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Lincoln Educational Services Corporation (NASDAQ:LINC)

Q4 2008 Earnings Call

March 5, 2009 10:00 am ET

Executives

David F. Carney – Chairman & Chief Executive Officer

Shaun E. McAlmont – President & Chief Operating Officer

Cesar Ribeiro – Senior Vice President & Chief Financial Officer

Analysts

[Unidentified Analyst] - Credit Suisse First Boston

Gary Bisbee - Barclays Capital

Jeffrey Silber - BMO Capital Markets

Trace Urdan - Signal Hill Group, LLC

David [Shoe] – Bank of America

[Gordon Lasy – Robert Beard]

Operator

Good morning ladies and gentlemen and welcome to the fourth quarter and year end 2008 Lincoln Educational Services earnings conference call. (Operator Instructions) This conference call is being webcast. An audio version of the call will be available on the company’s website for 90 days. As a reminder, this conference is being recorded for replay purposes.

Before we begin today’s call, the company would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events; future financial performance; strategies; expectations; competitive environment; regulations; and availability of resources. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially or from those stated in any forward-looking statements based on a number of factors and other risks which are more specifically identified in Lincoln’s filings with the SEC.

And I would now like to turn the call over to Mr. David Carney, Chairman and CEO of Lincoln Educational Services. Please go ahead, David.

David F. Carney

Thank you Shane. Good morning everyone and welcome to the Lincoln Educational Services fourth quarter and year end 2008 earnings conference call. Joining me today is Shaun McAlmont, our President and Chief Operating Officer as well as Cesar Ribeiro, our Senior Vice President and Chief Financial Officer.

Following my remarks Shaun will provide an update on operations and Cesar will provide a detailed review of our results. We will then open the call for the question-and-answer period.

And now turning to our results from continuing operations, revenue from continuing operations rose 18.9% to $107.3 million in the fourth quarter and included revenue of $1 million attributable to the acquisition of Briarwood. We benefited from a combination of strong carry in population as well as new student starts growth in the fourth quarter of 17.1%.

Net income from operations was $12.8 million and diluted earnings per share was $0.49 versus $0.37 in the fourth quarter of last year. However, diluted EPS from continuing operations for the fourth quarter of 2008 included $0.02 of charges related to the Baran acquisition which closed on January 20 of 2009. For the full year 2008, our revenue grew by 15% to $376.9 million compared to $327.8 million for 2007. Net income from continuing operations was $20.2 million compared to $13.8 million for 2007. Diluted EPS from continuing operations was $0.78 in 2008 compared to $0.53 for the year ended December 31, 2007. Again 2008 GPS of $0.78 included $0.02 of charges for the Baran acquisition.

Our performance during the fourth quarter capped off an outstanding year for Lincoln. We generated strong financial results, consistently strong starts in enrollment growth, and effectively advanced our various growth initiatives. We built upon the momentum and positive trends in our business and as a result we believe we are well positioned for sustainable growth and profitability as we move through 2009.

Now I’ll move to our start performance for the fourth quarter and the year. Starts during the fourth quarter were 5,200, up 17.1% compared to the same quarter a year ago and we generated start growth across all five verticals during the quarter. For the full year, starts totaled 27,175, up 12.4% over 2007. Our strong fourth quarter and full year starts growth reflect the benefit of a weakening economy, our diversified program offerings, and our strength and organization due to the many operational enhancements we implemented over the past three years.

Now let me cover our student enrollment. Student enrollment on a same school basis at December 31 reached a record of 21,116, an increase of 17.2% over the prior year while average enrollment for the quarter was 22,269, up 16.2% from 19,167 for the same quarter a year ago.

We also continued to benefit from a higher carry in population during the fourth quarter. As you may recall, we started 2008 with 1,400 more students than we had in 2007. That positive trend continued throughout the year and as a result we entered 2009 with 3,100 or 17.2% more students than 2008, excluding the effect of the recent acquisition.

This significantly larger carry in population can be attributed to continued strong growth across our product groups, especially in our Health Sciences programs. At December 31, 2008 our average enrollment of 22,269 was divided between Health Sciences 35%; Automotive 32%; Skilled Trades 14%; Business IT 10%; and Hospitality Services 9%. While all of our verticals experienced year-over-year start growth in the fourth quarter, Health Sciences has shown meaningful growth and is now our largest vertical.

Now I would like to take a minute and update you on the progress we made on our growth strategy during 2008 as well as our plans for 2009. Over the past several years, our strategy has focused on a combination of new program development; program replications; new campus openings; strategic acquisitions; and building additional capacity at existing campuses where demand for new programs supported it. During 2008 we continued to make progress by making a strategic acquisition; opening a new campus in an existing cluster; developing new programs, particularly for the online business; replicating programs like LPN; and adding capacity at several of our campuses offering Health Sciences programs.

As we have indicated in the past, we have made and continue to make a concerted effort to diversify our program offerings across our campuses. And today with few exceptions we’ve accomplished our goal. This is allowing us to increase our addressable market and as a result of our brand consolidation we are seeing benefits in the marketing area as well. As a result of our start growth across our verticals throughout 2008, our capacity utilization increased to 60% at year end, up from 53% at the end of 2007.

In 2009 we will continue to execute on our plan. We closed on our ninth acquisition on January 20 and are on track to open a new campus in Toledo, Ohio as part of our Southwestern College cluster this month. In terms of program replication we have applied to several additional states for approval to launch LPN programs and have received approval in Pennsylvania and Ohio, and expect to begin classes this year.

