Covista Inc. annual report, FY2014

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Filing Summary

Entity and period: The supplied filing is DeVry Education Group Inc.’s Form 10-K for the fiscal year ended June 30, 2014, filed August 27, 2014. This does not match the request metadata identifying Covista Inc. and “2013 Q4”; the filing itself reports annual FY2014 results, with unaudited quarterly data included.

Business context

DeVry Group provided postsecondary and professional education through three reporting segments: Medical and Healthcare; International and Professional Education; and Business, Technology and Management, which consisted of DeVry University. The filing describes a portfolio shift toward healthcare and international growth amid declining enrollment and revenue at DeVry University.

Financial results and liquidity

  • Revenue: $1.923 billion, down 2.1% from $1.964 billion in FY2013. Tuition revenue fell to $1.785 billion from $1.840 billion; other educational revenue rose to $138.7 million from $124.3 million.
  • Operating income and margin: $181.3 million, or 9.4% of revenue, versus $166.9 million, or 8.5%, in FY2013. The reported increase primarily reflects the absence of FY2013’s $57.0 million impairment charge. Excluding that charge, management said operating income declined 19.0% year over year.
  • Net income and EPS: Net income attributable to DeVry Group was $134.0 million versus $106.8 million; diluted EPS was $2.07 versus $1.65. Continuing-operations diluted EPS was $2.33 versus $1.91. FY2014 included a $17.0 million after-tax loss from discontinued operations, principally AAI.
  • Q4 snapshot: FY2014 fourth-quarter revenue was $485.1 million versus $480.0 million in Q4 FY2013. Operating income was $42.9 million versus an operating loss of $25.4 million, and net income attributable to DeVry was $37.5 million versus a net loss of $32.3 million. The prior-year quarter included impairment-related charges.
  • Segment revenue: Medical and Healthcare revenue rose 14.4% to $769.1 million; International and Professional Education rose 16.0% to $228.1 million; Business, Technology and Management fell 15.2% to $929.9 million.
  • Margins and costs: Cost of educational services increased 2.2% to $983.4 million and rose to 51.1% of revenue from 49.0%. Student services and administrative expense declined 3.8% to $727.9 million, improving to 37.8% of revenue from 38.5%.
  • Cash flow and capital spending: Cash from continuing operating activities was $266.1 million, compared with $267.2 million. Capital expenditures were $79.4 million, down from $111.8 million. Cash and cash equivalents were $358.2 million at year-end, including $232.3 million held by international operations that DeVry intended to reinvest abroad.
  • Liquidity and debt: Current assets were $577.1 million and current liabilities $316.8 million. Total liabilities were $457.9 million; shareholders’ equity was $1.533 billion. There were no borrowings under the $400 million revolving credit facility, which could be increased to $550 million with bank approval and matured in May 2016. DeVry reported compliance with its debt covenants.
  • Other metrics: The company declared dividends of $0.34 per share for FY2014. Net accounts receivable was $132.6 million, down from $139.8 million. The provision for uncollectible accounts rose to $52.4 million from $41.5 million.

Material changes and management commentary

  • DeVry University revenue declined 15.2%, with lower undergraduate and graduate enrollment and increased scholarships. Undergraduate total enrollment was down roughly 10%–16% across FY2014 sessions; graduate coursetakers were down roughly 14%–19% by session.
  • Growth elsewhere partly offset the decline: Chamberlain enrollment reached 18,929 in May 2014, up 35.7% year over year; Medical and Healthcare and DeVry Brasil also expanded. Carrington’s June 2014 total enrollment rose 3.4% year over year following earlier declines.
  • Management cited weak economic conditions, doubts about the value of a degree, reluctance to take on debt, and heightened competition as factors weighing on DeVry University enrollment.
  • FY2014 restructuring charges were $32.7 million pretax: $14.0 million for severance and $18.7 million for real estate consolidation. The year-end restructuring liability was $21.3 million. DeVry expected further restructuring and approximately $70 million of expense reductions in FY2015, primarily at DeVry University.
  • Management expected FY2015 first-quarter revenue to increase slightly year over year, with growth at all educational institutions except DeVry University. It expected FY2015 capital spending of $100 million to $110 million.
  • AAI’s assets were sold for $2.0 million in December 2013. FY2014 discontinued operations included a $13.5 million pretax impairment charge and operating losses.

Risks, contingencies, and unusual items

  • Regulatory and funding exposure: U.S. Title IV funding represented 66% of company tuition cash receipts in FY2013; FY2014 data were not yet available. Loss of accreditation, authorization, or federal student-aid eligibility could materially affect enrollment and revenue. The filing describes proposed gainful-employment rules and ongoing Higher Education Act reauthorization.
  • Investigations and litigation: Illinois and Massachusetts authorities were investigating matters involving compensation practices and student financial aid; the FTC had issued a civil investigative demand relating to education marketing; and the New York Attorney General requested information about DeVry University advertising. Outcomes and potential effects were not predictable. A shareholder case was resolved confidentially and its appeal dismissed; a separate qui tam case was dismissed without prejudice.
  • Brazil regulatory constraints: MEC restrictions on programs at Area 1 had limited admissions and program expansion; management expected remaining restrictions might be lifted in the first half of FY2015. DeVry Brasil also relied on FIES financing for about 41% of students and PROUNI scholarships for about 11% at June 30, 2014.
  • Impairment sensitivity: Goodwill of $519.9 million and intangible assets of $294.9 million together represented about 41% of total assets. No FY2014 impairment was recorded in the annual review, but Carrington’s estimated fair value exceeded carrying value by only 5%. DeVry University’s estimated excess was 24%, and management warned its margin had been declining; a future impairment was possible if results weakened.
  • Cash availability and tax: DeVry intended to indefinitely reinvest international cash and earnings. It estimated that distributing accumulated foreign earnings could create $200 million to $215 million of U.S. tax. International cash was therefore not available for domestic general corporate purposes under the stated plan.
  • Other commitments: Future minimum operating lease payments totaled $717.4 million. Deferred purchase-price obligations totaled $18.4 million. The filing also identifies currency, student-loan default, privacy, systems, and competition risks.

Important facts for investors to verify

  • Confirm the issuer and period: this document is DeVry Education Group’s FY2014 10-K, not a Covista Inc. 2013 Q4 filing.
  • Review subsequent enrollment trends at DeVry University and whether management’s FY2015 revenue and $70 million cost-reduction expectations were achieved.
  • Check FY2014 Title IV funding percentages and developments in the gainful-employment rules, reauthorization, and regulatory investigations.
  • Track Carrington’s performance and impairment headroom, along with DeVry University’s goodwill and intangible-asset valuation assumptions.
  • Assess domestic liquidity separately from the $232.3 million of international cash, and monitor cash flow, restructuring payments, leases, and planned capital spending.