LINC

Business Context and Reporting Period

Company: Lincoln Educational Services Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A diversified provider of career-oriented post-secondary education with 35 schools in 17 states. Programs include automotive technology, health sciences, skilled trades, business, IT, and hospitality. As of September 30, 2008, total enrollment was 22,404 students.

Key Financial Metrics

Margins (Nine Months 2008): Operating margin was 5.4%; Net income margin was 2.8%.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 16.1% ($13.9 million) for the quarter and 13.5% ($32.1 million) for the nine months compared to 2007. This was driven by an 11.8% to 13.6% increase in average student population and tuition increases of 3.0% to 3.5%.
• Profitability: Net income for the nine months ended September 30, 2008, was $7.4 million, a significant improvement from a net loss of $1.3 million in the same period in 2007. The 2007 loss included $5.5 million in losses from discontinued operations.
• Expense Trends: Selling, general, and administrative (SG&A) expenses increased 13.7% year-over-year for the nine months, primarily due to higher compensation, bad debt expense ($3.6 million increase), and software maintenance costs.
• Bad Debt: Bad debt expense as a percentage of revenue increased to 5.9% for the nine months ended September 30, 2008, from 5.2% in 2007, attributed to higher accounts receivable from increased enrollment and internal financing of student tuition gaps.
• Debt Reduction: The company repaid $28.0 million and borrowed $23.0 million during the nine months, resulting in zero outstanding borrowings under its $100 million credit agreement as of September 30, 2008, compared to $5.0 million at year-end 2007.

Guidance, Outlook, and Risks

• Acquisition: On October 14, 2008, the company entered a definitive agreement to acquire Briarwood College for approximately $11.4 million in cash. The transaction is expected to close in December 2008.
• Capital Expenditures: Expected to range between 6% and 7% of revenues for 2008, funded by operating cash flow and credit facility borrowings if necessary.
• Regulatory Risks:
  • 90/10 Rule: The Higher Education Opportunity Act reauthorization revised the 90/10 rule, making institutions ineligible for Title IV funds if more than 90% of revenue comes from these programs for two consecutive years.
  • Accreditation: The company received a "show cause" order from the Accrediting Commission of Career Schools and Colleges of Technology (ACCSCT) regarding its Philadelphia campus. A response was filed in September 2008, with a review scheduled for November 2008.
• Seasonality: The business is seasonal, with lower enrollment in the first half of the year and growth dependent on high school recruiting in the second half.

Investor Verification Checklist

• Enrollment Trends: Verify the sustainability of the 13.6% increase in average student population and the impact of the shift toward lower-tuition programs on revenue per student.
• Bad Debt Reserves: Monitor the trend of bad debt expense (currently 5.9% of revenue) and the effectiveness of internal financing strategies for student tuition gaps.
• Regulatory Compliance: Track the resolution of the ACCSCT "show cause" order for the Philadelphia campus and the impact of the new 90/10 rule calculations on Title IV eligibility.
• Acquisition Integration: Assess the financial impact and integration progress of the pending Briarwood College acquisition ($11.4 million).
• Cash Flow vs. CapEx: Confirm that operating cash flows ($30.0 million for 9 months) remain sufficient to fund the projected 6-7% of revenue in capital expenditures and the upcoming acquisition.