Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion regarding Lincoln Educational Services Corporation may contain forward-looking statements regarding our business, prospects and
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, 2017, 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, 2017, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2017.
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 23 schools in 14 states,
offers programs in
automotive technology, skilled trades (which, among other programs, include HVAC, welding and computerized numerical control and electronic systems technology), healthcare services (which, among other programs, include nursing, dental assistant,
medical administrative assistant and pharmacy technician), 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 of
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.
Our business is organized into three reportable business segments: (a) the Transportation and Skilled Trades segment, (b) the Healthcare and Other
Professions (“HOPS”) segment, and (c) the Transitional segment, which consists of schools that have been or are currently being taught out. In November 2015, the Board of Directors of the Company approved a plan for the Company to divest the 18
campuses then comprising the HOPS segment due to a strategic shift in the Company’s business strategy. The Company underwent an exhaustive process to divest 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. By the end of 2017, we had closed seven underperforming campuses leaving a total of 11 campuses remaining under the HOPS segment. The Company believes that
the closures of the aforementioned campuses have positioned the HOPS segment and the Company to be more profitable going forward.
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 and the closure of seven underperforming campuses, resulted in the Board reevaluating its divestiture plan and the Board’s 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 and continues to operate 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 consolidated financial statements.
In 2016, the Company completed the teach-out of its Hartford, Connecticut; Fern Park,
Florida; and Henderson (Green Valley), Nevada campuses, which originally operated in the HOPS segment. In 2017, the Company completed the teach-out of its Northeast Philadelphia, Pennsylvania; Center City Philadelphia, Pennsylvania; West Palm
Beach, Florida; Brockton, Massachusetts; and Lowell, Massachusetts schools, which also were previously in our HOPS segment and all of which were
taught out and closed by December 2017 and are included in the Transitional segment as of
December 31, 2017.
On August 14, 2017, New England Institute of Technology at Palm Beach, Inc. (“NEIT”), a wholly-owned subsidiary of the Company, consummated the 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, pursuant to a
previously disclosed purchase and sale agreement entered into on March 14, 2017. Pursuant to the terms of the 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 July 9, 2018, NEIT entered into a commercial contract (the “Sale Agreement”) with Elite Property Enterprise, LLC, pursuant to which NEIT agreed to sell
to Elite Property Enterprise, LLC the real property owned by NEIT located at 1126 53
rd
Court North, Mangonia Park, Palm Beach County, Florida and the improvements and certain personal property located thereon (the “Mangonia Park
Property”), for a cash purchase price of $2,550,000.
On August 23, 2018, NEIT, consummated the sale of the Mangonia Park Property.
At the closing, NEIT paid a real estate
brokerage fee equal to 5% of the gross sales price and other customary closing costs and expenses.
Pursuant to the provisions of the Company’s Credit Agreement with its lender,
Sterling National Bank, the net cash proceeds of the sale of the Mangonia Park Property were deposited into an account with the lender to serve as additional security for loans and other financial accommodations provided to the Company and its
subsidiaries under the Credit Agreement.
On July 11, 2018, the Company and its wholly-owned subsidiaries (collectively with the Company, the “Borrowers”) entered into a third amendment (the
“Third Amendment”) of the Credit Agreement dated as of March 31, 2017 (as previously amended, the “Credit Agreement”) between the Borrowers and Sterling National Bank, as lender (the “Bank”). Prior to the Third Amendment, if the Mangonia Park
Property was sold, NEIT was required to apply the net proceeds of such sale to repay a corresponding amount of the outstanding principal balance of revolving loans provided under the Credit Agreement, which repayment of principal would
permanently reduce the principal amount of revolving loans available under the Credit Agreement. As a result of the Third Amendment, when the Mangonia Park Property was sold, NEIT deposited the net proceeds of such sale into a non-interest
bearing cash collateral account to be held at and by the Bank as additional collateral for the loans outstanding under the Credit Agreement. Pursuant to the Third Amendment, the Bank reserves the right to apply the funds held in such cash
collateral account to the repayment of the outstanding principal balance of the loans outstanding under the Credit Agreement.
On August 20, 2018, the Company decided to cease operations, effective December 31, 2018, at the Lincoln College of New England (“LCNE”) campus at
Southington, Connecticut. The decision to close the campus follows the previously reported placement of LCNE on probation by the college’s institutional accreditor, the New England Association of Schools and Colleges (“NEASC”). After evaluating
alternative options, the Company concluded that teaching-out and closing the campus was in the best interest of the Company and its students. Subsequent to formalizing the LCNE closure decision, the Company partnered with Goodwin College,
another NEASC-accredited institution in the region, to assist LCNE students to complete their programs of study. The majority of the LCNE students will continue their education at Goodwin College thereby limiting some of the Company’s closing
costs. The revenue, net loss and ending population of LCNE, as of December 31, 2017, were $8.4 million, $1.6 million and 397 students, respectively. The Company expects to record costs associated with the closure in 2018 in the range of $3.5
million to $4.5 million, including $2 million in connection with the termination of the LCNE campus lease, which will be paid in equal monthly installments through January 2020, and approximately $700,000 of severance payments. LCNE results,
which was previously reported in the HOPS segment, is now included in the Transitional segment as of September 30, 2018. The Company expects to complete the teach-out and close the LCNE campus by December 31, 2018.
As of September 30, 2018, we had 11,732 students enrolled at 23 campuses in our programs.
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Estimates” and Note 1 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. For Revenue Recognition refer to
Note 3 to the condensed consolidated financial statements contained herein.
Effect of Inflation
Inflation has not had a material effect on our operations.
