Education Management Corporation Reports Fiscal 2013 First Quarter Results

PITTSBURGH, Oct. 31, 2012 /PRNewswire/ -- Education Management Corporation  (the "Company")  (NASDAQ: EDMC), one of the largest providers of post-secondary education in North America, today reported net revenues of $609.6 million for the three months ended September 30, 2012.  The Company reported a net loss of $13.1 million, or $0.11 per diluted share; excluding restructuring charges of $9.1 million and accelerated depreciation of $4.6 million related to the write-off of certain assets, the Company's net loss would have been $4.9 million, or $0.04 per diluted share, for the three months ended September 30, 2012.

"Our financial and operating results for the first quarter were largely consistent with our expectations, despite the challenges of the current operating environment.  Further, we are seeing several encouraging demand trends for our campus-based programs," said Edward H. West, Education Management's President and Chief Executive Officer.  "Our results this quarter are attributable to the dedication of our faculty and staff who remain committed to helping more students improve their lives through education and in assisting them to find jobs that close the skills gap of the American workforce."

Financial Highlights  

  • Financial highlights during the first quarter of fiscal 2013 included the following:
    • Net revenues were $609.6 million, a decrease of 10.6% from $682.1 million recorded in the first quarter of fiscal 2012, primarily due to an 11.5% decline in average enrolled student body for the three months ended September 30, 2012 compared to the prior year period.
    • The Company recorded a net loss of $13.1 million, or a $0.11 loss per diluted share, compared to net income of $27.0 million, or $0.21 per diluted share, for the prior year quarter.
    • After adjusting for restructuring charges of $9.1 million ($5.5 million, net of tax), which included $7.5 million for employee severance and $1.6 million for a lease abandonment charge, and $4.6 million in accelerated depreciation ($2.8 million, net of tax), the net loss would have been $4.9 million, or a $0.04 loss per diluted share.  In the same quarter in the prior year, the Company recorded net income of $31.0 million, or $0.24 per diluted share, after adjusting for restructuring charges of $6.7 million ($4.0 million, net of tax).
    • Earnings before interest, taxes and depreciation and amortization ("EBITDA") was $53.8 million compared to $109.9 million in the prior year quarter.  After adjusting for restructuring charges of $9.1 million and $6.7 million, respectively, EBITDA was $62.9 million in the first quarter of fiscal 2013 compared to $116.6 million in the prior year quarter.
  • Cash flow provided by operations for the three months ended September 30, 2012 was $156.6 million, compared to $221.3 million in the prior year period.  The decrease in operating cash flows was due primarily to reduced operating performance as compared to the prior year period.
  • At September 30, 2012, cash and cash equivalents were $212.0 million, compared to $465.5 million at September 30, 2011.  The decrease in cash and cash equivalents was due primarily to the transfer in March 2012 of $210.0 million to restricted cash in connection with the issuance of letters of credit under the Company's cash secured letter of credit facilities.  These facilities are being used to help satisfy the Company's previously disclosed $414.5 million letter of credit with the U.S. Department of Education.  There were no borrowings on the revolving credit facility at September 30, 2012.
  • On a cash basis, capital expenditures were $20.5 million, or 3.4% of net revenues, for the three months ended September 30, 2012 compared to $20.2 million, or 3.0% of net revenues, in the same period in the prior year.
  • Subsequent to the quarter ended September 30, 2012, the Company entered into sale leaseback transactions on three of its facilities.  The net cash proceeds from these transactions totaled approximately $36.9 million.

Student Enrollment  
Total student enrollment by segment as of October 2012 and 2011 was as follows:    

 


October


October


%


2012


2011


Change

The Art Institutes

71,000


80,400


(11.6)%

Argosy University

24,800


29,000


(14.6)%

Brown Mackie Colleges

17,800


19,900


(10.6)%

South University

18,400


21,900


(16.0)%

Total student enrollment

132,000


151,200


(12.7)%

 

The student enrollment data shown above includes the number of students enrolled in fully-online programs at The Art Institute of Pittsburgh, Argosy University and South University.  Total students enrolled in fully-online programs were approximately 30,300 as of October 2012 as compared to 39,100 as of October 2011.  Fully-online enrollment is measured based on the number of students meeting attendance requirements over a two-week period near the start of the fiscal quarter.