As we have mentioned on prior calls, our LPN program has been a significant catalyst since we acquired the program through acquisitions in 2005 and 2007. Our LPN program now accounts for approximately 6% of our total enrollment. As a result of our latest acquisitions, there are several new growth drivers that will begin to provide benefits in several of our markets over the next six to 24 months.

Now let me turn to those two recent acquisitions, Baran and Briarwood College. In January we announced the acquisition of the Baran school group. Baran is comprised of six schools that serve roughly 1,900 students and offers associate and diploma programs spanning four of our verticals; Automotive, Skilled Trade, Health Sciences and Culinary. We have closed on five of Baran schools and expect to close on the sixth school, Clemens College, after receiving approval from the New England Association of Schools and Colleges, or NEASC, this month.

Through the addition of Baran we will be adding a state-of-the-art destination Automotive and Skilled Trades campus with a strong New England presence; a growing Diesel School in New Jersey that will benefit from our 60 year brand awareness in the New York City metropolitan area; a leading Culinary School with outstanding facilities and a growing high school sales force; an expanded presence in Florida with the addition of nursing programs and Surgical Tech.

The acquisition of Baran dovetails with our overall growth strategy as it will strengthen our core offerings and expand our degree granting capabilities. In addition, assuming that our Substantive Change Application is approved by NEASC this month, we will complete the acquisition of Clemens College which will be our second regionally accredited institution and will provide a platform from which to launch higher end Hospitality degree programs.

In December of 2008 we closed on our acquisition of Briarwood College. Briarwood is recently accredited by the same accrediting agency NEASC and currently offers two Bachelors Degree programs and a number of Associate Degree programs. The acquisition of Briarwood is in line with our goal of expanding our addressable market as it bolsters our high end program offerings, including Dental Hygiene; deepens our degree granting capabilities; and represents our first regionally accredited school.

The acquisition will also expand our student life cycle as it will provide our current Connecticut students with the opportunity to further advance their education by the pursuit of an Associate or Bachelors Degree from Briarwood. Finally, Briarwood will serve as our online platform through the potential to offer regionally accredited programs.

Now turning to our 2009 financial outlook and our guidance. For the full year we expect annual revenue of $476 to $486 million, representing an increase of approximately 26 to 29% over 2008; student starts on a same school basis to increase 13 to 15% over 2008; and diluted earnings per share of $0.90 to $0.95 or an increase of approximately 15 to 22%. Our EPS guidance for 2009 reflects approximately $0.10 to $0.12 in dilution in connection with our acquisitions, with most of this dilution to occur in the first half.

For the first quarter of 2009 we expect starts on a same school basis to increase 25 to 28% over the first quarter of 2008. We expect revenue of $112 to $114 million and diluted earnings per share of $0.05 to $0.07.

Now let me just take a moment and update you on the student lending environment and the effect on Lincoln. First the credit crunch that has impacted the credit markets continue to have little impact on our ability to enroll and finance our students. The legislation passed last year has helped to greatly reduce the gap between tuition and the amount the students receive from financial aid. Therefore the students are benefiting in their ability to finance their education and the amount remaining or the gap has been reduced to a very manageable level. The president’s stimulus package has provided an additional $500 of Pell which will further assist our students in financing their education. And Cesar will comment further on our internal financing program in his prepared remarks.

Now finally as many of you are aware, in January we announced the next steps of our succession plan at the company. Following the annual meeting of shareholders on April 30, Shaun will become President and CEO for the company and I will become Executive Chairman. These changes are entirely in line with our succession plan and I will remain actively involved with the company on a full time basis through the end of 2010.

Many of you have gotten to know Shaun during his tenure as COO and are aware of his many strengths. He possesses a tremendous amount of industry knowledge and experience and has been a great asset to Lincoln since joining the company in 2005. I look forward to continuing to work with Shaun and the rest of the senior management team as we build upon the foundation of growth of success that Lincoln has achieved.

And with that said, let me turn the call over to Shaun for a review of operations.

Shaun E. McAlmont

Thanks Dave and good morning everyone. Our fourth quarter and full year 2008 results demonstrate the benefits of our efforts over the past few years to diversify our company. Although we continue to evolve in this regard, we’re positioned well with multiple avenues from which to grow our business. Our new student start growth and overall population increases were achieved through improvements in our new student conversions. Our leap to enrollment performances improved, in addition to increases in our enrollment to start or our show rate conversions. These gains reflect the efforts of many in our organization and have supported nine consecutive quarters of new student start growth.

The accelerated growth seen in the fourth quarter and also anticipated for the first quarter of 2009 also reflect the impact of the current economic climate. Operational improvements over the past year have bolstered the business and have given us a foundation from which we can launch the next phases of our strategic plan. We continue to build programmatic expertise within our company and also deepen our management strength.

Our strategy over the next three years involves expanding the breadth of our program offerings; expanding the depth and validity of our degrees; continuing to re-brand under Lincoln; and further developing our online platform and also continuing to consider strategic acquisitions. This plan is designed to position the company for long term sustainable growth and also margin expansion, though I’ll come back to the strategy in just a moment.

During the fourth quarter we continued to execute on the three key priorities that I outlined at this time last year. I’d like to take a few minutes to provide an overview of the significant progress we’ve made over the course of 2008 before I turn to our 2009 plans.

