Lincoln Educational Services Corporation — FY2022 Form 10-K Summary
Business context and reporting period
Lincoln Educational Services Corporation provides career-oriented post-secondary education through 22 campuses in 14 states under the Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute and Euphoria Institute brands. Programs primarily cover skilled trades, automotive technology, healthcare, hospitality and information technology. The filing covers the fiscal year ended December 31, 2022, compared with fiscal 2021.
The company had 12,388 students enrolled at year-end and average enrollment of 12,894 during 2022. Reportable segments were Transportation and Skilled Trades, Healthcare and Other Professions, and Transitional. The Transitional segment consists solely of the Somerville, Massachusetts campus, which is scheduled to close and complete its teach-out by the end of 2023.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $348.3 million | $335.3 million | Up 3.9% |
| Operating income | $16.3 million | $49.3 million | Down 67.0% |
| Operating margin | 4.7% | 14.7% | Down 10.0 percentage points |
| Income before taxes | $16.4 million | $47.2 million | Down 65.2% |
| Net income | $12.6 million | $34.7 million | Down 63.6% |
| Net income available to common stockholders | $11.5 million | $33.5 million | Down 65.6% |
| Basic and diluted EPS | $0.36 | $1.04 | Down $0.68 |
| Cash flow from operations | $0.9 million | $27.4 million | Down $26.6 million |
| Cash, cash equivalents and restricted cash | $50.3 million | $83.3 million | Down $33.0 million |
| Short-term investments | $14.8 million | None reported | New in 2022 |
| Debt outstanding | None | Debt was largely repaid in 2021 | Credit agreement terminated |
Educational services and facilities expense rose 7.1% to $148.7 million, or 42.7% of revenue, from 41.4%. Selling, general and administrative expense rose 8.0% to $182.4 million, or 52.4% of revenue, from 50.4%. Bad debt expense was 10.0% of revenue in 2022 versus 8.0% in 2021; the prior year benefited from approximately $3.0 million of COVID-related student account relief.
Revenue growth reflected a 3.6% increase in average revenue per student, tuition increases and efficiencies from the hybrid teaching model, while average student population was broadly flat. Year-end enrollment declined 5.1% to 12,388 students, and total student starts declined 3.1% to 14,920.
Segment revenue and operating income were $249.9 million and $42.3 million for Transportation and Skilled Trades, $91.5 million and $7.2 million for Healthcare and Other Professions, and $6.8 million and $(0.4) million for Transitional. Corporate expenses increased to $32.8 million from $14.6 million, contributing materially to the consolidated operating decline.
Liquidity, capital resources and unusual items
- At December 31, 2022, the company held $46.1 million of cash and cash equivalents, $4.2 million of restricted cash securing letters of credit, and $14.8 million of short-term investments.
- Operating cash flow was only $0.9 million, primarily because approximately $8.0 million of Title IV funds were delayed by a fourth-quarter system upgrade and received in January 2023, as well as increased accounts receivable and other working-capital needs.
- Investing cash outflows were $21.4 million, including $14.8 million of short-term investments and $9.0 million of capital expenditures. Capital expenditures were approximately 3% of revenue in 2022 and management expected approximately 11% in 2023, primarily for the Atlanta campus build-out.
- Financing cash outflows were $12.5 million, including $9.4 million of share repurchases, $2.0 million of net share-settlement payments and $1.1 million of preferred-stock dividends.
- The remaining revolving credit facility was terminated on November 4, 2022. The company had no debt outstanding at year-end but retained approximately $4.0 million of cash-collateralized letters of credit. Management expected to negotiate a new credit facility in the second quarter of 2023.
- The company had approximately $100.6 million of operating lease liabilities, including $9.6 million current and $91.0 million noncurrent. Operating lease cost was $18.9 million in 2022.
- The Nashville campus property was held for sale under a $34.5 million purchase agreement, with closing expected in the second quarter of 2023 subject to due diligence. Approximately $0.5 million of non-refundable payments had been received by year-end.
- 2022 included a $1.0 million long-lived asset impairment and a $0.2 million gain on the sale of the Suffield, Connecticut property. The prior year included a $22.5 million gain from the Denver and Grand Prairie sale-leaseback transaction, making the year-over-year profit comparison less favorable.