New Student Enrollment   
New student enrollment by segment for each quarter ended September 30 was as follows:

 


For the Three Months Ended September 30,


2012


2011


% Change

The Art Institutes

17,000


19,800


(14.6)%

Argosy University

5,900


7,200


(18.3)%

Brown Mackie Colleges

5,000


5,400


(6.0)%

South University

4,900


7,700


(36.2)%

Total new student enrollment

32,800


40,100


(18.2)%

 

The new student enrollment data shown above includes the number of new students who enrolled in fully-online programs at The Art Institute of Pittsburgh, Argosy University and South University.  Total new students who enrolled in fully-online programs for the three months ended September 30, 2012 were approximately 8,600 as compared to 13,200 in three months ended September 30, 2011.

Average Enrolled Student Body  
Average enrolled student body by segment for each quarter ended September 30 was as follows:    

 


For the Three Months Ended September 30,


2012


2011


%
Change

The Art Institutes

66,900


75,100


(11.1)%

Argosy University

24,600


28,800


(14.4)%

Brown Mackie Colleges

17,400


19,800


(11.9)%

South University

19,800


21,800


(9.1)%

Total average enrolled student body

128,700


145,500


(11.5)%

Average enrolled student body is the three month average of the unique students who met attendance requirements within a month of the quarter.  The data above includes the number of students enrolled in fully-online programs at The Art Institute of Pittsburgh, Argosy University and South University.  The average enrolled student body in fully-online programs was approximately 33,600 for the three months ended September 30, 2012 as compared to 42,100 in the three months ended September 30, 2011.

Our quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments, and our first fiscal quarter is typically the lowest revenue quarter of the fiscal year due to student vacations.  However, the seasonality of our business has decreased over the last several years, primarily due to the percentage of students enrolling in online programs, which generally experience less seasonal fluctuation than campus-based programs.


Fiscal 2013 Guidance   
The following discussion of the Company's fiscal 2013 guidance includes information that could constitute forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995.  As more fully described below under the heading "Cautionary Statement," these and other forward-looking statements are based on information currently available to management and involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to differ materially and unpredictably from any future results, performance or achievements expressed or implied by such forward-looking statements.  

For the fiscal year ending June 30, 2013, capital expenditures are projected to be between 3.0% and 3.5% of net revenues, compared to 3.4% of net revenues in the fiscal year ended June 30, 2012.  The following second quarter and annual guidance for fiscal 2013 exclude the impact of restructuring and other special charges.

Reconciliation of Fiscal Year 2013 Second Quarter and Annual Guidance of Net Income to EBITDA  
(Dollars in millions, except earnings per share) (Unaudited)

 

Fiscal 2013 Guidance 2nd Quarter:

 


For the Three Months Ending
December 31, 2012



Low



High

Earning per diluted share


$  0.18



$  0.19







Net income


$     22



$     24

Net interest expense


32



32

Income tax expense


15



16

Depreciation and amortization


38



38

EBITDA


$   107



$   110

 

Fiscal Year 2013 Guidance Annual:


For the Twelve Months Ending
June 30, 2013



Low


High

Earnings per diluted share


$   0.43


$  0.50

Earnings per diluted share excluding expenses related to restructuring and other charges


$   0.50


$  0.57






Net income


$      54


$     63

Expenses related to restructuring and other charges, net of tax


8


8

Net income excluding expenses related to restructuring and other charges


$      62


$    71






  Net interest expense


125


125

Income tax expense


42


48

Depreciation and amortization


156


156

EBITDA excluding expenses related to restructuring and other charges


$    385


$   400

The presentation of EBITDA, as well as the presentations excluding certain expenses, do not comply with U.S. generally accepted accounting principles ("GAAP").  For an explanation of EBITDA and EBITDA and net income excluding certain expenses, together with a reconciliation to net income, which is the most directly comparable GAAP financial measure, see the Non-GAAP Financial Measures disclosure in the financial tables section below.