The three key priorities for 2008 were first, to advance our high school plan; second, to strengthen the foundation for our online strategy; and third, to continue to improve the execution of our basic functions. Our high school efforts in 2008 built upon the various improvements achieved in our successful 2007 recruitment campaign and resulted in a 5% improvement over the comparable prior year period. We were able to leverage a stabilized admissions representative force which we’ve retained at an improved rate for the third consecutive year. This stability assisted us in improving our high school lead flow generated in the classroom and led to a record number of high school starts for the entire company.

We further improved our student financing processes and continued to strengthen our relationships with key high school personnel. We were also able to develop our Lincoln Tech sales force which allowed for continuous productivity in the face of a difficult automotive market at the time. Our relentless pursuit of performance in all facets of the program by our Vice President of Admissions and our five National Directors of Admissions led not only to the achievement of our 2008 targets, but has also provided a strong head start on 2009, positioning us ahead of our year ago pace. We continue to look at high school recruitment as a long term organic growth opportunity for all of our campuses.

In regards to our 2008 online plans, our efforts centered on strengthening our staff; refining our technical infrastructure; obtaining higher levels of accreditation; and developing our online brand. As a recap, a few years ago mentioning online and Lincoln in the same sentence would seem odd as we were known as a primarily automotive-based, hands-on institution. As our company has diversified, we saw opportunity emerge to deliver online courses. We began with degree completer options, which are short in length and allow diploma and certificate graduates to take required general education courses to finish their Associate degrees.

In 2006, we received approval to offer fully online degree programs under national accreditation and we launched programs that were within our scope of approved Associate degree programs offered through our ground campuses. We received approval to offer Bachelors Degrees in 2008 and started small [cohorts] of students in May and July. These launches allowed us to offer fully online programs for the first time, develop related student services, and build instructional expertise.

In late 2008 we began the final phase of our online development plan which includes regionally accredited degree programs and the launch of a unique online website. I’ll discuss the timeline associated with both of those efforts in a moment.

In regards to the execution of our basic functions in 2008, we focused on improving our market presence and penetration; our employee training; and our student services. Our goals were very straightforward and aimed at improving metrics in each of these areas. We achieved our execution targets as we improved website optimization performance in leads, conversions, and starts; we retained our employees at improved levels; and we improved our student retention for the full year.

Our 2008 marketing efforts produced a lead flow that exceeded prior year by 7%. Enrollment metrics also improved, which contributed to our 12.4% increase in starts for the full year. We also saw improvement in our overall expense metrics as our marketing costs per start decreased by 9% year-over-year. We enhanced our main website with the goal of optimizing search results at higher rates and began working to generate improved lead volume and quality through examination of our customer’s search, viewing and enrolling behaviors. Our website inquiries steadily rose during 2008 with our website continuing to outperform other lead sources, generating an increased portion of our total leads, enrollments and starts.

Our overall web cost metrics have improved and most recently we’ve seen a decrease in TV spot costs. We expect this trend to continue for adult and high school media across all of our verticals as we move forward into 2009.

We also implemented a series of advanced web lead generation initiatives focused on re-exposing inquiries to Lincoln following their initial contact. We’re very pleased with this effort and have demonstrated success as we’re enrolling an increased percentage of these unconverted leads over time.

We continued to strengthen the Lincoln brand in 2008 and began grouping Lincoln and our non-Lincoln branded schools under a tag called “The Lincoln Group of Schools,” primarily for our national advertising campaign and for the long term benefit of website optimization of Lincoln-related search. We made continuous steps in enhancing our marketing efforts according to our 2008 development plan and also added elements of Automotive Industry education in late 2008 based on media coverage of the industry. Recently we’ve seen Automotive activity pick up despite the negative OEM in industry news.

Finally and as mentioned earlier we’ve begun the development of our purely online website which we believe will attract students outside of our current demographic and provide a unique online user experience. Our development process included very specific market research that guided the development toward web features and images that distanced the new site from our more hands-on vocational website. Our expected launch of the website’s first phase is at the end of the first quarter of 2009.

Our goal is to fully complete all phases of the site in late 2009 to coincide with our originally accredited program launch in early 2010. Overall, we’re pleased with the sustained effectiveness of our marketing efforts and we look forward to continuing these gains in 2009.

In 2008 we were committed to providing our students with the best systems possible to continually improve their overall education. We’ve implemented numerous company wide processes to assist students. Some of these processes include and continue to refine systems that manage and promote student attendance as we’ve determined this to be one of the main factors in maintaining our positive population variance over prior year.

We continue to strengthen vital student services geared at assisting high school students and their parents in the enrollment process at our destination schools. We continue to focus on corporate wide placement assistance, integration of career services into the curriculum, and preparing students for their job search well before graduation. We’re committed to aggressively generating placement opportunities with businesses within a 50 mile radius of our campuses and also with national accounts for larger industry employers within each one of our verticals.

Our 90 local career services professionals are preparing students to search for employment while in school and we continue to aggressively work with them as graduates. In this economic climate some timelines have lengthened for students trying to find jobs. However, efforts within our two largest verticals, Automotive and Health Sciences, are tracking close to prior years. And we’ll report our full year results in June.

Our student satisfaction rates have improved consistently over the past three years and have stabilized at a rate that we feel reflects the success of our service improvement. 94% of our students are satisfied with 68% showing very high satisfaction. In addition, our total student year interrupt rate has improved by 60 basis points compared to the same period last year, correlating with our satisfaction scores.

We continue to make targeted program revisions to update our curriculum based on specific feedback from our industry advisors and we’re considering future adjustments or additions based on economic opportunities and recent political actions. And I’m proud to also mention that we continue our commitment to strong regulatory compliance at our campuses and maintain a strong regulatory performance record with all of our agencies.

