LINC

Business Context and Reporting Period

Company: Lincoln Educational Services Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A diversified provider of career-oriented post-secondary education operating 43 schools in 17 states. Programs include automotive technology, health sciences, skilled trades, business, IT, and hospitality. As of September 30, 2009, total enrollment was 31,509 students.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 47.7% ($47.9M) for the quarter and 46.6% ($125.5M) for the nine months compared to the prior year periods. Approximately 30-31% of this growth is attributed to acquisitions (Baran Institute of Technology and Briarwood College).
• Profitability: Net income surged 139% for the quarter ($13.7M vs $5.7M) and 262% for the nine months ($26.9M vs $7.4M). Operating margins improved significantly, rising from 10.3% to 16.3% (quarter) and 5.4% to 12.2% (nine months).
• Expense Trends: Educational services and facilities expenses increased 38.7% (quarter) and 37.6% (nine months), driven by acquisitions and higher student starts. Selling, general, and administrative (SG&A) expenses rose 37.3% (quarter) and 34.5% (nine months), partly due to increased bad debt reserves and personnel costs.
• Bad Debt Provision: Bad debt expense as a percentage of revenue increased to 6.8% (quarter) and 6.6% (nine months) from 6.3% and 5.9% respectively, as management increased reserves on graduate receivables from 10% to 17% due to the economic environment.
• Balance Sheet: Total assets grew from $268.0M to $367.9M, primarily due to acquisitions and increased cash. Long-term debt increased from $10.0M to $37.0M, largely due to capital leases assumed in acquisitions.

Guidance, Outlook, and Risks

• Acquisitions: The company completed the acquisition of Baran Institute of Technology (6 schools in Jan 2009, 1 in Apr 2009) and Briarwood College (Dec 2008). Purchase price allocations for Baran are preliminary.
• Liquidity: The company holds $38.1M in cash and has a $100M credit facility with approximately $94.4M available. The credit agreement matures on February 15, 2010, and the company intends to refinance.
• Capital Expenditures: Expected to approximate 5% of revenues in 2009, funded by operating cash flow and borrowings.
• Risks:
  • Economic Sensitivity: High unemployment may impact student loan repayment and cohort default rates. Default rates exceeding specified levels could jeopardize Title IV eligibility.
  • Regulatory: Dependence on Title IV funding (approx. 79% of cash receipts). New Department of Education regulations regarding the 90/10 rule, incentive compensation, and default rates pose compliance risks.
  • Seasonality: Results fluctuate seasonally with lower enrollment in Q1/Q2 and higher in Q3/Q4.

Investor Verification Checklist

• Acquisition Integration: Verify the final purchase price allocation for the Baran Institute of Technology acquisition and the impact on goodwill amortization.
• Bad Debt Reserves: Monitor the effectiveness of the increased 17% reserve on graduate receivables against actual collection rates in a high-unemployment environment.
• Debt Refinancing: Confirm the status of refinancing the $100M credit facility maturing in February 2010.
• Regulatory Compliance: Review updates on Department of Education regulations regarding Title IV eligibility and cohort default rates.
• Enrollment Trends: Track Q4 enrollment numbers to validate the seasonal growth pattern and the success of recent marketing investments.