Lincoln Educational Services Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; filed November 8, 2011. Lincoln operated 46 career-oriented post-secondary schools in 17 states, with 22,526 students enrolled at September 30, 2011. Programs covered health sciences, automotive technology, skilled trades, business and information technology, and hospitality services.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $123.5 million | $167.2 million | $397.1 million | $472.5 million |
| Operating income (loss) | $(5.0) million | $32.4 million | $22.8 million | $80.7 million |
| Net income (loss) | $(3.9) million | $18.9 million | $11.4 million | $46.5 million |
| Diluted EPS | $(0.18) | $0.76 | $0.51 | $1.80 |
| Operating margin | (4.1%) | 19.3% | 5.8% | 17.0% |
| Net margin | (3.2%) | 11.3% | 2.9% | 9.8% |
- Revenue declined 26.2% in Q3 and 16.0% for the first nine months, primarily because average student population fell 28.9% and 19.1%, respectively.
- Educational services and facilities expense declined in dollars but increased to 46.5% of revenue in Q3 and 43.1% for nine months, compared with 37.9% and 38.2% in the comparable periods.
- Selling, general and administrative expense declined 15.1% in Q3 and 8.8% for nine months, but increased as a percentage of revenue to 49.2% and 48.5%, respectively.
- Q3 included a $10.4 million impairment charge, consisting primarily of $9.4 million of goodwill impairment across five reporting units and a $1.0 million impairment of an unused regional accreditation intangible asset.
Cash Flow, Liquidity and Debt
- Net cash provided by operating activities was $27.2 million for the first nine months, down from $68.1 million in 2010.
- Capital expenditures were $30.9 million, compared with $33.5 million in the prior-year period. Management expected 2011 capital expenditures of approximately 7% to 9% of revenue.
- Net cash used in financing activities was $36.9 million, including $20.0 million of credit-facility repayments and $16.9 million of dividends.
- Cash and cash equivalents were $26.1 million at September 30, 2011, down from $66.0 million at December 31, 2010.
- Total debt and lease obligations were $36.6 million, including $0.5 million of current maturities. The $115 million revolving credit facility had no outstanding borrowings, approximately $114.5 million of availability, and $0.5 million of letters of credit. The facility matures December 1, 2012, and the company reported compliance with its covenants.
- Total contractual cash obligations were $234.9 million, including $171.3 million of operating leases and $55.8 million of capital leases, including interest.
Material Changes Versus the Prior Comparable Period
- Management implemented more selective admissions, restructured programs, reduced the number of ability-to-benefit students, and changed program financing to address student outcomes, the 90/10 rule and cohort default rates. These actions contributed to a 39.5% decline in student starts during the first nine months.
- Average revenue per student increased approximately 3.9%, primarily from tuition increases of 3% to 5% and changes that shortened certain program delivery periods.
- Bad debt expense as a percentage of revenue improved to 6.0% for nine months from 6.6%, and days revenue outstanding improved to 17.9 days from 25.9 days.
- Student loan commitments increased to $26.7 million at September 30, 2011 from $17.3 million at December 31, 2010, reflecting increased financing gaps created by program changes.
- Goodwill declined to $97.4 million from $106.7 million at December 31, 2010 following the impairment charge.
- The company paid quarterly dividends under a previously declared annual rate of $1.00 per share; future dividends remained subject to board approval.
Outlook, Risks and Unusual Items
- Management expected the decline in student starts to moderate but stated that visibility into fourth-quarter enrollment was limited. Actual results for the first nine months had not met expectations, and further enrollment weakness could materially reduce revenue and profitability.
- Title IV programs represented approximately 83% of cash receipts relating to revenue in 2010. Loss or restriction of Title IV eligibility, changes in federal funding, or regulatory changes could materially affect enrollment, collections and operations.
- For 2010, institutional 90/10 percentages ranged from 62.1% to 96.9%; the Dayton institution was above 90%. Temporary relief for certain increased loan limits expired for loans received on or after July 1, 2011.
- Five institutions had 2009 two-year cohort default rates of at least 25%, ranging across all institutions from 10.5% to 35.4%. The company appealed the 2009 official rates.
- Gainful-employment regulations effective July 1, 2012 could require disclosures, corrective actions, program changes or loss of Title IV eligibility if programs fail applicable debt and repayment measures.
- The New York Attorney General was investigating compliance with state consumer protection, securities and finance laws and had requested records dating from May 17, 2005.
- A consolidated securities class action was dismissed with prejudice on September 6, 2011. Two of three shareholder derivative actions were voluntarily dismissed without prejudice in October 2011; the company stated that it believed the lawsuits were without merit.
- The Department of Education closed a Grand Prairie program review without monetary liabilities. A Philadelphia review identified five areas of non-compliance but reported no open liabilities.
- The company stated that existing cash, operating cash flow and available credit should fund operations and planned capital expenditures through 2012, while noting that additional financing might not be available on favorable terms.
Investor Verification Items
- Verify whether enrollment, student starts and revenue trends improve as management’s selective-admissions and program-restructuring initiatives mature.
- Monitor 90/10 compliance, cohort default rates, gainful-employment measures and any resulting effects on Title IV eligibility.
- Assess the sustainability of cash generation given lower operating cash flow, $26.1 million of cash, capital spending needs and substantial lease obligations.
- Review the assumptions supporting the $10.4 million impairment charge and the remaining $97.4 million goodwill balance.
- Track student loan commitments, collections, bad debt reserves and exposure to changes in student financial aid funding.
- Confirm the status and potential consequences of the New York Attorney General investigation, regulatory reviews and remaining derivative litigation.