Our 2009 plans will build on our expanded platform and our 2008 successes. Our strategic focus for long term sustainable growth involves expanding our program breadth and degree depth to address a broader market and in doing so we will build each vertical to withstand potential downturn in any one program area. In addition, increasing our degree options provides a path for students to migrate from diploma to degree within the Lincoln family of schools, while also allowing prospective students to enter our schools at multiple degree entry points and to utilize transfer credits brought from other institutions.

As of December 31, 2008, our degree mix included 21% of our students enrolled in Associate degrees while approximately 1% were enrolled in Bachelors programs. Our 2009 efforts toward this strategy will include new program launches, program replications and engaging in the regional accreditation approval process for new degrees.

Our 2009 plans also include the integration of acquisitions. As many of you know, Lincoln has grown over the past several years through a combination of organic growth initiatives as well as select acquisitions. In each of these cases we demonstrated the ability to smoothly integrate the acquired schools and also programs under the Lincoln umbrella. We believe we have a strong track record in this area and that the integration of Baran and Briarwood will be successful as well.

We will leverage our corporate platform by applying functional area expertise. We’ll apply marketing processes; re-brand the schools with the Lincoln brand; introduce management information systems; assist local management with new student admissions and retention processes as well.

The aggressive integration of Baran and Briarwood will further increase our addressable market and therefore expand our growth profile. Our 2009 online plans are focused on accelerating the growth profile of our online platform through Briarwood. We anticipate that fully online, regionally accredited programs will be delivered from this school in its 12 to 15 month timeframe. In the meantime we’ll continue to offer our current online programs via our West Palm Lincoln campus and expect to maintain our current growth rate in 2009.

When bolstered by regionally accredited programs that will validate our offerings and also a new online website that will allow us to better manage the online user experience and also meet the unique expectations of a purely online student, we feel our online platform will provide a significant and sustainable future growth opportunity.

In summary, our operational improvement provided great strength to the organization in 2008 and has given us a foundation from which to advance our longer term strategy for sustained growth and profitability.

Now let me turn the call over to Cesar for the financial review. Cesar.

Cesar Ribeiro

Thank you Shaun. Good morning everyone. As we disclosed in our press release earlier this morning and as Dave stated in his prepared remarks, we are very pleased with our fourth quarter and 2008 full year results.

Our fourth quarter results were positively impacted by our entering the quarter with approximately 2,900 more students than we had in the fourth quarter of 2007. This larger carry in population and the 17.2% student start growth we generated during the fourth quarter drove our approximately 19% revenue growth.

Other key highlights for our fourth quarter include we generated free cash flow of $19.9 million compared to $13.3 million during the fourth quarter of 2007; our operating margin improved 100 basis points to 19.8 from 18.8% for the fourth quarter of 2007; earnings per diluted share grew 32.4% to $0.49 from $0.37 per share from the fourth quarter of 2007 as we benefited from the increased capacity utilization and the leverage inherent in our business model.

We closed on the acquisition of Briarwood College on December 1, 2008 and funded the purchase price of $10.5 million net of cash acquired with cash on hand. We finished the year with $15.2 million in cash and cash equivalents and no borrowings outstanding on our [inaudible] agreement. And bad debt for the quarter was favorably impacted by strong cash collections and was 5.4% of revenue as compared to 5.7% for the fourth quarter of 2007.

Now let me turn to our full year results. Revenues increased by $49.1 million or 15% to $376.9 million for the fiscal year 2008 from $327.8 million for 2007. Approximately $1 million of this increase was as a result of our acquisition of Briarwood on December 1, 2008. Excluding Briarwood, the increase in revenues was primarily attributable to a 13% increase in average student population which increased to 19,983 for the year ended December 31, 2008 from 17,687 for the year ended December 31, 2007.

Revenues were also favorably impacted during the year by tuition increases which averaged from 3 to 3.5% and increases in tool sales and interest income collected on student loans, which increased by $0.7 million and $0.8 million respectively for the year ended December 31, 2008. Average revenue per student increased 4.5% for the year ended December 31, 2008 from the year ended December 31, 2007 primarily due to tuition increases offset by a shift in our student population to lower tuition programs.

Operating income margin for the year ended December 31, 2008 increased to 9.4% from 7.9% for the year ended December 31, 2007. The improvement in operating income was related to the increase in our average student population which resulted in past utilization of 60% at December 31, 2008 versus 53% at December 31, 2007. This increase in capacity utilization enabled us to leverage our educational services and facilities expenses during the year. Accordingly, the additional revenues from increased student population increased to the increase in operating income margin.

Our educational services and facilities expenses increased by $14 million or 10.1% to $153.5 million for the year ended December 31, 2008 from $139.5 million for the year ended December 31, 2007. Briarwood accounted for $0.5 million or 0.4% of this increase. Excluding Briarwood, the increase in educational services and facility expenses was primarily due to instructional expenses and books and tools expenses which increased by $6.l million or 8.4% and $3.6 million or 20.9% respectively over the prior year. This increase was attributable to a 12.4% increase in student starts for the year ended December 31, 2008 as compared to the prior year, and the overall increase in student population and higher tool sales during 2008 compared to 2007.