Conference Call and Webcast   
Education Management Corporation will host a conference call to discuss its fiscal 2013 first quarter results on Thursday, November 1, 2012 at 9:00 a.m. (Eastern Time).  Those wishing to participate in this call should dial 412-317-6789 approximately 10 minutes prior to the start of the call.  A listen-only audio of the conference call will also be broadcast live over the Internet at www.edmc.edu.  A replay of the conference call will be available at www.edmc.edu for up to one year.

 

 

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

 


For the Three Months Ended
September 30,


2012


2011


% Change

Net revenues

 

$   609,564


$   682,095


(10.6)%


Costs and expenses:






Educational services (1) (2)

381,296


374,447


1.8%


General and administrative (1) (3)

174,492


197,757


(11.8)%


Depreciation and amortization (4)

44,145


38,888


13.5%


Total costs and expenses

599,933


611,092


(1.8)%


Income before interest and income taxes

9,631


71,003


(86.4)%


Interest expense, net

31,452


26,888


17.0%


(Loss) Income before income taxes

(21,821)


44,115


(149.5)%


Income tax (benefit) expense

(8,728)


17,161


(150.9)%


Net (loss) income

$   (13,093)


$     26,954


(148.6)%


(Loss) Earnings per share:






Basic

$       (0.11)


$        0.21



Diluted

$       (0.11)


$        0.21



Weighted average number of shares outstanding:






Basic

124,478


128,474



Diluted

124,478


129,715









(1) Certain reclassifications of fiscal 2012 data have been made to conform to the fiscal 2013 presentation.


(2) Includes bad debt expense of $48.9 million and $35.1 million, respectively, in the 2012 and 2011 periods presented above. Also, the 2012 period includes $6.6 million of employee severance costs and a lease abandonment charge of $1.6 million. The 2011 period includes a lease termination fee of $1.5 million.


(3) Includes employee severance costs of $0.9 million and $5.2 million in the three months ended September 30, 2012 and 2011, respectively.


(4) The 2012 period includes a $4.6 million charge related to software assets that no longer had a useful life.

 

 

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)








September 30, 2012


June 30,

2012


September 30, 2011


(Unaudited)




(Unaudited)

Assets






Current assets:






Cash and cash equivalents

 

$       211,956


 

$     191,008


 

$       465,492

Restricted cash

277,376


267,880


88,071

Total cash, cash equivalents and restricted cash

489,332


458,888


553,563

Student receivables net of allowances of $244,245, 
          $230,587 and $198,950

229,847


198,411


202,523

Notes, advances and other receivables

30,856


22,174


31,057

Inventories

10,041


8,382


12,858

Deferred income taxes

102,668


102,668


76,804

Prepaid income taxes

15,789


6,796


10,021

Other current assets

40,856


40,399


47,286

Total current assets

919,389


837,718


934,112

Property and equipment, net

626,337


651,797


676,950

Other long-term assets

57,551


56,001


43,733

Intangible assets, net

329,658


330,029


461,342

Goodwill

963,550


963,550


2,581,999

Total assets

$    2,896,485


$  2,839,095


$    4,698,136

Liabilities and shareholders' equity






Current liabilities:






Current portion of long-term debt

$         12,076


$       12,076


$        12,076

Revolving credit facility


111,300


Accounts payable

30,168


54,834


34,395

Accrued liabilities

154,342


137,348


159,574

Unearned tuition

168,601


116,277


170,399

Advance payments

238,957


102,170


320,779

Total current liabilities

604,144


534,005


697,223

Long-term debt, less current portion

1,450,583


1,453,468


1,463,749

Deferred income taxes

110,053


111,767


215,481

Deferred rent

198,449


197,758


196,323

Other long-term liabilities

46,429


45,533


47,702

Shareholders' equity:






Common stock, at par

1,434


1,434


1,432

Additional paid-in capital

1,781,345


1,777,732


1,764,848

Treasury stock

(328,605)


