Lincoln Educational Services Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 6, 2023. The Company operates 22 career-oriented post-secondary education campuses in 14 states, serving recent high school graduates and working adults. Reportable segments are Campus Operations and Transitional.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $99.6 million, up 8.5% | $275.5 million, up 7.4% |
| Operating income | $2.0 million; 2.0% margin | $24.4 million; 8.9% margin |
| Net income | $2.1 million; 2.1% margin | $19.2 million; 7.0% margin |
| Diluted EPS | $0.07 | $0.63 |
| Net cash from operating activities | $3.6 million for the nine-month period |
- Revenue drivers: Campus Operations revenue increased 10.5% in the quarter and 9.1% year to date. Student starts increased 7.1% in the quarter and 10.3% year to date; average revenue per student increased 7.3% and 8.9%, respectively, partly due to tuition increases and the hybrid teaching model.
- Profitability: Third-quarter operating income declined from $4.9 million to $2.0 million. Selling, general and administrative expense rose 16.0%, including higher bad debt expense, performance-based incentives, marketing and student-services costs. Year-to-date results benefited from a $30.9 million gain on the Nashville property sale, partially offset by a $4.2 million impairment charge.
- Cash and liquidity: Cash, cash equivalents and restricted cash totaled $46.0 million at September 30, 2023, compared with $50.3 million at December 31, 2022. Short-term investments totaled $24.3 million, compared with $14.8 million at year-end. Restricted cash included approximately $4.1 million securing outstanding letters of credit.
- Debt: The Company had no debt outstanding and no credit facility at quarter-end. Management continues to evaluate potential lenders for future credit needs.
- Balance sheet: Total assets were $315.8 million and stockholders’ equity was $157.2 million. Student receivables, net of allowance, totaled $57.0 million, including $16.7 million classified as noncurrent.
- Credit losses: Adoption of CECL on January 1, 2023 increased the allowance for credit losses by approximately $10.8 million and reduced retained earnings by $7.9 million after tax. The allowance was $52.0 million at September 30, 2023.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased $7.8 million, while operating income decreased $2.9 million because expense growth, particularly SG&A, exceeded revenue growth.
- Nine-month revenue increased $19.0 million and operating income increased $19.4 million, primarily because of the $30.9 million Nashville property gain and significantly lower corporate expenses compared with the prior year.
- Educational services and facilities expense increased 8.0% for both the quarter and nine months, reflecting higher instructional staffing, facilities costs, books and tools, inflation and enrollment-related expenses.
- The Transitional segment, consisting solely of the Somerville, Massachusetts campus, generated $0.1 million of third-quarter revenue and an operating loss of $0.7 million. The campus has been taught out and is expected to incur approximately $2.0 million of additional closing costs through year-end 2023.
- The Company repurchased 165,064 shares for approximately $0.9 million during the nine months. Approximately $29.7 million remained available under the repurchase authorization at September 30, 2023.
Cash Flow, Capital Spending and Outlook
- Operating cash flow was $3.6 million, investing cash flow was negative $5.0 million and financing cash flow was negative $2.9 million for the nine months ended September 30, 2023.
- Capital expenditures were $28.7 million, primarily for the Atlanta campus buildout and the $10.2 million purchase of a 90,000-square-foot property in Levittown, Pennsylvania. The Company expects 2023 capital expenditures to approximate 11% of revenue, funded with operating cash flow and cash on hand.
- The Levittown campus is expected to open in the first quarter of 2025, with projected average enrollment of approximately 600 students. The Company expects to invest approximately $17.0 million in the buildout and plans to sell the property and enter into an approximately 20-year leaseback.
- The Company sold its Nashville property for approximately $33.8 million, generating approximately $33.3 million of proceeds. It may continue operating at the site rent-free for 15 months, subject to limited extension options.
- Subsequent to quarter-end, the Company entered into leases for new campuses in Nashville, Tennessee, and Houston, Texas. The Nashville lease has an initial term of 15 years; the Houston lease has an initial term of 21.5 years.
Guidance, Risks and Unusual Items
- No formal revenue or earnings guidance is provided in the filing. Management expects elevated capital spending in 2023 and intends to fund it with cash on hand and operating cash flow.
- Approximately 74% of 2022 cash receipts relating to revenue came from Title IV programs. Reductions in student aid, loss of program or institutional eligibility, or delays in funding could materially affect revenue, receivables, liquidity and operations.
- New Department of Education gainful-employment, financial-responsibility, administrative-capability and certification regulations generally take effect July 1, 2024. The Company cannot yet predict whether programs will meet the new benchmarks or whether financial protection, program changes, enrollment restrictions or loss of Title IV eligibility could result.
- The Company’s institutions are provisionally certified based on alleged deficiencies identified in recent DOE audits, which may increase regulatory scrutiny and reduce procedural protections.
- Key operating risks include student receivable collectability, lower collections, competition, accreditation, regulatory compliance, program development, campus openings and closures, inflationary costs and seasonal enrollment patterns.
- Unusual items include the Nashville gain, Nashville-related goodwill and long-lived-asset impairment, CECL adoption effects, the Somerville teach-out, and substantial noncash lease and rent-related expenses.
- Management reported no material new risk factors for the quarter, no material developments in previously disclosed legal proceedings, and adequate and effective disclosure controls.
Investor Verification Checklist
- Verify the sustainability of revenue growth, student starts and average revenue per student excluding tuition increases and accelerated recognition associated with the hybrid teaching model.
- Assess whether SG&A growth, bad debt expense and collection trends are reducing operating leverage and cash conversion.
- Reconcile year-to-date earnings and cash flow excluding the $30.9 million Nashville property gain and related $4.2 million impairment.
- Monitor the $52.0 million allowance for credit losses, student-receivable write-offs and the effect of Title IV funding on collections.
- Confirm funding capacity for planned capital expenditures, the Levittown buildout and long-term campus leases given the absence of a credit facility.
- Evaluate the potential impact of DOE regulations effective July 1, 2024, including gainful-employment results, provisional certification conditions and possible financial-protection requirements.