- Series A preferred stock was mandatorily converted on November 30, 2022 into 5,381,356 common shares. No further preferred dividends are payable. The company repurchased 1,572,414 common shares for approximately $9.4 million and later extended its repurchase authorization.
Material changes versus the prior comparable period
- Revenue increased 3.9%, but operating income declined 67.0% because expense growth exceeded revenue growth and 2021 benefited from a large sale-leaseback gain.
- Instructional salaries, facility costs, inflationary consumables, marketing, student services, medical costs, severance and bad debt expense increased. Denver and Grand Prairie lease costs added approximately $2.6 million.
- Marketing spending shifted toward paid search and paid social media, while pay-per-lead affiliate spending declined. Management reported improved lead generation but noted that low unemployment, inflation and reluctance to incur additional debt delayed conversions to starts.
- Average enrollment was essentially flat excluding COVID-related leave-of-absence effects, but ending enrollment and starts declined.
- Liquidity decreased substantially from year-end 2021, although the company remained debt-free and management stated that expected cash sources should fund operations for at least the next 12 months and the foreseeable future.
- The company continued implementing a hybrid education model, centralizing financial aid functions, standardizing programs and course calendars, and expanding the Atlanta campus.
Guidance, outlook, management commentary and risks
Management did not provide a formal revenue or earnings forecast in the filing. It expected 2023 capital expenditures to approximate 11% of revenue, primarily due to the Atlanta campus build-out, and anticipated that increased marketing-generated interest could convert into enrollment if economic conditions improved. The company also expected to fund capital expenditures with operating cash flow and cash on hand.
- Approximately 74% of 2022 revenue on a cash basis was derived from Title IV Programs, creating substantial exposure to federal student-aid eligibility, funding levels and regulatory changes.
- All institutions were provisionally certified by the Department of Education based on alleged deficiencies identified in recent Title IV compliance audits. The company calculated its 2022 composite score at 2.9, subject to DOE review.
- Fiscal 2022 90/10 Rule percentages ranged from 72% to 79%, below the 90% threshold. Changes under the American Rescue Plan and new DOE rules may include veterans’ and other federal funds and could increase the calculated percentages beginning with future periods.
- The DOE’s borrower-defense review remains unresolved. The Sweet v. Cardona settlement could result in automatic approval of certain borrower-defense applications involving the company’s institutions and potential DOE recoupment liabilities. The company appealed and stated that the potential amount and timing of any liability cannot be predicted.
- The Massachusetts Attorney General is investigating alleged unfair or deceptive practices involving fee refunds and related disclosures at a Massachusetts school. The company has provided requested documents and is cooperating.
- Risks include loss or restriction of Title IV eligibility, accreditation or state authorization, new gainful-employment and financial-responsibility rules, letter-of-credit requirements, student-loan defaults, competition, enrollment and retention declines, higher student borrowing costs, bad debt, labor issues, cybersecurity and privacy incidents, and dependence on leased facilities.
- All campuses were accredited by ACCSC, whose continued recognition by the DOE remained subject to regulatory review. Several campuses had upcoming reaccreditation dates in 2023.
Most important facts for investors to verify
- Whether the company successfully obtains a replacement credit facility and maintains adequate liquidity while funding approximately 11% of revenue in planned 2023 capital expenditures.
- The timing and terms of the Nashville property sale and whether expected proceeds are realized.
- Enrollment starts, retention, ending enrollment and the conversion of marketing leads into new students.
- Bad debt expense, student receivable collections and the effect of the transition to the hybrid teaching model on margins.
- The DOE’s resolution of provisional certification, compliance-audit findings, borrower-defense matters and the Sweet v. Cardona appeal, including any recoupment or letter-of-credit exposure.
- The effect of revised 90/10 Rule calculations, including the treatment of veterans’ benefits and other federal funds.
- Progress, costs and enrollment impact associated with the Atlanta campus and the Somerville campus closure and teach-out.
- Whether the company’s stated liquidity suffices after considering lease obligations, institutional student-financing commitments of approximately $30.5 million and regulatory contingencies.