Business context and reporting period
Filing identity: The supplied filing is DeVry Education Group Inc.’s Form 10-Q for the quarter ended March 31, 2016 (its fiscal third quarter and first nine months of fiscal 2016). This conflicts with the request metadata identifying Covista Inc. and 2015 Q3; investors should verify the issuer and period before relying on this summary.
DeVry provides postsecondary education through Medical and Healthcare, International and Professional Education, and Business, Technology and Management segments. The filing is unaudited; amounts below are U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $474.2 million, down 3.2% year over year | $1,371.8 million, down 4.5% |
| Operating income | $60.8 million, versus $49.5 million | $12.7 million, versus $123.1 million |
| Net income attributable to DeVry | $51.9 million, versus $47.1 million | $6.8 million, versus $110.0 million |
| Diluted EPS | $0.81, versus $0.72 | $0.11, versus $1.68 |
| Operating margin | 12.8%, versus 10.1% | 0.9%, versus 8.6% |
| Operating cash flow | $219.7 million for nine months, versus $209.4 million |
Excluding restructuring, impairment and asset-sale items, management’s non-GAAP diluted EPS was $0.71 for the quarter (versus $0.70) and $1.77 for nine months (versus $1.92). The nine-month GAAP comparison was heavily affected by a $99.5 million Carrington impairment charge in fiscal 2016; the prior-year period included $5.6 million of discontinued-operations income.
At March 31, 2016, cash and cash equivalents were $330.2 million, current assets $594.6 million, current liabilities $401.6 million, and total liabilities $556.4 million. The company had no revolver borrowings and reported compliance with its debt covenants. Its revolving credit facility provides $400 million of capacity, with up to $50 million available for letters of credit. Nine-month capital expenditures were $51.0 million; investing cash outflow was $200.0 million, including $170.6 million for business acquisitions. Cash declined $22.8 million from fiscal year-end.
Material changes and operating trends
- DeVry University revenue fell 23.3% in the quarter and 22.9% year to date, amid falling enrollment and increased discounting. Management said enrollment declines are expected to continue through fiscal 2017.
- Medical and Healthcare revenue rose 9.5% in the quarter and 9.3% year to date, led by Chamberlain and DeVry Medical International. Chamberlain enrollment grew 19.8% year over year for the March 2016 session.
- International and Professional Education revenue rose 17.4% in the quarter and 9.8% year to date, with growth from Brazil and acquisitions. Brazilian-real weakness reduced reported revenue by approximately $9 million for the quarter and $37 million year to date.
- Carrington revenue declined 6.7% in the quarter. The company recorded a $99.5 million non-cash impairment in the second quarter, comprising $93.0 million of goodwill and $6.5 million of intangible assets.
- DeVry acquired Brazil’s Grupo Ibmec for approximately $190.8 million, including about $10.3 million payable over six years. It also sold the Fremont campus and housing facilities for $24.8 million, recognizing a $3.8 million pre-tax gain.
- Cost actions reduced student services and administrative expense 10.4% in the quarter, but cost of educational services as a share of revenue increased to 53.3% from 51.7%. Nine-month restructuring expense was $39.9 million; the remaining restructuring liability was $29.2 million.
Outlook, risks and contingencies
Management expected fourth-quarter fiscal 2016 revenue to decline approximately 2%–3% year over year and operating costs to decline approximately 3%–4%. Full-year fiscal 2016 net income before special items was expected to fall approximately 4%–5% from fiscal 2015. Management projected at least $170 million of fiscal 2016 expense reductions from restructuring and other cost initiatives, primarily at DeVry University, and full-year capital spending of $75–$80 million.
- Regulatory and litigation exposure: The Department of Education issued a Notice of Intent to Limit DeVry University’s Title IV participation concerning historical employment-outcome representations. Potential consequences include a letter of credit equal to at least 10% of fiscal 2015 Title IV disbursements, cash monitoring or reimbursement procedures, and provisional certification. The company requested a hearing.
- The FTC filed a civil complaint alleging certain employment and earnings advertising claims were false, misleading or unsubstantiated; a related putative class action was also pending. The company said it intended to defend the matters. Outcomes and potential financial effects were not predictable.
- State inquiries, Department of Education program reviews, and proposed borrower-defense rules could lead to penalties, repayment obligations, restrictions on Title IV participation, or substantial letters of credit. Management noted that aggregate required security could constrain liquidity and borrowing capacity.
- Brazil funding and currency: FIES represented approximately 31% of DeVry Brasil revenue. Its receivable was about $49.4 million at March 31, 2016, including delayed 2015 payments scheduled in installments through June 2018. Funding-rule changes, slower government payments and economic weakness pose enrollment and liquidity risks. The company reported a $14.5 million translation loss in accumulated other comprehensive loss over the first nine months.
- Impairment sensitivity: Goodwill and intangible assets totaled approximately $936 million, about 44% of total assets. Further impairment could occur if Carrington’s performance falls materially below management’s assumptions; the filing cites potential write-offs of up to $66.5 million for Carrington and $23.8 million for DeVry University under specified circumstances.
Most important facts for investors to verify
- Confirm the filing belongs to DeVry Education Group and the period is the quarter ended March 31, 2016—not Covista Inc. or 2015 Q3.
- Track DeVry University and Carrington enrollment, revenue, discounting and progress against cost-reduction plans.
- Review developments in the Department of Education Notice of Intent to Limit, FTC litigation, class action and other regulatory reviews, including any required letter of credit or funding restrictions.
- Monitor Carrington impairment assumptions and the company’s annual impairment review, along with Brazil’s FIES collections and currency movements.
- Reconcile reported GAAP results with management’s non-GAAP outlook and special-item adjustments; confirm liquidity remains available after acquisitions, repurchases and any regulatory security requirements.