Lincoln Educational Services Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2023. Lincoln provides career-oriented post-secondary education through 22 campuses in 14 states, with programs in skilled trades, automotive technology, healthcare, hospitality and information technology. Beginning January 1, 2023, the Company reported two segments: 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.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $88.6 million | $82.1 million | $175.9 million | $164.7 million |
| Operating income | $23.5 million | $0.4 million | $22.4 million | $0.1 million |
| Operating margin | 26.5% | 0.5% | 12.7% | 0.0% |
| Net income | $17.3 million | $0.3 million | $17.1 million | $0.5 million |
| Net margin | 19.5% | 0.3% | 9.7% | 0.3% |
| Diluted EPS | $0.57 | $(0.00) | $0.57 | $(0.00) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $10.4 million | $(10.0) million |
Q2 revenue increased 7.9%; excluding the Transitional segment, revenue increased 9.8%. Management attributed growth to a 17.9% increase in Campus Operations student starts, tuition increases and the hybrid teaching model, which also increased average revenue per student by 8.6%. For the six-month period, student starts increased 12.5% and average revenue per student increased 8.8%.
Educational services and facilities expense represented 45.2% of Q2 revenue versus 44.0% in the prior-year quarter. Selling, general and administrative expense represented 58.5% versus 55.8%. Higher costs reflected increased instructional staffing, facilities and books and tools costs, salaries, incentives, marketing, student services, legal costs and credit-loss provisions.
At June 30, 2023, cash and cash equivalents were $66.4 million, restricted cash was $4.2 million and short-term investments were $24.3 million. Total cash, cash equivalents and restricted cash were $70.6 million, compared with $50.3 million at December 31, 2022. Total assets were $311.4 million and stockholders’ equity was $154.5 million.
The Company had no debt outstanding and no credit facility at June 30, 2023. Cash-collateralized letters of credit totaling approximately $4.0 million remained outstanding and were classified as restricted cash. Operating lease liabilities totaled $98.1 million on a present-value basis.
Material changes versus the prior comparable period
- Revenue increased $6.5 million in Q2 and $11.2 million for the six-month period.
- Operating income increased substantially, primarily because of a $30.9 million gain on the sale of the Nashville, Tennessee property. The gain was partly offset by a $4.2 million non-cash impairment charge, comprising $3.8 million of goodwill and $0.4 million of long-lived assets.
- The Nashville property sale closed June 8, 2023 for $33.8 million, generating approximately $33.3 million of net proceeds. Lincoln may occupy the existing campus rent-free for 15 months while it seeks a replacement facility.
- Campus Operations Q2 revenue increased 9.8% to $88.2 million, while segment operating income declined 52.6% to $4.2 million because cost growth exceeded revenue growth and the segment absorbed the Nashville impairment.
- Transitional revenue declined 75.9% to $0.4 million in Q2 as Somerville stopped enrolling new students. Management estimates total Somerville closure and teach-out costs of approximately $2.0 million.
- Cash flow from operations improved to $10.4 million from an outflow of $10.0 million in the first six months of 2022. Investing cash flow was $12.8 million, driven primarily by Nashville sale proceeds, while capital expenditures were $10.9 million.
- 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 was $47.6 million at June 30, 2023.
Guidance, outlook, commentary and risks
Management expects 2023 capital expenditures to approximate 11% of revenue, compared with 3% in 2022. Planned spending includes the Atlanta campus buildout, additional space and new programs at multiple campuses. The Company expects to fund capital expenditures with operating cash flow and cash on hand. The filing does not provide formal revenue or earnings guidance.
The Company intends to invest approximately $15 million to $20 million to build out a new Nashville-area campus, including HVAC and electrical programs. The location had not yet been determined as of the filing date.
Title IV funding represented approximately 74% of cash receipts related to revenue in 2022. Accordingly, changes to federal financial-aid eligibility, the 90/10 Rule, cohort rates, gainful-employment requirements, accreditation, financial-responsibility standards or other Department of Education regulations could materially affect operations and receivables.
The Department of Education’s proposed rules address gainful employment, financial responsibility, administrative capability and certification. The Company stated that it cannot predict the final rules or the performance of its programs under the proposed metrics. Final rules could increase reporting, financial-protection, compliance and potential Title IV eligibility requirements.
The Company continues to appeal the Sweet v. Cardona settlement. The Supreme Court denied its stay application, and the Department of Education could automatically approve certain borrower-defense claims involving former students. The timing, amount and potential liabilities or sanctions remain uncertain and could materially adversely affect the Company.
Other risks include student receivable collectability, higher bad-debt provisions, seasonal enrollment patterns, competition, program and campus execution, regulatory compliance, accreditation and the Company’s lack of a credit facility. Management stated that disclosure controls were effective and that there were no newly identified material risk factors for the quarter.
Most important facts for investors to verify
- Separate recurring operating performance from the $30.9 million Nashville property gain and the $4.2 million impairment charge.
- Track Campus Operations margins, since revenue and student starts grew while operating income declined.
- Monitor the $47.6 million allowance for credit losses, student receivable collections and the effects of CECL estimates.
- Confirm the timing and cost of the planned $15 million to $20 million Nashville replacement campus and the Atlanta buildout.
- Assess liquidity after planned capital expenditures, share repurchases and the absence of a committed credit facility.
- Follow the Sweet v. Cardona appeal and potential borrower-defense liabilities or sanctions.
- Evaluate the final Department of Education regulations and potential effects on program eligibility, financial protection and compliance costs.
- Verify the completion of the Somerville teach-out and closure by December 31, 2023, including the estimated $2.0 million closure cost.