Lincoln Educational Services Corporation: FY2023 Form 10-K Summary
Business context and reporting period
Lincoln provides career-oriented post-secondary education through 21 operating campuses in 13 states, serving recent high school graduates and working adults. Programs include skilled trades, automotive technology, health sciences, hospitality and information technology. The filing covers the fiscal year ended December 31, 2023, with comparison to fiscal 2022. The company reported 13,270 period-end students and 12,941 average students. Its reportable segments are Campus Operations and Transitional; the Somerville, Massachusetts campus was fully taught out by year-end.
Financial performance and key metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $378.1 million | $348.3 million | 8.6% increase |
| Operating income | $33.4 million | $16.3 million | 104.9% increase |
| Operating margin | 8.8% | 4.7% | Up 410 basis points |
| Net income | $26.0 million | $12.6 million | 106.0% increase |
| Net margin | 6.8% | 3.6% | Up 320 basis points |
| Diluted EPS | $0.85 | $0.36 | Increase |
| Net cash from operating activities | $25.6 million | $0.9 million | Increase |
- Campus Operations revenue increased 10.3% to $376.6 million, while segment operating income declined 3.9% to $47.6 million because higher instructional, facility, marketing, administrative and student-service costs offset revenue growth.
- Student starts increased 11.4%, and average revenue per student increased 8.0%, supported by tuition increases and the hybrid teaching model. Period-end enrollment increased 7.1% from 12,388 students to 13,270.
- Educational services and facilities expense rose 9.1% to $162.3 million, or 42.9% of revenue versus 42.7% in 2022. Selling, general and administrative expense rose 14.7% to $209.1 million, or 55.3% of revenue versus 52.4%.
- The company recognized a $30.9 million gain on the sale of its Nashville property. It also recorded $4.2 million of impairment charges, including $3.8 million of goodwill and $0.4 million of long-lived assets related to Nashville.
- Bad debt expense was 11.0% of revenue versus 10.0% in 2022. The allowance for credit losses ended at $53.8 million after adoption of the current expected credit loss model, which produced a $10.8 million opening allowance adjustment and a $7.9 million after-tax reduction to retained earnings.
Cash flow, liquidity, debt and capital allocation
- Cash, cash equivalents and restricted cash totaled $80.3 million at December 31, 2023, compared with $50.3 million at December 31, 2022; 2022 also included $14.8 million of short-term investments.
- Operating cash flow was $25.6 million. Investing cash flow was $7.4 million, including approximately $33.3 million of net proceeds from the Nashville property sale and $40.7 million of capital expenditures. Financing cash outflow was $2.9 million.
- The company had no debt outstanding and no credit facility at December 31, 2023. Existing letters of credit totaling $4.1 million were cash collateralized and classified as restricted cash.
- On February 16, 2024, Lincoln entered into a new $40.0 million revolving credit facility with Fifth Third Bank, including a $10.0 million letter-of-credit sublimit and a $20.0 million accordion feature, maturing February 16, 2027.
- Capital expenditures represented 11.0% of revenue in 2023; management expects approximately 15% of revenue in 2024, funded with cash on hand and operating cash flow.
- The company repurchased 165,064 shares for approximately $0.9 million in 2023. Approximately $29.7 million remained authorized under the repurchase program at year-end. No common stock dividends are currently planned.
Material changes versus the prior comparable period
- Revenue, operating income and net income increased substantially, although the reported operating improvement benefited from the Nashville property sale gain.
- Title IV Programs represented approximately 81% of cash-basis revenue in 2023 versus 74% in 2022, increasing exposure to federal student-aid regulation and funding changes.
- The company expanded its hybrid Lincoln 10.0 teaching model, reporting that the transformation was more than 50% complete and expected to be completed by the end of 2024.
- New campuses or facilities were added or developed in East Point, Georgia; Nashville, Tennessee; Houston, Texas; and Levittown, Pennsylvania. East Point was expected to begin its first class in March 2024, Houston is expected to open in the first quarter of 2026, and the new Levittown campus is expected to open in the second half of 2025.
- The company entered into a sale-leaseback for the Levittown property on January 30, 2024 for approximately $11.0 million, with a 20-year triple-net lease and a $2.5 million tenant improvement allowance.
Guidance, outlook, commentary, risks and unusual items
- Management expects improving margins in the second half of 2024 as curriculum standardization, centralized functions and the hybrid model are implemented. No specific revenue or earnings guidance was provided in the filing.
- Management expects 2024 capital expenditures of approximately 15% of revenue, driven by campus buildouts, facility expansion and new programs.
- All three DOE institutions are provisionally certified, which subjects them to heightened scrutiny, fewer due-process protections and prior approval requirements for certain new locations and programs.
- New DOE gainful-employment, financial-responsibility, administrative-capability and certification rules generally become effective July 1, 2024. Programs that fail applicable gainful-employment measures could lose Title IV eligibility after the required evaluation period; initial official outcome rates were expected in early 2025.
- The company is included among institutions covered by the Sweet v. Cardona borrower-defense settlement and is appealing the settlement in the Ninth Circuit. The DOE may discharge student loans and could seek recoupment from Lincoln, but the amount and timing cannot be determined from the filing.
- FY2023 90/10 percentages for the company’s institutions ranged from approximately 79% to 84%, below the 90% threshold. The company calculated a 2023 composite score of 3.0, subject to DOE review. The latest published cohort default rates were zero.
- Other significant risks include dependence on Title IV funding, enrollment and retention trends, student receivable collections, competition, regulatory and accreditation actions, cybersecurity incidents, labor relations, interest rates and the execution of campus expansion plans.
- The filing reports effective disclosure controls and effective internal control over financial reporting, with an unqualified audit opinion from Deloitte & Touche LLP.
Most important facts for investors to verify
- Reconcile operating performance excluding the $30.9 million Nashville property gain and assess the sustainability of the underlying campus margins.
- Monitor the 11.0% bad debt ratio, the $53.8 million allowance for credit losses and collection performance under the CECL methodology.
- Confirm the timing, cost and enrollment contribution of the East Point, Levittown and Houston campus projects, including projected 2024 capital expenditures.
- Track DOE actions concerning provisional certification, gainful-employment rules, financial-responsibility requirements and the 90/10 calculations.
- Assess potential liabilities and recoupment exposure from the Sweet v. Cardona settlement and other borrower-defense or regulatory proceedings; the filing does not provide a clear dollar estimate.
- Verify the terms and availability of the Fifth Third revolving facility and the extent to which cash remains restricted for letters of credit.