Lincoln Educational Services Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; filed November 7, 2022. Lincoln operated 22 career-oriented post-secondary schools in 14 states across Transportation and Skilled Trades and Healthcare and Other Professions (“HOPS”).
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $91.8 million | $89.1 million | $256.5 million | $247.5 million |
| Operating income | $4.9 million | $5.7 million | $5.0 million | $15.2 million |
| Operating margin | 5.3% | 6.4% | 1.9% | 6.1% |
| Net income | $3.5 million | $3.8 million | $4.1 million | $10.8 million |
| Income available to common shareholders | $3.2 million | $3.5 million | $3.2 million | $9.8 million |
| Basic and diluted EPS | $0.10 | $0.11 | $0.10 | $0.30 |
- Revenue drivers: Q3 revenue rose 3.1%, as revenue per student increased 5.9%, more than offsetting a 2.7% decline in average student population. Nine-month revenue increased 3.6%, supported by a 2.7% increase in revenue per student and a modest increase in average student population.
- Enrollment: Q3 new student starts declined 9.2% and average student population declined 2.8%. Nine-month starts declined 4.3%, while average student population increased 0.4%. End-of-period population was 13,586, down 3.0% year over year.
- Margins and expenses: Educational services and facilities expense increased to 43.5% of revenue in Q3 from 42.8% and to 43.8% for nine months from 42.1%. Selling, general and administrative expense increased to 51.2% of revenue in Q3 from 50.8% and to 54.4% for nine months from 51.8%.
- Cash flow: Net cash provided by operating activities was $0.6 million for the nine months, down from $17.8 million in the prior-year period. Accounts receivable increased $32.5 million in operating cash flow uses, while the provision for doubtful accounts was $24.9 million.
- Investing and financing: Capital expenditures were $7.1 million; proceeds from property sales were $2.4 million. Financing cash outflows included $6.7 million of common-share repurchases, $2.0 million of net share settlements and $0.9 million of preferred dividends.
- Liquidity: Cash and cash equivalents were $69.6 million at September 30, 2022, compared with $83.3 million at December 31, 2021. Current assets were $111.0 million and current liabilities were $59.9 million.
- Debt: The Company had no borrowings outstanding under its Credit Facility and was in compliance with covenants. Standby letters of credit totaled $4.0 million. On November 4, 2022, after quarter-end, the Company terminated the Credit Agreement and remaining revolving facility; the letters of credit remained outstanding subject to cash collateralization.
- Lease obligations: Operating lease liabilities totaled $102.3 million in present value, with total undiscounted lease payments of $144.0 million. Lease expense increased following the Denver and Grand Prairie sale-leaseback transaction.
Material changes versus the prior comparable period
- Revenue grew, but operating income declined 15.1% in Q3 and 67.5% for the nine months, reflecting higher instructional, facility, salary, student-service, severance and other SG&A costs.
- Nine-month operating income declined in both Transportation and Skilled Trades, to $26.1 million from $35.4 million, and HOPS, to $4.1 million from $7.7 million.
- Bad debt expense and related receivable allowances increased materially; management attributed part of the comparison to a prior-year benefit from HEERF-related student account relief.
- Interest expense fell to $0.1 million for the nine months from $0.9 million because outstanding debt was repaid in the fourth quarter of 2021.
- The Company repurchased 1.1 million common shares for approximately $6.7 million during the first nine months under a $30.0 million authorization. Approximately $23.3 million remained available at September 30, 2022.
- The Company adopted a hybrid teaching model intended to improve program-delivery efficiency and revenue per student, but implementation contributed to higher instructional costs.
Guidance, outlook, commentary and risks
- Management expects 2022 capital expenditures to approximate 3% of revenue, funded by operating cash flow and cash on hand. The filing does not provide formal revenue or earnings guidance.
- Results are seasonal, with generally larger class starts in the third quarter and higher attrition in the first half. High-school recruiting is an important determinant of second-half enrollment.
- The Nashville campus was classified as held for sale under a $34.5 million sale agreement, with closing expected in the second quarter of 2023. The Company plans to relocate the campus but had not selected a location as of the filing.
- After quarter-end, the Company approved closure of its Somerville, Massachusetts campus. The campus represented $5.3 million of nine-month revenue and a $0.2 million operating loss; total closure and teach-out costs are expected to be approximately $2.0 million through 2023.
- Approximately $2.3 million of deferred FICA payroll taxes remained in accrued expenses at September 30, 2022, with the remaining balance due by January 3, 2023.
- The Company relies substantially on Title IV funding; approximately 75% of 2021 revenue-related cash receipts came from Title IV Programs. Changes to borrower-defense rules, the 90/10 rule, accreditation, state regulation or eligibility for federal aid could materially affect operations.
- The Department of Education’s borrower-defense matters and the proposed Sweet v. Cardona settlement could result in automatic loan discharges, potential recoupment claims, sanctions and reputational harm. The Company stated that the timing and amount of any potential liability cannot be predicted.
- Inflation, supply-chain pressures, higher instructional and facility costs, student starts, student attrition, bad debt and the transition to hybrid instruction remain operating risks.
- The Company stated that no currently pending ordinary-course legal proceedings were expected to have a material adverse effect, but the DOE borrower-defense matters are separately identified as potentially material.
Important facts for investors to verify
- Whether declining starts and end-of-period enrollment stabilize, particularly in HOPS and Transportation and Skilled Trades.
- Whether higher revenue per student and the hybrid teaching model can offset higher instructional, facility and SG&A costs.
- Cash conversion, accounts receivable collections and the sustainability of the substantially lower operating cash flow.
- The financial impact and timing of the Somerville closure, Nashville sale and planned campus relocation.
- The final outcome of the Sweet v. Cardona settlement and any DOE borrower-defense recoupment, sanctions or related claims.
- Implementation and impact of the revised 90/10 rule and other DOE, state and accreditation requirements.
- Use of cash for share repurchases and preferred dividends while operating cash flow remains modest.
- Cash collateral requirements for the $4.0 million of outstanding letters of credit following termination of the Credit Agreement.