Results of Continuing Operations
The following table sets forth selected consolidated statements of continuing operations data as a percentage of revenues for each of the periods indicated:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities
|
|
|
49.4
|
%
|
|
|
52.4
|
%
|
|
|
49.3
|
%
|
|
|
51.2
|
%
|
Selling, general and administrative
|
|
|
56.4
|
%
|
|
|
57.4
|
%
|
|
|
58.5
|
%
|
|
|
58.1
|
%
|
Loss (gain) on sale of assets
|
|
|
0.0
|
%
|
|
|
-0.1
|
%
|
|
|
0.1
|
%
|
|
|
-0.1
|
%
|
Total costs and expenses
|
|
|
105.8
|
%
|
|
|
109.7
|
%
|
|
|
107.9
|
%
|
|
|
109.2
|
%
|
Operating loss
|
|
|
-5.8
|
%
|
|
|
-9.7
|
%
|
|
|
-7.9
|
%
|
|
|
-9.2
|
%
|
Interest expense, net
|
|
|
-0.8
|
%
|
|
|
-1.1
|
%
|
|
|
-0.9
|
%
|
|
|
-4.6
|
%
|
Loss from operations before income taxes
|
|
|
-6.6
|
%
|
|
|
-10.8
|
%
|
|
|
-8.8
|
%
|
|
|
-13.8
|
%
|
Provision for income taxes
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Net Loss
|
|
|
-6.7
|
%
|
|
|
-10.9
|
%
|
|
|
-8.9
|
%
|
|
|
-13.9
|
%
|
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Consolidated Results of Operations
Revenue.
Revenue increased by $2.8 million,
or 4.1%, to $70.1 million for the three months ended September 30, 2018 from $67.3 million in the prior year comparable period. Increased revenue was a result of four consecutive quarters of start growth, excluding the Transitional segment,
which has helped drive a 3.6% and 12.6% increase in average student population for the Transportation and Skilled Trades segment and the HOPS segment, respectively. Excluding the Transitional segment, which had revenue of $0.8 million for the
three months ended September 30, 2018 compared to $2.6 million in the prior year comparable period, revenue would have increased by $4.6 million, or 7.1% quarter over quarter.
Total student starts increased by 4.7% for the three months ended September 30, 2018 as
compared to the prior year comparable period. Excluding the Transitional segment student starts would have increased 7.5% quarter over quarter. We attribute this growth to
continued investments in marketing, enhanced high school
programs and improved admissions process driving more consistency from lead to start.
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 $0.6 million, or 1.7%, to $33.5 million for the three months ended September 30, 2018 from $34.1 million in the prior year comparable period. The expense reductions were primarily due
to the Transitional segment which accounted for $1.8 million in cost savings, partially offset by $1.0 million in additional books and tools expense and $0.2 million in additional instructional expenses. Increases in books and tools expense were
a result of the correlation between providing laptops for a growing number of program offerings and an increased student population. Educational services and facilities expense as a percentage of revenue decreased to 47.8% for the three months
ended September 30, 2018 from 50.6% in the prior year comparable period.
Selling, general and administrative expense.
Our selling, general and administrative expense increased by $0.6 million, or 1.7%, to $36.1 million for the three months ended September 30, 2018 from $35.5 million in the prior year
comparable period. The Transitional segment and corporate accounted for $1.6 million and $0.5 million in cost reductions, which were fully offset by increased selling, general and administrative expenses. The increase in expenses were due to
higher bad debt expense of $2.0 million and increased marketing expense of $1.0 million.
Bad debt expense has increased due to larger reserves, driven by a higher accounts receivable balance. The Company’s accounts receivable during
the quarter was impacted by an increased number of student files selected for verification by the Department of Education. Consequently, this has resulted in additional documentation requests for students before the disbursement of scheduled
funding. The change in the verification process has impacted the entire industry and has driven our average verification rate, which had been historically about 25%, to between 25% and 60%. Management expects this issue to normalize in the
fourth quarter of 2018.
Marketing investments during the three months ended September 30, 2018 were approximately $1.0 million over the prior year, $0.4 million of which was for
creative development. While marketing investments have increased in the current quarter, the cost to obtain prospective students has remained essentially flat when compared to the prior year. Marketing dollars are providing a return on
investment and are expected to yield start growth over the next several quarters.
Selling general and administrative expense, as a percentage of revenue decreased to 51.5% for the three months ended September 30, 2018 from 52.7% in the
prior year comparable period.
Loss (gain) on sale of asset.
Loss on sale of assets increased to $0.4 million for the three months ended September 30, 2018,
from a gain on sale of asset of $1.5 million in the prior year comparable period.
The $2.0 million increase was primarily driven by a $0.4 million loss on the sale of the Mangonia Park Property on August 23, 2018; and a $1.5 million
gain in the prior year comparable quarter resulting from the sale of the West Palm Beach Property on August 14, 2017.
Net interest expense.
Net interest expense
for the three months ended September 30, 2018 decreased by $1.0 million, or 11.7%, to $0.6 million from $0.7 million in the prior year comparable period. The expense reduction was due to additional interest expense incurred in the prior year in
relation to an $8.0 million bridge term loan secured by our West Palm Beach Property. The bridge term loan was repaid in August 2017 upon the sale of the West Palm Beach Property.
Income taxes.
Our provision for income taxes
was $0.1 million, or 9.1% of pretax loss, for the three months ended September 30, 2018, compared to a provision for income taxes of $0.1 million, or 3.5% of pretax loss, in the prior year comparable period.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax
Act, among other things, eliminates the corporate alternative minimum tax (the “AMT”) and changes how existing AMT credits can be realized either to offset regular tax liability or to be refunded.
