Business context and reporting period
The filing is Adtalem Global Education Inc.’s unaudited Form 10-Q for the three months ended September 30, 2017, its fiscal 2018 first quarter. The request metadata names Covista Inc.; that does not match the registrant identified in the filing and should be verified.
Adtalem operates postsecondary and professional education businesses across four reported segments: Medical and Healthcare, Professional Education, Technology and Business (Adtalem Brazil), and U.S. Traditional Postsecondary.
Financial results and position
| Metric | Quarter ended Sept. 30, 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $421.0 million | $449.9 million | Down 6.4% |
| Operating income | $14.4 million | $33.1 million | Down 56.4% |
| Operating margin | 3.4% | 7.4% | Down 4.0 percentage points |
| Net income attributable to Adtalem | $12.8 million | $25.2 million | Down about 49% |
| Diluted EPS | $0.20 | $0.39 | Down $0.19 |
| Operating cash flow | $90.3 million | $98.8 million | Down $8.4 million |
Cost of educational services was $248.1 million, or 58.9% of revenue, versus 55.7% a year earlier. Student services and administrative expense was $150.5 million, or 35.7% of revenue, versus 35.8%. Net income attributable to Adtalem was 3.0% of revenue, compared with 5.6%.
At September 30, cash and cash equivalents were $273.8 million; restricted cash was $7.4 million. Current assets were $541.6 million and current liabilities $450.5 million. Revolver borrowings were $135.0 million at a 3.24% weighted-average rate; $68.5 million of letters of credit were outstanding. The $400 million facility matures March 31, 2020, and the company reported covenant compliance. About $248.9 million of cash was held internationally and management intends to reinvest it abroad, so it is not available for general domestic purposes without repatriation.
Material changes and operating drivers
- U.S. Traditional Postsecondary revenue fell 19.0% to $127.9 million, with lower enrollment at DeVry University and Carrington. Segment operating loss widened to $20.2 million from $10.0 million.
- Medical and Healthcare revenue decreased 4.2% to $191.3 million, including an estimated $7.3 million first-quarter revenue impact from Hurricanes Irma and Maria. Segment operating income fell to $26.2 million from $43.9 million.
- Professional Education revenue grew 15.3% to $40.0 million, primarily from ACAMS; operating income rose to $10.5 million from $6.1 million.
- Technology and Business revenue grew 7.2% to $62.4 million, including $1.7 million from favorable currency translation; constant-currency growth was 4.3%. The segment returned to operating income of $1.9 million from a $2.0 million loss.
- Cost reductions partly offset weaker revenue: student services and administrative expense fell 6.6%, and cost of educational services fell 1.0% despite hurricane-related charges. Excluding hurricanes, restructuring and currency effects, management said consolidated operating income increased 13.1%.
- The quarter included $8.0 million of restructuring charges, mainly workforce reductions at DeVry and the home office. Adtalem repurchased 1.48 million shares for $50.4 million, averaging $34.08 per share.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2018 second-quarter revenue to decline 4%–5% year over year, with growth in several segments and approximately $5 million of hurricane-related timing revenue offset by continuing U.S. Traditional Postsecondary declines. It expected second-quarter operating costs to decline 1%–2% year over year.
- Management expected another $5–$10 million of restructuring charges during the remainder of fiscal 2018, primarily in U.S. Traditional Postsecondary, and full-year capital spending of $60–$65 million excluding hurricane spending.
- Hurricanes caused $13.6 million of recorded expense, including evacuation costs and asset impairment. AUC and RUSM recorded $10.9 million of impairment charges. Management reported $11.1 million of hurricane-related insurance receivables at quarter-end and expected most repair, replacement and certain operating costs to be reimbursed, subject to deductibles. AUC resumed instruction in the UK; RUSM began instruction in St. Kitts after quarter-end. Insurance recovery, enrollment retention and relocation costs remain important uncertainties.
- Adtalem disclosed ongoing litigation and regulatory matters related to DeVry’s graduate-outcome representations, including securities, student and derivative actions. The Department of Education settlement requires DeVry to remain provisionally certified for five years and post a letter of credit equal to the greater of 10% of annual Title IV disbursements or $68.4 million. Outcomes of pending matters cannot be predicted by the company.
- Other material risks include reliance on government student aid, regulatory and accreditation requirements, continuing enrollment pressure and competition, Brazil’s economic conditions and FIES funding changes, and potential impairment of goodwill and intangible assets. Those assets totaled about $1.28 billion, approximately 54% of total assets. Management reported no impairment triggering event at quarter-end.
- The effective tax rate was 11.5%, versus 21.5% a year earlier, reflecting foreign earnings mix, stock-compensation tax benefits and a one-time state tax benefit. The filing states international earnings are intended to be indefinitely reinvested.
Important facts for investors to verify
- Confirm the intended issuer: the provided metadata says Covista Inc., but the filing is for Adtalem Global Education Inc.
- Track DeVry and Carrington enrollment, revenue declines, campus closures, cost reductions and the pace of any stabilization.
- Verify hurricane insurance receipts, deductible exposure, relocation expenses, repair costs and student retention at AUC and RUSM.
- Monitor DeVry’s Title IV provisional certification, required letter of credit, pending legal matters, and other regulatory or financial-aid developments.
- Assess the availability and use of cash held internationally, revolver borrowings and letters of credit, share repurchases, and compliance with debt covenants.
- Compare subsequent results with management’s second-quarter revenue and cost expectations and the fiscal 2018 restructuring and capital-spending estimates.