Lincoln Educational Services Corporation — Q1 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, 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 months ended March 31, 2022, compared with the same period in 2021. Financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $82.6 million | $78.0 million | Up 5.8% |
| Operating income (loss) | $(0.3) million | $6.0 million | Declined $6.3 million |
| Net income | $0.3 million | $4.5 million | Down $4.2 million |
| Income (loss) available to common shareholders | $(0.03) million | $4.2 million | Declined $4.2 million |
| Basic and diluted EPS | $(0.00) | $0.13 | Declined |
| Operating margin | (0.4%) | 7.7% | Down 8.1 percentage points |
| Net margin | 0.3% | 5.8% | Down 5.5 percentage points |
| Net cash used in operating activities | $(14.4) million | $(8.3) million | Outflow increased $6.1 million |
Revenue growth reflected a 4.4% increase in average student population and a 1.3% increase in average revenue per student. Total starts declined 5.5% to 3,353, while average population increased 3.6% to 12,884 and period-end population increased 1.8% to 12,974.
- Transportation and Skilled Trades revenue increased 5.6% to $58.8 million, but operating income fell 41.2% to $7.2 million.
- Healthcare and Other Professions revenue increased 6.5% to $23.8 million, while operating income fell 55.7% to $1.3 million.
- Educational services and facilities expense rose 11.9% to $36.2 million, driven by higher instructional staffing, inflation and supply-chain costs, maintenance, and approximately $0.8 million of additional rent from the Denver and Grand Prairie sale-leaseback.
- Selling, general and administrative expense rose 17.8% to $46.7 million, primarily due to higher bad debt expense, increased marketing, $0.9 million of additional stock compensation, severance, and approximately $0.8 million of one-time operational streamlining costs.
- Bad debt expense was affected by the absence of approximately $3.0 million of HEERF-related relief recognized in the prior-year quarter.
- Interest expense declined 84.9% to less than $0.1 million because all Credit Facility debt was repaid in the fourth quarter of 2021.
Cash Flow, Liquidity, Debt, and Capital Resources
Cash and cash equivalents were $65.6 million at March 31, 2022, compared with $83.3 million at December 31, 2021. The decline reflected seasonal operating cash requirements, a $13.4 million increase in accounts receivable from collection timing, and lower accrued expenses following incentive compensation payments.
- Cash used in investing activities was $1.0 million, including $1.1 million of capital expenditures.
- Cash used in financing activities was $2.3 million, including the $0.3 million Series A preferred dividend and $2.0 million of net share settlements for equity compensation taxes.
- The company had no outstanding debt under its Credit Facility at March 31, 2022 and was in compliance with all debt covenants.
- Letters of credit outstanding under the Credit Facility totaled $4.0 million.
- Operating lease liabilities totaled $101.8 million on a present-value basis, with total undiscounted lease payments of $142.9 million.
- Capital expenditures are expected to approximate 3% of revenue in 2022 and are expected to be funded with operating cash flow and cash on hand.
Material Changes, Outlook, Risks, and Unusual Items
- The company’s profitability deteriorated materially despite revenue growth because operating expenses increased faster than revenue.
- The October 2021 Denver and Grand Prairie sale-leaseback generated approximately $45.4 million of net proceeds, produced a $22.5 million gain, and funded repayment of approximately $16.7 million of term-loan principal and swap termination costs. The transaction also created long-term operating lease obligations.
- The Nashville property remained classified as held for sale. The expected sale price is $34.5 million, with closing expected in the third quarter of 2022, although the buyer may terminate during due diligence and completion is not assured.
- Management expects seasonal variation, including lower student populations in the first and second quarters and larger class starts in the third quarter. Full-year results are not necessarily indicated by first-quarter results.
- The company expects increased marketing investment to yield positive returns during the second half of 2022, but the filing provides no quantitative earnings or revenue guidance.
- COVID-19 effects continued to influence operations, although all schools had reopened and most students previously on leave or deferral had returned. The company had drawn and distributed $14.8 million of CRRSAA and ARPA funds as of March 31, 2022; remaining allocations were held by the Department of Education and subject to compliance requirements.
- The company had $2.3 million of deferred FICA payroll taxes in accrued expenses, with the remaining 50% due by January 3, 2023.
- The CFPB is assessing whether it has supervisory authority over the company’s student-credit activities. The company provided requested information and was awaiting further response.
- Potential changes to gainful-employment, 90/10, substantial-misrepresentation, private education lending, and Federal Trade Commission rules could affect Title IV eligibility, program offerings, enrollment, or compliance costs.
- The company had $30.1 million of outstanding institutional loan commitments to active students. These commitments are not recorded as debt, are not fully guaranteed unless students complete their programs, and involve no cash advances to students.
- Series A preferred stock carries a 9.6% annual dividend rate, paid in cash during the quarter, and is convertible into common stock subject to specified conditions and a 19.99% ownership cap.
Important Facts for Investors to Verify
- Whether enrollment starts and second-half recruiting convert into sustained population and revenue growth.
- Whether bad debt, marketing, labor, rent, and inflationary costs normalize sufficiently to restore operating margins.
- The timing and completion risk of the Nashville property sale and the effect of related lease or relocation costs.
- Compliance with Title IV funding requirements, the 90/10 rule, gainful-employment standards, and evolving DOE and FTC regulations.
- The outcome of the CFPB review and any related regulatory or consumer-finance exposure.
- Cash conversion and working-capital trends, particularly accounts receivable collections and seasonal operating cash outflows.
- The financial impact of long-term operating leases and the company’s ability to fund capital expenditures without additional borrowing.
- Potential dilution, dividend obligations, and conversion terms associated with the Series A preferred stock and restricted-stock awards.