As of September 30, 2018 we have not completed our analysis of the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of
the effects of the Tax Act’s change in the federal rate and revalued our deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state
tax rate. Based on our initial analysis of the impact, we recorded a decrease related to deferred tax assets of $17.7 million at December 31, 2017. The expense is offset with a corresponding release of valuation allowance.
No other federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Consolidated Results of Operations
Revenue.
Revenue decreased by $1.4 million,
or 0.7%, to $193.1 million for the nine months ended September 30, 2018 from $194.5 million in the prior year comparable period. This decrease was driven by the Transitional segment which accounted for $9.0 million in reduced revenue year over
year. Excluding the Transitional segment, which had revenue of $4.7 million for the nine months ended September 30, 2018 compared to $13.7 million in the prior year comparable period, revenue would have increased by $7.6 million, or 4.2%.
Increased revenue was a result of an increased student population due to four consecutive quarters of start growth in combination with an increase in average revenue per student for the Transportation and Skilled Trades segment and the HOPS
segment.
Total student starts increased by 4.4% for the nine months ended September 30, 2018 as compared to the prior year comparable period.
Excluding the Transitional segment, student starts would have increased 6.8% year over year. We attribute this growth to
continued investments in marketing, enhanced high school
programs and improved admissions process driving more consistency from lead to start.
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 $5.0 million, or 5.1%, to $94.2 million for the nine months ended September 30, 2018 from $99.2 million in the prior year comparable period. The expense reductions were primarily due
to the Transitional segment, which accounted for $6.8 million in cost savings partially offset by $1.6 million in additional books and tools expense and $0.3 million in additional instructional expenses. The increase in books and tools expense
was a result of the correlation between providing laptops for a growing number of program offerings and an increased student population.
Educational services and facilities expense as a percentage of revenue decreased to 48.8% for the nine months ended September 30, 2018 from 51.0% in the
prior year comparable period.
Selling, general and administrative expense.
Our selling, general and administrative expense decreased by $1.3 million, or 1.2%, to $108.1 million for the nine months ended September 30, 2018 from $109.4 million in the prior year
comparable period. The Transitional segment and corporate accounted for $5.1 million and $0.3 million, respectively, in cost reductions, which were partially offset by increased selling, general and administrative expenses. The increase in
expenses were due to higher bad debt expense of $2.5 million and increased marketing expense of $2.2 million.
Bad debt expense has increased due to larger reserves, driven by a higher accounts receivable balance. The Company’s
accounts receivable during the quarter was impacted by an increased number of student files selected for verification by the Department of Education. Consequently, this has resulted in additional documentation requests for students before the
disbursement of scheduled funding. The change in the verification process has impacted the entire industry and has driven our average verification rate, which had been historically about 25%, to between 25% and 60%. Management expects this
issue to normalize in the fourth quarter of 2018.
Marketing investments during the nine months ended September 30, 2018 were approximately $2.2 million over the prior year, $0.8 million of which was for
creative development. While marketing investments have increased in the current quarter, the cost to obtain prospective students has remained essentially flat when compared to the prior year. Marketing dollars are providing a return on
investment and are expected to yield start growth over the next several quarters.
Selling, general and administrative expense as a percentage of revenue decreased to 56.0% for the nine months ended September 30, 2018 from 56.3% in the
prior year comparable period.
As of September 30, 2018, we had total outstanding loan commitments to our students of $59.1 million, as compared to $51.9 million at December 31, 2017.
The increase was due to an increased number of students electing to take our institutional loans to finance their education costs that are not covered by a third party or financial aid. Our institutional loans constitute loans of last resort,
available to assist our most financially challenged students. Further contributing to the increase in loan commitments is a notable increase in student population and seasonality of the business.
Loss (gain) on sale of asset.
Loss on sale of assets increased to $0.5 million for the nine months ended September 30, 2018,
from a gain on sale of asset of $1.6 million in the prior year comparable period.
The $2.1 million increase was primarily driven by a $0.4 million loss on the sale of the Mangonia Park Property on August 23, 2018 and a $1.5 million
gain in the prior year comparable quarter resulting from the sale of the West Palm Beach Property on August 14, 2017.
Net interest expense.
Net interest expense for the nine months ended September 30, 2018 decreased by $4.8 million, or 73.8%, to $1.7 million from $6.6 million in the prior year comparable period.
The decrease was
the result of the termination of our previous term loan which yielded significantly higher rates and the related fees and expenses associated with its early termination, which occurred on March 31, 2017. Additional interest expense was also
incurred in the prior year
in relation to an $8.0 million bridge term loan secured by our West Palm Beach Property, which was repaid in August 2017.
Income taxes.
Our provision for income taxes
was $0.2 million, or 1.3% of pretax loss, for the nine months ended September 30, 2018, compared to a provision for income taxes of $0.2 million, or 0.8% of pretax loss, in the prior year comparable period.
As noted above, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax
Act”). The Tax Act, among other things, eliminates the corporate alternative minimum tax (the “AMT”) and changes how existing AMT credits can be realized either to offset regular tax liability or to be refunded.
As of September 30, 2018, we have not completed our analysis of the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of
the effects of the Tax Act’s change in the federal rate and revalued our deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state
tax rate. Based on our initial analysis of the impact, we recorded a decrease related to deferred tax assets of $17.7 million at December 31, 2017. The expense is offset with a corresponding release of valuation allowance.
No other federal or state income tax benefit was recognized for the current period loss due to the recognition of a full valuation allowance.
