Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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, 2018, 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, 2018, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2018.
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 22 schools in 14 states,
offers programs in automotive technology, skilled trades (which include HVAC, welding and computerized numerical control and electrical and
electronic systems technology, among other programs), healthcare services (which include nursing, dental assistant and medical administrative assistant, among other programs), hospitality services (which include culinary, therapeutic massage,
cosmetology and aesthetics) and information technology programs. The schools operate under Lincoln Technical Institute, Lincoln College of Technology, 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.
Our business is organized into three reportable business segments: (a) Transportation and Skilled Trades, (b) Healthcare and Other Professions (“HOPS”), and (c) Transitional, which refers to businesses that have been taught out.
On July 9, 2018, New England Institute of Technology at Palm Beach, Inc. (“NEIT”), a wholly-owned subsidiary of the Company,
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 53rd 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 facility 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 facility. In
December 2018, the funds were used to repay the outstanding principal balance of the loans outstanding under the credit facility and such repayment permanently reduced the revolving loan availability under the credit facility designated as Facility 1
under the Company’s Credit Agreement to $22.7 million.
Effective December 31, 2018, the Company completed the teach-out and ceased operation of its Lincoln College of New England (“LCNE”) campus at Southington, Connecticut. The decision to close the LCNE campus followed 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 in August 2018, 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 Company recorded net costs associated with the closure of the LCNE campus in 2018 of
approximately $4.3 million, including (i) $1.6 million in connection with the termination of the LCNE campus lease, which is the net present value of the remaining obligation, to be paid in equal monthly installments through January 2020, (ii)
approximately $700,000 of severance payments and (iii) $2.0 million of additional operating losses related to no longer enrolling additional students during 2018. LCNE results, previously reported in the HOPS segment, were included in the Transitional
segment as of December 31, 2018.
As of June 30, 2019, we had 10,777 students enrolled at 22 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 to
the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and Note 1 to the consolidated financial statements included in this Form 10-Q for the quarter ended June 30, 2019.
Effect of Inflation
Inflation has not had a material effect on our operations.
Results of Continuing Operations for the Three and Six Months Ended June 30, 2019
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities
|
|
|
46.8
|
%
|
|
|
49.4
|
%
|
|
|
47.1
|
%
|
|
|
49.3
|
%
|
Selling, general and administrative
|
|
|
56.5
|
%
|
|
|
56.4
|
%
|
|
|
58.4
|
%
|
|
|
58.5
|
%
|
Loss (gain) on sale of assets
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
Total costs and expenses
|
|
|
103.3
|
%
|
|
|
105.8
|
%
|
|
|
105.5
|
%
|
|
|
107.9
|
%
|
Operating loss
|
|
|
-3.3
|
%
|
|
|
-5.8
|
%
|
|
|
-5.5
|
%
|
|
|
-7.9
|
%
|
Interest expense, net
|
|
|
-1.3
|
%
|
|
|
-0.9
|
%
|
|
|
-1.1
|
%
|
|
|
-0.9
|
%
|
Loss from operations before income taxes
|
|
|
-4.6
|
%
|
|
|
-6.7
|
%
|
|
|
-6.6
|
%
|
|
|
-8.8
|
%
|
Provision for income taxes
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Net Loss
|
|
|
-4.8
|
%
|
|
|
-6.8
|
%
|
|
|
-6.8
|
%
|
|
|
-8.9
|
%
|
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Consolidated Results of Operations
Revenue.
Revenue increased by $2.5 million, or 4%, to $63.6 million for the three months ended June 30, 2019 from $61.1 million in the prior
year comparable period. Excluding the Transitional segment, which had revenue of zero and $1.5 million for the three months ended June 30, 2019 and 2018 respectively, revenue increased by $3.9 million, or 6.6%.
The increase in revenue is
due to a 5.8% increase in average student population, which is attributed to the Company’s consistent student start growth over the last seven quarters.
Total student starts increased by 2.5% for the three months ended June 30, 2019 as compared to the prior year comparable period. Excluding the Transitional segment student starts would have increased 3.6% quarter over
quarter.
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 $0.4 million, or 1.4%, to $29.8 million for the three
months ended June 30, 2019 from $30.2 million in the prior year comparable period. The expense reductions were primarily due to the Transitional segment, which accounted for $1.2 million in cost savings partially offset by $0.8 million of increased
instructional expenses related to our continued growth in student population in addition to increases in instructor salaries. Educational services and facilities expense, as a percentage of revenue, decreased to 46.8% for the three months ended June
30, 2019 from 49.4% in the prior year comparable period.