We begun 2008 with approximately 1,400 more students than we had on January 1, 2007 and as of December 31, 2008 our population was approximately 3,600 higher than as of December 31, 2007. The remainder of the increase in educational services and facilities expenses was due to facilities expenses which increased by $3.8 million for the year ended December 31, 2008 over prior year. This increase was primarily due to increase in depreciation expense of $2.7 million resulting from higher capital expenditures during 2008 and 2007. The remainder of the increase in facilities expenses was due to higher utilities, rent and repairs and maintenance expenses on our campuses.

Capital expenditures in 2008 included the renovation and conversion of our former auto school in Grand Prairie, Texas to a skilled trades school as well as the opening of our new campus, Aliante, in North Las Vegas, Nevada. Educational services and facilities expenses as a percentage of revenues decreased to 40.7% of revenues for the year ended December 31, 2008 from 42.6% for the year ended December 31, 2007.

Our selling, general and administrative expenses for the year ended December 31, 2008 were $187.7 million, an increase of $25.3 million or 15.6% from $162.4 million for the year ended December 31, 2007. Approximately $0.3 million or 1.2% of this increase was attributable to Briarwood. Excluding Briarwood, the increase in our selling, general and administrative expenses for the year ended December 31, 2008 were primarily due to a $1.9 million or 13.4% increase in student services; a $4.8 million or 7.4% increase in sales and marketing; and an $18.3 million or 22% increase in administrative expenses as compared to prior year.

The increase in student services was due to increases in compensation and benefit expenses attributed to additional financial aid and career services personnel as a result of a larger student population during the year ended December 31, 2008 as compared to the prior year. In addition, we expanded a pilot program which we began in 2007 to centralize the back office administration of our financial aid department in an effort to improve the effectiveness of our financial aid processing. This resulted in the hiring of additional financial aid representatives during 2008.

The increase in sales and marketing expense was due to one, annual compensation increase to sales representatives; two, the hiring of additional sales representatives; and three, increased call center support for the year ended December 31, 2008 as compared to the prior year. In addition, we increased our marketing investment in an effort to continue to grow our student population.

The increase in administrative expenses was due to one, a $9.8 million increase in compensation and benefits resulting from annual compensation increases including increases in employee bonuses, stock compensation expense and a cost of benefits provided to employees; two, a $4.2 million increase in bad debt expense; three, $0.2 million that was refunded to the U.S. Department of Education resulting from a program review at a Southwestern College; four, a $0.6 million increase in software maintenance expenses resulting from increased software licenses for our student management systems; five, a $0.9 million of acquisition related expenses relating to the Baran acquisition in accordance with financial accounting standards, Statement Number 141R, Business Combinations; and finally a $0.9 million of expenses incurred in connection with two registration statements on Form S-3 filed with the SEC during 2008 and other related expenses.

For the year ended December 31, 2008 our bad debt expenses as a percentage of revenue were 5.7% as compared to 5.3% for the year ended December 31, 2007. This increase was primarily attributable to higher accounts receivable due to an increase of 13% in average student population for 2008 as compared to the same period in 2007. The number of days sales outstanding for the year ended December 31, 2008 decreased to 25.4 days compared to 27.7 days for 2007, primarily due to the timing of collection of federal funds.

As a percentage of revenue, selling, general and administrative expenses increased to 49.9% of revenues for 2008 from 49.5% for 2007. Net income from continuing operations for the year ended December 31, 2008 was $20.2 million or $0.78 per diluted share as compared to $13.8 million or $0.53 per diluted share for 2007.

Now let me turn to our balance sheet. At December 31, 2008 we had $15.2 million in cash and cash equivalents compared to $3.5 million at December 31, 2007. Net accounts receivable at December 31, 2008 were $26.2 million as compared to $24.9 million at December 31, 2007. Net property and equipment grew to $108.6 million at December 31, 2008 as compared to $106.6 million at December 31, 2007. The increase is into the purchase of capital expenditures of $20.2 million during the year, offset by depreciation expense. As of December 31, 2008 we had no borrowings outstanding on our credit agreement versus $5 million outstanding on our credit agreement at December 31, 2007 and December 30, 2007 respectively.

Cash from operations during 2008 reached a record of $54.2 million compared to cash from operations of $15.7 million during 2007. Our strong cash flows for the year reflect the operational improvements we have made to date and [practicing] our students.

Now turning to our loan program, as of December 31, 2008 we had grants and loan commitments to our students net of interest that would be due in the loans to maturity of $17 million as compared to $15.4 million and $13.7 million at December 30, 2008 and June 30, 2008 respectively. The passage of the Ensuring Continued Access to Student Loan Act, better known as HR 5715, provided our students with access to an additional $2 thousand of unsubsidized loans per academic year.

This additional funding, coupled with increases in overall financial aid, provided by the Higher Education Act or HR 4137 reduced the gap between the amount of tuition funded by financial aid and alternative loans. Based on this additional funding we have previously stated that based upon our analysis we expected that our annual investment in net accounts receivable that will be required by Lincoln to assist its students in financing the gap in 2009 will not exceed $5 million per year.

And finally, in February we completed a secondary offering of 6.325 million shares of our common stock at a price to the public of $14 per share. Of these share approximately 1.150 million were sold by the company and 5.175 million were sold by selling stockholders.

With that I’d like to turn the call back over to Dave.

David F. Carney

Okay. Thanks Cesar. To summarize, we’re extremely pleased with our fourth quarter and full year results. We delivered record financial results and generated consistent starts in enrollment growth over the course of the year. We continued to see the benefits of the many operational initiatives we have implemented over the past several years.