Segment Results of Operations
The for-profit education industry has been impacted by numerous regulatory changes, a 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 2017, the Company completed the teach-out of
its Center City Philadelphia, Pennsylvania; Northeast Philadelphia, Pennsylvania; West Palm Beach, Florida; Brockton, Massachusetts; and Lowell, Massachusetts schools. All of these schools were previously included in our HOPS segment and as of
December 31, 2017, they have all been closed.
On August 20, 2018, the Company decided to teach-out the LCNE campus at Southington, Connecticut. LCNE results, which was previously reported in the HOPS segment, is
now included in the Transitional segment as of September 30, 2018. The Company expects to complete the teach-out and exit the LCNE campus by December 31, 2018.
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 promote attainment of excellence to attract more students and gain market share. Also, strategically, we began offering continuing education training to select employers who hire our graduates and this is best achieved at campuses
focused on the applicable profession.
As a result of the regulatory environment, market forces and our strategic decisions, we now operate our business in three reportable segments: (a) the
Transportation and Skilled Trades segment; (b) the Healthcare and Other Professions segment; and (c) the 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 described below.
Transportation and Skilled Trades –
The
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
– The Transitional segment refers
to campuses that are being taught-out and closed and operations that are being phased out. The schools in the Transitional segment employ a gradual teach-out process that enables the schools to continue to operate to allow their current students
to complete their course of study. These schools are no longer enrolling new students.
The Company continually evaluates each campus for profitability, earning potential, and customer satisfaction. This evaluation takes several factors into
consideration, including the campus’s 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 classified 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.
For all prior periods presented, the Company reclassified its Marietta, Georgia campus from the HOPS segment to the Transportation and Skilled Trades
segment. This reclassification occurred to address how the Company evaluates performance and allocates resources and was approved by the Company’s Board of Directors.
The following table present results for our three reportable segments for the three months ended September 30, 2018 and 2017:
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
51,008
|
|
|
$
|
48,795
|
|
|
|
4.5
|
%
|
Healthcare and Other Professions
|
|
|
18,249
|
|
|
|
15,890
|
|
|
|
14.8
|
%
|
Transitional
|
|
|
821
|
|
|
|
2,623
|
|
|
|
-68.7
|
%
|
Total
|
|
$
|
70,078
|
|
|
$
|
67,308
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
6,330
|
|
|
$
|
6,121
|
|
|
|
3.4
|
%
|
Healthcare and Other Professions
|
|
|
830
|
|
|
|
276
|
|
|
|
-200.7
|
%
|
Transitional
|
|
|
(1,863
|
)
|
|
|
(3,406
|
)
|
|
|
45.3
|
%
|
Corporate
|
|
|
(5,221
|
)
|
|
|
(3,722
|
)
|
|
|
-40.3
|
%
|
Total
|
|
$
|
76
|
|
|
$
|
(731
|
)
|
|
|
110.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
3,391
|
|
|
|
3,076
|
|
|
|
10.2
|
%
|
Healthcare and Other Professions
|
|
|
1,232
|
|
|
|
1,224
|
|
|
|
0.7
|
%
|
Transitional
|
|
|
30
|
|
|
|
145
|
|
|
|
0.0
|
%
|
Total
|
|
|
4,653
|
|
|
|
4,445
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,453
|
|
|
|
7,194
|
|
|
|
3.6
|
%
|
Healthcare and Other Professions
|
|
|
3,317
|
|
|
|
2,945
|
|
|
|
12.6
|
%
|
Transitional
|
|
|
127
|
|
|
|
424
|
|
|
|
-70.0
|
%
|
Total
|
|
|
10,897
|
|
|
|
10,563
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,922
|
|
|
|
7,626
|
|
|
|
3.9
|
%
|
Healthcare and Other Professions
|
|
|
3,637
|
|
|
|
3,280
|
|
|
|
10.9
|
%
|
Transitional
|
|
|
173
|
|
|
|
609
|
|
|
|
-71.6
|
%
|
Total
|
|
|
11,732
|
|
|
|
11,515
|
|
|
|
1.9
|
%
|
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Transportation and Skilled Trades
Student starts increased 10.2% for the three months ended September 30, 2018 when compared to the prior year comparable period.
Operating income increased to $6.3 million for the three months ended September 30, 2018 from $6.1 million in the prior year comparable period mainly due to
the following factors:
|
·
|
Revenue increased by $2.2 million, or 4.5%, to $51.0 million for the three months ended September 30, 2018, as compared to $48.8 million in the prior year period. The
increase in revenue was primarily attributable to four consecutive quarters of start growth, most notably, a 10.2% increase in student starts in the current quarter, which drove a 3.6% increase in average student population.
|
|
·
|
Educational services and facilities expense increased by $0.6 million, or 2.6%, to $23.4 million for the three months ended September 30, 2018 from $22.8 million in the
prior year comparable period. The increase was driven by additional books and tools expense from the correlation between providing laptops for a growing number of program offerings and an increased student population
|
|
·
|
Selling, general and administrative expenses increased by $1.4 million, or 7.1%, to $21.3 million for the three months ended September 30, 2018 from $19.8 million in the
prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing expense as detailed in the consolidated results of operations.
|
Healthcare and Other Professions
Student starts increased slightly by 0.7% for the three months ended September 30, 2018 when compared to the prior year comparable period.
