Lincoln Educational Services Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2011, filed August 5, 2011. Lincoln provides career-oriented post-secondary education through 45 schools in 17 states, serving 22,262 students at June 30, 2011. Programs include health sciences, automotive technology, skilled trades, business and information technology, and hospitality services.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $128.2 million, down 16.1% | $273.6 million, down 10.4% |
| Operating income | $9.3 million; 7.3% margin | $27.8 million; 10.2% margin |
| Net income | $4.9 million; diluted EPS $0.22 | $15.3 million; diluted EPS $0.68 |
| Operating cash flow | Not separately provided for the quarter | $19.1 million |
| Capital expenditures | Not separately provided for the quarter | $24.1 million |
For the comparable 2010 periods, revenue was $152.8 million and $305.3 million, operating income was $23.0 million and $48.3 million, and net income was $13.2 million and $27.7 million, respectively. Diluted EPS was $0.50 for the 2010 quarter and $1.05 for the 2010 six-month period.
- Educational services and facilities expense was $54.6 million in the quarter and $113.6 million year to date. As a percentage of revenue, it increased to 42.6% and 41.5%, respectively, from 38.0% and 38.3%.
- Selling, general and administrative expense was $64.2 million in the quarter and $132.1 million year to date. The expense ratio increased to 50.1% and 48.3%, respectively, from 46.9% and 45.9%.
- Bad debt expense declined to 5.8% of quarterly revenue and 5.2% of six-month revenue, compared with 6.6% and 6.1%. Days revenue outstanding improved to 18.4 days at June 30, 2011 from 23.6 days a year earlier.
- Cash and cash equivalents were $30.3 million at June 30, 2011, compared with $66.0 million at December 31, 2010.
- Total debt and lease obligations were $36.7 million, including $0.5 million current, versus $56.9 million at December 31, 2010. The company repaid $20.0 million under its credit facility and had no revolving borrowings outstanding at quarter-end.
- The $115 million secured revolving credit facility had approximately $114.5 million of net borrowing availability, including a $24.5 million letter-of-credit sublimit. The facility matures December 1, 2012, and the company was in compliance with its covenants.
- Total assets were $380.4 million and stockholders’ equity was $239.6 million at June 30, 2011. Goodwill was $106.7 million, or approximately 28% of total assets.
- Contractual cash obligations totaled $241.6 million, including $177.0 million of operating leases and $56.5 million of capital leases including interest.
Material Changes Versus the Prior Comparable Period
- Average student population declined 20.2% in the quarter to 24,711 and 14.0% for the six months to 26,580. Student starts declined 42.9% year to date.
- Management attributed lower enrollment to more selective admissions, program restructuring, efforts to improve compliance with the 90/10 rule, reduced participation by higher-risk ability-to-benefit students, regulatory changes, and economic conditions.
- Average revenue per student increased 5.2% in the quarter and 4.3% year to date, primarily due to tuition increases of approximately 3% to 5% and changes that shortened certain program delivery periods.
- Despite lower revenue, educational services and facilities expense declined only 6.0% in the quarter and 2.9% year to date. SG&A declined 10.4% in the quarter and 5.6% year to date, including lower bad debt, compensation, marketing, and administrative costs.
- Operating margin declined 7.7 percentage points in the quarter and 5.6 percentage points year to date. Net margin declined to 3.8% from 8.6% in the quarter and to 5.6% from 9.1% year to date.
- Operating cash flow decreased to $19.1 million from $24.9 million, while investing cash outflow was broadly unchanged at $23.3 million. Financing cash outflow increased to $31.5 million, primarily because of $11.3 million in dividends and the $20.0 million debt repayment.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects the rate of decline in student starts to decelerate during the second half of 2011, supported by three new campuses and expanded offerings at the relocated Denver campus, but stated that visibility into future enrollments is limited.
- Capital expenditures were expected to decline during the remainder of 2011. Management projected 2011 capital expenditures of approximately 7% to 9% of revenue, funded primarily through operating cash flow and, if necessary, credit-facility borrowings.
- Management expected cash, operating cash flow, and available credit to fund operations and identified capital needs beyond the next twelve months, while noting that additional financing may not be available on favorable terms.
- Title IV funding represented approximately 83% of cash receipts relating to revenue in 2010. Changes to federal aid eligibility, the 90/10 rule, cohort default rates, gainful-employment requirements, ability-to-benefit rules, and other Department of Education regulations could materially affect enrollment, revenue, liquidity, and profitability.
- For 2010, institutional 90/10 percentages ranged from 62.1% to 96.9%; the Dayton institution was above 90%. Temporary regulatory relief affecting the calculation expired for loans received on or after July 1, 2011.
- Draft 2009 cohort default rates ranged from 10.6% to 35.7%, with five institutions above 25%. The company planned to appeal the draft rates. A final rate of at least 25% for Grand Prairie would represent its second consecutive year at or above that level.
- New gainful-employment regulations take effect July 1, 2012 and could ultimately result in program disclosures, warnings, or loss of Title IV eligibility if specified debt and repayment measures are not met.
- The Grand Prairie, Texas campus was placed on notice of a conditional certificate by the Texas Workforce Commission because two programs did not meet minimum employment rates. Continued failure could result in revoked program approval, cessation of new enrollments, and student teach-outs.
- The company received a subpoena from the New York Attorney General concerning compliance with New York consumer protection, securities, and finance laws and is cooperating with the investigation.
- The company and executives face consolidated securities class-action litigation, and directors and officers face three shareholder derivative actions. Motions to dismiss or stay were pending; management considers the claims meritless and does not currently expect pending proceedings to have a material adverse effect.
- Philadelphia and Dayton Department of Education program reviews were closed without monetary liabilities. A Grand Prairie review was completed in July 2011, with the final report pending as of the filing.
- The company declared an annual cash dividend of $1.00 per share, payable quarterly, subject to future board determinations.
Most Important Facts to Verify
- Whether second-half 2011 enrollment and student-start trends improved as management expected.
- Final 2009 and subsequent cohort default rates, particularly for Grand Prairie and other campuses above applicable thresholds.
- Compliance with the 90/10 rule after expiration of temporary relief and the effect on Title IV eligibility.
- Potential enrollment and program impacts from gainful-employment and other Department of Education regulations.
- Outcome of the New York Attorney General investigation, securities litigation, derivative lawsuits, and the Grand Prairie regulatory review.
- Whether cash flow remains sufficient to fund capital expenditures, lease obligations, dividends, and operations while revenue is declining.
- Future impairment risk for $106.7 million of goodwill, given weaker enrollment and operating performance.