LINCOLN EDUCATIONAL SERVICES CORP quarterly report, Q3 FY2021

Lincoln Educational Services Corporation — Form 10-Q Summary

Business Context and Reporting Period

Lincoln Educational Services Corporation provides career-oriented post-secondary education through 22 schools in 14 states, primarily under the Lincoln Technical Institute, Lincoln College of Technology, Lincoln Culinary Institute and Euphoria Institute brands. Its two reportable segments are Transportation and Skilled Trades and Healthcare and Other Professions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the same periods in 2020.

Key Financial Metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Revenue	$89.1 million	$78.8 million	$247.5 million	$211.3 million
Operating income	$5.7 million	$3.8 million	$15.2 million	$3.7 million
Operating margin	6.4%	4.8%	6.1%	1.7%
Net income	$3.8 million	$3.5 million	$10.8 million	$2.5 million
Income available to common shareholders	$3.5 million	$2.4 million	$9.8 million	$1.5 million
Basic and diluted EPS	$0.11	$0.08	$0.30	$0.05
Net cash from operating activities	Not provided for the quarter	Not provided for the quarter	$17.8 million	$10.2 million

Q3 revenue increased 13.0%; nine-month revenue increased 17.1%.
Q3 net margin was approximately 4.3%; nine-month net margin was approximately 4.3%, compared with 1.2% in the prior-year nine-month period.
Q3 Transportation and Skilled Trades revenue increased 14.3% to $65.0 million, while HOPS revenue increased 9.8% to $24.1 million.
Nine-month Transportation and Skilled Trades revenue increased 19.3% to $177.6 million, and HOPS revenue increased 11.9% to $69.9 million.
At September 30, 2021, cash and cash equivalents were $47.2 million, compared with $38.0 million at December 31, 2020. Net cash, after credit agreement borrowings, was $31.3 million versus $20.8 million at year-end.
Capital expenditures were $5.3 million in the first nine months, compared with $3.6 million in the prior-year period. Management expected 2021 capital expenditures to approximate 2% of revenue.
Debt principal outstanding under the credit facility was $16.3 million, net of $0.5 million of deferred financing fees, compared with $17.8 million net at December 31, 2020. Letters of credit totaled $4.0 million.
Total assets were $253.5 million and stockholders’ equity was $102.0 million at September 30, 2021.

Material Changes Versus the Prior Comparable Period

Revenue growth reflected an 8.3% increase in average student population and a 4.3% increase in average revenue per student in Q3. For nine months, average population increased 11.3%, student starts increased 8.8%, and average revenue per student increased 5.2%.
Operating income increased 49.6% in Q3 and 316.3% for the first nine months. The nine-month improvement benefited from the recovery from COVID-19-related disruption in 2020 and the return to in-person instruction.
Educational services and facilities expense increased 11.3% in Q3 and 14.8% for nine months, driven by higher instructional, books and tools, and facilities costs. Instructor shortages created salary pressure.
Selling, general and administrative expense increased 11.1% in Q3 and 9.5% for nine months, primarily due to higher incentive and stock-based compensation, increased marketing investment and normalized operating costs.
Operating expense ratios improved: educational services and facilities expense declined to 42.8% of revenue in Q3 from 43.5%, while selling, general and administrative expense declined to 50.8% from 51.7%. For nine months, total costs and expenses declined to 93.9% of revenue from 98.3%.
Cash flow from operations increased to $17.8 million from $10.2 million. The 2020 comparison included approximately $11.5 million of CARES Act funds; excluding those funds, 2020 operating cash flow would have been negative $1.2 million.
The effective tax rate increased to 29.6% in Q3 and 25.0% for nine months, principally because the Company released a valuation allowance at December 31, 2020.

Guidance, Outlook, Risks and Unusual Items

Management stated that all schools had reopened and that most students previously on leave or deferral had returned. COVID-19 remained a dynamic risk, and future impacts could be material, although no material adverse impact was identified at September 30, 2021.
The Company is seasonally dependent on second-half enrollment and a successful high-school recruiting season. Q3 starts declined 1.5% year over year to 5,430, despite higher average and ending student populations.
The Company relies heavily on government-sponsored aid; approximately 77% of 2020 cash receipts relating to revenue came from Title IV programs. Loss or restriction of Title IV eligibility would materially affect enrollment, revenue and liquidity.
ARPA amendments to the 90/10 rule are expected to apply beginning in fiscal 2023 and will include additional federal funding sources in the calculation. Management expects to modify operations to maintain compliance, but stated that the outcome cannot be assured.
Three institutions had Title IV audit findings, including repeat findings at the New Britain institution. The New Britain audit identified approximately $16,000 of questioned funds, which had been repaid; potential future adverse action remains possible.
The DOE’s Office of Inspector General issued a final report concerning the Indianapolis institution containing three alleged noncompliance findings and two other matters. The outcome and potential liabilities were not determinable.
The DOE was reviewing 315 borrower-defense applications received in two groups in 2021. Management could not predict potential liabilities from discharged loans.
ACCSC, the accreditor for all institutions, was undergoing DOE recognition review. An adverse decision could ultimately threaten institutional Title IV eligibility.
On October 29, 2021, after the reporting date, the Company completed the sale-leaseback of its Denver and Grand Prairie campuses for $46.5 million before adjustments. It received approximately $28.5 million of net proceeds after transaction costs and repayment of the term loan and swap termination fee. The related leases have an initial 20-year term and approximately $2.6 million of first-year annual base rent.
The Nashville campus property was classified as held for sale, with a proposed sale price of $34.5 million and an expected first-quarter 2022 closing, subject to conditions and the buyer’s termination rights during due diligence.
The September 23, 2021 credit agreement consent and waiver required repayment of the term loan upon specified property transaction closings. The Company stated that it was exploring alternatives for a future credit facility.
The Company had $4.5 million of deferred payroll taxes at September 30, 2021, with repayment scheduled in 2022 and 2023.
Series A convertible preferred stock had a $1,000-per-share liquidation preference, a 9.6% initial dividend rate and potential conversion into approximately 5.4 million common shares, which were excluded from diluted EPS as anti-dilutive.
The Company reported no material adverse effect from pending legal proceedings. A COVID-related class action was dismissed in its entirety on November 3, 2021, after the reporting date.

Most Important Facts for Investors to Verify

Whether enrollment and student-start growth can continue after the post-COVID normalization period, particularly given flat Q3 starts.
The effect of the October 2021 debt repayment and sale-leaseback on future liquidity, rent expense, collateral and access to replacement borrowing capacity.
Compliance with Title IV, 90/10, borrower-defense, accreditation and other DOE requirements, including the outcomes of pending audits and ACCSC’s recognition review.
The sustainability of improved operating margins after CARES Act and HEERF-related benefits, valuation allowance changes and lower prior-year comparables.
Future cash requirements for preferred dividends, lease obligations, deferred payroll taxes, institutional loan commitments and potential regulatory liabilities.
The final economics and timing of the proposed Nashville property sale and campus relocation.