Operating income increased to $0.8 million for the three months ended September 30, 2018 from $0.2 million in the prior year comparable period. The $0.6
million increase was mainly due to the following factors:
|
·
|
Revenue increased by $2.4 million, or 14.9%, to $18.3 million for the three months ended September 30, 2018, as compared to $15.9 million in the prior year comparable
period. The increase in revenue was mainly attributable to a higher carry in population; four consecutive quarters of student start growth, which drove a 12.6% increase in average student population; and an increase in average
revenue per student.
|
|
·
|
Educational services and facilities expense increased by $0.6 million, or 7.1% to $8.9 million for the three months ended September 30, 2018 from $8.3 million in the
prior year comparable period. The increase in expense was primarily driven by increased instructional expense and books and tools expense due to a 12.6% increase in average student population quarter over quarter.
|
|
·
|
Selling, general and administrative expense increased by $1.2 million, or 16.6%, to $8.6 million for the three months ended September 30, 2018 from $7.3 million in the
prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing expense as detailed in the consolidated results of operations.
|
Transitional
The following table lists the schools previously categorized in the Transitional segment as of December 31, 2017. As of September 30, 2018 the LCNE campus
at Southington, Connecticut was included in the Transitional segment.
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,
2018 and 2017.
Revenue was $0.8 million and $2.6 million for the three months ended September 30, 2018 and 2017, respectively. The decrease in revenue was due to one
campus classified in the Transitional segment in the current quarter versus five campuses classified in the segment in the prior year comparable quarter. The Transitional segment during the quarter includes the Lincoln College of New England
campus at Southington, Connecticut.
Operating loss was $1.9 million and $3.4 million
for the three months ended September
30, 2018 and 2017, respectively.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $5.2 million for the three months
ended September 30, 2018 as compared to $3.7 million in the prior year comparable period. The $1.5 million increase was primarily driven by a $0.4 million loss from the sale of the Mangonia Park Property on August 23, 2018 and a $1.5 million
gain in the prior year comparable quarter resulting from the sale of the West Palm Beach Property on August 14, 2017. Excluding the sale of the Mangonia Park Property and the West Palm Beach Property in the current and prior year quarters,
respectively, Corporate expenses would have decreased by $0.5 million quarter over quarter.
The following table present results for our three reportable segments for the nine months ended September 30, 2018 and 2017:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
135,838
|
|
|
$
|
134,285
|
|
|
|
1.2
|
%
|
Healthcare and Other Professions
|
|
|
52,554
|
|
|
|
46,470
|
|
|
|
13.1
|
%
|
Transitional
|
|
|
4,695
|
|
|
|
13,697
|
|
|
|
-65.7
|
%
|
Total
|
|
$
|
193,087
|
|
|
$
|
194,452
|
|
|
|
-0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
8,747
|
|
|
$
|
8,806
|
|
|
|
-0.7
|
%
|
Healthcare and Other Professions
|
|
|
2,747
|
|
|
|
914
|
|
|
|
-200.5
|
%
|
Transitional
|
|
|
(2,899
|
)
|
|
|
(5,703
|
)
|
|
|
49.2
|
%
|
Corporate
|
|
|
(18,305
|
)
|
|
|
(16,507
|
)
|
|
|
-10.9
|
%
|
Total
|
|
$
|
(9,710
|
)
|
|
$
|
(12,490
|
)
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,156
|
|
|
|
6,695
|
|
|
|
6.9
|
%
|
Healthcare and Other Professions
|
|
|
3,048
|
|
|
|
2,856
|
|
|
|
6.7
|
%
|
Transitional
|
|
|
140
|
|
|
|
355
|
|
|
|
-139.4
|
%
|
Total
|
|
|
10,344
|
|
|
|
9,906
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
6,891
|
|
|
|
6,903
|
|
|
|
-0.2
|
%
|
Healthcare and Other Professions
|
|
|
3,245
|
|
|
|
2,965
|
|
|
|
9.4
|
%
|
Transitional
|
|
|
269
|
|
|
|
877
|
|
|
|
-69.3
|
%
|
Total
|
|
|
10,405
|
|
|
|
10,745
|
|
|
|
-3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,922
|
|
|
|
7,626
|
|
|
|
3.9
|
%
|
Healthcare and Other Professions
|
|
|
3,637
|
|
|
|
3,280
|
|
|
|
10.9
|
%
|
Transitional
|
|
|
173
|
|
|
|
609
|
|
|
|
-71.6
|
%
|
Total
|
|
|
11,732
|
|
|
|
11,515
|
|
|
|
1.9
|
%
|
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Transportation and Skilled Trades
Student starts increased 6.9% for the nine months ended September 30, 2018 when compared to the prior year comparable period.
Operating income remained relatively flat at $8.8 million for the nine months ended September 30, 2018 and 2017.
|
·
|
Revenue increased by $1.6 million, or 1.2%, to $135.8 million for the nine months ended September 30, 2018, as compared to $134.3 million in the prior year comparable
period. This increase was primarily driven by four consecutive quarter of start grow, most notably a 6.9% increase in student starts, during the nine months ended September 30, 2018 in addition to a 1.3% increase in average revenue
per student primarily due to tuition increases.
|
|
·
|
Educational services and facilities expense remained essentially flat at $64.4 million for the nine months ended September 30, 2018 and 2017.
|
|
·
|
Selling, general and administrative expense increased by $1.6 million, or 2.6%, to $62.7 million for the nine months ended September 30, 2018, as compared to $61.2
million in the prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing expense as detailed in the consolidated results of operations.
|
Healthcare and Other Professions
Student starts increased by 6.7% for the nine months ended September 30, 2018, as compared to the prior year comparable period.
