Filing identity and reporting period
The supplied filing is Adtalem Global Education Inc.’s Form 10-K for the fiscal year ended June 30, 2018, filed August 24, 2018. It is not identified as a Covista Inc. filing, and it covers fiscal 2018—not “2017 Q4.” Unless noted, continuing-operations results exclude DeVry University and Carrington, which were classified as discontinued operations and held for sale.
Business context
Adtalem provides higher education and professional training through Medical and Healthcare, Professional Education, and Technology and Business segments. Its principal continuing businesses include Chamberlain University, Caribbean medical and veterinary schools, ACAMS, Becker, and Adtalem Brazil.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue from continuing operations | $1,231.2 million | $1,207.9 million |
| Operating income from continuing operations | $207.5 million | $135.5 million |
| Income from continuing operations | $114.4 million | $121.0 million |
| Net income attributable to Adtalem | $33.8 million | $122.3 million |
| Diluted EPS, continuing operations / total | $1.83 / $0.54 | $1.87 / $1.91 |
| Cash provided by operating activities | $239.2 million total; $221.3 million continuing operations | $230.9 million total |
- Continuing revenue increased 1.9%. Segment revenue was Medical and Healthcare $815.7 million (+1.6%), Professional Education $147.2 million (+11.7%), and Technology and Business $270.9 million (-2.0% reported; +1.3% at constant currency).
- Operating margin from continuing operations was 16.9%, versus 11.2%. The comparison is affected by $52.2 million of regulatory settlement expense in FY2017; excluding regulatory settlements and restructuring, FY2018 operating income increased 5.9% year over year.
- FY2018 net income includes an $80.1 million after-tax loss from discontinued operations. Continuing income also reflected an effective tax rate of 42.3%, including a $103.9 million Tax Act charge and a $48.9 million tax benefit related to the Carrington investment loss. Adjusted continuing net income excluding special items was $172.9 million, or $2.78 diluted EPS; this is a non-GAAP measure.
- Capital expenditures were $66.5 million, up from $42.5 million. Operating cash flow less capital expenditures was not presented as a company-defined free-cash-flow measure.
- At June 30, 2018, cash and cash equivalents were $430.7 million, current assets $688.0 million, and current liabilities $365.8 million. The filing identifies $57.8 million of cash in Brazil as unavailable for general company purposes under its reinvestment policy.
- Debt principal was $300.0 million, compared with $125.0 million at June 30, 2017; the Term B Loan rate was 5.08%. The new facility also includes a $300 million revolver, with $231.6 million reported as undrawn after considering letters of credit. Adtalem was in compliance with debt covenants.
Material changes versus the prior year
- ACAMS growth and Chamberlain enrollment gains supported revenue; Becker revenue fell 6.4% as CPA review candidates declined. The Brazilian real reduced reported FY2018 revenue by $9.1 million.
- Hurricanes Irma and Maria disrupted AUC and RUSM operations. Management reported $4.6 million of lost revenue and $13.4 million of net hurricane-related expense after insurance offsets; it recorded $31.0 million of property impairment write-downs and expected most damage costs to be covered by insurance.
- The Tax Act drove the unusually high reported tax expense. The statutory transition-tax liability was reduced from $96.3 million to $14.4 million after tax-loss utilization, with payments expected to be deferred until FY2021 as credits are used.
- DeVry University revenue fell 22.9% to $359.6 million; Carrington revenue fell 7.8% to $124.7 million. Their FY2018 operating results included substantial impairments: $58.6 million at DeVry and $37.4 million at Carrington.
- Adtalem repurchased 3.54 million shares for $137.0 million in FY2018. It paid no dividend; the board had discontinued dividends in February 2017.
Outlook, commentary, risks and unusual items
- Adtalem agreed to sell DeVry University to Cogswell for nominal consideration, with a $7.5 million minimum working-capital commitment and potential earn-out payments of up to $20 million over ten years. It agreed to sell Carrington to SJVC for nominal consideration and committed an $11.5 million capital contribution, subject to adjustment. Both sales were subject to closing conditions and regulatory approvals; completion was not assured at filing.
- Management expected FY2019 capital spending of $70–$75 million, including approximately $25–$30 million for the planned RUSM relocation to Barbados. The relocation, expected for January 2019, was subject to final U.S. Department of Education approval. The Dominica property, with a $35.2 million net book value, was to be evaluated for possible write-down.
- Management cited longer-term low-single-digit new-enrollment growth expectations for the medical and veterinary schools, while noting heightened competition. The filing does not provide consolidated earnings or revenue guidance.
- Key risks include extensive U.S. and Brazilian education regulation; dependence on Title IV and Brazilian FIES funding; pending DeVry-related consumer, securities and derivative litigation; potential regulatory sanctions, letters of credit, or loss of aid eligibility; and the uncertain timing and completion of the divestitures.
- Other notable exposures include RUSVM’s “zone” status under then-current gainful-employment measures, FIES receivables and changes to Brazilian student-financing rules, foreign-exchange risk, tax-rule uncertainty, and significant goodwill and intangible assets subject to impairment estimates. Goodwill and intangible assets together were about 50% of total assets.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether and when the DeVry and Carrington sales closed, and the final cash, working-capital, indemnity, lease, and regulatory obligations retained by Adtalem.
- Actual FY2019 performance and enrollment trends by continuing segment, particularly Chamberlain, the medical schools, ACAMS/Becker, and Adtalem Brazil.
- Insurance recoveries and remaining costs for hurricane damage, plus the impairment outcome for RUSM’s Dominica assets after relocation.
- Developments in pending litigation and education regulations, including Title IV exposure, RUSVM gainful-employment status, and the continuing $68.4 million DeVry-related letter of credit.
- Cash availability, debt and revolver usage, covenant headroom, tax payments, and the effect of share repurchases on liquidity.