Education Management Corporation Reports Fiscal 2013 Second Quarter Results

PITTSBURGH, Jan. 30, 2013 /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 $654.9 million for the three months ended December 31, 2012.  The Company reported net income of $31.1 million, or $0.25 per diluted share.

"As a result of the efforts and dedication of our faculty and staff, I am pleased with the progress we have made to improve student retention which is reflected in our January class start," said Edward H. West, Education Management's President and Chief Executive Officer. "While the operating environment remains challenging, we continue to see several encouraging signs.  In addition to positive retention rates, new student demand has turned positive at several of our colleges and universities.  Furthermore, we are continuing to make investments in our students to help them achieve their goals as they progress toward graduation in this difficult economy."

Financial Highlights


  • Financial highlights for the second quarter of fiscal 2013 included the following:
    • Net revenues were $654.9 million, a decrease of 11.2% from $737.2 million recorded in the second quarter of fiscal 2012, primarily due to a 12.7% decline in average enrolled student body for the three months ended December 31, 2012 compared to the prior year quarter.
    • The Company recorded net income of $31.1 million, or $0.25 per diluted share, compared to $63.1 million, or $0.49 per diluted share, for the prior year quarter.
    • Earnings before interest, taxes and depreciation and amortization ("EBITDA") was $123.3 million compared to $169.3 million in the prior year quarter. 
  • Cash flows provided by operating activities remained relatively flat for the six months ended December 31, 2012 at $93.2 million, compared to $97.0 million in the six months ended December 31, 2011.  Lower operating performance was substantially offset by lower tax payments and lower working capital usage in the current year period compared to the prior year period.  Additionally, the conversion to a non-term academic structure for students attending fully-online programs at Argosy University and South University resulted in a greater change in restricted cash in the prior year period compared to the current year period.  
  • At December 31, 2012, cash and cash equivalents were $189.0 million, compared to $299.9 million at December 31, 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 letter of credit with the U.S. Department of Education.
  • On a cash basis, capital expenditures were $39.5 million, or 3.1% of net revenues, for the six months ended December 31, 2012 compared to $36.1 million, or 2.5% of net revenues, in the same period in the prior year.
  • During the quarter ended December 31, 2012, the Company completed five sale-leaseback transactions with unrelated third parties for net proceeds of $65.1 million.  The Company recorded a net loss of $3.5 million related to these transactions during the quarter ended December 31, 2012.  A deferred gain of approximately $17.8 million will be recognized over the initial terms of the new leases, which range from three to 15 years.   

New Student Enrollment 

New student enrollment by segment was as follows:


For the Three Months Ended December 31,


2012


2011


% Change

The Art Institutes

12,300


15,200


(20.2)

%

Argosy University

3,400


3,800


(10.3)

%

Brown Mackie Colleges

3,800


4,100


(5.3)

%

South University

4,500


7,600


(40.0)

%

Total EDMC

24,000


30,700


(21.9)

%

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 December 31, 2012 were approximately 7,300 as compared to 12,500 in three months ended December 31, 2011.  The reduction in new students enrolled in fully-online programs represented approximately 80% of the total EDMC year-over-year decline in new students for the three months ending December 31, 2012.

Average Enrolled Student Body

Average enrolled student body by segment was as follows:    


For the Three Months Ended December 31,


2012


2011


% Change

The Art Institutes

69,500


78,900


(12.1)

%

Argosy University

25,500


29,900


(14.7)

%

Brown Mackie Colleges

17,500


19,500


(10.0)

%

South University

19,000


22,300


(14.8)

%

Total EDMC

131,500


150,600


(12.7)

%

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 32,100 for the three months ended December 31, 2012 as compared to 41,000 in the three months ended December 31, 2011.

Starting Student Enrollment

Starting student enrollment by segment was as follows:    


January


January


%


2013


2012


Change

The Art Institutes

67,700


75,600


(10.5)

%

Argosy University

24,100


27,700


(13.0)

%

Brown Mackie Colleges

17,200


18,700


(8.4)

%

South University

17,800


20,600


(13.4)

%

Total EDMC

126,800


142,600


(11.1)

%

The starting 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.  Starting students enrolled in fully-online programs were approximately 29,100 as of January 2013 as compared to 35,800 as of January 2012.  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.

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, 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 third quarter and annual guidance for fiscal 2013 exclude the impact of restructuring and other special charges. 