Operating income increased to $2.7 million for the nine months ended September 30, 2018 from $0.9 million in the prior year comparable period. The $1.8
million increase was primarily driven by the following factors:
|
·
|
Revenue increased by $6.1 million, or 13.1%, to $52.6 million for the nine months ended September 30, 2018, as compared to $46.5 million in the prior year comparable
period. The increase is primarily due to four consecutive quarters of start growth, which drove a 9.5% increase in average student population, in combination with a 3.2% increase in average revenue per student resulting from tuition
increases.
|
|
·
|
Educational services and facilities expense increased by $1.8 million, or 7.3%, to $25.9 million for the nine months ended September 30, 2018, from $24.1 million in the
prior year comparable period. The increase was primarily driven by increased instructional expenses and books and tools expense due to a 9.5% increase in average student population.
|
|
·
|
Selling, general and administrative expenses increased $2.5 million, or 11.6% to $23.9 million for the nine months ended September 30, 2018 from $21.5 million in the
prior year comparable period. The increase was primarily driven by additional bad debt expense and marketing expense as detailed in the consolidated results of operations.
|
Transitional
The following table lists the schools previously categorized in the Transitional segment as of December 31, 2017. As of September 30, 2018 the LCNE campus
in Southington, Connecticut was included in the Transitional segment.
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 nine months ended September 30, 2018
and 2017.
Revenue was $4.7 million and $13.7 million for the nine months ended September 30, 2018 and 2017, respectively. The decrease in revenue was due to one
campus classified in the Transitional segment compared to five campuses classified in the segment in the prior year comparable quarter. The Transitional segment during the nine months ended September 30, 2018 and 2017 includes the Lincoln
College of New England campus at Southington, Connecticut.
Operating loss was $2.9 million and $5.7 million
for the nine months ended September
30, 2018 and 2017, respectively.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $18.3 million for the nine months
ended September 30, 2018 as compared to $16.5 million in the prior year comparable period. The $1.8 million increase was primarily driven by a $0.4 million loss on the sale of the Mangonia Park Property on August 23, 2018 and a $1.5 million gain
in the prior year comparable quarter resulting from the sale of the West Palm Beach Property on August 14, 2017. Excluding the sale of the Mangonia Park Property and the West Palm Beach Property in the current and prior year quarter,
respectively, Corporate expenses would have decreased by $0.3 million quarter over quarter.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital expenditures are for facilities expansion and maintenance, and the development of new programs. Our principal sources of liquidity have
been cash provided by operating activities and borrowings under our credit facility. The following chart summarizes the principal elements of our cash flow for each of the nine months ended September 30, 2018 and 2017:
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash used in operating activities
|
|
$
|
(5,816
|
)
|
|
$
|
(16,607
|
)
|
Net cash used in investing activities
|
|
|
(1,869
|
)
|
|
|
11,687
|
|
Net cash used in financing activities
|
|
|
(28,866
|
)
|
|
|
(28,329
|
)
|
As of September 30, 2018, the Company had a net debt balance of $7.0 million compared to a net cash balance of $1.2 million as of December 31, 2017. The
decrease in cash position can mainly be attributed to the repayment of $32.8 million in borrowings under our line of credit facility, a net loss during the nine months ended September 30, 2018 and the seasonality of our business. Management
believes that the Company has adequate resources in place to execute its 2018 operating plan.
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. However, our financial and population results continue to improve as evidenced by our start growth for the last four consecutive quarters. As a
result, 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, i
n addition
to our current sources of capital that provide short term liquidity.
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 78% of
our cash receipts relating to revenues in 2017. 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 Program financial aid is refunded according to federal, state and accrediting agency standards.
As a result of the significant amount of Title IV Program funds received by our students, we are highly dependent on these funds to operate our business.
Any reduction in the level of Title IV Program funds that our students are eligible to receive or any restriction on our eligibility to receive Title IV Program funds would have a significant impact on our operations and our financial condition.
For more information, see “Risks Related to Our Industry” found under the heading“ Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Operating Activities
Net cash used in operating activities was $5.8 million for the nine months ended September 30, 2018 compared to $16.6 million in the prior year comparable
period. The decrease in cash used in operating activities for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 is primarily due to a reduction in net loss from operations as well as changes in
other working capital such as accounts receivable, accounts payable, accrued expenses and unearned tuition.
Investing Activities
Net cash used in investing activities was $1.9 million for the nine months ended September 30, 2018 compared to net cash provided by investing activities of
$11.7 million in the prior year comparable period. The decrease of $13.6 million was primarily the result of the sale of the West Palm Beach Property on August 14, 2017, resulting in cash inflows of $15.5 million in the prior year. The sale of
the Mangonia Park Property on August 23, 2018 generated a cash inflow of $2.3 million in the current year.
One of our primary uses 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 former school
property located in Suffield, Connecticut.
Capital expenditures are expected to approximate 2% of revenues in 2018. 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 $28.9 million for the nine months ended September 30, 2018 as compared to $28.3 million in the prior year
comparable period. The increase of $0.6 million was primarily due to increased net borrowings of $28.4 million for the nine months ended September 30, 2018 as compared to net payments on borrowings of $26.7 million in the prior year comparable
period. Also contributing to the increase year over year were outflows in the prior year of $1.1 million relating to the write-off of previously capitalized expenditures upon execution of our new revolving credit facility.
