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Lincoln Educational Services Corp. Reports Operating Results (10-Q)

August 06, 2012 | About:
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Lincoln Educational Services Corp. (LINC) filed Quarterly Report for the period ended 2012-06-30.

Lincoln Educational Services Corporation has a market cap of $78.5 million; its shares were traded at around $3.48 with a P/E ratio of 26.5 and P/S ratio of 0.2. The dividend yield of Lincoln Educational Services Corporation stocks is 8.1%. Lincoln Educational Services Corporation had an annual average earning growth of 18.4% over the past 5 years.

Highlight of Business Operations:

Our bad debt expense as a percentage of revenues for the three months ended June 30, 2012 and 2011 were both 5.8%, and for the six months ended June 30, 2012 and 2011 was 4.7% and 5.2%, respectively. Our exposure to changes in our bad debt expense could impact our operations. A 1% increase in our bad debt expense as a percentage of revenues for the three months ended June 30, 2012 and 2011 would have resulted in an increase in bad debt expense of $1.0 million and $1.3 million, respectively, and for the six months ended June 30, 2012 and 2011 would have resulted in an increase in bad debt expense of $2.1 million and $2.7 million, respectively.

Revenue. Revenue decreased by $27.9 million, or 21.7%, to $100.4 million for the quarter ended June 30, 2012 from $128.2 million for the quarter ended June 30, 2011. The decrease was primarily attributable to a 25.0% decrease in average student population, which decreased to 18,528 for the quarter ended June 30, 2012 from 24,711 for the quarter ended June 30, 2011, partially offset by a 4.4% increase in average revenue per student. The decrease in average student population was primarily due to adjustments in our business model to be better aligned with the Department of Education, or DOE s, increased emphasis on student outcomes and our efforts to comply with the 90/10 rule and cohort default rates. As part of these measures, we implemented a more selective student enrollment policy to ensure that we enroll students who demonstrate a strong ability to achieve successful student outcomes, including higher graduation and repayment rates and lower student debt levels. We also restructured certain programs and altered program offerings at some of our campuses, which resulted in lower financial aid funding availability and higher student cash contributions. We believe these changes coupled with the current economic conditions, are resulting in an increase in the number of potential students hesitant to take on debt and thus not enrolling in our schools. This has resulted in a significant decline in student starts and average student population. Average revenue per student increased 4.4% for the quarter ended June 30, 2012 from the quarter ended June 30, 2011, primarily from tuition increases that averaged 3% during the quarter and from changes to some of our program offerings, which shortened the delivery time of these programs and slightly accelerated revenue. For a general discussion of trends in our student enrollment, see “Seasonality and Trends” below. Educational services and facilities expense. Our educational services and facilities expense decreased by $4.8 million, or 8.9%, to $49.8 million for the quarter ended June 30, 2012 from $54.6 million for the quarter ended June 30, 2011. This decrease in educational services and facilities expense was due to a $4.8 million, or 15.5%, decrease in instructional expenses, a $0.3 million, or 7.7%, increase in books and tools expense, and a $0.3 million, or 1.7%, decrease in facilities expense. The decrease in instructional expenses was primarily due to a reduction in the number of instructors at most of our campuses resulting from a lower student population. The increase in books and tools expense was attributable to an increase in student starts of approximately 750 or 18.4% for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011. Facilities expense primarily decreased due to lower rent expense partially offset by increased depreciation expense as a result of the relocation of our Denver campus, as well reduction in property taxes as a result of reassessed property values. The education expenses contain a high fixed cost component and are not as leverageable as some of our other expenses. As our student population decreases, we typically experience reductions in average class size and, therefore, are not always able to align these expenses with the corresponding decrease in population. 18 Index

