Lincoln Educational Services Corporation — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Lincoln provides career-oriented post-secondary education through 22 campuses in 14 states, offering skilled trades, automotive, healthcare, hospitality and information technology programs. This report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Beginning January 1, 2023, the Company reorganized its reporting segments into Campus Operations and Transitional. The Transitional segment consists solely of the Somerville, Massachusetts campus, which is being taught out and is expected to close by December 31, 2023.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $87.3 million | $82.6 million | +5.7% |
| Operating loss | $(1.1) million | $(0.3) million | Higher loss |
| Operating margin | (1.3%) | (0.4%) | Down 0.9 percentage points |
| Net income (loss) | $(0.1) million | $0.3 million | Declined $0.4 million |
| Net margin | (0.1%) | 0.3% | Down 0.4 percentage points |
| Net cash used in operations | $(0.2) million | $(14.4) million | Improved $14.2 million |
| Capital expenditures | $3.2 million | $1.1 million | Higher investment |
- Revenue growth was driven by a 6.4% increase in Campus Operations student starts, a 9.0% increase in average revenue per student, tuition increases, the hybrid teaching model and higher program fees.
- Educational services and facilities expense increased 5.2% to $38.1 million, while selling, general and administrative expense increased 7.8% to $50.3 million. SG&A rose to 57.6% of revenue from 56.5%.
- Campus Operations revenue increased 6.9% to $86.4 million and operating income increased 17.4% to $10.1 million. Corporate expense increased to $11.0 million from $8.9 million, more than offsetting the segment improvement.
- Cash, cash equivalents and restricted cash totaled $44.5 million at March 31, 2023, supplemented by $14.8 million of short-term investments. Cash and cash equivalents alone were $40.3 million.
- The Company had no outstanding debt or credit facility at quarter-end. Approximately $4.0 million of outstanding letters of credit was cash collateralized and included in restricted cash. Management expected to negotiate a new credit facility in the second quarter of 2023.
- Operating lease liabilities totaled approximately $100.6 million on a present-value basis. The Company expects 2023 capital expenditures to approximate 11% of revenue, primarily for the Atlanta campus buildout and new programs.
Material Changes Versus the Prior Comparable Period
- Revenue increased $4.7 million, but the operating loss widened by $0.8 million because expense growth exceeded revenue growth.
- Campus Operations performance improved, while Transitional revenue declined 47.4% to $0.9 million as Somerville stopped enrolling new students. Transitional operating loss increased to $0.2 million.
- Corporate costs increased $2.2 million, primarily due to higher salaries and benefits, legal expenses and workers’ compensation costs.
- Operating cash usage improved substantially, partly because approximately $8.0 million of Title IV funds was received in January 2023 and because the prior-year period included a $6.1 million incentive compensation payment.
- The Company adopted CECL on January 1, 2023. The adoption increased the allowance for credit losses by approximately $10.8 million, reduced retained earnings by $7.9 million after tax and increased deferred tax assets by $2.9 million.
- The allowance for credit losses totaled $46.6 million at March 31, 2023, including an $8.2 million quarterly provision and $7.8 million of write-offs.
- The Series A preferred stock was fully converted into 5.4 million common shares in November 2022; no preferred stock dividends were recorded in Q1 2023.
- The Company repurchased 104,030 common shares for approximately $0.5 million during the quarter. Approximately $30.0 million remained available under the repurchase authorization at March 31, 2023.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2023 capital expenditures to approximate 11% of revenue, compared with 3% of revenue in 2022. Funding is expected from operating cash flow and cash on hand.
- The Somerville campus closure and teach-out are expected to cost approximately $2.0 million and be completed by year-end 2023.
- The Nashville campus property, carried as held for sale at $4.6 million, was subject to an expected second-quarter 2023 sale for an aggregate price of $34.5 million, subject to customary adjustments and completion of due diligence.
- The Company remains highly dependent on Title IV funding, which represented approximately 74% of cash receipts related to revenue in 2022. Changes to federal funding, eligibility, accreditation or regulatory requirements could materially affect operations and receivables.
- In Sweet v. Cardona, the Ninth Circuit and the U.S. Supreme Court denied requests to stay the settlement. The Department of Education could automatically approve certain borrower-defense applications and may seek recoupment from participating schools. The Company cannot estimate the timing or amount of any potential liability, which could be material.
- Potential changes to DOE third-party servicer requirements could require contract revisions, additional reporting and compliance costs, or replacement of service providers.
- Results are seasonal, with historically lower student populations in the first half of the year and larger class starts generally occurring in the third quarter. The filing provides no formal revenue or earnings guidance.
- The Company stated that inflation had not materially affected operations, although instructional consumables, student travel costs and other expenses experienced pressure.
Investor Verification Priorities
- Verify the timing and terms of any new credit facility and whether the Company maintains adequate liquidity while funding elevated capital expenditures.
- Monitor student receivable collections, write-offs and allowance assumptions following CECL adoption.
- Assess the ultimate exposure from Sweet v. Cardona, including potential borrower-defense approvals and DOE recoupment claims.
- Confirm completion, proceeds and accounting treatment of the Nashville property sale.
- Track the Atlanta campus buildout, planned new programs and whether projected capital expenditures remain near 11% of revenue.
- Evaluate whether student starts, average revenue per student and end-of-period population support continued revenue growth despite lower average population.
- Review the effect of corporate cost growth, marketing investments and the Somerville teach-out on future operating margins.