Net payments on borrowings consisted of: (a) total borrowing to date under our secured revolving credit facility of $4.4 million; and (b) $32.8 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”). Subsequently, as a result of a November 29, 2017
amendment of the Credit Facility, aggregate availability of funds under the Credit Facility increased to $65 million, consisting of (a) a $25 million revolving loan (“Facility 1”), (b) a $25 million revolving loan facility (“Facility 2”), which
includes a sublimit amount for letters of credit of $10 million, and
(c) a $
15 million revolving credit loan (“Facility 3”). The Credit Agreement was again amended on
February 23, 2018, to, among other things, effect certain modifications to the financial covenants and other provisions of the Credit Agreement and to allow the Company to pursue the sale of certain real property assets. The February 23, 2018
amendment increased the interest rate for borrowings under Facility 1 to a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%. Prior to the February 23, 2018 amendment of the Credit Agreement, revolving
loans outstanding under Facility 1 bore interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.50% and (y) 6.00%. Revolving loans under Facility 2 and Facility 3 bear interest at a rate per annum equal to the
greater of (x) the Bank’s prime rate and (y) 3.50%. Pursuant to the most recent amendment of the Credit Agreement, which occurred on July 11, 2018, the Bank permitted the net proceeds of the sale of the Mangonia Park Property to be deposited
into a non-interest bearing cash collateral account to be held at and by the Bank as additional collateral for the loans outstanding under the Credit Facility, but reserved the right to apply the funds held in such cash collateral account to
the repayment of the outstanding principal balance of the loans outstanding under the Credit Facility. Prior to this most recent amendment of the Credit Agreement, the Company was required to apply the net proceeds of such sale to repay a
corresponding amount of the outstanding principal balance of revolving loans provided under the Credit Facility, which repayment of principal would have permanently reduced the principal amount of revolving loans available under the Credit
Facility.
The term of the Credit Facility is 38 months, maturing on May 31, 2020, except that Facility 3 will mature one year earlier, on May 31, 2019.
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 and
mortgages on four parcels of real property owned by the Company in Colorado, Tennessee and Texas, at which three of the Company’s schools are located, as well as a former school property owned by the Company located in Connecticut.
At the closing of the Credit Facility, the Company drew $25 million under Facility 1, which was used to repay the Company’s previous credit facility and to
pay transaction costs associated with closing the Credit Facility.
Under the terms of the Credit Agreement, all draws under Facility 2 for letters of credit or revolving loans and all draws under Facility 3 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.
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 $6.2 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, which, if not
maintained, results in a fee of $12,500 payable to the Bank for that quarter.
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 for the year commencing on December 31, 2019 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, 2018, the Company is in compliance with all covenants.
As of September 30, 2018, the Company had $25.0 million outstanding under the Credit Facility, offset by $0.6 million of deferred finance fees. As of
December 31, 2017, the Company had $53.4 million outstanding under the Credit Facility, offset by $0.8 million of deferred finance fees. As of September 30, 2018 and December 31, 2017, letters of credit in the aggregate principal amount of $5.5
million and $7.2 million, respectively, were outstanding under the Credit Facility. During the nine months ended September 30, 2018, the Company repaid all outstanding amounts as of December 31, 2017 on Facility 2 of $17.8 million and Facility 3
of $15 million.
The following table sets forth our long-term debt (in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Credit agreement
|
|
$
|
25,000
|
|
|
$
|
53,400
|
|
Deferred Financing Fees
|
|
|
(626
|
)
|
|
|
(807
|
)
|
|
|
|
24,374
|
|
|
|
52,593
|
|
Less current maturities
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
24,374
|
|
|
$
|
52,593
|
|
As of September 30, 2018, we had outstanding loan commitments to our students of $59.1 million, as compared to $51.9 million at December 31, 2017. Loan
commitments, net of interest that would be due on the loans through maturity, were $43.4 million at September 30, 2018, as compared to $38.5 million at December 31, 2017.
Contractual Obligations
Long-term Debt
. As of December 31, 2018, 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, 2018 (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Credit facility
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating leases
|
|
|
71,231
|
|
|
|
19,127
|
|
|
|
25,935
|
|
|
|
12,686
|
|
|
|
13,483
|
|
Total contractual cash obligations
|
|
$
|
96,231
|
|
|
$
|
19,127
|
|
|
$
|
50,935
|
|
|
$
|
12,686
|
|
|
$
|
13,483
|
|
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2018, except for surety bonds. As of September 30, 2018, we posted surety bonds in the total
amount of approximately $12.7 million. Cash collateralized letters of credit of $5.5 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 14 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. We are also continuing to take actions to improve cash flow by aligning our cost structure to our student
population.
Regulatory Update
Cohort Default Rates.
In September 2018, the DOE released the final cohort default rates for the 2015 federal fiscal year. These are the most recent final rates published by
the DOE. The rates for our existing institutions for the 2015 federal fiscal year range from 8.7% to 13.2%. None of our institutions had a cohort default rate equal to or greater than 30% for the 2014 federal fiscal year.
Borrower Defense to Repayment Regulations.
In
January 2016, the DOE began negotiated rulemaking to develop proposed regulations regarding, among other things, a borrower’s ability to allege acts or omissions by an institution as a defense to the repayment of certain Title IV loans and the
consequences to the borrower, the DOE, and the institution. On November 1, 2016, the DOE published in the
Federal Register
the final version of these
regulations with a general effective date of July 1, 2017.
Subsequently, the DOE delayed the effective date of a majority of the borrower defense to repayment regulations until July 1, 2019, to ensure that there
would be adequate time to conduct negotiated rulemaking and, as necessary, develop revised regulations. However, a federal court ruled that the delay in the effective date of the regulations was unlawful and, on October 16, 2018, denied a
request to extend a stay preventing the regulations from taking effect. The DOE has not yet issued subsequent guidance regarding how the DOE will implement the regulations. There is ongoing litigation challenging the regulations, but we cannot
provide any assurance as to whether the litigation could result in the future suspension or invalidation of some or all of those regulations.