We strive to align our expenses throughout the year to our student population. As our population increases or decreases, we align our personnel and our expenses to the extent possible to meet the needs of our existing population. As a result of the foregoing, educational services and facilities expenses, as a percentage of revenue, increased to 49.6% for the quarter ended June 30, 2012 from 42.6% for the quarter ended June 30, 2011. Selling, general and administrative expense. Our selling, general and administrative expense for the quarter ended June 30, 2012 was $55.0 million, a decrease of $9.2 million, or 14.4%, from $64.2 million for the quarter ended June 30, 2011. The decrease in our selling, general and administrative expense was primarily due to a $5.1 million, or 14.7%, decrease in administrative expenses, a $3.0 million, or 13.0%, decrease in sales and marketing expenses and a $1.2 million, or 17.4%, decrease in student services expenses. The decrease in administrative expenses was partly due to a $1.5 million reduction in bad debt expense, a $1.4 million decrease in costs associated with the financial accounting system implemented during 2011 as well as reduced maintenance expenses for our student management system, $0.3 million lower furniture and fixture expense as a result of the relocation of our Denver campus and a $0.6 million reduction in legal expenses. The bad debt expense as a percentage of revenue was 5.8% for the quarter ended June 30, 2012, essentially flat as compared to 5.8% for the quarter ended June 30, 2011. The decrease in sales and marketing expenses during the quarter ended June 30, 2012 was primarily due to a $0.9 million reduction in marketing expenses and a decrease in the number of admissions representatives in order to align our cost structure to our population. This resulted in savings of approximately $1.7 million. Student services expenses decreased due to a reduction in the number of financial aid employees as we aligned our cost structure to our student population. As a percentage of revenues, selling, general and administrative expense for the quarter ended June 30, 2012 increased to 54.8% from 50.1% for the quarter ended June 30, 2011. As of June 30, 2012, we had outstanding loan commitments to our students of $29.1 million, as compared to $28.8 million at March 31, 2012. Loan commitments, net of interest that would be due on the loans through maturity, were $22.0 million at June 30, 2012 as compared to $21.4 million at March 31, 2012. Impairment of goodwill and long-lived assets. At June 30, 2012, we tested our goodwill and long-lived assets for impairment and determined that a non-tax pre-tax impairment charge of approximately $23.7 million existed for five reporting units related to goodwill and 10 asset groups related to long-lived assets. Net interest expense. The net interest expense for the quarter ended June 30, 2012 was $1.0 million compared to $1.1 million for the quarter ended June 30, 2011. Income taxes. The benefit for income taxes for the quarter ended June 30, 2012 was $8.4 million, or 28.9% of pretax loss, compared to a provision for income taxes of $3.3 million, or 40.3%, of pretax income for the quarter ended June 30, 2011. The effective tax rate decrease was due to the effect of nondeductible permanent items mainly comprised of certain goodwill impairment charges. Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011 Revenue. Revenue decreased by $68.3 million, or 25.0%, to $205.2 million for the six months ended June 30, 2012 from $273.6 million for the six months ended June 30, 2011. The decrease was primarily attributable to a 28.3% decrease in average student population, which decreased to 19,050 for the six months ended June 30, 2012 from 26,580 for the six months ended June 30, 2011, partially offset by a 4.7% increase in average revenue per student. The decrease in average student population was primarily due to adjustments in our business model to be better aligned with the Department of Education, or DOE s, increased emphasis on student outcomes and our efforts to comply with the 90/10 rule and cohort default rates. As part of these measures, we implemented a more selective student enrollment policy to ensure that we enroll students who demonstrate a strong ability to achieve successful student outcomes, including higher graduation and repayment rates and lower student debt levels. We also restructured certain programs and altered program offerings at some of our campuses, which resulted in lower financial aid funding availability and higher student cash contributions. We believe these changes coupled with the current economic conditions, are resulting in an increase in the number of potential students hesitant to take on debt and thus not enrolling in our schools. This has resulted in a significant decline in student starts and average student population.

