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Education Management Corp. Reports Operating Results (10-Q)

February 11, 2011 | About:
10qk

10qk

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Education Management Corp. (EDMC) filed Quarterly Report for the period ended 2010-12-31.

Education Management Corp. has a market cap of $2.63 billion; its shares were traded at around $20.05 with a P/E ratio of 11.8 and P/S ratio of 1. Hedge Fund Gurus that owns EDMC: Steven Cohen of SAC Capital Advisors. Mutual Fund and Other Gurus that owns EDMC: Ruane Cunniff of Ruane & Cunniff & Goldfarb Inc, Ron Baron of Baron Funds.

Highlight of Business Operations:

Bad debt expense was $37.1 million, or 4.8% of net revenues, in the current quarter compared to $27.4 million, or 4.2% of net revenues, in the prior year quarter, which represented an increase of 63 basis points. The increase in bad debt expense as a percentage of net revenues was primarily due to larger receivable balances as a result of our assistance with students cost of education through extended credit terms, higher delinquency rates and an increase in the proportion of our receivables from out-of-school students, which are reserved for at a higher rate than receivables from in-school students. The extension of our credit terms to students may result in higher bad debt expense as a percentage of net revenues in future periods. Additionally, loans purchased under the Education Finance Loan program were redesignated from held for investment to held for sale during the current quarter resulting in a $7.5 million fair value adjustment that accounted for an increase of 97 basis points in educational services expense from the prior year quarter. The fair value adjustment due to the reclassification of these loans as held for sale includes $1.5 million that would have been recorded in bad debt expense if the loans had not been reclassified.

Net interest expense was $28.6 million in the current quarter, a decrease of $1.8 million from the prior year quarter. The decrease in net interest expense is primarily related to a lower principal amount outstanding on the Senior Subordinated Notes as a result of the early retirement of $337.3 million of these notes in fiscal 2010, partially offset by a $1.5 million increase in interest expense due to a higher interest rate on the $758.7 million principal balance of the term loan held by lenders who consented to the amendment and extension of the senior secured credit facility in December 2010.

Bad debt expense was $73.6 million, or 5.1% of net revenues, in the current six month period compared to $50.6 million, or 4.2% of net revenues, in the prior period, which represented an increase of 87 basis points. The increase in bad debt expense as a percentage of net revenues was primarily due to larger receivable balances as a result of our assistance with students cost of education through extended credit terms, higher delinquency rates and an increase in the proportion of our receivables from out-of-school students, which are reserved for at a higher rate than receivables from in-school students. The extension of our credit terms to students may result in higher bad debt expense as a percentage of net revenues in future periods. Additionally, loans purchased under the Education Finance Loan program were redesignated from held for investment to held for sale during the current period resulting in a $7.5 million fair value adjustment that accounted for an increase of 52 basis points in educational services expense from the prior year period. The fair value adjustment due to the reclassification of these loans as held for sale includes $1.5 million of bad debt expense that would have been recorded if the loans had not been reclassified.

Net interest expense was $56.1 million in the current period, a decrease of $10.7 million from the prior year period. The decrease in net interest expense is primarily related to a lower principal amount outstanding on the Senior Subordinated Notes as a result of the early retirement of $337.3 million of these notes during fiscal 2010, partially offset by a $1.5 million increase in interest expense due to a higher interest rate on the $758.7 million principal balance of the term loan held by lenders who consented to the amendment and extension of the senior credit facility in December 2010.

Cash flow from operations for the six month period ended December 31, 2010 was $174.4 million, compared to $100.4 million in the prior year period, which included a non-recurring $29.6 million outflow to terminate a management agreement with Sponsors in connection with the initial public offering. The increase in operating cash flows as compared to the prior year period was primarily related to improved operating performance and a reduction of $9.7 million in the amount of interest paid on our debt compared to the prior year period as a result of $337.3 million of debt repurchases since September 30, 2009.

In October 2009, we consummated an initial public offering of 23.0 million shares of our common stock for net proceeds of approximately $387.3 million. The proceeds were primarily used to purchase a face value of $316.0 million of the Senior Subordinated Notes in a tender offer for $355.5 million and to pay a termination fee of $29.6 million under a management agreement entered into with the Sponsors in connection with the Transaction. In addition, we purchased Senior Subordinated Notes with a face value of approximately $21.3 million through a tender offer during the quarter ended March 31, 2010.

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