(328,605)


(274,234)

(Accumulated deficit) Retained earnings

(949,053)


(935,960)


606,735

Accumulated other comprehensive loss

(18,294)


(18,037)


(21,123)

Total shareholders' equity

486,827


496,564


2,077,658

Total liabilities and shareholders' equity

$     2,896,485


$  2,839,095


$   4,698,136

 

 

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)





For the Three Months Ended September 30,


2012


2011

Cash flows from operating activities:




Net (loss) income

$      (13,093)


$      26,954

Adjustments to reconcile net (loss) income to net cash

flows from operating activities:




Depreciation and amortization of property and equipment

42,616


36,978

Amortization of intangible assets

1,529


1,910

Bad debt expense

48,931


35,130

Amortization of debt issuance costs

1,280


1,316

Share-based compensation

3,613


2,926

Non cash adjustments related to deferred rent

(3,622)


(2,410)

Changes in assets and liabilities:




Restricted cash

(9,496)


(40,558)

Receivables

(89,033)


(95,813)

Reimbursements for tenant improvements

1,202


6,980

Inventory

(1,654)


(3,282)

Other assets

(3,410)


(217)

Accounts payable

(21,896)


(17,701)

Accrued liabilities

10,624


29,894

Unearned tuition

52,324


30,249

Advance payments

136,662


208,951

Total adjustments

169,670


194,353

Net cash flows provided by operating activities

156,577


221,307

Cash flows from investing activities:




Expenditures for long-lived assets

(20,541)


(20,198)

Reimbursements for tenant improvements

(1,202)


(6,980)

Net cash flows used in investing activities

(21,743)


(27,178)

Cash flows from financing activities:




Payments under revolving credit facility

(111,300)


(79,000)

Issuance of common stock


75

Common stock repurchased for treasury


(49,702)

Principal payments on long-term debt

(2,885)


(3,025)

Net cash flows used in financing activities

(114,185)


(131,652)

Effect of exchange rate changes on cash and cash equivalents

299


(209)

Net change in cash and cash equivalents

20,948


62,268

Cash and cash equivalents, beginning of period

191,008


403,224

Cash and cash equivalents, end of period

$     211,956


$    465,492

Cash paid during the period for:




Interest (including swap settlement)

$       22,044


$      26,904

Income taxes, net of refunds

1,059


14,945


As of September 30,

Noncash investing activities:

2012


2011

Capital expenditures in current liabilities

$         9,050


$        9,117

 


EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES  
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Unaudited)

The Company reports results in four segments - The Art Institutes, Argosy University, Brown Mackie Colleges and South University.  The Company evaluates segment performance based on EBITDA excluding certain expenses.  Adjustments to reconcile segment results to consolidated results are included under the caption "Corporate and Other," which primarily includes unallocated corporate activity.

EBITDA, a measure used by management to measure operating performance, is defined as net income before interest expense, net, provision for income taxes and depreciation and amortization. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Management believes EBITDA is helpful in highlighting trends because EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also present earnings per share, net income and EBITDA after adjusting for certain expenses, which also are non-GAAP financial measures. Management believes this presentation is also helpful in highlighting trends in our business because it excludes certain expenses management believes are not indicative of ongoing operations. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to similarly titled measures of other companies.  A reconciliation of EBITDA excluding certain expenses by segment to consolidated net (loss) income is detailed below:

 

 

Segment Information and Reconciliation of EBITDA to Net Income to

Net Income Excluding Certain Expenses

(In thousands except per share amounts) (Unaudited)




For the Three Months Ended September 30,


2012



2011



% Change

Net revenues:






The Art Institutes

$     380,139



$     428,900



(11.4)%

Argosy University

81,920



98,143



(16.5)%

Brown Mackie Colleges

73,972



80,923



(8.6)%

South University

73,533



74,129



(0.8)%

Total EDMC

609,564



682,094



(10.6)%







EBITDA excluding certain expenses:






The Art Institutes

67,926



110,318



(38.4)%

Argosy University

1,193



10,234



(88.3)%

Brown Mackie Colleges

10,595



17,583



(39.7)%

South University

6,313



164



                 N/M

Corporate and other

(23,106)



