quarter and, in the event that the Company terminates the Credit Facility or refinances with another lender within 18 months of closing, the Company is required to pay the Bank a breakage fee of $500,000.
In addition to the foregoing, the Credit Agreement contains customary representations, warranties and affirmative and negative covenants, including financial covenants that restrict capital expenditures, prohibit the incurrence of a net loss commencing on December 31, 2018 and require a minimum adjusted EBITDA and a minimum tangible net worth, which is an annual covenant, as well as events of default customary for facilities of this type. As of September 30, 2017, the Company is in compliance with all covenants.
In connection with the Credit Agreement, the Company paid the Bank an origination fee in the amount of $250,000 and other fees and reimbursements that are customary for facilities of this type.
The Company incurred an early termination premium of approximately $1.8 million in connection with the termination of the Prior Credit Facility.
On April 28, 2017, the Company entered into an additional secured credit agreement with the Bank, pursuant to which the Company obtained a short term loan in the principal amount of $8 million, the proceeds of which were used for working capital and general corporate purposes. The loan, which had an interest rate equal to the greater of the Bank’s prime rate plus 2.50% or 6.00%, was secured by real property assets located in West Palm Beach, Florida at which schools operated by the Company were located and matured upon the earlier of October 1, 2017 and the date of the sale of the West Palm Beach, Florida property. The Company sold two of three properties located in West Palm Beach, Florida to Tambone in the third quarter of 2017 and subsequently repaid the $8 million.
As of September 30, 2017, the Company had $17.5 million outstanding under the Credit Facility; offset by $0.8 million of deferred finance fees. As of December 31, 2016, the Company had $44.3 million outstanding under the Prior Credit Facility; offset by $2.3 million of deferred finance fees, which were written-off.
As of September 30, 2017 and December 31, 2016, there were letters of credit in the aggregate outstanding principal amount of $7.2 million and $6.2 million, respectively. As of September 30, 2017, there are no revolving loans outstanding under Facility 2.
The following table sets forth our long-term debt (in thousands):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Credit agreement
|
|
$
|
16,721
|
|
|
$
|
-
|
|
Term loan
|
|
|
-
|
|
|
|
44,267
|
|
|
|
|
16,721
|
|
|
|
44,267
|
|
Less current maturities
|
|
|
-
|
|
|
|
(11,713
|
)
|
|
|
$
|
16,721
|
|
|
$
|
32,554
|
|
As of September 30, 2017, we had outstanding loan commitments to our students of $46.9 million, as compared to $40.0 million at December 31, 2016. Loan commitments, net of interest that would be due on the loans through maturity, were $34.9 million at September 30, 2017, as compared to $30.0 million at December 31, 2016.
Contractual Obligations
Long-term Debt
. As of September 30, 2017, our current portion of long-term debt and our long-term debt consisted of borrowings under our Credit Facility.
Lease Commitments
. We lease offices, educational facilities and equipment for varying periods through the year 2030 at base annual rentals (excluding taxes, insurance, and other expenses under certain leases).
The following table contains supplemental information regarding our total contractual obligations as of September 30, 2017 (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Credit facility
|
|
$
|
17,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,500
|
|
|
$
|
-
|
|
Operating leases
|
|
|
83,394
|
|
|
|
19,506
|
|
|
|
31,246
|
|
|
|
15,723
|
|
|
|
16,919
|
|
Total contractual cash obligations
|
|
$
|
100,894
|
|
|
$
|
19,506
|
|
|
$
|
31,246
|
|
|
$
|
33,223
|
|
|
$
|
16,919
|
|
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2017, except for surety bonds. As of September 30, 2017, we posted surety bonds in the total amount of approximately $14.3 million. Cash collateralized letters of credit of $7.2 million are primarily comprised of letters of credit for the DOE and security deposits in connection with certain of our real estate leases. These off-balance sheet arrangements do not adversely impact our liquidity or capital resources.
Seasonality and Outlook
Seasonality
Our revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. Student population varies as a result of new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our first and second quarters and we have experienced larger class starts in the third quarter and higher student attrition in the first half of the year. Our second half growth is largely dependent on a successful high school recruiting season. We recruit our high school students several months ahead of their scheduled start dates and, thus, while we have visibility on the number of students who have expressed interest in attending our schools, we cannot predict with certainty the actual number of new student enrollments and the related impact on revenue. Our expenses, however, typically do not vary significantly over the course of the year with changes in our student population and revenue. During the first half of the year, we make significant investments in marketing, staff, programs and facilities to meet our second half of the year targets and, as a result, such expenses do not fluctuate significantly on a quarterly basis. To the extent new student enrollments, and related revenue, in the second half of the year fall short of our estimates, our operating results could be negatively impacted. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change as a result of new school openings, new program introductions, and increased enrollments of adult students and/or acquisitions.
Outlook
Similar to many companies in the proprietary education sector, we have experienced significant deterioration in student enrollments over the last several years. This can be attributed to many factors including the economic environment and numerous regulatory changes such as changes to admissions advisor compensation policies, elimination of “ability-to-benefit,” changes to the 90/10 Rule and cohort default rates, gainful employment and modifications to Title IV amounts and eligibility. While the industry has not returned to growth, the trends are far more stable as declines have slowed.
As the economy continues to improve and the unemployment rate continues to decline our student enrollment is negatively impacted due to a portion of our potential student base entering the workforce earlier without obtaining any post-secondary training. Offsetting this short term decline in available students is the fact that an increasing number of individuals in the “baby boom” generation are retiring from the workforce. The retirement of baby boomers coupled with a growing economy has resulted in additional employers looking to us to help solve their workforce needs. With schools in 15 states, we are a very attractive employment solution for large regional and national employers.
To fund our business plans, including any anticipated future losses, purchase commitments, capital expenditures, principal and interest payments on borrowings and to satisfy the DOE financial responsibility standards, we have entered into a new credit facility as described above and continue to have the ability to sell our assets that are classified as held for sale. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student population.
Regulatory Update
On April 26, 2013, the DOE notified our Union, New Jersey campus that an on-site Program Review was scheduled to begin on May 20, 2013. The Program Review assessed the institution’s administration of Title IV Programs in which the campus participated for the 2011-2012 and 2012-2013 awards years. On September 29, 2017, the DOE issued its Final Program Review Determination (“FPRD”) that closed the review and indicated that the DOE had determined the Company’s financial liability to the DOE resulting from the FPRD to be $175, which amount has been paid by the Company to the DOE.
Cohort Default Rates
In September 2017, the DOE released the final cohort default rates for the 2014 federal fiscal year. These are the most recent final rates published by the DOE. The rates for our existing institutions for the 2014 federal fiscal year range from 5.2% to 13.6%. None of our institutions had a cohort default rate equal to or greater than 30% for the 2014 federal fiscal year.