Lincoln Educational Services Corporation — Q2 2012 Form 10-Q Summary
Business context and reporting period
Lincoln provides career-oriented post-secondary education through 46 schools and five training sites in 17 states, serving health sciences, automotive technology, skilled trades, business and information technology, and hospitality programs. The filing covers the three and six months ended June 30, 2012; financial statements are unaudited. Enrollment was 18,156 students at June 30, 2012.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $100.4 million | $128.2 million | $205.2 million | $273.6 million |
| Operating income (loss) | $(28.1) million | $9.3 million | $(32.2) million | $27.8 million |
| Net income (loss) | $(20.7) million | $4.9 million | $(23.8) million | $15.3 million |
| Diluted EPS | $(0.93) | $0.22 | $(1.07) | $0.68 |
| Operating margin | (28.0%) | 7.3% | (15.7%) | 10.2% |
| Net margin | (20.6%) | 3.8% | (11.6%) | 5.6% |
- Revenue declined 21.7% in the quarter and 25.0% year to date. Average student population decreased 25.0% in the quarter and 28.3% year to date, partly offset by higher revenue per student of 4.4% and 4.7%, respectively.
- Educational services and facilities expense represented 49.6% of quarterly revenue and 49.5% year-to-date, compared with 42.6% and 41.5% in the prior-year periods.
- Selling, general and administrative expense represented 54.8% of quarterly revenue and 54.7% year-to-date, compared with 50.1% and 48.3% previously.
- Results included a $23.7 million pretax, non-cash impairment charge: $15.4 million for goodwill and $8.3 million for long-lived assets. Goodwill declined to $83.9 million from $97.4 million at December 31, 2011.
- Cash provided by operating activities was $4.0 million for the six months, down from $19.1 million. Investing cash use was $6.2 million, including $4.8 million of capital expenditures and $1.5 million for the FMTI acquisition. Financing cash use was $4.3 million, including $3.2 million of dividends.
- Cash and cash equivalents were $20.0 million at June 30, 2012, versus $26.5 million at December 31, 2011. Total current assets were $73.3 million and current liabilities were $67.7 million.
- Total debt and lease obligations were $36.2 million, including $35.8 million classified as noncurrent. The company had no revolving credit borrowings and $1.6 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Enrollment weakness, more selective admissions, program restructuring, reduced financial-aid availability and economic conditions drove the revenue decline.
- Management reduced instructional, administrative, marketing and student-services costs, but the largely fixed cost structure caused expense ratios and operating losses to worsen.
- The company entered into a new secured revolving credit facility on April 5, 2012, with capacity of up to $85 million, maturing April 5, 2015. Approximately $83.4 million was available at June 30, 2012, including a $23.4 million net letter-of-credit sublimit.
- Lincoln acquired Florida Medical Training Institute on April 18, 2012 for approximately $1.7 million net of cash acquired, adding five Florida locations.
- The company paid a quarterly dividend of $0.07 per share, or approximately $3.2 million in total.
Guidance, outlook, risks and unusual items
- Management expected enrollment deterioration to improve in the second half of 2012, but at a slower pace. It cautioned that economic conditions, regulatory changes and the loss of new ability-to-benefit students could cause further revenue declines.
- Capital expenditures were expected to equal 4% to 5% of 2012 revenue, compared with 7.4% in 2011.
- On July 31, 2012, the board approved closure of seven campuses and stopped enrolling new students there. The campuses were expected to contribute approximately $14.5 million of 2012 revenue and 570 second-half student starts. Shutdown costs were estimated at approximately $11.4 million, with potential offsets from subleasing and student transfers. Management expected the action to be accretive to 2013 earnings by approximately $0.21 per share. The campuses will be reported as discontinued operations after closure.
- Regulatory exposure remains significant. Title IV programs represented approximately 84% of 2011 revenue-related cash receipts. Risks include the 90/10 rule, cohort default rates, gainful-employment requirements, limits on ability-to-benefit students and other Department of Education requirements.
- For 2010, one institution had a 90/10 percentage of 96.9%; for 2011, institutional percentages ranged from 76.5% to 89.2%. Revised 2009 cohort default rates ranged from 8.1% to 33.7%, and draft 2010 rates ranged from 12.2% to 33.7%.
- The company disclosed a material weakness in internal control over financial reporting related to the interpretation of impairment-triggering events under ASC 360-10-35. Management recorded $5.1 million of long-lived-asset impairment net of tax and stated that it had revised its financial reporting closing questionnaire to remediate the weakness.
- The company stated that pending legal proceedings were not expected to have a material adverse effect, but actual outcomes of litigation, investigations and claims remain uncertain.
Important facts for investors to verify
- Whether enrollment and student starts improve as projected and whether the seven-campus closures reduce ongoing losses without materially exceeding the estimated $11.4 million shutdown cost.
- Compliance with Title IV eligibility, the 90/10 rule, cohort default-rate thresholds and applicable Department of Education requirements.
- Potential additional goodwill or long-lived-asset impairments given the decline in market capitalization and student population.
- Cash generation, working-capital needs and compliance with the new secured credit facility’s financial and regulatory covenants.
- The remediation and future testing of the disclosed material weakness in impairment accounting controls.
- The collectability of student receivables and the company’s $29.1 million of outstanding student loan commitments, or $22.0 million net of future interest.