Business context and reporting period
The supplied filing is DeVry Education Group Inc.’s unaudited Form 10-Q for the three months ended September 30, 2016 (fiscal 2017 first quarter), filed November 2, 2016. This does not match the request metadata naming Covista Inc.; verify the intended issuer and filing.
DeVry operates postsecondary education businesses across Medical and Healthcare, International and Professional Education, and Business, Technology and Management (DeVry University). Results are seasonal, and management cautions that the quarter is not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Quarter ended September 30, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $449.9 million | $441.4 million | +1.9% |
| Operating income | $33.1 million | $8.2 million | +301.4% |
| Net income attributable to DeVry | $25.2 million | $5.5 million | Increased |
| Diluted EPS | $0.39 | $0.08 | Increased |
| Operating margin | 7.4% | 1.9% | Improved |
| Net margin | 5.6% | 1.2% | Improved |
| Operating cash flow | $97.8 million | $116.6 million | Lower |
Revenue growth reflected acquisitions and growth at Chamberlain and DeVry Brasil, partly offset by a 24.2% decline at DeVry University. Operating income improved substantially, chiefly because restructuring expense fell by $19.0 million, from $24.1 million to $5.0 million. Excluding the decrease in restructuring expense and exchange-rate effects, management reported operating income growth of 13.2%. Adjusted net income excluding restructuring charges was $28.8 million, or $0.45 diluted EPS, versus $24.5 million, or $0.38, a non-GAAP comparison.
Cash and cash equivalents were $189.0 million at September 30, versus $308.2 million at June 30 and $436.5 million a year earlier. Current assets were $423.7 million and current liabilities $444.8 million. The balance sheet showed a $130.0 million long-term revolving-credit borrowing, at a 2.53% weighted-average rate; the company reported compliance with covenants. The $400 million facility expires in March 2020 and may be increased to $550 million subject to conditions. About $162.6 million of cash was held internationally and management said it was intended for reinvestment abroad, not general domestic use.
Operating cash flow was below the prior-year quarter despite higher net income, reflecting lower noncash adjustments and working-capital movements. Investing cash use was $342.4 million, including $331.1 million for the ACAMS acquisition; financing cash provided $124.8 million, including net revolving-credit borrowings. Capital expenditures were $11.3 million; management forecast fiscal 2017 capital spending of $70–75 million.
Material changes and operating trends
- Medical and Healthcare revenue rose 5.7% to $236.8 million; operating income rose 22.2% to $41.8 million. Chamberlain revenue increased 10.4%, with September enrollment up 11.5% year over year. Carrington revenue fell 7.9% to $37.0 million as enrollment declined.
- International and Professional Education revenue increased 58.5% to $93.0 million, including $29.5 million from ACAMS and fiscal 2016 acquisitions. Segment operating income rose to $4.1 million from $2.0 million. DeVry Brasil revenue benefited from acquired businesses and a stronger Brazilian real; underlying enrollment trends remained exposed to economic conditions and changes in government student financing.
- Business, Technology and Management revenue fell 24.2% to $120.9 million as DeVry University undergraduate enrollment continued to contract. The segment reported an $8.0 million operating loss, versus a $25.2 million loss a year earlier; excluding restructuring, its loss widened to $6.3 million from $1.6 million.
- On July 1, 2016, Becker acquired ACAMS for $331.1 million net of cash acquired, funded partly with $175 million of facility borrowings. Management expected the acquisition to be neutral to fiscal 2017 EPS and accretive in fiscal 2018 and beyond. Preliminary purchase accounting recorded $274.7 million of goodwill.
Guidance, risks and unusual items
- Management expected second-quarter fiscal 2017 revenue to be flat to up 1% year over year and operating costs to decline 1–2%. DeVry University enrollment-related revenue declines were expected to continue through the remainder of fiscal 2017.
- Management expected a further $10–15 million of restructuring charges in the remainder of fiscal 2017, mainly in DeVry University; the September 30 restructuring liability was $40.4 million. The company anticipated further campus consolidations and closures.
- The October 13, 2016 Department of Education settlement requires DeVry University to stop specified graduate-employment claims, adopt compliance measures, and post a letter of credit equal to the greater of 10% of annual Title IV disbursements or $68.4 million for five years. The university will be provisionally certified for five years; students’ Title IV access was not otherwise limited by the settlement. The credit facility was amended after quarter-end to raise its letter-of-credit sublimit from $50 million to $100 million.
- The filing describes ongoing government reviews and litigation, including an FTC lawsuit and putative securities and student class actions involving employment and earnings representations. Outcomes and potential financial effects were uncertain; the company warned that resolution could require significant resources and adversely affect operations.
- Regulatory and funding risks include dependence on U.S. Title IV aid, Brazilian FIES funding and student affordability. DeVry voluntarily committed to limit revenue from federal funding at six Title IV institutions to 85%, including VA and military tuition assistance, with a target date of July 2017.
- Goodwill and intangible assets totaled approximately $1.28 billion, about 55% of total assets. Management found no new impairment trigger at quarter-end, but identified potential impairment exposure if performance weakens at Carrington or DeVry University. Currency translation remained material: a $0.01 change in the Brazilian real was estimated to shift accumulated translation adjustments by about $15.8 million.
- The effective tax rate rose to 21.5% from 10.9%, primarily because a greater share of earnings came from higher-taxed U.S. operations. The quarter included $5.0 million of restructuring charges and $6.8 million of currency translation losses in other comprehensive income.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for DeVry Education Group Inc., not Covista Inc., and covers fiscal 2017 Q1 rather than calendar 2016 Q1.
- Track DeVry University enrollment, revenue, cost reductions and whether management’s turnaround expectations are achieved.
- Verify the timing, amount, and liquidity impact of the required $68.4 million-or-greater letter of credit, alongside borrowing capacity and covenant compliance.
- Monitor the Department of Education reviews, FTC and class-action proceedings, and any changes to Title IV eligibility, certification or funding.
- Assess ACAMS integration, actual contribution to earnings, and final acquisition purchase accounting; also monitor goodwill and intangible-asset impairment indicators.
- Check whether Brazilian FIES receivables are collected as scheduled and how currency movements and financing-policy changes affect revenue and cash flow.
- Compare subsequent results with the stated second-quarter revenue and cost outlook, fiscal-year capital spending range, and expected restructuring charges.