Business Context and Reporting Period
Company: Lincoln Educational Services Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A diversified provider of career-oriented post-secondary education with 43 schools in 17 states. Programs include automotive technology, health sciences, skilled trades, business/IT, and hospitality. As of June 30, 2009, total enrollment was 26,035 students.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
Three Months Ended June 30, 2009 |
|---|---|---|---|
| Revenues | $246,709 | $169,103 | $128,110 |
| Net Income | $13,250 | $1,725 | $7,426 |
| Operating Income | $24,118 | $3,935 | $13,429 |
| Operating Margin | 9.8% | 2.3% | 10.5% |
| Net Cash from Operations | $9,832 | $8,357 | N/A |
| Cash and Equivalents (End of Period) | $12,638 | $8,891 | $12,638 |
| Total Debt (Long-term + Current) | $42,603 | $10,174 | $42,603 |
| Goodwill | $111,926 | $91,460 | $111,926 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 45.9% ($77.6 million) for the six months ended June 30, 2009, compared to the prior year. Approximately 32.1% of this increase was attributable to acquisitions (Baran Institute of Technology and Clemens College). Organic growth was driven by a 25.6% increase in average student population and a 4.4% increase in average revenue per student.
- Profitability: Net income surged 669% to $13.25 million for the six-month period, compared to $1.73 million in 2008. Operating margins improved significantly from 2.3% to 9.8% due to revenue growth outpacing expense increases.
- Acquisitions: The company acquired six schools of Baran Institute of Technology (Jan 2009) and Clemens College (Apr 2009) for a total of approximately $27.6 million in cash. These acquisitions added significant goodwill ($19.2 million) and intangible assets.
- Debt Levels: Total debt increased from $10.2 million to $42.6 million. This increase was primarily due to assuming $27.3 million in real estate capital leases from the Baran acquisition and utilizing the credit facility to fund acquisitions and working capital.
- Bad Debt Expense: Bad debt expense increased to 6.4% of revenue for the six months (up from 5.7% in 2008), driven by higher accounts receivable from increased enrollment. However, days sales outstanding improved to 23.5 days from 26.6 days.
Guidance, Outlook, and Risks
- Outlook: Management expects capital expenditures to approximate 5% of revenues in 2009. The company anticipates meeting short-term cash needs through operating cash flows, existing balances, and borrowings under its credit agreement.
- Seasonality: The business is seasonal, with lower student populations in Q1 and Q2. Growth is heavily dependent on successful high school recruiting in the second half of the year. The company reported 11 consecutive quarters of positive student start growth.
- Key Risks:
- Title IV Dependence: Approximately 79% of cash receipts relate to Title IV federal student aid programs. Regulatory changes or funding reductions could materially impact operations.
- Debt Covenants: The company has a $100 million credit facility terminating in February 2010. Covenants include a minimum net worth of $141.8 million and a cohort default rate not exceeding 20%. The company was in compliance as of June 30, 2009.
- Refinancing Risk: The company intends to refinance its credit agreement prior to maturity but cannot assure favorable terms.
- Unusual Items: The company incurred approximately $1.3 million in acquisition-related expenses expensed in accordance with SFAS No. 141R. Additionally, a trade name for the Florida Culinary Institute was written off due to rebranding.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of projected synergies and revenue growth from the Baran Institute and Clemens College acquisitions.
- Debt Service Capacity: Monitor the ability to service the increased debt load ($42.6 million) and comply with credit agreement covenants, particularly the cohort default rate and net worth requirements.
- Enrollment Trends: Confirm that the 11 consecutive quarters of student start growth continues, especially given the seasonal reliance on second-half recruiting.
- Bad Debt Reserves: Assess the adequacy of the allowance for uncollectible accounts given the 6.4% bad debt expense ratio and reliance on federal student loans.
- Refinancing Status: Track progress on refinancing the $100 million credit facility maturing in February 2010.