Reconciliation of Fiscal Year 2013 Third Quarter and Annual Guidance of Net Income to EBITDA


(Dollars in millions, except earnings per share) (Unaudited)






Fiscal 2013 Guidance 3rd Quarter:

 


For the Three Months Ending

March 31, 2013




Low


High

Earning per diluted share


$    0.20



$    0.22







Net income


$       25



$       27


Net interest expense


31



31


Income tax expense


17



19


Depreciation and amortization


40



40


EBITDA


$     113



$     117














Fiscal Year 2013 Guidance Annual:

 


For the Twelve Months Ending

June 30, 2013




Low


High

Earnings per diluted share


$     0.32



$     0.37


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


$     0.38



$     0.44







Net income


$        40



$        47


Expenses related to restructuring and other charges, net of tax


8



8


Net income excluding expenses related to restructuring and other charges


$        48



$        55







  Net interest expense


$      124



$      124


Income tax expense


34



37


Depreciation and amortization


159



159


EBITDA excluding expenses related to restructuring and other charges


$      365



$      375


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 second quarter results on Thursday, January 31, 2013 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

December 31,


For the Six Months Ended

December 31,


2012


2011


% Change


2012


2011


% Change

Net revenues

$

654,895


$

737,188


(11.2)

%


$

1,264,459


$

1,419,283


(10.9)

%

Costs and expenses:












Educational services (1) (2)

360,377


375,770


(4.1)

%


741,673


750,217


(1.1)

%

General and administrative (1) (3)

171,190


192,085


(10.9)

%


345,682


389,879


(11.3)

%

Depreciation and amortization (4)

39,255


39,196


0.2

%


83,400


78,084


6.8

%

Total costs and expenses

570,822


607,051


(6.0)

%


1,170,755


1,218,180


(3.9)

%

Income before interest and income

taxes

84,073


130,137


(35.4)

%


93,704


201,103


(53.4)

%

Interest expense, net

31,009


26,846


15.5

%


62,461


53,697


16.3

%

Income before income taxes

53,064


103,291


(48.6)

%


31,243


147,406


(78.8)

%

Income tax expense

21,920


40,164


(45.4)

%


13,192


57,325


(77.0)

%

Net income

$

31,144


$

63,127


(50.7)

%


$

18,051


$

90,081


(80.0)

%

Earnings per share:












Basic

$

0.25


$

0.50




$

0.14


$

0.70



Diluted

$

0.25


$

0.49




$

0.14


$

0.70



Weighted average number of

shares outstanding:












Basic

124,560


127,193




124,519


127,833



Diluted

124,762


128,764




124,620


129,240







(1)

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



(2)

Includes bad debt expense of $40.8 million and $41.3 million in the three months ended December 31, 2012 and 2011, respectively and $89.8 million and $76.5 million in the six months ended December 31, 2012 and 2011, respectively. 




Also, the six months ended December 31, 2012 period include $6.6 million of employee severance costs and a lease abandonment charge of $1.6 million.  The six months ended December 31, 2011 include a lease termination fee of $1.5 million.



(3)

Includes employee severance costs of $0.9 million and $5.2 million in the six months ended December 31, 2012 and 2011, respectively.



(4)

The six months ended December 31, 2012 period include 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)



December 31, 2012


June 30, 2012


December 31, 2011

Assets

(Unaudited)




(Unaudited)

Current assets:






Cash and cash equivalents

$

189,042


$

191,008


$

299,934

Restricted cash

273,425


267,880


79,323

Total cash, cash equivalents and restricted cash

462,467


458,888


379,257

Student receivables net of allowances of $180,337,

$230,587 and $211,467

151,364


198,411


156,495

Notes, advances and other receivables

16,532


22,174


14,652

Inventories

8,968


8,382


9,430

Deferred income taxes

102,668


102,668


76,804

Prepaid income taxes


6,796


Other current assets

39,139


40,399


46,941

Total current assets

781,138


837,718


683,579

Property and equipment, net

562,184


651,797


663,660

Other long-term assets

57,585


56,001


45,717

Intangible assets, net

329,361


330,029


460,144

Goodwill

963,550


963,550


2,581,999

Total assets

$

2,693,818


$

2,839,095


$

4,435,099

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

38,161


54,834


28,620

Accrued liabilities

136,613


137,348


130,512

Accrued income taxes

10,525



18,976

Unearned tuition

55,038


116,277


61,170

Advance payments

116,569


102,170


140,323

Total current liabilities

368,982


534,005


391,677

Long-term debt, less current portion

1,447,699


1,453,468


1,460,720

Deferred income taxes

99,845


111,767


215,157

Deferred rent

212,085


197,758


195,723

Other long-term liabilities

41,599


45,533


45,391

Shareholders' equity:






Common stock, at par

1,435


1,434


1,434

Additional paid-in capital

1,785,413


1,777,732


1,770,645

Treasury stock, at cost

(328,605)


(328,605)


(296,409)

(Accumulated deficit) Retained earnings

(917,909)


(935,960)


669,862)

Accumulated other comprehensive loss

(16,726)


(18,037)


(19,101)