In addition, we further diversified our program offerings and continued building a strong presence in the five verticals that possess attractive employment prospects. During 2008 we made considerable progress expanding our addressable market by strengthening the overall breadth of our program offerings and accelerating our concerted push into higher degree levels. Our efforts in these areas will serve to extend our student life cycle as well as offer degree completer opportunities.

The recent acquisitions at Baran and Briarwood are consistent with this strategy. As a result of our efforts and continued successful execution of our growth strategy, Lincoln today is a much stronger and balanced company, positioned for sustainable and long term growth.

And with that said, we’d be happy to begin the question-and-answer period. Thanks.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Unidentified Analyst] - Credit Suisse First Boston.

Unidentified Analyst - Credit Suisse First Boston

Can you give some updated thoughts on how you view the economy impacting enrollments and perhaps also do you have any reason to believe that a weak economy won’t continue to help enrollments if things worsen further?

David F. Carney

Well, I would say that – first part of your question, certainly we’re seeing the benefits of the increased unemployment, particularly over the last couple of quarters. The trends certainly have continued into the first quarter of 2009. I would say that, you know, given the fact that we’re watching placement rates very closely and we have programs that are focused on high demand markets and job opportunities, we feel pretty comfortable that a continued weakened economy, assuming it doesn’t last forever, we’re pretty well positioned to deal with that.

Unidentified Analyst - Credit Suisse First Boston

What assumptions about the economy if any are reflected in ’09 guidance?

David F. Carney

Well, I would say this. You saw our overall guidance for the year. You’ve seen the guidance for the first quarter in terms of start growth. We’re pretty mindful that two quarters don’t make a year. So basically we see the impact. We’re very pleased with the trends in the first quarter but overall for the year we’re assuming that, as you can tell from the first quarter, that 25 to 28% and the 13 to 15% overall for the year, so we’re not attributing the last three quarters to a continuation of this trend. A more conservative view. I think when we speak to you next quarter, perhaps we’ll update our guidance based on what we see. But at the moment our visibility is pretty well limited to the next quarter.

Operator

Your next question comes from Gary Bisbee - Barclays Capital.

Gary Bisbee - Barclays Capital

I guess first question, can you give us some sense what the contributing factors to the $0.10 to $0.12 dilution from the acquisition [biz]? What part of that might be just the amortization versus are these businesses actually losing money today versus what level of investments you’ve planned to making them over the next couple of quarters?

David F. Carney

Well, I’ll let Cesar talk about the accounting side of it and everything else. But I’ll give you an overall view, Gary. In terms of the acquisitions and basically five of the six schools we’ve owned for 60 days. Our operating people have been into the schools, had access over the last 60 days. They’re very excited about the upside and the potential. And with that said, they’ve identified a number of opportunities that we want to be able to take advantage of sooner rather than later. And for that reason we’re providing ourselves the opportunity to do that in terms of the $0.10 to $0.12. Cesar.

Cesar Ribeiro

Gary, the acquisitions basically it’s all a result of acquisition accounting, especially on the 141R. There’s a significant amount of fair value items that need to be valued and amortized into the P&L and all those come below the line. So a lot of those are charges related to that. But as far as the EBITDA level, all these acquisitions were profitable. It’s just that acquisition related amortization and intangibles, student contracts, etc. become dilutive in the first year.

Gary Bisbee - Barclays Capital

And how long does the amortization go or how quickly does it fall off? I know you –

Cesar Ribeiro

They’ll be accretive in 2010. It’s usually 12 to 15 months – 12 to 18 months is usually the amortization period on a lot of these items. But starting in 2010 these acquisitions will be accretive to earnings.

Gary Bisbee - Barclays Capital

Bad debt was down quite a bit in I know you talked about the year, but in the quarter relative to the last couple. Can you give us any color on that and how should we think about this trending in ’09? Is the annual number for ’08 a decent proxy give or take a little bit for how we should think about that?

David F. Carney

I believe we continue to model 6 to 6.5% of bad debt expense. I think what you’re starting to see and it’s too early to tell at this point, is that I think you’re starting to see a lot of the benefits that we made within our financial aid package and in our cash collections starting to come home. However, with that said, one quarter of excellent cash collections as received from our cash flow from operations – I’m not ready yet to predict the year. So I would still stick with the 6 to 6.5% and as we go through the first quarter or second quarter for the year we’ll update that accordingly when we see better trends.

Gary Bisbee - Barclays Capital

Obviously on the front end starts are doing great and obviously the market. One of the big fears as we get deeper and deeper into the current jobs recession is that placement’s going to get tougher. So can you give us some sense – how are you feeling about the ability to place kids, particularly one that I feel like I don’t have a good handle on and a lot of investors don’t is the Skilled Trades programs. Are there lots of jobs? I mean with the implosion of the housing and commercial real estate in terms of new building, a lot of people wonder if a lot of those jobs will still be out there. How are you thinking about it and how confident are you in the ability to continue to place these kids going forward?

Shaun E. McAlmont

This is Shaun. I’ll take that question. We’ve always been very aggressive in placing our students and we’ll continue to do that. Just as background, we’ve got 90 career services professionals out of our schools that work on a local basis with students. And we start with them from day one all the way through finding a job. And you know we’ll stay very aggressive in that regard. We’ll increase that number as necessary. But we continue to watch each local market very carefully and each vertical. And we feel like today there is some pressure on numbers as we compare to our prior year total 83% placement rate. And what we see today are some lengthening timelines for students trying to find jobs. Maybe some employers pushing start dates out a bit, but this said, our students are still finding positions.