Selling, general and administrative expense.
Our selling general and administrative expense increased $1.4 million, or 4.2%, to $35.9 million for the three months
ended June 30, 2019 from $34.5 million in the prior year comparable period. Excluding the Transitional segment, which had cost reductions of $1.1 million, selling, general and administrative expenses would have increased $2.6 million. This increase
was primary driven by additional bad debt expense; marketing expense and other corporate expenses. Increased bad debt expense was a result of a growing student population, which drove an increase in accounts receivable and the correlating bad debt
expense. Marketing increases were a result of initiatives implemented during the quarter designed to continue to drive start growth into the second half of the year. The remaining increase in administrative expense related to corporate costs incurred
in connection with the evaluation of strategic initiatives intended to increase shareholder value.
Net interest expense.
Net interest expense increased $0.3 million, or 55.7%, to $0.8 million for the three months ended June 30, 2019 from $0.5 million in the
prior year comparable period. This increase in expense is a direct result of slight increases in both principal and interest rates and the write-off of some non-cash deferred finance fees.
Income taxes.
Our provision for income taxes was $0.1 million, or 4.9% of pretax loss, for the three months ended June 30, 2019, compared to a provision for
income taxes of $0.1 million, or 1.2% 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. As of June 30, 2019, the full valuation allowance was reduced
for deferred
tax liability related to indefinite lived intangibles by $0.1 million and $0.1 million of deferred tax expense was recognized.
In addition, minimal state income tax expenses were recognized during the quarter.
As of June 30, 2019, $0.4 million with respect to deferred tax asset for refundable AMT credits was reclassified to income tax receivable as we expect to receive the refund of these credits upon future corporate income tax
return filings.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Consolidated Results of Operations
Revenue.
Revenue increased by $3.8 million, or 3.1%, to $126.8 million for the six months ended June 30, 2019 from $123 million in the prior
year comparable period. Excluding the Transitional segment, which had revenue of zero and $3.9 million for the six months ended June 30, 2019 and 2018 respectively, revenue increased by $7.7 million, or 6.5%.
The increase in revenue is due
to a 6.9% increase in average student population, which is attributed to the Company’s consistent student start growth over the last seven quarters
.
Total student starts increased by 2.5% for the six months ended June 30, 2019 as compared to the prior year comparable period. Excluding the Transitional segment student starts would have increased 4.6% year over
year.
We attribute this growth to our improved processes in marketing and admissions.
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 $1 million, or 1.6%, to $59.7 million for the six months
ended June 30, 2019 from $60.7 million in the prior year comparable period. The expense reductions were primarily due to the Transitional segment, which accounted for $2.7 million in cost savings partially offset by $1.7 million of increased
instructional expenses related to our increased student population and instructor salary increases. Educational services and facilities expense, as a percentage of revenue, decreased to 47.1% for the six months ended June 30, 2019 from 49.3% in the
prior year comparable period.
Selling, general and administrative expense.
Our selling general and administrative expense increased $2.1 million, or 2.9%, to $74.1 million for the six months
ended June 30, 2019 from $72 million in the prior year comparable period. Excluding the Transitional segment, which had cost reductions of $2.2 million, selling, general and administrative expenses would have increased $4.2 million. This increase was
primarily driven by additional bad debt expense, growth in sales and marketing expense and additional other corporate expenses. Increased bad debt expense was a result of a growing student population, which drove an increase in accounts receivable and
the correlating bad debt expense. Increased marketing initiatives were implemented during the quarter to continue to drive growth and brand awareness. These initiatives are expected to continue to yield start growth over the next several quarters.
Remaining expense relates to corporate costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.
Net interest expense.
Net interest expense increased $0.3 million, or 26.2%, to $1.4 million for the six months ended June 30, 2019 from $1.1 million in the prior
year comparable period. This increase in expense is a direct result of slight increases in both principal and interest rates and the write-off of some non-cash deferred finance fees.
Income taxes.
Our provision for income taxes was $0.2 million, or 2.3% of pretax loss, for the six months ended June 30, 2019, compared to a provision for income
taxes of $0.1 million, or 0.9% of pretax loss, in the prior year comparable period.
As of June 30, 2019, the full valuation allowance was reduced
for deferred tax liability related to indefinite lived intangibles by $0.1 million and $0.1 million of deferred tax expense was recognized.
In addition, minimal state tax expenses were recognized for the six months ended June 30, 2019.
