Lincoln Educational Services Corporation — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed March 12, 2013. The filing also provides unaudited fourth-quarter information. Lincoln operated 38 campuses and five training sites in 17 states, serving 16,235 diploma and degree students and 305 certificate students at year-end.
Business Context and Key Metrics
- Lincoln provides career-oriented post-secondary education in automotive technology, health sciences, skilled trades, hospitality services, and business and information technology.
- Average diploma and degree enrollment declined 22.3% to 18,086 in 2012 from 23,276 in 2011. Average revenue per student increased 5.4%.
- Approximately 81% of revenue on a cash-receipts basis came indirectly from federal Title IV programs, compared with 84% in 2011.
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $402.7 million | $491.8 million | Down 18.1% |
| Operating income (loss) | $(27.7) million | $40.2 million | Declined materially |
| Operating margin | (6.9%) | 8.2% | Down 15.1 points |
| Income (loss) from continuing operations | $(23.9) million | $21.1 million | Turned to loss |
| Net income (loss) | $(37.2) million | $17.5 million | Turned to loss |
| Basic net loss per share | $(1.68) | $0.80 | Turned to loss |
| Cash flow from operating activities | $16.0 million | $36.8 million | Down $20.9 million |
| Capital expenditures | $8.8 million | $38.1 million | Down $29.3 million |
| Cash and equivalents | $61.7 million | $26.5 million | Up $35.2 million |
| Total debt | $73.5 million | $36.5 million | Up $37.0 million |
Margins, Cash Flow, Debt and Liquidity
- Educational services and facilities expense fell 8.9% to $192.2 million, but increased to 47.7% of revenue from 42.9%.
- Selling, general and administrative expense declined 12.1% to $204.3 million, but increased to 50.8% of revenue from 47.2%.
- Bad debt expense improved to 5.0% of revenue from 5.9%; management cited improved financial-aid processes and collections. A fourth-quarter reserve reduction contributed $1.5 million.
- Operating cash flow was $16.0 million, while investing cash use was $10.2 million and financing cash inflow was $29.4 million.
- Lincoln entered into an $85 million secured revolving credit facility maturing April 5, 2015. Borrowings were $37.5 million at December 31, 2012 and were repaid on January 3, 2013. Approximately $45.9 million of net borrowing capacity remained at year-end, including a $23.4 million letter-of-credit sub-limit.
- Total contractual cash obligations were $238.6 million, including $142.3 million of operating leases and $52.5 million of capital leases, including interest.
- The company had $34.7 million of outstanding student loan commitments, or $25.0 million net of interest, compared with $26.4 million and $20.2 million, respectively, in 2011.
Material Changes Versus the Prior Comparable Period
- Enrollment and revenue continued to decline as Lincoln adopted more selective admissions, restructured programs to address the 90/10 rule, stopped enrolling fully online students early in 2012, and ceased enrolling new ability-to-benefit students after July 1, 2012.
- Fourth-quarter student starts declined 21.5% year over year; full-year continuing-operations student starts declined 7.7%. Fully online student starts declined 76.7%.
- Lincoln approved the closure of seven campuses in July 2012; all had ceased operations by December 31, 2012. Their 2012 revenue was $8.5 million and their net loss was $13.3 million, reported as discontinued operations.
- Goodwill and long-lived-asset impairment charges rose to $33.9 million from $8.3 million. Total 2012 pre-tax impairment charges, including discontinued operations, were approximately $34.7 million.
- Goodwill declined to $65.5 million from $97.4 million after impairment charges. Goodwill and identified intangible assets represented approximately 19.5% of total assets at year-end.
- Lincoln acquired Florida Medical Training Institute for $1.7 million net of cash acquired. FMTI provides primarily non-Title IV certificate and associate-degree programs and was acquired to diversify cash sources.
- The quarterly dividend was reduced to $0.07 per share from $0.25 per share in the first three quarters of 2011; total 2012 dividends declared were $0.28 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expected enrollment declines to improve over the next several quarters but at a slower pace, while noting that the loss of ability-to-benefit students and a prolonged economic downturn would constrain growth.
- Capital expenditures were expected to be approximately 4% to 5% of revenue in 2013, compared with 2.1% in 2012.
- Management expected cash from operations, existing cash, and available credit capacity to fund operations and planned capital expenditures through 2013, but noted that additional financing may be difficult or unavailable on favorable terms.
- One Dayton institution and its eight additional locations generated 93.0% of revenue from Title IV programs in 2012. A second consecutive year above 90% in 2013 could result in loss of Title IV eligibility and an event of default under the credit agreement.
- The company’s calculated 2012 Department of Education financial-responsibility composite score was 1.6, down from 2.1 in 2011 and subject to DOE review.
- Two-year cohort default rates for 2010 ranged from 11.6% to 23.9%; seven institutions had three-year cohort default rates of at least 30% for the 2009 cohort. Denver’s Perkins cohort default rate was 30.5%, and the institution was provisionally certified.
- Most gainful-employment regulations were vacated by a federal district court in June 2012, but the DOE could appeal, issue new regulations, or take further action.
- Lincoln received a Massachusetts Attorney General Civil Investigation Demand concerning compliance with state consumer-protection and finance laws. The company stated that it was cooperating and did not believe current legal proceedings would have a material effect.
- Program reviews were pending or scheduled at the Lincoln, Rhode Island; New Britain, Connecticut; and Columbia, Maryland campuses. Determination letters had not yet been received for the identified completed reviews.
- Title IV concentration, regulatory compliance, cohort default rates, 90/10 compliance, student financing and collections, competition, enrollment trends, fixed costs, impairment risk, lease obligations, and geographic concentration are key investor risks.
Important Facts for Investors to Verify
- Whether enrollment and student starts stabilized or improved after the 2012 reductions, particularly following the online-program exit and elimination of new ability-to-benefit enrollment.
- Whether the Dayton institution remained below the 90% Title IV revenue threshold in 2013 and whether FMTI helped diversify non-Title IV revenue.
- The DOE’s final determination of the 2012 financial-responsibility composite score and the effect of any required monitoring, letters of credit, or payment restrictions.
- Updated two-year and three-year cohort default rates and any resulting provisional certification or Title IV eligibility consequences.
- Results of the pending DOE program reviews and the Massachusetts Attorney General investigation.
- Whether operating cash flow can support the company’s fixed-cost base, student loan commitments, lease obligations, pension funding, dividends, and planned capital expenditures without renewed borrowing.
- Whether further goodwill or long-lived-asset impairments may be required if enrollment, revenue, or campus profitability remain weak.