Business Context and Reporting Period
Company: Lincoln Educational Services Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A provider of diversified career-oriented post-secondary education with 43 schools in 17 states. Programs include health sciences, automotive technology, skilled trades, hospitality services, and business/IT. As of September 30, 2010, total enrollment was 33,157 students.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Balance Sheet (Sep 30, 2010) |
|---|---|---|---|
| Revenue | $167,211 | $472,471 | - |
| Net Income | $18,881 | $46,537 | - |
| Operating Income | $32,376 | $80,681 | - |
| Operating Margin | 19.3% | 17.0% | - |
| Net Cash from Operations | - | $68,077 | - |
| Cash and Equivalents | - | - | $14,430 |
| Total Debt (Long-term + Current) | - | - | $37,040 |
| Goodwill | - | - | $112,953 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 12.7% ($18.8M) for the quarter and 19.6% ($77.4M) for the nine months compared to the prior year periods. This was driven by a 10.6% increase in average student population for the quarter and a 17.4% increase for the nine months.
- Profitability: Net income rose 38.3% for the quarter and 72.9% for the nine months year-over-year. Operating margins improved to 19.3% (quarter) and 17.0% (nine months) from 16.3% and 12.2% respectively in 2009.
- Expense Trends: Selling, general, and administrative (SG&A) expenses increased due to higher sales/marketing spend and bad debt provisions. Bad debt expense as a percentage of revenue rose to 7.7% for the quarter (from 6.8% in 2009) due to economic conditions and higher unemployment.
- Liquidity: Cash and cash equivalents decreased by $31.6 million to $14.4 million from the prior year-end. This decline was primarily due to the repayment of $20.0 million in credit facility debt and $50.0 million in stock repurchases.
Guidance, Outlook, Risks, and Unusual Items
- Capital Allocation: The Company repurchased approximately $50.0 million of common stock during the nine months ended September 30, 2010. The Board authorized a quarterly cash dividend of $0.25 per share, with the first payment scheduled for December 31, 2010.
- Regulatory Risks (Title IV): The Company faces significant regulatory risk regarding the Department of Education's "90/10 Rule," which limits revenue derived from federal Title IV programs to 90%. Increased federal loan limits and Pell Grants are making compliance more difficult. Additionally, new regulations regarding "gainful employment" and cohort default rates are under review and could impact program eligibility.
- Legal Proceedings: Two purported class action lawsuits were filed in August and September 2010 alleging false and misleading statements regarding the Company's business. Management intends to vigorously defend against these claims.
- Capital Expenditures: Capital expenditures increased significantly to $33.5 million for the nine months (vs. $9.0 million in 2009) due to facility expansions, relocations, and a new campus in Denver. Management anticipates CapEx to range from 8% to 9% of revenues for the full year 2010.
Investor Verification Checklist
- 90/10 Rule Compliance: Verify the Company's current percentage of revenue derived from Title IV sources to assess the risk of losing federal funding eligibility.
- Cohort Default Rates: Monitor the impact of the new three-year cohort default rate calculation methodology on the Company's eligibility for federal loan programs.
- Stock Repurchase Impact: Confirm the remaining capacity under the $50 million repurchase authorization and the impact of the new dividend policy on future cash flows.
- Bad Debt Reserves: Review the adequacy of the allowance for doubtful accounts given the rising unemployment rates and the Company's reliance on student loan repayments.
- Regulatory Changes: Track the finalization of the Department of Education's "gainful employment" regulations and their potential effect on specific program offerings.