Education Management Corporation Reports Fiscal 2013 Third Quarter Results

PITTSBURGH, May 1, 2013 /PRNewswire/ -- Education Management Corporation (the "Company")  (NASDAQ:EDMC), one of the largest providers of post-secondary education in North America, today reported its financial results for the three months ended March 31, 2013.  Net revenues during the quarter were $638.9 million and, as a result of certain charges further described below, including non-cash asset impairment charges of $323.7 million, the Company reported a net loss of $284.0 million, or $2.28 per diluted share.  Excluding these charges, net income would have been $30.5 million or $0.24 per diluted share.

"We are pleased with this quarter's results as we made progress across multiple objectives," said Edward H. West, Education Management's President and Chief Executive Officer.  "In addition to the sequential improvement in new student enrollment trends during the quarter, we also experienced improvements in retention as a result of the commitment and efforts made by faculty and staff across our colleges and universities.  Our students are at the core of what we do, and we are passionate about helping them achieve their career goals through education that is aligned with real opportunities in the American workforce."

Mr. West added, "During the quarter, we made good progress on other fronts, including the debt exchange that reduces our outstanding debt and extends our maturity schedule.  We also strengthened our executive management team with the additions of Carol DiBattiste and Joan Walker to lead our legal and compliance and corporate communications functions, respectively, and Mick Beekhuizen as our new Chief Financial Officer.  It is a testament to our mission and position as an industry leader that we were able to attract these accomplished individuals to EDMC."

Due primarily to the Company's equity market capitalization being below book value at March 31, 2013, the Company performed impairment reviews of the carrying value of goodwill and indefinite-lived intangible assets at each of its four reporting units at March 31, 2013.  The reviews resulted in a non-cash goodwill impairment of $294.5 million and a non-cash indefinite-lived intangible asset impairment of $28.0 million at The Art Institutes reporting unit.  Goodwill and indefinite-lived intangible asset impairments were not indicated at the Company's other three reporting units, which are Argosy University, Brown Mackie Colleges and South University.   In addition, the Company recorded a $1.2 million non-cash impairment charge related to fixed assets at one of its schools. 

Financial Highlights

• Financial highlights for the third quarter of fiscal 2013 included the following:
  • Net revenues were $638.9 million, a decrease of 9.1% from $702.5 million recorded in the third quarter of fiscal 2012, primarily due to an 11.4% decline in average enrolled student body for the three months ended March 31, 2013 compared to the prior year quarter.
  • The Company recorded a net loss of $284.0 million, or $2.28 per diluted share, compared to a net loss of $417.1 million, or $3.31 per diluted share, for the prior year quarter.  The prior year quarter included a goodwill impairment charge of $495.4 million.
  • As noted in the table below, the Company incurred long-lived asset impairments, a loss on debt refinancing, and a reversal of an uncertain tax position liability in both the current quarter and the prior year quarter, as well as a restructuring charge in the prior year quarter.  After adjusting for these expenses, net income would have been $30.5 million, or $0.24 per diluted share, in the current quarter compared to net income of $41.6 million, or $0.33 per diluted share, in the prior year quarter.
  • Earnings before interest, taxes and depreciation and amortization ("EBITDA") was a loss of $206.9 million compared to a loss of $376.3 million in the prior year quarter.  After adjusting for  impairment charges, a debt refinancing charge and restructuring charges described below, EBITDA would have been $122.0 million in the current quarter compared to $134.5 million in the prior year quarter.

• On March 5, 2013, the Company completed an offer to exchange the 8.75% Senior Notes due June 1, 2014 ("Old Notes") for new Senior Cash Pay/PIK Notes due July 1, 2018 ("New Notes") and cash.  In connection with this exchange offer and a simultaneous private exchange on the same terms, the Company issued $203.0 million of New Notes and paid down $162.3 million of Old Notes with cash on hand.  The remaining $9.7 million of Old Notes not tendered were extinguished in April 2013 at par.  A loss on debt refinancing of $5.2 million was reported in the fiscal third quarter, which represents fees paid to third parties in connection with this exchange offer. 
• Despite lower operating performance in the current period, cash flows provided by operating activities for the nine months ended March 31, 2013 were $286.2 million compared to $152.7 million in the nine months ended March 31, 2012.  Current year operating cash flows were comparatively higher primarily due to a transfer of $210.0 million to restricted cash in the prior year quarter in connection with the issuance of letters of credit under the Company's cash secured letter of credit facilities, which reduced the prior year period's cash flow from operating activities. The cash secured letter of credit facilities are being used to help satisfy the Company's previously disclosed letter of credit requirement with the U.S. Department of Education.
• At March 31, 2013, cash and cash equivalents were $183.6 million, compared to $287.5 million at March 31, 2012. 
• On a cash basis, capital expenditures were $64.6 million, or 3.4% of net revenues, for the nine months ended March 31, 2013 compared to $64.7 million, or 3.0% of net revenues, in the same period in the prior year.

New Student Enrollment 

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 March 31, 2013 were approximately 7,700 as compared to 10,300 in three months ended March 31, 2012.

Average Enrolled Student Body

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 31,800 for the three months ended March 31, 2013 as compared to 39,300 in the three months ended March 31, 2012.

Starting Student Enrollment

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 29,500 as of April 2013 as compared to 34,200 as of April 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.

Fiscal 2013 Guidance
The following discussion of the Company's fiscal 2013 guidance includes information that could constitute forward-looking statements within 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 approximately 3.5% of net revenues, compared to 3.4% of net revenues in the fiscal year ended June 30, 2012.  The following fourth quarter and annual guidance for fiscal 2013 excludes the impact of asset impairments, restructuring and other special charges. 

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.

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 third quarter results on Thursday, May 2, 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
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 diluted earnings per share, weighted average number of diluted shares outstanding, 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 to consolidated net income, excluding certain expenses is detailed below:

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 fourth 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.    

SOURCE Education Management Corporation

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