For our two largest verticals they’re holding well, Automotive and Health Sciences, very close to last year’s period to date numbers. We in the Skilled Trades place a number of our students into HVAC positions which continue to see demand. We don’t place that many in real estate to tell you the truth, especially residential. Commercial real estate we were placing a few. We feel that there’s an advantage coming in the stimulus package infrastructure development that will be happening on many state levels. So as of today, we’re not necessarily concerned about the Skilled Trades but we’ll continue to just look at it very specifically as we do all the verticals. And also I just wanted to mention that we report our full year numbers in June and I can’t tell you what we anticipate for all the verticals along the way, but we feel very confident that the numbers we’re seeing today aren’t varying too much from what we saw last year.

Gary Bisbee - Barclays Capital

I assume – I don’t think you said exactly. I assume that auto, you said all five verticals had starts growth, auto probably a lot slower so several of the other verticals probably a lot quicker than the number you reported in the fourth quarter in total. When we think about the capacity utilization, how much room is there in the schools that are teaching the curriculum that is in strong demand today relative to schools that might have more modest growth? I know a big strategy’s been putting Skilled Trades into the auto schools where you had a lot of excess capacity. But is much of that excess capacity still in the schools that were traditionally auto? Or do you have enough that you’re real confident you can grow capacity utilization, even if healthcare continues to be the dominant part of your growth over the next year? Thanks a lot.

David F. Carney

Yes, Gary, as of December we’re at 60%. And that’s pretty much across the board. 57, 58% is Auto; 62 is Health Sciences and that’s pretty much spread across all of the schools. It’s an average but it’s also pretty much where all the schools stand. So we still have ample capacity. I think we’ve said in the past that not until it gets to about 75% or so do we really need to continue to invest in capacity. So I think there are lots of opportunities there. We have a long way to go. What we hope that – we went from 53 to 60% this year and we hope to accomplish the same thing next year or better.

Operator

Your next question comes from Jeffrey Silber - BMO Capital Markets.

Jeffrey Silber - BMO Capital Markets

In your remarks you talked a little bit about the funding environment and the potential increase in Pell grants and the stimulus plan. If that does go through does that change any of your thoughts in terms of lending or in terms of revenue guidance, enrollment growth, etc.?

David F. Carney

No, it does not. I mean obviously to date I think as we said in the prepared remarks we really haven’t seen any issues as far as being able to finance our students. It wouldn’t affect enrollment growth at all because it hasn’t impacted it to date. There’s $500 right now on the table for additional Pell. That will probably cover 3, 3.5% tuition increases so I would expect it to be pretty much status quo. Obviously there might be a $200 benefit which will be positive but I don’t think it’s going to have a meaningful impact.

Jeffrey Silber - BMO Capital Markets

I just wanted to clarify something on your guidance. You’re looking for I guess you’d call it same school starts growth of about 25 to 28% in the current quarter. What would be the impact of both Baran and Briarwood on that number?

Shaun E. McAlmont

I would say Baran starts in the first quarter are probably in the –

David F. Carney

We’ll have to get back to you, Jeff.

Jeffrey Silber - BMO Capital Markets

Do you have what the Briarwood impact was on the fourth quarter in terms of starts?

Shaun E. McAlmont

Zero.

Jeffrey Silber - BMO Capital Markets

And again just some modeling related questions. What should we be looking for for capital spending and taxes in 2009?

Cesar Ribeiro

Capital expenditures will be I’d say between $25 to $30 million. Taxes you should probably model in 40 to 41%.

Jeffrey Silber - BMO Capital Markets

In terms of D&A, depreciation and amortization for the year?

Cesar Ribeiro

It continues to run about I’d say about 4%.

Jeffrey Silber - BMO Capital Markets

And that’s including the additional amortization from the acquisitions you mentioned?

Cesar Ribeiro

No. That’s on a same school basis.

Jeffrey Silber - BMO Capital Markets

And do you have again we’re just trying to model for the entire company what the incremental amortization would be for the year? With the acquisition?

Cesar Ribeiro

Not yet and only because we’re still in the process of having as you might appreciate, January 1 we have a new basis of accounting that was introduced. Everything needs to be valued. So we have made preliminary estimates on what those valuations are but they’re still subject to completion and there are valuation people in the field today trying to revalue everything in accordance with 141R. So we have an estimate but we prefer to hold off until we have the final valuations completed.

Jeffrey Silber - BMO Capital Markets

And roughly when will that happen?

Cesar Ribeiro

That should happen – we’ll have that by the second quarter results.

Jeffrey Silber - BMO Capital Markets

Just in terms of your balance sheet right now post this acquisition, what does it look like?

Cesar Ribeiro

Well, we have obviously zero debt. We had borrowed money to fund the acquisition of Baran. We used the proceeds from the offering to pay that off. So to date we continue very healthy with zero debt.

Jeffrey Silber - BMO Capital Markets

And the availability on the credit line?

Cesar Ribeiro

It’s $100 million.

Operator

Your next question comes from Trace Urdan - Signal Hill Group, LLC.

Trace Urdan - Signal Hill Group, LLC

Could you speak to the improvement at the Educational Services line? Is it solely due to the increased enrollment or were there other items in there that may have contributed to that sort of year-over-year improvement at the Educational Services line?

David F. Carney

No, it’s really due to increased enrollment. As you know we get a lot of leverage (a) our facility costs are fixed so as revenue goes up, we get a little leverage from facility costs; and the main benefit comes from the instructional costs. As we increase capacity, our student-teacher ratios increase and we obtain leverage from that line item.

