Lincoln Educational Services Corporation — FY2021 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. Programs include transportation and skilled trades, automotive technology, healthcare, hospitality and information technology. The company reports two segments: Transportation and Skilled Trades and Healthcare and Other Professions.
This filing covers the fiscal year ended December 31, 2021, rather than a standalone fourth quarter. Average enrollment was 12,899 students, up 10.0% from 2020 excluding COVID-19-related leaves of absence; ending enrollment was 13,059 students.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $335.3 million | $293.1 million | 14.4% increase |
| Operating income | $49.3 million | $14.8 million | 233.3% increase |
| Operating margin | 14.7% | 5.0% | Up 9.7 percentage points |
| Income before taxes | $47.2 million | $13.5 million | Increase |
| Net income | $34.7 million | $48.6 million | Decrease |
| Income available to common stockholders | $33.5 million | $47.2 million | Decrease |
| Basic and diluted EPS | $1.04 | $1.49 | Decrease |
| Net cash from operating activities | $27.4 million | $23.5 million | Increase |
| Capital expenditures | $7.5 million | $5.6 million | Increase |
| Cash and cash equivalents | $83.3 million | $38.0 million | Increase |
| Credit facility debt | $0 | $17.8 million | Fully repaid |
Educational services and facilities expense increased 13.7% to $138.9 million, while selling, general and administrative expense increased 8.1% to $168.9 million. As a percentage of revenue, these costs declined to 41.4% and 50.4%, respectively, from 41.7% and 53.3%.
The company reported a 26.5% effective tax rate in 2021, compared with a 2020 tax benefit of $35.1 million primarily resulting from the release of a valuation allowance on deferred tax assets. This tax benefit was a major reason 2020 net income exceeded 2021 net income despite substantially higher 2021 operating income.
Segment performance
| Segment | FY2021 revenue | Revenue change | FY2021 operating income | Operating income change |
|---|---|---|---|---|
| Transportation and Skilled Trades | $240.5 million | 16.0% increase | $52.1 million | 51.1% increase |
| Healthcare and Other Professions | $94.8 million | 10.7% increase | $11.8 million | 7.0% increase |
Transportation and Skilled Trades represented 71.7% of total revenue and was the primary contributor to the improvement in operating results. Total student starts increased 7.5%, including a 9.0% increase in Transportation and Skilled Trades and a 4.8% increase in Healthcare and Other Professions.
Material changes versus the prior comparable period
- Revenue growth reflected higher enrollment, a 7.5% increase in student starts, a return toward in-person instruction and a 4.0% increase in average revenue per student.
- Operating income benefited from revenue growth, operating leverage and a $22.5 million gain on the sale-leaseback of the Denver and Grand Prairie campuses.
- The company incurred a $0.7 million noncash impairment charge related to former property in Suffield, Connecticut.
- Net income and EPS declined because 2020 included a $35.1 million income tax benefit, while 2021 included a $12.5 million tax provision.
- Cash increased substantially following the sale-leaseback. Net proceeds were approximately $45.4 million, of which approximately $16.7 million was used to repay the term loan and terminate the related interest-rate swap.
- The sale-leaseback created operating lease obligations. Initial annual rent for the Denver and Grand Prairie properties was approximately $2.6 million, with annual 2.0% increases. Total operating lease liabilities were $97.9 million at year-end.
- Bad debt expense was 8.0% of revenue in 2021 versus 9.2% in 2020. HEERF-related student relief produced an approximately $3.0 million net benefit to 2021 bad debt expense.
Liquidity, debt and capital resources
Operating cash flow was $27.4 million. Investing cash flow was $37.8 million, primarily due to sale-leaseback proceeds, while financing cash flow was negative $20.0 million due largely to debt repayment, preferred dividends and equity-compensation settlements.
The company had $83.3 million of cash and no outstanding debt under its credit facility at December 31, 2021. It had $4.0 million of outstanding letters of credit and was negotiating a new credit facility. Management stated that expected cash sources should fund operations for at least the next twelve months and the foreseeable future.
Other financial commitments included approximately $30.0 million of student financing commitments, $7.9 million of future executive employment contract commitments and $12.8 million of state-related surety bonds. Approximately $82.7 million of cash exceeded FDIC insurance limits at year-end.
Guidance, outlook, commentary and unusual items
- Management expects 2022 capital expenditures to approximate 2% of revenue and intends to fund them with operating cash flow and cash on hand.
- Management plans to expand programs, improve facility utilization, develop shorter and more intensive programs, expand geographically and increase blended in-person and virtual instruction.
- Revenue and operating results are seasonal, with typically lower first- and second-quarter student populations and larger class starts in the third quarter.
- The company expects to sell its Nashville campus property for $34.5 million, subject to closing conditions. The transaction was expected in the first half of 2022, but the buyer could terminate during due diligence.
- Approximately 75% of 2021 revenue on a cash-receipts basis came from Title IV programs, and approximately 7% came from veterans’ benefits programs, creating significant regulatory and funding concentration.
- All three DOE reporting institutions were provisionally certified. The company calculated composite scores of 2.7 for 2020 and 3.0 for 2021, subject to DOE review, and had returned to advance payment status in August 2021.
- The 2021 institutional 90/10 Rule percentages ranged from 72% to 80%. Amendments under ARPA are expected to apply to fiscal years beginning January 1, 2023 and could increase the calculated percentages.
- ACCSC recognition by the DOE was under review, and several campuses had upcoming reaccreditation dates. Loss of accreditation or DOE recognition could affect Title IV eligibility.
- The DOE was reviewing borrower-defense applications concerning the company, and an OIG audit identified alleged compliance findings regarding HEERF funds and related matters. The filing does not provide a clear estimate of any potential liability.
- The CFPB was assessing whether the company is subject to supervisory authority based on its student lending activities. The company had provided requested information and was awaiting further response.
- The company paid $1.2 million of dividends on Series A preferred stock in 2021. It has not paid common-stock dividends since 2015 and does not expect to resume them in the foreseeable future.
Most important facts for investors to verify
- Whether enrollment, student starts and revenue growth continued after the favorable post-COVID comparison period.
- The sustainability of operating margins excluding the $22.5 million sale-leaseback gain and the approximately $3.0 million HEERF-related bad-debt benefit.
- Final DOE determinations regarding the 2021 composite score, provisional certifications, audit findings and Title IV eligibility.
- The outcome and implementation timing of pending DOE rulemaking on the 90/10 Rule, gainful employment, borrower defense, administrative capability and financial responsibility.
- The status of the CFPB assessment, DOE borrower-defense review, OIG audit and any resulting liabilities, sanctions or letter-of-credit requirements.
- Completion of the Nashville property sale and the company’s relocation and lease costs.
- Availability and terms of a replacement credit facility, including the effect of $4.0 million of outstanding letters of credit.
- Future obligations associated with operating leases, preferred-stock dividends and potential conversion or redemption of the Series A preferred stock.