Lincoln Educational Services Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period ended March 31, 2020. The unaudited filing covers 22 career-oriented post-secondary schools in 14 states, organized into Transportation and Skilled Trades and Healthcare and Other Professions.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $78.0 million | $70.0 million | Up 11.4% |
| Operating income (loss) | $6.0 million | $(1.3) million | Improved $7.4 million |
| Operating margin | 7.7% | (1.9)% | Improved 9.6 points |
| Net income (loss) | $4.5 million | $(1.8) million | Improved $6.2 million |
| Income available to common shareholders | $4.2 million | $(1.8) million | Improved $5.9 million |
| Basic and diluted EPS | $0.13 | $(0.08) | Improved $0.21 |
| Net income margin | 5.8% | (2.5)% | Improved 8.3 points |
- Educational services and facilities expense was $32.3 million, or 41.5% of revenue, versus $30.2 million, or 43.2%, in the prior-year quarter.
- Selling, general and administrative expense was $39.6 million, or 50.8% of revenue, versus $41.1 million, or 58.7%. The reduction primarily reflected lower bad-debt and sales expense.
- Interest expense declined to $0.3 million from $0.4 million. The income-tax provision was $1.2 million, representing a 21.7% effective rate, primarily due to reversal of a full valuation allowance at December 31, 2020.
- Cash and cash equivalents were $26.7 million at March 31, 2021, down from $38.0 million at December 31, 2020. Net cash, defined by the Company as cash less credit-facility borrowings, was $10.0 million versus $20.8 million at year-end.
- Net cash used in operating activities was $8.3 million, compared with $11.9 million in Q1 2020. Investing cash usage was $1.2 million, principally capital expenditures. Financing cash usage was $1.8 million, including $0.5 million of debt repayment, $0.3 million of preferred dividends and $1.0 million of equity-compensation share settlement.
- Credit-facility principal outstanding was $17.3 million, net debt carrying value was $16.8 million after deferred financing fees, and $4.0 million of letters of credit were outstanding. The Company reported compliance with all debt covenants and approximately $21.0 million of additional borrowing capacity.
- Total assets were $239.9 million and total liabilities were $133.0 million at March 31, 2021. Series A convertible preferred stock had a carrying value of $12.0 million; 12,700 shares remained outstanding.
Material changes versus the prior comparable period
- Average student population increased 9.8% excluding COVID-19-related leaves of absence, while total student starts increased 30.6% to 3,548. End-of-period population increased 13.1% to 12,744, or 15.5% excluding students on COVID-19 leave.
- Transportation and Skilled Trades revenue increased 13.5% to $55.7 million and operating income increased to $12.3 million from $4.8 million. Healthcare and Other Professions revenue increased 6.4% to $22.3 million and operating income increased to $2.9 million from $2.0 million.
- Q1 2021 results benefited from approximately $3.0 million of net bad-debt expense relief associated with HEERF funding and DOE guidance permitting relief for certain COVID-19-related student receivables. Management stated that, without this adjustment, bad-debt expense as a percentage of revenue would have been comparable with the prior year.
- Corporate expense increased to $9.3 million from $8.2 million, primarily due to incentive plans tied to improved financial performance.
- The Company began Q1 2021 with approximately 1,000 more students than in the prior-year quarter. Approximately 300 students whose starts were delayed by the initial pandemic disruption contributed to the year-over-year increase.
Guidance, outlook, risks and unusual items
- Management expects available cash sources to fund operations for the next twelve months and the foreseeable future, but cautions that a materially adverse evolution of COVID-19 could significantly impair liquidity.
- All schools had reopened by the reporting date. As of March 31, 2021, 98 students remained on COVID-19-related leave of absence; the Company expected most to complete their externships. The pandemic continues to create risks relating to enrollment, externships, student collections, operating costs and campus operations.
- Capital expenditures are expected to approximate 2% of revenue in 2021 and are expected to be funded with operating cash flow and credit-facility borrowings.
- Title IV programs represented approximately 77% of 2020 cash receipts relating to revenue, making the Company highly dependent on continued eligibility and funding under federal student-aid programs.
- The American Rescue Plan Act amended the 90/10 rule beginning with fiscal years on or after January 1, 2023. The Company expects the changes to increase its 90/10 calculations and cannot assure continued compliance. Loss of Title IV eligibility could trigger a credit-agreement default and materially affect operations.
- The Department of Education allocated $15.4 million of additional CRRSAA HEERF funding to the Company’s schools; none had been drawn as of March 31, 2021. Noncompliance with use or reporting requirements could require repayment or result in sanctions.
- The Company deferred $4.5 million of FICA payroll taxes, with 50% due by January 3, 2022 and the remainder by January 3, 2023.
- On April 29, 2021, the DOE notified Lincoln that it had received borrower-defense applications containing allegations concerning the Company and requested information relating to 2007–2013. The number of applications, potential loan exposure and outcome were not specified and management could not predict the result.
- The Company is subject to lawsuits, investigations and routine claims but did not believe currently pending proceedings would have a material adverse effect. The filing states that Q1 results are not necessarily indicative of full-year results and that the business is seasonal.
Most important facts for investors to verify
- Whether enrollment and start growth continue after the favorable pandemic-related comparison and the approximately $3.0 million HEERF-related bad-debt benefit.
- The Company’s future cash conversion, given Q1 operating cash use of $8.3 million and the decline in net cash to $10.0 million.
- Compliance with the 90/10 rule, including the impact of ARPA-related changes beginning in fiscal 2023 and the Company’s reliance on Title IV funding.
- The potential financial, regulatory and credit-agreement consequences of the DOE borrower-defense review.
- Compliance with credit-facility covenants, availability of the stated $21.0 million borrowing capacity, and scheduled debt maturities through 2024.
- Use and reporting of the $15.4 million CRRSAA allocation and any additional ARPA funds ultimately received.
- The timing and cash impact of repayment of the $4.5 million deferred FICA payroll taxes and the Company’s $59.7 million present value of operating lease liabilities.