The DOE published proposed regulations on July 31, 2018, that would modify the defense to
repayment regulations, including regulations regarding, among other things,
acts or omissions of an institution of higher education a borrower
may assert as a defense to repayment of certain Title IV loans. The proposed regulations also include regulations regarding other topics such as permitting the use of arbitration clauses and class action waivers in enrollment agreements and
triggering events that would result in recalculating a school’s financial responsibility score and require the school to post a letter of credit or other surety
. We are in
the process of evaluating the proposed regulations. Any regulations published in final form by November 1, 2018 typically would have taken effect on July 1, 2019. However, the DOE announced that it would not publish the regulations in final
form by November 1, 2018 and has not yet issued the final regulations.
If the regulations are published prior to November 1, 2019, they typically would take effect on July 1, 2020, unless the DOE is willing and able to provide for an earlier implementation date.
We
cannot provide any assurance as to the timing, content, and ultimate effective date of any such final regulations.
Financial Responsibility Standards.
All
institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based on the institution's annual audited financial
statements, as well as following a change in ownership resulting in a change of control of the institution. See the “Regulatory Environment – Financial Responsibility Standards” and “Risk Factors –
If we or our eligible institutions do not meet the financial responsibility standards prescribed by the DOE, we may be required to post letters of credit or our eligibility to participate in
Title IV Programs could be terminated or limited, which could significantly reduce our student population and revenues”
sections of our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC.
In November 2016, the DOE published new Borrower Defense to Repayment regulations that included expanded standards of financial responsibility that could
result in a requirement that we submit to the DOE a substantial letter of credit or other form of financial protection in an amount determined by the DOE, and be subject to other conditions and requirements, based on any one of an extensive list
of triggering circumstances.
The expanded financial responsibility regulations could result in the DOE recalculating and reducing our composite score to account for DOE estimates of
potential losses under one or more of the extensive list of triggering circumstances and also could result in the imposition of conditions and requirements including a requirement to provide financial protection in amounts that are difficult to
predict, calculated by the DOE under potentially subjective standards and, in some cases, could be based solely on the existence of proceedings or circumstances that ultimately may lack merit or otherwise not result in liabilities or losses.
For example, one of the triggering circumstances in the regulations is if an institution’s accrediting agency requires the institution to submit a teach-out
plan that covers the closing of the institution or one of its locations. We are in the process of closing our campus in Southington, Connecticut and submitted a teach-out plan in response to a requirement by our accrediting agency. We have
notified the DOE that we intend to close our Southington campus and that our accrediting agency required a teach-out plan. The DOE could attempt to recalculate our composite score, could seek to treat all Title IV funds received by the location
in its most recently completed fiscal year at that campus as a loss in the recalculation, and could seek to impose a letter of credit based on the reduced composite score. However, it is uncertain whether the DOE would apply the regulation to
the accrediting agency’s request for a teach-out plan which occurred after the July 1, 2017 effective date of the regulations, but prior to the expiration of the stay of the regulation on October 16, 2018; whether the DOE’s recalculation of the
composite score would result in a letter of credit requirement; or whether the DOE would require a letter of credit given that the campus currently is expected to be closed on or around December 31, 2018.
The regulations indicate that the letter of credit or other form of financial protection
required for an institution under the regulations must equal 10 percent of the total amount of Title IV Program funds received by the institution during its most recently completed fiscal year plus any additional amount that the DOE determines
is necessary to fully cover any estimated losses unless the institution demonstrates that the additional amount is unnecessary to protect, or is contrary to, the Federal interest.
The regulations state that the DOE maintains the full
amount of financial protection until the DOE determines that the institution has a composite score of 1.0 or greater based on a review of the institution’s audited financial statements for the fiscal year in which all losses from the
aforementioned events have been fully recognized or if the recalculated composite score is 1.0 or greater and the aforementioned events have ceased to exist. Consequently, it is difficult to predict the amount or duration of any letter of credit
requirement that the DOE might impose under the regulation. The requirement to submit a letter of credit or to accept other conditions or restrictions
could have a material adverse
effect on our schools’ business and results of operations.
Gainful Employment.
In October 2014, the DOE
issued final gainful employment regulations requiring each educational program offered by our institutions to achieve threshold rates in at least one of two debt measure categories related to an annual debt to annual earnings ratio and an annual
debt to discretionary income ratio. The final regulations had a general effective date of July 1, 2015. In January 2017, the DOE issued the first set of gainful employment rates for each of our programs for the debt measure year ended June 30,
2015. See the “Regulatory Environment – Gainful Employment” section of our Annual Report on Form 10-K for year ended December 31, 2017, as filed with the SEC. The DOE has yet to begin the process of issuing gainful employment rates for the 2016
debt measure year, although it could begin that process at any time.
In August 2018, the DOE published proposed regulations that would eliminate the existing gainful employment regulations. The DOE indicated that its plans
include, but are not limited to, publishing outcomes data at the program level on a DOE website such as the College Scorecard or some other website. The DOE permitted the submission of public comments to the proposed regulations until September
13, 2018. Any regulations published in final form by November 1, 2018 typically would have taken effect on July 1, 2019. However, the DOE announced that it would not publish the regulations in final form by November 1, 2018, and has not yet
issued the final regulations. If the regulations are published prior to November 1, 2019, they typically would take effect on July 1, 2020, unless the DOE is willing and able to provide for an earlier implementation date. We cannot provide any
assurance as to the timing, content, and ultimate effective date of any such final regulations.
In January 2018, the DOE issued a template for institutions to provide required disclosures and required institutions to update their disclosures by April
6, 2018. In June 2018, the DOE announced the further extension of the compliance date for certain other gainful employment disclosure requirements until July 1, 2019. The DOE stated that institutions are still required to comply with other
gainful employment disclosure requirements in the interim.