As of June 30, 2019, $0.4 million with respect to deferred tax asset for refundable AMT credits was reclassified to income tax receivable as we expect to receive the refund of these credits upon future corporate income tax
return filings.
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 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.
As of June 30, 2019, no campuses have been categorized in the Transitional segment.
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 June 30, 2019 and 2018:
|
|
Three Months Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
44,028
|
|
|
$
|
42,085
|
|
|
|
4.6
|
%
|
Healthcare and Other Professions
|
|
|
19,541
|
|
|
|
17,562
|
|
|
|
11.3
|
%
|
Transitional
|
|
|
-
|
|
|
|
1,473
|
|
|
|
-100.0
|
%
|
Total
|
|
$
|
63,569
|
|
|
$
|
61,120
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
2,484
|
|
|
$
|
1,740
|
|
|
|
42.8
|
%
|
Healthcare and Other Professions
|
|
|
1,839
|
|
|
|
1,542
|
|
|
|
19.3
|
%
|
Transitional
|
|
|
-
|
|
|
|
(899
|
)
|
|
|
100.0
|
%
|
Corporate
|
|
|
(6,416
|
)
|
|
|
(5,906
|
)
|
|
|
-8.6
|
%
|
Total
|
|
$
|
(2,093
|
)
|
|
$
|
(3,523
|
)
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
2,028
|
|
|
|
1,959
|
|
|
|
3.5
|
%
|
Healthcare and Other Professions
|
|
|
949
|
|
|
|
915
|
|
|
|
3.7
|
%
|
Transitional
|
|
|
-
|
|
|
|
31
|
|
|
|
0.0
|
%
|
Total
|
|
|
2,977
|
|
|
|
2,905
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
6,827
|
|
|
|
6,592
|
|
|
|
3.6
|
%
|
Healthcare and Other Professions
|
|
|
3,578
|
|
|
|
3,243
|
|
|
|
10.3
|
%
|
Transitional
|
|
|
-
|
|
|
|
268
|
|
|
|
-100.0
|
%
|
Total
|
|
|
10,405
|
|
|
|
10,103
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,195
|
|
|
|
6,975
|
|
|
|
3.2
|
%
|
Healthcare and Other Professions
|
|
|
3,582
|
|
|
|
3,264
|
|
|
|
9.7
|
%
|
Transitional
|
|
|
-
|
|
|
|
132
|
|
|
|
-100.0
|
%
|
Total
|
|
|
10,777
|
|
|
|
10,371
|
|
|
|
3.9
|
%
|
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Transportation and Skilled Trades
Student starts for the quarter increased approximately 3.5% for the three months ended June 30, 2019 when compared to the prior year comparable period.
Operating income increased $0.7 million, to $2.5 million for the three months ended June 30, 2019 from $1.7 million in the prior year comparable period mainly due to the following factors:
|
•
|
Revenue increased $1.9 million, or 4.6%, to $44 million for the three months ended June 30, 2019, as compared to $42.1 million in the prior year comparable period. The increase in revenue is due to continued
student start growth which drove a 3.6% increase in average student population quarter over quarter.
|
|
•
|
Educational services and facilities expense increased $0.2 million, or 1% to $20.4 million for the three months ended June 30, 2019, as compared to $20.2 million in the prior year comparable period.
|
|
•
|
Selling general and administrative expense increased $1 million, or 4.9%, to $21.1 million for the three months ended June 30, 2019, from $20.1 million in the prior year comparable period. Increased expenses were primarily due to
additional investments in marketing during the quarter.
|
Healthcare and Other Professions
Student starts increased by 3.7% for the three months ended June 30, 2019 when compared to the prior year comparable period.
Operating income increased by $0.3 million, to $1.8 million for the three months ended June 30, 2019 from $1.5 million in the prior year comparable period mainly due to the following factors:
|
•
|
Revenue increased by $2 million, or 11.3%, to $19.5 million for the three months ended June 30, 2019, as compared to $17.6 million in the prior year comparable period. The increase in revenue was mainly due to a 10.3% increase in
average student population, which is attributed to consistent start growth over the last 21 months.
|
|
•
|
Educational services and facilities expense increased $0.6 million, or 6.9%, to $9.3 million for the three months ended June 30, 2019, from $8.7 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 an increased student population quarter over quarter.
|
|
•
|
Selling general and administrative expense increased by $1.1 million, or 14.8%, to $8.4 million for the three months ended June 30, 2019 from $7.3 million in the prior year comparable period. Increases in expense were primarily due to
additional bad debt expense driven by an increased student population in addition to higher sales expense and marketing expense.
