Adtalem Global Education Inc. (NYSE: ATGE) — FY2019 Form 10-K
Period: Fiscal year ended June 30, 2019. The filing is an annual report, not a standalone 2018 Q4 filing. The supplied filing identifies Adtalem Global Education Inc., not Covista Inc.; annual results below are for continuing operations unless stated otherwise.
Business context and reporting period
Adtalem provides education and workforce training through Medical and Healthcare (Chamberlain, AUC, Ross medical and veterinary schools), Financial Services (including ACAMS, Becker and newly acquired OnCourse Learning), and Business and Law (Adtalem Brazil). Carrington College and DeVry University were sold in December 2018 and are reported as discontinued operations.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,239.7 million | $1,231.2 million |
| Operating income from continuing operations | $186.0 million | $207.5 million |
| Net income attributable to Adtalem | $95.2 million | $33.8 million |
| Income from continuing operations attributable to Adtalem | $135.6 million | $113.9 million |
| Adjusted continuing-operations net income, excluding special items (non-GAAP) | $167.2 million | $172.9 million |
| Diluted EPS | $1.60 | $0.54 |
| Operating cash flow, continuing operations | $226.4 million | $221.3 million |
| Operating cash flow, total company | $204.9 million | $239.2 million |
| Capital expenditures | $64.8 million | $66.5 million |
| Cash and cash equivalents at year-end | $299.4 million | $430.7 million |
| Debt principal outstanding at year-end | $407.0 million | $300.0 million |
FY2019 operating margin was 15.0%, versus 16.9% in FY2018; cost of educational services was 50.3% of revenue, versus 52.4%. The reported effective tax rate on continuing operations was 20.1%, compared with 42.3%; excluding special items, rates were 19.0% and 19.1%, respectively. No cash dividends were paid in FY2019.
Material changes versus the prior comparable period
- Revenue rose 0.7% as reported and 3.7% on a constant-currency basis. Medical and Healthcare revenue increased 4.2% to $849.9 million; Financial Services increased 13.6% to $167.2 million, including acquisitions; Business and Law revenue fell 16.6% to $225.8 million, largely reflecting a $36.8 million adverse Brazilian-real translation effect. Business and Law revenue declined 3.1% on a constant-currency basis.
- Reported operating income declined 10.4%. FY2019 included $55.9 million of restructuring expense, partly offset by $26.2 million of settlement gains. Management said continuing-operations income excluding special items declined 3.3%, reflecting higher interest expense and lower Medical and Healthcare and Brazil operating income.
- Reported net income increased substantially, but the comparison is affected by discontinued operations and unusual tax and restructuring items. Net income from discontinued operations was a $40.4 million loss in FY2019 and an $80.1 million loss in FY2018.
- Adtalem acquired OnCourse Learning for $118.4 million, net of acquired cash, funded partly with $100 million of revolver borrowings. It also completed the sales of DeVry University and Carrington for nominal consideration, recording pre-tax disposal losses of $22.3 million and $11.3 million, respectively.
Outlook, management commentary, risks and unusual items
- Management forecast FY2020 capital expenditures of $45–$50 million and expected additional restructuring expense as it continues home-office cost reductions. The filing provides no specific FY2020 revenue or earnings guidance.
- Management cited continued growth opportunities in Chamberlain and Financial Services, while noting competitive pressure and weaker Brazilian economic conditions. Brazil enrollment gains were supported by online programs and discounting; the filing says this enrollment growth did not translate into higher revenue because online tuition is lower.
- RUSM relocated its basic-science campus from Dominica to Barbados in January 2019. The Dominica land, buildings and equipment were fully impaired; FY2019 restructuring charges were primarily related to this exit, alongside real-estate consolidations and workforce reductions.
- FY2019 included a $15.6 million hurricane-insurance settlement gain and a $10.6 million net gain on a shareholder lawsuit settlement. Restructuring cash payments were $22.7 million; the remaining $25.1 million liability was expected to be paid over periods of up to seven years.
- Regulatory and litigation exposure remains significant. The DOJ issued civil investigative demands concerning alleged recruitment practices and incentive compensation involving Chamberlain and former subsidiary DeVry University; the company said it was cooperating and could not predict the outcome. Multiple DeVry-related student and shareholder matters also remained pending, with outcomes and potential costs uncertain.
- Title IV funding is a key industry risk. For FY2018, federal assistance was 46% of revenue and Brazil’s FIES program was 6%; FY2019 funding-source data was not yet available in the filing. The company reported that its U.S. Title IV institutions remained below its voluntary 85% funding limit for FY2018.
- Brazilian-real weakness reduced reported revenue and operating income; Adtalem disclosed no foreign-exchange hedging instruments. A 100-basis-point increase in short-term interest rates would add about $4.1 million of annual interest expense on the reported debt balance.
- Goodwill and intangible assets totaled $1.29 billion, or 58% of total assets. Brazil reporting-unit fair value exceeded carrying value by 13% in the annual impairment test, making the valuation sensitive to assumptions. The auditor identified this impairment assessment as a critical audit matter.
Most important facts for investors to verify
- Reconcile GAAP net income and diluted EPS to continuing-operations performance and the company’s non-GAAP adjustments, particularly the effects of discontinued operations, restructuring, settlement gains and taxes.
- Review post-year-end enrollment, pricing, and margins in Brazil and the Medical and Healthcare segment, as well as whether Financial Services growth persists after the OnCourse Learning acquisition.
- Track cash generation, the $407.0 million debt balance, floating-rate exposure, credit-facility availability and the impact of share repurchases on liquidity.
- Monitor developments in DOJ and other legal or regulatory matters, including potential settlements, indemnities and any required letters of credit or restrictions on Title IV eligibility.
- Assess whether Brazil’s goodwill valuation assumptions remain supportable and whether the Dominica exit, restructuring program and planned FY2020 investment deliver expected operating benefits.
- Note that the auditor issued unqualified opinions on the financial statements and internal control over financial reporting; OnCourse Learning was excluded from the internal-control audit because it was acquired in May 2019.