(21,741)



6.3%

Total EDMC

62,921



116,558



(46.0)%







Reconciliation to EBITDA:






Restructuring

9,145



6,667



37.2%

EBITDA

53,776



109,891



(51.1%)







Reconciliation to operating income:






Depreciation and amortization

44,145



38,888



13.5%

Operating income

9,631



71,003



(86.4%)







Reconciliation to net (loss) income:






Net interest expense

31,452



26,888



17.0%

Income tax (benefit) expense

(8,728)



17,161



(150.9)%

Net (loss) income

$      (13,093)



$      26,954



(148.6)%







Restructuring, net of tax

$         5,488



$        4,000



37.2%

Software-related charge, net of tax

2,753





                 N/M

Net (loss) income, excluding
certain expenses

$        (4,852)



$      30,954



(115.7)%







Diluted (loss) earnings per share, excluding
certain expenses

$          (0.04)



$          0.24




Weighted average number of diluted shares outstanding

124,478



129,715




 


About Education Management Corporation

Education Management Corporation (www.edmc.edu), with approximately 132,000 students as of October 2012, is among the largest providers of post-secondary education in North America, based on student enrollment and revenue, with a total of 110 locations in 32 U.S. states and Canada.  We offer academic programs to our students through campus-based and online instruction, or through a combination of both.  We are committed to offering quality academic programs and strive to improve the learning experience for our students.  Our educational institutions offer students the opportunity to earn undergraduate and graduate degrees and certain specialized non-degree diplomas in a broad range of disciplines, including media arts, health sciences, design, psychology and behavioral sciences, culinary, business, fashion, legal, education and information technology.

Cautionary Statement

This press release includes information that could constitute forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995.  These statements, which are based on information currently available to management, concern the Company's strategy, plans, intentions or expectations and typically contain words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "will," "should," "seeks," "approximately," or "plans" or similar words, although the absence of such words does not mean that any particular statement is not forward-looking.  All of the statements included in this press release that relate to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results, including the second quarter and annual guidance for fiscal 2013, and including statements regarding expected enrollment, revenue, expense levels, capital expenditures and earnings, are forward-looking statements, as are any statements concerning the Company's expected future operations and performance and other future developments.  These and other forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to differ materially and unpredictably from any future results, performance or achievements expressed or implied by such forward-looking statements.  The Company derives many of its forward-looking statements from its operating budgets and forecasts, which are based upon many detailed assumptions, and the Company cautions that it is very difficult to predict the impact of unknown factors, and impossible to anticipate all factors, that could affect its actual results.  Some of the factors that the Company believes could affect its results and that could cause actual results to differ materially from expectations include, but are not limited to: the timing and magnitude of student enrollment and changes in student mix, including the relative proportions of campus-based and online students enrolled in its programs; changes in average registered credits taken by students; the Company's ability to maintain eligibility to participate in Title IV programs; other changes in its students' ability to access federal and state financial aid, as well as obtain loans from third-party lenders; difficulties the Company may face in opening new schools, growing its academic programs and otherwise implementing its growth strategy; increased or unanticipated legal and regulatory costs; the results of program reviews and audits; changes in accreditation standards; the implementation of new operating procedures for the Company's fully online programs; the implementation of program initiatives in response to the U.S. Department of Education's new gainful employment regulations; adjustments to the Company's programmatic offerings to comply with the 90/10 rule; its high degree of leverage and ability to generate sufficient cash to service all of its debt obligations and other liquidity needs; market and credit risks associated with the post-secondary education industry, adverse media coverage of the industry and the overall condition of the industry; changes in the overall U.S. or global economies and access to credit and capital markets; the effects of war, terrorism, natural disasters or other catastrophic events and other risks affecting the Company, including but not limited to those described in its periodic reports filed with the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934.                

Education Management Corporation
COMPANY CONTACT: 
John Iannone 
Director of Investor Relations 
(412)995-7727

SOURCE Education Management Corporation



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