Investments in marketing expense are expected to yield continued start
growth over the next several quarters.
|
Transitional
During the year ended December 31, 2018, one campus, the LCNE campus at Southington, Connecticut was categorized in the Transitional segment. This campus has been fully taught out of as of December 31, 2018 and financial information for this campus
has been included in the Transitional segment for the period ending June 30, 2018. As of June 30, 2019, no campuses have been categorized in the Transitional segment.
Revenue was zero and $1.5 million for the three months ended June 30, 2019 and 2018 respectively.
Operating loss was zero and $0.9 million
for the three months ended June 30, 2019 and 2018, respectively.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $6.4 million for the three months ended June 30, 2019 as compared to $5.9 million in the prior year comparable period. The $0.5
million increase was primarily driven by costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.
The following table present results for our three reportable segments for the six months ended June 30, 2019 and 2018:
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
$
|
88,354
|
|
|
$
|
84,832
|
|
|
|
4.2
|
%
|
Healthcare and Other Professions
|
|
|
38,479
|
|
|
|
34,303
|
|
|
|
12.2
|
%
|
Transitional
|
|
|
-
|
|
|
|
3,874
|
|
|
|
-100.0
|
%
|
Total
|
|
$
|
126,833
|
|
|
$
|
123,009
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
Transportation and Skilled Trades
|
|
$
|
4,300
|
|
|
$
|
2,416
|
|
|
|
78.0
|
%
|
Healthcare and Other Professions
|
|
|
2,811
|
|
|
|
1,918
|
|
|
|
46.6
|
%
|
Transitional
|
|
|
-
|
|
|
|
(1,031
|
)
|
|
|
100.0
|
%
|
Corporate
|
|
|
(14,069
|
)
|
|
|
(13,088
|
)
|
|
|
-7.5
|
%
|
Total
|
|
$
|
(6,958
|
)
|
|
$
|
(9,785
|
)
|
|
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
3,849
|
|
|
|
3,765
|
|
|
|
2.2
|
%
|
Healthcare and Other Professions
|
|
|
1,987
|
|
|
|
1,816
|
|
|
|
9.4
|
%
|
Transitional
|
|
|
-
|
|
|
|
110
|
|
|
|
-100.0
|
%
|
Total
|
|
|
5,836
|
|
|
|
5,691
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
6,935
|
|
|
|
6,610
|
|
|
|
4.9
|
%
|
Healthcare and Other Professions
|
|
|
3,561
|
|
|
|
3,209
|
|
|
|
11.0
|
%
|
Transitional
|
|
|
-
|
|
|
|
339
|
|
|
|
-100.0
|
%
|
Total
|
|
|
10,496
|
|
|
|
10,158
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Population:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Skilled Trades
|
|
|
7,195
|
|
|
|
6,975
|
|
|
|
3.2
|
%
|
Healthcare and Other Professions
|
|
|
3,582
|
|
|
|
3,264
|
|
|
|
9.7
|
%
|
Transitional
|
|
|
-
|
|
|
|
132
|
|
|
|
-100.0
|
%
|
Total
|
|
|
10,777
|
|
|
|
10,371
|
|
|
|
3.9
|
%
|
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Transportation and Skilled Trades
Student starts increased approximately 2.2% for the six months ended June 30, 2019 when compared to the prior year comparable period.
Operating income increased by $1.9 million, or 78%, to $4.3 million for the six months ended June 30, 2019 from $2.4 million in the prior year comparable period mainly due to the following factors:
|
•
|
Revenue increased by $3.5 million, or 4.2%, to $88.4 million for the six months ended June 30, 2019, as compared to $84.8 million in the prior year comparable period. The increase in revenue is due to continued
student start growth which drove a 4.9% increase in average student population year over year.
|
|
•
|
Educational services and facilities expense remained essentially flat at $41 million for the six months ended June 30, 2019 and 2018 respectively.
|
|
•
|
Selling general and administrative expense increased $1.5 million, or 3.7%, to $43 million for the six months ended June 30, 2019, from $41.5 million in the prior year comparable period. Increases in expense were primarily due to
additional bad debt expense driven by an increased student population in addition to increased investments in sales and marketing expense.
Investments in sales and marketing expense are expected to
yield continued start growth over the next several quarters.
|
Healthcare and Other Professions
Student starts increased 9.4% for the six months ended June 30, 2019 when compared to the prior year comparable period.
