Lincoln Educational Services Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Lincoln operated 22 career-oriented post-secondary schools in 14 states across Transportation and Skilled Trades and Healthcare and Other Professions.
Financial Performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $80.5 million | $62.5 million | $158.5 million | $132.5 million |
| Operating income (loss) | $3.5 million | $1.2 million | $9.5 million | $(0.2) million |
| Net income (loss) | $2.4 million | $0.8 million | $6.9 million | $(1.0) million |
| Income available to common shareholders | $2.1 million | $0.8 million | $6.3 million | $(1.0) million |
| Basic and diluted EPS | $0.06 | $0.02 | $0.19 | $(0.06) |
- Q2 revenue increased 28.8%; six-month revenue increased 19.6%. Management attributed growth to higher student starts, larger beginning student populations and normalization following the return to in-person instruction.
- Q2 operating margin was 4.3%, compared with 1.9% in the prior-year quarter. Six-month operating margin was 6.0%, compared with negative 0.1% in 2020.
- Educational services and facilities expense was 41.9% of Q2 revenue and 41.7% of six-month revenue, versus 42.0% and 42.6%, respectively, in the prior-year periods.
- Selling, general and administrative expense declined to 53.8% of Q2 revenue and 52.3% of six-month revenue, versus 56.3% and 57.6%, respectively. The six-month comparison benefited from approximately $3.0 million of net bad-debt relief related to HEERF-supported student account adjustments.
- Interest expense was $0.3 million in Q2 and $0.6 million for the six months. Income-tax expense increased to $0.7 million and $2.0 million, respectively, primarily because the company released a valuation allowance at December 31, 2020.
Segments and Operating Trends
- Transportation and Skilled Trades: Q2 revenue rose 32.7% to $57.0 million and operating income rose 131.1% to $11.3 million. Six-month revenue rose 22.5% to $112.6 million and operating income rose 142.9% to $23.6 million.
- Healthcare and Other Professions: Q2 revenue increased 20.2% to $23.5 million and operating income increased 8.5% to $3.0 million. Six-month revenue increased 13.0% to $45.8 million and operating income increased 24.9% to $5.9 million.
- Total Q2 student starts increased 8.0%; six-month starts increased 18.0%. Average population increased 16.3% in Q2 excluding COVID-19 leave-of-absence students and 13.0% for the six months on the same basis.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $1.1 million, compared with $6.5 million in 2020. The 2020 period included approximately $14.5 million of CARES Act funds; excluding those funds, 2020 operating cash flow would have been approximately negative $8.0 million.
- Capital expenditures were $3.5 million, compared with $3.1 million in the prior-year period. Management expects capital expenditures to approximate 2% of revenue in 2021.
- Cash used in financing activities was $2.6 million, including $1.0 million of debt repayment, $0.6 million of preferred dividends and $1.0 million of net share-settlement payments.
- Cash and cash equivalents were $33.0 million at June 30, 2021, compared with $38.0 million at December 31, 2020. Net cash, defined by the company as cash less credit-facility borrowings, was $16.7 million versus $20.8 million at year-end.
- Credit-facility principal outstanding was $16.8 million, net debt carrying value was $16.3 million, and $4.0 million of letters of credit were outstanding. The company stated that an additional $21.0 million was available under the facility and that all debt covenants were satisfied.
- Operating lease liabilities totaled approximately $60.6 million on a present-value basis. Series A convertible preferred stock was recorded as mezzanine equity at $12.0 million; $0.6 million of preferred dividends was paid during the six months.
Material Changes and Unusual Items
- Results benefited from reopening campuses and the return toward in-person, hands-on instruction after the severe COVID-19 disruption in the 2020 comparison period.
- HEERF funding of $27.4 million was allocated to Lincoln schools. The company distributed or utilized the full amount as of June 30, 2021. Additional CRRSAA funds of $15.4 million and approximately $8.0 million of ARPA funds had not been drawn as of June 30, 2021.
- The company deferred $4.5 million of FICA payroll taxes, with repayment scheduled in two installments beginning January 2022.
- Corporate expenses increased to $10.8 million in Q2 and $20.0 million for the six months, including higher incentive compensation tied to improved financial performance.
Outlook, Risks and Contingencies
- Management believes available liquidity and expected cash sources are sufficient to fund operations for the next twelve months and the foreseeable future, but cautions that an adverse evolution of COVID-19 could materially affect liquidity.
- Revenue and operating results are seasonal, with typically lower first- and second-quarter populations and greater reliance on third-quarter starts and the high-school recruiting season.
- Title IV programs represented approximately 77% of 2020 cash receipts related to revenue. Loss or restriction of Title IV eligibility would materially affect enrollment, revenue and liquidity.
- Changes to the 90/10 rule under ARPA will apply to institutional fiscal years beginning on or after January 1, 2023 and may increase compliance pressure, particularly because certain federal aid programs may become included in the calculation.
- The Department of Education is reviewing borrower-defense applications concerning Lincoln. The company received groups of 175 and 140 applications in May and July 2021 and cannot predict potential liabilities. The DOE may seek recovery for discharged loans.
- The company received closed-school discharge liability notices; the most recent asserted approximately $74,000, later reduced to $61,000 after appeal. Total amounts paid since September 2020 were approximately $280,000.
- A COVID-related class action lawsuit remains pending only as to student and technology fees after dismissal of the other claims. Management does not believe currently pending proceedings will have a material adverse effect, but outcomes remain uncertain.
Investor Verification Items
- Verify whether enrollment and student-start growth continues after comparisons normalize from the 2020 COVID disruption.
- Assess the sustainability of operating improvement excluding HEERF-related bad-debt benefits and other pandemic-related effects.
- Monitor operating cash conversion, seasonal liquidity needs, capital expenditures and debt repayments.
- Review Title IV concentration, 90/10 compliance and the effect of ARPA-related rule changes beginning in 2023.
- Track the DOE borrower-defense review, closed-school discharge claims and any resulting liabilities or letter-of-credit requirements.
- Evaluate the potential dilution and dividend burden associated with the Series A convertible preferred stock.