Lincoln Educational Services Corporation — Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2011, filed March 9, 2012. Lincoln provided career-oriented post-secondary education through 46 campuses in 17 states, offering programs in health sciences, automotive technology, skilled trades, hospitality services, and business and information technology. Enrollment was 19,204 at year-end and average enrollment was 24,301.
The company operated as one reportable segment. Approximately 84% of 2011 revenue, calculated on a cash-receipts basis, was derived indirectly from federal Title IV programs.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $512.6 million | $639.5 million | Down 19.8% |
| Operating income | $34.9 million | $122.6 million | Down 71.6% |
| Operating margin | 6.8% | 19.2% | Down 12.4 percentage points |
| Net income | $17.5 million | $69.7 million | Down 74.8% |
| Diluted EPS | $0.79 | $2.79 | Down 71.7% |
| Net cash from operations | $36.8 million | $114.5 million | Down 67.8% |
| Capital expenditures | $38.1 million | $42.4 million | Down 10.0% |
| Cash and equivalents | $26.5 million | $66.0 million | Down $39.5 million |
| Total debt | $36.5 million | $56.9 million | Down $20.4 million |
| Working capital | $1.5 million | $(4.2) million | Improved |
Educational services and facilities expense declined 7.0% to $223.0 million, but increased to 43.5% of revenue from 37.5% because of lower facility utilization and the company’s fixed-cost structure. Selling, general and administrative expense declined 9.8% to $244.4 million, but increased to 47.7% of revenue from 42.3%.
The 2011 results included $10.4 million of goodwill and long-lived-asset impairment charges, including a $9.4 million goodwill charge and a $1.0 million accreditation-intangible impairment charge. Excluding these charges, the filing does not provide a separately reported adjusted operating income or adjusted net income.
Cash Flow, Debt, and Liquidity
- Operating cash flow fell to $36.8 million from $114.5 million, primarily due to lower net income, lower unearned tuition, and working-capital changes.
- Investing cash outflow was $37.4 million, principally capital expenditures for facility improvements, relocations, and classroom and shop technology.
- Financing cash outflow was $38.9 million, including repayment of $20.0 million under the revolving credit facility and $18.5 million of dividends.
- The company had no borrowings outstanding under its $115 million secured revolving credit facility at December 31, 2011 and reported approximately $113.4 million of net availability, including a $23.4 million letter-of-credit sub-limit.
- The credit facility matured on December 1, 2012 and contained covenants tied to leverage, fixed-charge coverage, financial responsibility, cohort default rates, and other matters. The company stated that it was in compliance at year-end.
- Remaining debt consisted primarily of a $9.7 million finance obligation and $26.7 million of property capital leases. Total contractual cash obligations were $227.9 million, including operating leases, capital leases, and the finance obligation.
- The company expected 2012 capital expenditures to be approximately 4% to 5% of revenue and expected to fund them through operating cash flow and, if necessary, credit-facility borrowings.
Material Changes Versus the Prior Comparable Period
- Average enrollment declined 22.9%, from 31,535 to 24,301; student starts declined 39.6%.
- Revenue per student increased approximately 4.0%, reflecting tuition increases of approximately 3% to 5% and changes to program offerings, but this was more than offset by enrollment declines.
- Management adopted more selective admissions policies, reduced enrollment of higher-risk ability-to-benefit students, and restructured programs to increase student cash contributions and support compliance with the 90/10 rule.
- Ability-to-benefit students represented approximately 5.5% to 5.8% of the student population at year-end 2011, compared with 13.5% at year-end 2010.
- Outstanding student loan commitments increased to $26.4 million gross, or $20.2 million net of interest, from $17.3 million gross, or $15.4 million net, at year-end 2010.
- Days revenue outstanding improved to 18.0 days from 23.1 days, and bad debt expense declined to 6.0% of revenue from 6.1%.
- Goodwill declined to $97.4 million from $106.7 million after the 2011 impairment charge. Goodwill represented approximately 26.9% of total assets at year-end.
- Quarterly results were uneven: fourth-quarter 2011 revenue was $115.6 million, operating income was $12.1 million, and net income was $6.2 million; third-quarter 2011 included an operating loss of $5.0 million and a net loss of $3.9 million.
Guidance, Outlook, Commentary, and Risks
Management expected the decline in student starts to improve in 2012, supported by three campuses opened in 2011, expanded offerings at the Denver campus, and more favorable year-over-year comparisons. Management cautioned that enrollment remained difficult to forecast and that further enrollment deterioration could materially reduce revenue and profitability.
- Final gainful-employment regulations were scheduled to take effect July 1, 2012. Programs could face additional disclosures, warnings, or loss of Title IV eligibility depending on debt-repayment and earnings measures.
- The Consolidated Appropriations Act eliminated most federal aid eligibility for new ability-to-benefit students beginning July 1, 2012 and reduced the maximum Pell Grant eligibility period. The company could not predict the ultimate financial impact.
- 2011 institutional 90/10 percentages ranged from 76.5% to 89.2%; none exceeded 90% in 2011. One institution had exceeded 90% in 2010 at 96.9%.
- Final 2009 two-year cohort default rates ranged from 10.5% to 33.6% after revisions. Draft 2010 two-year rates ranged from 12.2% to 33.7%, and draft 2009 three-year rates ranged from 17.7% to 49.8%; the company planned to appeal the draft rates.
- The company calculated a 2011 Department of Education financial-responsibility composite score of 2.1, compared with 1.8 in 2010 and 2.0 in 2009; the 2011 score remained subject to Department of Education review.
- All institutions were provisionally certified for Title IV participation, generally through September 30, 2013, primarily because of a 2010 change in ownership. Loss of Title IV eligibility, accreditation, or state authorization would also constitute an event of default under the credit agreement.
- The New York Attorney General was investigating potential compliance with New York consumer-protection, securities, and finance laws and had subpoenaed documents covering May 17, 2005 through the filing date.
- Two securities class actions were dismissed with prejudice in September 2011 without appeal, and three shareholder derivative actions were voluntarily dismissed without prejudice.
- Management stated that no pending legal proceeding was expected to have a material adverse effect. The filing does not provide a quantified potential liability for the New York investigation.
Important Facts for Investors to Verify
- Whether enrollment and student starts stabilized or recovered after the 2011 admissions and program changes.
- Final 2010 two-year and 2009 three-year cohort default rates and any resulting Title IV sanctions or appeals.
- Program-level performance under gainful-employment regulations and the effect of the July 2012 ability-to-benefit changes.
- Renewal or refinancing of the revolving credit facility, which matured in December 2012, and continued compliance with its financial covenants.
- Cash conversion, student loan commitments, receivables collectibility, and bad debt expense as enrollment and financing gaps changed.
- Potential developments from the New York Attorney General investigation and any related regulatory or litigation exposure.
- Future goodwill or intangible-asset impairments, given the 2011 market-capitalization decline and substantial intangible-asset balance.