Operating income increased by $0.9 million, or 46.7%, to $2.8 million for the six months ended June 30, 2019 from $1.9 million in the prior year comparable period mainly due to the following factors:
|
•
|
Revenue increased by $4.2 million, or 12.2%, to $38.5 million for the six months ended June 30, 2019, as compared to $34.3 million in the prior year comparable period. The increase in revenue was mainly due to a 11% increase in average
student population, which is attributed to consistent start growth over the last 21 months.
|
|
•
|
Educational services and facilities expense increased $1.7 million, or 10%, to $18.7 million for the six months ended June 30, 2019, from $17 million in the prior year comparable period. The increase in expense was primarily driven by
additional instructional expense and books and tools expense due to an 11% increase in student population year over year.
|
|
•
|
Selling, general and administrative expense increased by $1.6 million, or 10.3%, to $17 million for the six months ended June 30, 2019 from $15.4 million in the prior year comparable period. Increases in expense were primarily due to
additional bad debt expense driven by an increased student population in addition to increased investments in sales expense.
|
Transitional
During the year ended December 31, 2018, one campus, the LCNE campus at Southington, Connecticut was categorized in the Transitional segment. This campus has been fully taught out of as of December 31, 2018 and financial information for this campus
has been included in the Transitional segment for the period ending June 30, 2018. As of June 30, 2019, no campuses have been categorized in the Transitional segment.
Revenue was zero and $3.9 million for the six months ended June 30, 2019 and 2018 respectively.
Operating loss was zero and $1 million
for the six months ended June 30, 2019 and 2018, respectively.
Corporate and Other
This category includes unallocated expenses incurred on behalf of the entire Company. Corporate and other expenses were $14.1 million for the six months ended June 30, 2019 as compared to $13.1 million in the prior year comparable period. The $1
million increase was primarily driven by costs incurred in connection with the evaluation of strategic initiatives intended to increase shareholder value.
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 six months ended June 30, 2019 and 2018:
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(10,782
|
)
|
|
$
|
(12,334
|
)
|
Net cash used in investing activities
|
|
|
(1,212
|
)
|
|
|
(1,796
|
)
|
Net cash used in financing activities
|
|
|
(22,966
|
)
|
|
|
(28,853
|
)
|
As of June 30, 2019, the Company had a net debt balance of $15.5 million compared to a net debt balance of $3.4 million as of December 31, 2018. The decrease in cash position can mainly be attributed to the repayment of
$26.6 million in borrowings under our line of credit facility; a net loss during the six months ended June 30, 2019; and seasonality of the business. Management believes that the Company has adequate resources in place to execute its 2019 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 seven 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 2018. 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. See “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K
for the year ended December 31, 2018.
Operating Activities
Net cash used in operating activities was $10.8 million for the six months ended June 30, 2019 compared to $12.3 million in the prior year comparable period. The decrease in cash used in operating activities for the six
months ended June 30, 2019 as compared to the six months ended June 30, 2018 is primarily due to operating losses and changes in working capital such as accounts receivable, accounts payable, accrued expenses and unearned tuition year over year.
Investing Activities
Net cash used in investing activities was $1.2 million for the six months ended June 30, 2019 compared to $1.8 million in the prior year comparable period. The decrease was primarily caused by reduced spending for capital
expenditures during the first half of 2019.
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 property owned as part of a former school located in Suffield, Connecticut.
Capital expenditures are expected to approximate 2% of revenues in 2019. We expect to fund future capital expenditures with cash generated from operating activities, borrowings under our credit facility, and cash from our
real estate monetization.
Financing Activities
Net cash used in financing activities was $23.0 million for the six months ended June 30, 2019 as compared to $28.9 million in the prior year comparable period. The decrease of $5.9 million was primarily due to decreased
net borrowings of $22.9 million for the six months ended June 30, 2019 as compared to $28.4 million in the prior year comparable period.
Net payments on borrowings consisted of: (a) total borrowing to date under our secured credit facility of $3.7 million; and (b) $26.6 million in total repayments made by the Company.