Average revenue per student increased 4.7% for the six months ended June 30, 2012 from the six months ended June 30, 2011, primarily from tuition increases that averaged 3% during the six months and from changes to some of our program offerings, which shortened the delivery time of these programs and slightly accelerated revenue. For a general discussion of trends in our student enrollment, see “Seasonality and Trends” below. 19 Index Educational services and facilities expense. Our educational services and facilities expense decreased by $12.1 million, or 10.6%, to $101.6 million for the six months ended June 30, 2012 from $113.6 million for the six months ended June 30, 2011. This decrease in educational services and facilities expense was due to a $10.3 million, or 16.1%, decrease in instructional expenses, a $0.9 million, or 8.1%, decrease in books and tools expense, and a $0.9 million, or 2.3%, decrease in facilities expense. The decrease in instructional expenses was primarily due to a reduction in the number of instructors at most of our campuses resulting from a lower student population. The decrease in books and tools expense was attributable to a decline in average student population of approximately 7,500 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. We began 2012 with approximately 10,000, or 34.3%, fewer students than we had on January 1, 2011. Facilities expense primarily decreased due to lower rent expense partially offset by increased depreciation expense as a result of the relocation of our Denver campus, as well as a reduction in utilities due to rate reductions in certain states. The education expenses contain a high fixed cost component and are not as leverageable as some of our other expenses. As our student population decreases, we typically experience reductions in average class size and, therefore, are not always able to align these expenses with the corresponding drop in population. We strive to align our expenses throughout the year to our student population. As our population increases or decreases, we align our personnel and our expenses to the extent possible to meet the needs of our existing population. As a result of the foregoing, educational services and facilities expenses, as a percentage of revenue, increased to 49.5% for the six months ended June 30, 2012 from 41.5% for the six months ended June 30, 2011. Selling, general and administrative expense. Our selling, general and administrative expense for the six months ended June 30, 2012 was $112.2 million, a decrease of $19.9 million, or 15.1%, from $132.1 million for the six months ended June 30, 2011. The decrease in our selling, general and administrative expense was primarily due to a $9.2 million, or 13.2%, decrease in administrative expenses, a $8.5 million, or 17.3%, decrease in sales and marketing expenses and a $2.2 million, or 16.4%, decrease in student services expenses. The decrease in administrative expenses was primarily due to a $4.6 million reduction in bad debt expense, a $1.7 million decrease in costs associated with the financial accounting system implemented during 2011 as well as reduced maintenance expenses for our student management system, $0.4 million lower furniture and fixture expense as a result of the relocation of our Denver campus, $0.5 million decrease in travel expenses and a $0.4 million reduction in legal expenses. The bad debt expense as a percentage of revenue was 4.7% for the six months ended June 30, 2012, compared to 5.2% for the six months ended June 30, 2011. The reduction in bad debt as a percentage of revenue was due to a decrease in outstanding balances of our students, primarily due to lower revenue for the period. The decrease in sales and marketing expenses during the six months ended June 30, 2012 was primarily due to a $3.9 million reduction in marketing expenses and a decrease in the number of admissions representatives in order to align our cost structure to our population. This resulted in savings of approximately $3.5 million. Student services expenses decreased due to a reduction in the number of financial aid employees as we aligned our cost structure to our student population. As a percentage of revenues, selling, general and administrative expense for the six months ended June 30, 2012 increased to 54.7% from 48.3% for the six months ended June 30, 2011. As of June 30, 2012, we had outstanding loan commitments to our students of $29.1 million as compared to $26.4 million at December 31, 2011. Loan commitments, net of interest that would be due on the loans through maturity, were $22.0 million at June 30, 2012 as compared to $20.2 million at December 31, 2011. The increase in loan commitment during the year is attributable to changes we made to certain programs resulting in higher financing gaps for our students to better enable us to comply with the 90/10 Rule. Impairment of goodwill and long-lived assets. At June 30, 2012, we tested our goodwill and long-lived assets for impairment and determined that a non-tax pre-tax impairment charge of approximately $23.7 million existed for five reporting units related to goodwill and 10 asset groups related to long-lived assets. Net interest expense. The net interest expense for the six months ended June 30, 2012 was $2.4 million compared to $2.2 million for the six months ended June 30, 2011.

Selling, general and administrative expense. Our selling, general and administrative expense for the six months ended June 30, 2012 was $112.2 million, a decrease of $19.9 million, or 15.1%, from $132.1 million for the six months ended June 30, 2011. The decrease in our selling, general and administrative expense was primarily due to a $9.2 million, or 13.2%, decrease in administrative expenses, a $8.5 million, or 17.3%, decrease in sales and marketing expenses and a $2.2 million, or 16.4%, decrease in student services expenses.

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