Covista Inc. quarterly report, Q1 FY2016

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DeVry Education Group Inc. — Form 10-Q Summary

Entity note: The supplied filing identifies the registrant as DeVry Education Group Inc., not Covista Inc.

Business context and reporting period

This unaudited quarterly report covers the three months ended September 30, 2015, the first quarter of fiscal 2016. DeVry provides postsecondary education through Medical and Healthcare, International and Professional Education, and Business, Technology and Management (DeVry University) segments. The company cautions that quarterly results are seasonal and are not necessarily indicative of full-year results.

Financial performance and liquidity

  • Revenue: $441.4 million, down 4.5% from $462.0 million. Tuition revenue fell to $396.1 million from $421.9 million; other educational revenue rose to $45.4 million from $40.2 million.
  • Profit and margins: Operating income was $8.2 million versus $24.6 million; operating margin was 1.9% versus 5.3%. Net income attributable to DeVry was $5.5 million versus $20.4 million. Diluted EPS was $0.08 versus $0.31. The effective tax rate was 10.9%, compared with 17.1%.
  • Restructuring-adjusted results: Excluding restructuring charges, net income was $24.5 million and diluted EPS was $0.38, versus $30.9 million and $0.47 a year earlier. These are non-GAAP measures presented by management.
  • Cash flow: Operating cash flow was $116.6 million, down from $141.1 million. Capital expenditures were $22.8 million; cash and cash equivalents increased to $436.5 million from $353.0 million at June 30, 2015.
  • Liquidity and debt: Current assets were $718.1 million and current liabilities were $439.4 million. There were no borrowings under the $400 million revolving credit facility, which expires in March 2020; $0.1 million of letters of credit was outstanding. The company reported compliance with facility covenants. Deferred acquisition purchase obligations remain, and the filing does not provide a single total for them in the supplied text.
  • Other balance-sheet items: Total assets were $2.137 billion and total liabilities were $589.7 million. Accumulated other comprehensive loss was $122.2 million, largely reflecting foreign-currency translation losses.

Material changes versus the prior-year quarter

  • DeVry University revenue declined 21.7%, with undergraduate and graduate enrollment continuing to fall. The segment reported a $25.2 million operating loss, compared with a $12.5 million loss.
  • Medical and Healthcare revenue increased 8.7% to $224.0 million, led by Chamberlain enrollment growth; segment operating income declined 9.0% to $34.3 million.
  • International and Professional Education revenue increased 10.3% to $58.7 million, including contributions from recent Brazilian acquisitions. Segment operating income fell 57.0% to $2.0 million. Brazilian currency weakness reduced reported DeVry Brasil revenue by approximately $19.6 million and segment operating income by $0.9 million.
  • Operating expenses included $24.1 million of restructuring charges, up from $13.3 million. Student services and administrative expense decreased 7.7%, while cost of educational services decreased 0.5%; the latter rose as a share of revenue to 55.5% from 53.3%.
  • Accounts receivable increased to $186.0 million from $170.3 million a year earlier, primarily due to delayed Brazilian government FIES reimbursements. FIES receivables in Brazil rose to approximately R$97 million (US$24 million) from R$47 million (US$12 million).

Outlook, commentary, and risks

  • Management expected second-quarter fiscal 2016 revenue to decline approximately 6% year over year, driven by DeVry University enrollment trends and the expected Brazilian real impact. It expected second-quarter operating costs to decline approximately 6%.
  • Management expected more than $125 million of fiscal 2016 expense reductions from restructuring and other cost-saving initiatives, primarily at DeVry University. Additional fiscal 2016 restructuring charges of $10 million to $20 million were expected, mostly in that segment. Management also expected fiscal 2016 capital spending to be similar to fiscal 2015.
  • DeVry University planned further campus closures: 22 locations had closed since fiscal 2014 began, and 16 additional closures were expected by the end of fiscal 2016. The company cited heightened competition, price pressure, lower enrollment demand, and student reluctance to take on debt.
  • Brazil faces economic weakness and changes to FIES that restrict eligibility and delay government payments. Approximately 40% of DeVry Brasil degree-seeking students had FIES financing, exposing the company to enrollment and collection risks. The Brazilian real had declined approximately 38% against the U.S. dollar over the prior 12 months; the quarter’s currency movement produced a $46.4 million charge to accumulated other comprehensive loss.
  • Goodwill and intangible assets totaled $837.3 million, approximately 39% of total assets. Management reported no impairment trigger in the quarter, but warned that weaker enrollment or performance at Carrington or DeVry University could lead to impairment; identified potential write-offs were up to $168.1 million at Carrington and $23.8 million at DeVry University.
  • Regulatory and legal matters include ongoing FTC, New York Attorney General, Illinois, and Massachusetts inquiries. A False Claims Act action concerning DeVry University’s Health Information Technology program was dismissed without prejudice on October 2, 2015. The filing states that outcomes of pending matters cannot be predicted and could adversely affect operations or finances.
  • Other contingencies include continuing federal financial-aid reviews and a Department of Education request concerning DeVry University graduate employment outcomes and earnings. The company depends substantially on government financial aid; fiscal 2014 Title IV funding represented 60% of total company revenue.

Most important facts for investors to verify

  • Confirm the intended issuer: the supplied filing is for DeVry Education Group Inc., not Covista Inc.
  • Track DeVry University enrollment, revenue, cost reductions, and whether management’s second-quarter and fiscal-year expectations were achieved.
  • Monitor Brazilian FIES receivables and payment timing, student eligibility changes, and foreign-exchange effects on reported results and equity.
  • Review developments in regulatory inquiries, financial-aid program reviews, and litigation, including any potential repayment, restrictions, or penalties.
  • Assess impairment sensitivity for goodwill and intangible assets, particularly at Carrington and DeVry University, and verify the assumptions underlying management’s valuations.
  • Compare operating cash flow with earnings and watch accounts receivable, restructuring cash payments, acquisition obligations, and the use of the share-repurchase authorization.