Credit Agreement
On March 31, 2017, the Company obtained a secured credit facility (the “Credit Facility”) from Sterling National Bank (the “Bank”) pursuant to a Credit Agreement dated March 31, 2017 among the Company, the Company’s
subsidiaries and the Bank, which was subsequently amended on November 29, 2017, February 23, 2018, July 11, 2018 and, most recently, on March 6, 2019 (as amended, the “Credit Agreement”). Prior to the most recent amendment of the Credit Agreement (the
“Fourth Amendment”), the financial accommodations available to the Company under the Credit Agreement consisted of (a) a $25 million revolving loan facility designated as “Facility 1”, (b) a $25 million revolving loan facility (including a sublimit
amount for letters of credit of $10 million) designated as “Facility 2” and (c) a $15 million revolving credit loan designated as “Facility 3”.
Pursuant to the terms of the Fourth Amendment and upon its effectiveness, Facility 1 was converted into a term loan (the “Term Loan”) in the original principal amount of $22.7 million (such amount being the entire unpaid
principal and accrued interest outstanding under Facility 1 as of the effective date of the Fourth Amendment), which matures on March 31, 2024 (the “Term Loan Maturity Date”). The Term Loan is being repaid in monthly installments as follows: (a) on
April 1, 2019 and on the same day of each month thereafter through and including June 30, 2019, accrued interest only; (b) on July 1, 2019 and on the same day of each month thereafter through and including December 31, 2019, the principal amount of
$0.2 million plus accrued interest; (c) on January 1, 2020 and on the same day of each month thereafter through and including June 30, 2020, accrued interest only; (d) on July 1, 2020 and on the same day of each month thereafter through and including
December 31, 2020, the principal amount of $0.6 million plus accrued interest; (e) on January 1, 2021 and on the same day of each month thereafter through and including June 30, 2021, accrued interest only; (f) on July 1, 2021 and on the same day of
each month thereafter through and including December 31, 2021, the principal amount of $0.4 million plus accrued interest; (g) on January 1, 2022 and on the same day of each month thereafter through and including June 30, 2022, accrued interest only;
(h) on July 1, 2022 and on the same day of each month thereafter through and including December 31, 2022, the principal amount of $0.4 million plus accrued interest; (i) on January 1, 2023 and on the same day of each month thereafter through and
including June 30, 2023, accrued interest only; (j) on July 1, 2023 and on the same day of each month thereafter through and including December 31, 2023, the principal amount of $0.4 million plus accrued interest; (k) on January 1, 2024 and on the
same day of each month thereafter through and including the Term Loan Maturity Date, accrued interest only; and (l) on the Term Loan Maturity Date, the remaining outstanding principal amount of the Term Loan, together with accrued interest, will be due
and payable. In the event of a sale of any campus, school or business of the Company permitted under the Credit Agreement, 25% of the net proceeds of any such sale must be used to pay down the outstanding principal amount of the Term Loan in inverse
order of maturity.
The maturity date of Facility 2 is April 30, 2020. Facility 3 matured on May 31, 2019, unused, and is no longer available for borrowing.
Under 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 the proceeds of the Term Loan or other available cash of the Company. Notwithstanding such requirement, pursuant to the terms of the Fourth Amendment, a $2.5 million revolving loan was advanced
under Facility 2 at the closing of the Fourth Amendment on March 6, 2019 and an additional $1.25 million on both April 17, 2019 and July 26, 2019, respectively, without any requirement for cash collateral. The $5 million in revolving loans advanced
under Facility 2 must be repaid on November 1, 2019 and, prior to their repayment, the Company is required to make monthly payments of accrued interest only on such revolving loans.
The Term Loan bears interest at a rate per annum equal to the greater of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%. Revolving loans advanced under Facility 2 that are cash collateralized will 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 Fourth Amendment, revolving loans advanced under Facility 2 that are not secured by cash collateral will bear interest at a rate per annum equal to the greater
of (x) the Bank’s prime rate plus 2.85% and (y) 6.00%.
The Bank is entitled to receive an unused facility fee on the average daily unused balance of Facility 2 at a rate per annum equal to 0.50%, which fee is payable quarterly in arrears.
In the event the Bank’s prime rate is greater than or equal to 6.50% while any loans are outstanding, the Company may be required to enter into a hedging contract in form and content satisfactory to the Bank.
The Company is required to give the Bank the first opportunity to provide any and all traditional banking services required by the Company, including, but not limited to, treasury management, loans and other financing
services, on terms mutually acceptable to the Company and the Bank, in accordance with the terms set forth in the Fourth Amendment. In the event that loans provided under the Credit Agreement are repaid through replacement financing, the Company must
pay to the Bank an exit fee in an amount equal to 1.25% of the total amount repaid and the face amount of all letters of credit replaced in connection with the replacement financing; provided, however, that no exit fee will be required in the event the
Bank or the Bank’s affiliate arranges or provides the replacement financing or the payoff of the applicable loans occurs after March 5, 2021.