Trace Urdan - Signal Hill Group, LLC

Can you comment, Cesar, on – I don’t even know if you have something like this, but how much of your capacity has been diverted from Auto into other areas on a year-over-year basis?

Cesar Ribeiro

None. I mean as you know we have 10 Auto schools and those Auto schools were basically not Auto. All of our schools are diversified so we had other programs in there. But we still classified those schools as Auto schools as part of our Auto capacity. So even if we introduced new programs, they’re still part of that Auto capacity. But the latest program we introduced to an Auto school was our Columbia Culinary School and that was at the beginning of 2008.

Operator

Your next question comes from David [Shoe] – Bank of America.

David Shoe – Bank of America

Just a question on in your prepared remarks you mentioned a recent pick up in Auto. Can you just elaborate a little bit on that?

Shaun E. McAlmont

I would say that based on a number of the changes in our messaging, we have seen increased lead flow and positive trends. We mentioned we had positive start growth in the fourth quarter of 2008. We would attribute a good part of that to overcoming some of the negativity out of Detroit. And I would say further that we’re seeing very positive trends in the first quarter of 2009 as well, largely due to the fact that there is the weakening economy but more importantly as it relates to Automotive we’re getting the message out that the jobs are still in demand.

David Shoe – Bank of America

I mean, you guys had mentioned no change in the job outlook. I mean, I guess going forward do you expect that to continue?

Shaun E. McAlmont

Are you speaking specifically about Automotive?

David Shoe – Bank of America

Yes, just outlook for Auto.

Shaun E. McAlmont

Let me just say a couple of things on Automotive. You know, as we prepare technicians we’re all looking at the same statistics about the age of vehicles on the road today, they continue to increase. And there’s a turnover in technicians out there as well. So we feel very confident about the outlook for Automotive technicians, although dealerships are going through some struggles, we’re finding that dealerships are also increasing their service hours and looking to gain greater revenues from their service parts of their business. And so that bodes well for our graduates moving forward.

We met recently with our Greater New York Auto Dealers Association’s executive director and he shared the same news, that dealerships really are turning to more aggressive service while independent shops are also seeing their business boom and also related tool companies. And so for our direct Auto placement or related Auto placements we feel very confident that they’ll continue to be strong.

David Shoe – Bank of America

The conversion of that Auto school to a Field Trade school, what’s the difference between that and your general I guess strategy of just kind of adding Skilled Trade to your Auto schools?

Shaun E. McAlmont

Nothing really. We had the opportunity to refurbish the smaller Automotive school that we had in the Grand Prairie market – Dallas market. It’s – I don’t know, I think it’s 0.8 of a mile away from the main facility, so it’s just a dedicated facility with welding, HVAC, ST and so on in one particular building under the same management. So not a big difference.

Operator

Your next question comes from [Gordon Lasy – Robert Beard].

Gordon Lasy – Robert Beard

I just wanted to dig a little deeper into the sales and marketing expense line. You know you mentioned the hiring of additional sales reps contributed to that. I wonder if you can quantify that increase and what are your thoughts for 2009? How comfortable are you with the number of reps you have? And then kind of an offshoot of that is, is your guidance assuming a [rand] in productivity of those sales reps and if so how much?

Shaun E. McAlmont

We probably increased our representative sales force by 5% year-over-year. And those representatives also saw increases in conversions. We feel there’s additional upside in their ability to convert from lead to enrollment and enrollment to start, and so we don’t see significantly increasing that representative force into the subsequent year. We’ve had better retention and so we again we continue to see their productivity increase and we see that there’s additional upside there.

But I’ll also mention that an added benefit from the acquisitions gives us a well trained representative force representing Automotive and non-Automotive programs, especially from the Baran acquisition. And those representatives are local and we also have a team of national representatives as well that will add to our high school force. So we feel very good about where we sit today and our sales force and feel that there’s upside without having an increase in number.

Gordon Lasy – Robert Beard

Are you going to make any cuts to the sales force of your acquisitions?

Shaun E. McAlmont

You know, we also get an opportunity to rationalize the sales force. We don’t see cuts but we do see a revision of territory. And we feel that that’s probably the first opportunity that we have to continue to address the market that we currently serve and also to move in to new markets. And so you’ll probably see the same total and shifting focus geographically.

Gordon Lasy – Robert Beard

Just a little bit of a longer term question. Right now you talked about 21% of your students are Associates, 1% are Bachelors. You know as we think about the ramp up of online and some of these upstream programs, as we think about two to three years out can you give us any kind of thoughts on where you think Associates and Bachelors can trend over that timeframe?

Shaun E. McAlmont

I think we’ll provide more clarity on where we see our degree mix. I would say two to three years out we feel very confident we can move from the 20, 22% range to approximately 35%. And our opportunity really does relate to how quickly we can add regionally accredited degrees. We feel that there’s a competitive advantage to having a valid or validated Associate and Bachelors option out there and so our ability to work with [audio impairment] especially will give us that opportunity on a quicker basis.

I’ll remind you that our first regionally accredited programs are expected to be offered on ground in Connecticut and also online 12 to 15 months. And so that will give you a little bit of our timeframe.

Operator

I would now like to turn the call over to management for closing remarks.

David F. Carney

Thank you. Thanks everyone for joining the call today and we look forward to updating you on our progress on our next call in early May. Thanks very much and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Lincoln Educational Services Corporation Q4 2008 Earnings Call Transcript
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