Total shareholders' equity

523,608


496,564


2,126,431

Total liabilities and shareholders' equity

$

2,693,818


$

2,839,095


$

4,435,099

 

 


EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)



For the Six Months Ended

 December 31,

Cash flows from operating activities:

2012


2011

Net income


$      18,051




$      90,081


Adjustments to reconcile net income to net cash

flows from operating activities:




Depreciation and amortization of property and equipment

80,241



74,246


Amortization of intangible assets

3,159



3,838


Bad debt expense

89,768



76,458


Amortization of debt issuance costs

2,561



2,632


Share-based compensation

7,679



6,530


Non cash adjustments related to deferred rent

(7,824)



(5,398)


Changes in assets and liabilities:




Restricted cash

(5,545)



(31,810)


Receivables

(40,727)



(76,106)


Reimbursements for tenant improvements

3,891



10,705


Inventory

(583)



155


Other assets

2,939



(6,666)


Accounts payable

(15,853)



(26,522)


Accrued liabilities

2,343



29,437


Unearned tuition

(61,239)



(78,980)


Advance payments

14,316



28,404


Total adjustments

75,126



6,923


Net cash flows provided by operating activities

93,177



97,004


Cash flows from investing activities:




Expenditures for long-lived assets

(39,458)



(36,125)


Sale of fixed assets

65,065




Reimbursements for tenant improvements

(3,891)



(10,705)


Net cash flows provided by (used in) investing activities

21,716



(46,830)


Cash flows from financing activities:




Payments under revolving credit facility

(111,300)



(79,000)


Issuance of common stock

3



2,270


Common stock repurchased for treasury



(70,378)


Principal payments on long-term debt

(5,769)



(6,054)


Net cash flows used in financing activities

(117,066)



(153,162)


Effect of exchange rate changes on cash and cash equivalents

207



(302)


Net change in cash and cash equivalents

(1,966)



(103,290)


Cash and cash equivalents, beginning of period

191,008



403,224


Cash and cash equivalents, end of period


$    189,042




$    299,934


Cash paid during the period for:




Interest (including swap settlement)


$      60,980




$      60,433


Income taxes, net of refunds

7,860



27,525



As of December 31,

Noncash investing activities:

2012


2011

Capital expenditures in current liabilities


$      13,538




$      12,249


 

 

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 net interest expense, 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 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

 December 31,


For the Six Months Ended

December 31,


2012


2011


% Change


2012


2011


% Change

Net revenues:












The Art Institutes

$

411,533


$

469,603


(12.4)

%


$

791,672


$

898,503


(11.9)

%

Argosy University

92,312


106,070


(13.0)

%


174,232


204,213


(14.7)

%

Brown Mackie Colleges

78,274


81,745


(4.2)

%


152,246


162,668


(6.4)

%

South University

72,776


79,770


(8.8)

%


146,309


153,899


(4.9)

%

Total EDMC

654,895


737,188


(11.2)

%


1,264,459


1,419,283


(10.9)

%















EBITDA excluding certain expenses:













The Art Institutes

112,263


151,759


(26.0)

%


180,189


262,038


(31.2)

%

Argosy University

15,797


21,144


(25.3)

%


16,990


31,380


(45.9)

%

Brown Mackie Colleges

9,766


18,629


(47.6)

%


20,361


36,212


(43.8)

%

South University

8,946


3,136


185.3

%


15,259


3,300


362.4

%

Corporate and other

(23,444)


(25,335)


(7.5)

%


(46,550)


(47,076)


(1.1)

%

Total EDMC

123,328


169,333


(27.2)

%


186,249


285,854


(34.8)

%













Reconciliation to EBITDA:












Restructuring



N/M


9,145


6,667


37.2

%

EBITDA

123,328


169,333


(27.2)

%


177,104


279,187


(36.6)

%














Reconciliation to operating income:












Depreciation and amortization

39,255


39,196


0.2

%


83,400


78,084


6.8

%

Operating income

84,073


130,137


(35.4)

%


93,704


201,103


(53.4)

%













Reconciliation to net income:











Net interest expense

31,009


26,846


15.5

%


62,461


53,697


16.3

%

Income tax expense

21,920


40,164


(45.4)

%


13,192


57,325


(77.0)

%

Net income

$

31,144


$

63,127


(50.7)

%


$

18,051


$

90,081


(80.0)

%













Restructuring, net of tax

$


$


N/M


$

5,488


$

4,000


37.2

%

Software-related charge, net of tax



N/M


2,753



N/M

Net income, excluding certain expenses

$

31,144


$

63,127


(50.7)

%


$

26,292


$

94,081


(72.1)

%













Diluted earnings per share, excluding certain expenses

$

0.25


$

0.49




$

0.21


$

0.73



















Weighted average number of diluted shares outstanding

124,762


128,764




124,620


129,240



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 third 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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