In connection with the effectiveness of the Fourth Amendment, the Company paid to the Bank a one-time modification fee in the amount of $50,000.
Pursuant to the Credit Agreement, in December 2018, the net proceeds of the sale of the Mangonia Park Property, which were held in a non-interest bearing cash collateral account at and by the Bank as additional collateral for
the loans outstanding under the Credit Agreement, were applied to the outstanding principal balance of revolving loans outstanding under Facility 1 and, as a result of such repayment, the revolving loan availability under Facility 1 was permanently
reduced to $22.7 million.
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.
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 require the Company 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. The Credit Agreement also contains events of default customary for facilities of this
type. As of December 31, 2018, the Company is in compliance with all covenants, including financial covenants that (i) restrict capital expenditures tested on a fiscal year end basis; (ii) prohibit the incurrence of a net loss commencing on December
31, 2019; and (iii) require a minimum adjusted EBITDA tested quarterly on a rolling twelve month basis. The Fourth Amendment (i) modifies the minimum adjusted EBITDA required; (ii) eliminates the requirement for a minimum funded debt to adjusted
EBITDA ratio; and (iii) requires the maintenance of a maximum funded debt to adjusted EBITDA ratio tested quarterly on a rolling twelve month basis.
As of June 30, 2019, the Company had $26.5 million outstanding under the Credit Facility; offset by $0.4 million of deferred finance fees. As of December 31, 2018, the Company had $49.3 million outstanding under the Credit
Facility, offset by $0.5 million of deferred finance fees, which were written-off. As of June 30, 2019 and December 31, 2018, letters of credit in the aggregate outstanding principal amount of $4.5 million and $1.8 million, respectively, were
outstanding under the Credit Facility.
The following table sets forth our long-term debt (in thousands):
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Credit agreement and term loan
|
|
$
|
26,451
|
|
|
$
|
49,301
|
|
Deferred financing fees
|
|
|
(437
|
)
|
|
|
(532
|
)
|
|
|
|
26,014
|
|
|
|
48,769
|
|
Less current maturities
|
|
|
(4,579
|
)
|
|
|
(15,000
|
)
|
|
|
$
|
21,435
|
|
|
$
|
33,769
|
|
As of June 30, 2019, we had outstanding loan commitments to our students of $64.2 million, as compared to $63.1 million at December 31, 2018.
Contractual Obligations
Long-term Debt
. As of June 30, 2019, 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 June 30, 2019 (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Credit facility and term loan
|
|
$
|
26,450
|
|
|
$
|
4,885
|
|
|
$
|
5,675
|
|
|
$
|
15,890
|
|
|
$
|
-
|
|
Operating leases
|
|
|
66,352
|
|
|
|
16,683
|
|
|
|
22,652
|
|
|
|
11,710
|
|
|
|
15,307
|
|
Total contractual cash obligations
|
|
$
|
92,802
|
|
|
$
|
21,568
|
|
|
$
|
28,327
|
|
|
$
|
27,600
|
|
|
$
|
15,307
|
|
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2019, except for surety bonds. As of June 30, 2019, we posted surety bonds in the total amount of approximately $12.7 million. Cash collateralized letters of credit of
$4.5 million are primarily comprised of letters of credit for the DOE and security deposits in connection with certain of our real estate leases.
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
Our nation is a facing a Skills Gap caused by technological, demographic and policy changes. Technology is permeating every industry and job and necessitating retraining of the existing workforce in order to keep them
productive and engaged. At the same time baby boomers are retiring in large numbers which is forcing companies to look for replacement employees but unfortunately there are not enough new skilled employees to replace the retiring ones. A major reason
for this shortfall is caused by the reduction of career education in many high schools starting in the 1980’s as policy makers decided more students needed to attend college and resources and programs were steered in that direction. Consequently,
today there are more job openings than qualified people to fill the jobs. This is a great opportunity for our Company and one we proudly seek to remedy.
Traditionally, our enrollments decline in a low unemployment environment. However for the last seven quarters, we have achieved growth despite declining unemployment levels. We attribute this growth to both better marketing
of our high return on investment programs and a growing awareness that four year post-secondary degrees along with their high costs may not be the best option for everyone. By partnering with industry and increasing our advertising spend we expect to
continue to grow awareness and our enrollments as we seek to eliminate the Skills Gap. Employers are reaching out to us and we like the economy in general have more job requests from employers than graduates.
