Lincoln Educational Services Corporation: Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Lincoln provides career-oriented post-secondary education through 22 schools in 14 states, serving recent high school graduates and working adults. Programs include transportation and skilled trades, healthcare, hospitality, and information technology. The company reports two segments: Transportation and Skilled Trades and Healthcare and Other Professions.
This filing covers the three and six months ended June 30, 2022. The interim financial statements are unaudited and results for the six-month period are not necessarily indicative of the full fiscal year.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $82.1 million, up 2.1% | $164.7 million, up 3.9% |
| Operating income | $0.4 million, versus $3.5 million | $0.1 million, versus $9.5 million |
| Net income | $0.3 million, versus $2.4 million | $0.5 million, versus $6.9 million |
| Income available to common shareholders | $(0.05) million | $(0.08) million |
| Basic and diluted EPS | $(0.00), versus $0.06 | $(0.00), versus $0.19 |
| Operating margin | 0.5%, versus 4.3% | Approximately 0.0%, versus 6.0% |
| Cash flow from operations | Not separately provided | $(10.0) million, versus $1.1 million provided |
Educational services and facilities expense rose 7.2% in the quarter and 9.5% year to date, while selling, general and administrative expense rose 5.8% and 11.5%, respectively. Cost increases reflected higher instructional staffing, inflation and supply-chain pressures, additional rent from the Denver and Grand Prairie sale-leaseback, medical claims, and higher bad debt expense.
Cash and cash equivalents were $67.0 million at June 30, 2022, compared with $83.3 million at December 31, 2021. Total assets were $285.4 million and total liabilities were $146.9 million. The company had no debt outstanding under its credit facility and was in compliance with its covenants. Letters of credit totaling $4.0 million remained outstanding.
Investing cash flow was $(1.2) million, including $3.6 million of capital expenditures and $2.4 million of proceeds from the sale of the Suffield, Connecticut property. Financing cash flow was $(5.1) million, including $2.5 million of common-stock repurchases, $0.6 million of preferred dividends, and $2.0 million of net share settlements for equity compensation.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, supported by higher average student populations and a higher beginning-of-period student base.
- Average population increased 2.1% year to date; Transportation and Skilled Trades average population increased 4.7%, while Healthcare and Other Professions declined 2.6%.
- Operating income declined sharply because expenses grew faster than revenue. Segment operating income fell 39.2% in Transportation and Skilled Trades and 50.7% in Healthcare and Other Professions for the six-month period.
- Bad debt expense increased, partly reflecting lower historical repayment rates. The prior-year period benefited from an approximately $3.0 million HEERF-related reduction in bad debt expense.
- Interest expense declined substantially after the company repaid its term loan and related swap obligations in connection with the 2021 sale-leaseback transaction.
- The company initiated a $30.0 million share-repurchase program in May 2022 and repurchased 414,963 shares for approximately $2.5 million during the quarter. Approximately $27.5 million remained authorized at June 30.
- The company canceled 5.9 million shares previously held in treasury, reducing treasury stock and common stock by $82.9 million.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided. Management expects capital expenditures to approximate 3% of revenue in 2022, funded by operating cash flow and cash on hand.
- Results are seasonal: student populations are generally lower in the first half of the year, with larger class starts expected in the third quarter. Full-year performance depends materially on the high-school recruiting season.
- The company executed a 12-year Atlanta lease expected to commence in the third quarter of 2022, with undiscounted payments of approximately $12.2 million.
- The Nashville campus property remains held for sale. Management expects the approximately $34.5 million transaction to close within 15 months or earlier, but the buyer may terminate during due diligence and closing is not assured.
- On August 5, 2022, the company amended its credit agreement to extend the revolving-loan maturity to November 14, 2023.
- Approximately 75% of 2021 cash receipts relating to revenue came from Title IV programs. Any reduction in student aid, loss of eligibility, or adverse regulatory action could materially affect operations and liquidity.
- Pending and proposed Department of Education rules concerning borrower defense, closed-school discharges, the 90/10 rule, financial responsibility, gainful employment, and changes in ownership could increase liabilities, letter-of-credit requirements, reporting obligations, or the risk of losing Title IV eligibility.
- The company is responding to Department of Education borrower-defense applications and sought to intervene in litigation involving a proposed settlement that could automatically discharge certain student loans. The potential timing and amount of any company liability are not determinable from the filing.
- The Consumer Financial Protection Bureau is assessing whether it has supervisory authority over certain student-credit activities. The Massachusetts Attorney General is investigating alleged unfair or deceptive practices involving fee refunds and related disclosures at the Somerville campus.
- As of June 30, 2022, the company had $2.3 million of deferred payroll taxes remaining to be repaid by January 3, 2023.
Most Important Facts to Verify
- Whether enrollment growth and third-quarter starts offset continuing inflation, staffing costs, facility rent, and bad debt pressure.
- Collections, student receivables, and the sustainability of the materially higher bad debt expense.
- Cash-flow recovery after $10.0 million of operating cash use in the first six months and the impact of seasonal working-capital needs.
- Final terms and closing status of the Nashville property sale and the related campus relocation plan.
- Availability and covenant terms of the revolving credit facility following the August 2022 maturity extension.
- Potential financial and regulatory effects of borrower-defense claims, the proposed settlement, 90/10 rule changes, and other Department of Education rulemaking.
- Progress and outcome of the CFPB and Massachusetts Attorney General matters.
- Remaining authorization and future pace of the $30.0 million share-repurchase program, balanced against liquidity and preferred-stock dividend obligations.