Furthermore, when the economy slows down, we expect that our enrollments will also increase as more people are displaced from the workforce and need to acquire skills to find employment.
Borrower Defense to Repayment Regulations Update
The DOE published borrower defense to repayment regulations on November 1, 2016 (“2016 Final Regulations”) with an effective date of July 1, 2017, but subsequently delayed the effective date of a majority of the regulations
until July 1, 2019, to ensure 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 regulations are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the caption “Regulatory Environment –
Borrower Defense to Repayment Regulations.”
On March 15, 2019, the DOE published an electronic announcement with guidance regarding how the DOE is implementing the 2016 Final Regulations, including, among other things, the provisions regarding the processes for
enabling borrowers to obtain from the DOE a discharge of some or all of their federal student loans based on circumstances involving the institution and for the DOE to impose and collect liabilities against the institution following the loan
discharges, the prohibition on certain contractual provisions regarding arbitration, dispute resolution, and participation in class actions, and the requirement to submit certain arbitral and judicial records to the DOE in connection with certain
proceedings concerning borrower defense claims. The DOE also stated that it would provide guidance at a later date about providing repayment warnings to students in the future and disclosures to students regarding the occurrence of certain financial
events, actions, or conditions.
The DOE also provided guidance regarding the requirement to notify the DOE within specified timeframes of the occurrence of any of a list of events, actions or conditions that occur on or after July 1, 2017. The DOE stated
in the electronic announcement that it recognized that some institutions may have been uncertain about how to comply with these requirements in light of the delays and court orders regarding the effective date of the 2016 Final Regulations. The DOE
guidance generally gives institutions a 60-day period commencing from the date of the electronic announcement to send notifications of events, actions, or conditions that, with certain exceptions, occurred between the July 1, 2017 effective date of the
2016 Final Regulations and the date of the electronic announcement. Institutions have an ongoing obligation under the 2016 Final Regulations to notify the DOE of subsequent events, actions or conditions that are triggering circumstances in the
regulations. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the caption “Regulatory Environment – Financial Responsibility Standards.”
The DOE published proposed regulations on July 31, 2018 that would modify the defense to repayment regulations, but has not issued final regulations. The proposed regulations are described in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2018 under the caption “Regulatory Environment – Borrower Defense to Repayment Regulations.” We cannot provide any assurances as to the timing, content or ultimate effective date of any such regulations.
Negotiated Rulemaking Update
On October 15, 2018, the DOE published a notice in the Federal Register announcing its intent to establish a negotiated rulemaking committee and three subcommittees to develop proposed regulations related to several
matters that are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the caption “Regulatory Environment – Negotiated Rulemaking.”
The DOE released draft proposed regulations for consideration and
negotiation by the negotiated rulemaking committee and subcommittee that covered additional topics and made additional revisions and updates to the draft proposed regulations prior to subsequent meetings of the committee and subcommittees in early
2019. The committee and subcommittees completed their meetings in April 2019 and reached consensus on draft proposed regulations. On June 12, 2019, the DOE published proposed regulations on some of the topics in a notice of proposed rulemaking in the
Federal Register for public comment and to consider revisions to the regulations in response to the comments before publishing the final versions of the regulations. The DOE stated that it intends to publish proposed regulations on the remaining
issues in a separate notice of proposed rulemaking, but did not indicate when it would publish those proposed changes. The proposed changes to the regulations remain subject to further change during the rulemaking process. We cannot provide any
assurances as to the timing, content or impact of any final regulations arising from the rulemaking process.
Gainful Employment Update
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. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 under the caption “Regulatory Environment –
Gainful Employment.”
On July 1, 2019, the DOE issued final regulations that rescind the gainful employment regulations. The final regulations have an effective date of July 1, 2020, but the DOE stated in an electronic announcement dated
June 28, 2019 that institutions may elect to implement immediately the new regulations and that institutions that early implement the regulations will not be required to report gainful employment data for the 2018-2019 award year, to comply with
requirements for including a gainful employment disclosure template in their promotional materials or directly distributing the disclosure template to prospective students, to post the gainful employment template and any other gainful employment
disclosures required under the gainful employment regulations on their web pages, or to comply with certification requirements for gainful employment. The DOE stated in the electronic announcement that institutions that do not early implement the new
regulations are expected to comply with the existing gainful employment regulations until July 1, 2020. We have elected to implement the new regulations early and have documented our early implementation of the new regulations as required by the DOE.