DeVry Education Group Inc. — Form 10-Q summary
Entity and period: The filing is for DeVry Education Group Inc., not Covista Inc. It covers the three months ended September 30, 2014—the company’s first quarter of fiscal 2015. The financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2014 | Prior-year quarter |
|---|---|---|
| Revenue | $462.0 million | $450.9 million |
| Operating income | $24.6 million | $10.3 million |
| Operating margin | 5.3% | 2.3% |
| Net income (loss) attributable to DeVry | $20.4 million | $(7.1) million |
| Diluted EPS | $0.31 | $(0.11) |
| Cash from operating activities | $141.1 million | $142.5 million |
| Capital expenditures | $21.2 million | $22.2 million |
Revenue increased 2.5%. GAAP net income improved substantially, but the comparison is affected by a $15.3 million after-tax discontinued-operations loss in the prior-year quarter. Excluding restructuring charges and the prior-year gain on asset sale, management’s non-GAAP continuing-operations net income was $30.9 million, or $0.47 diluted EPS, versus $14.2 million, or $0.22, a year earlier. These measures are supplemental and are not GAAP results.
Cash and equivalents were $473.1 million at September 30, 2014, versus $358.2 million at June 30, 2014 and $308.5 million a year earlier. Current assets were $735.9 million and current liabilities $451.3 million. Total liabilities were $587.8 million; shareholders’ equity was $1.54 billion. The company had no borrowings under its revolving credit facility; $7.8 million of letters of credit were outstanding. The facility provides up to $400 million, with potential expansion to $550 million subject to bank approval. The filing does not state a single total for seller-financed acquisition obligations.
Operating cash flow was nearly flat year over year despite higher net income, reflecting working-capital movements. Deferred and advance tuition contributed significantly to cash generation. Approximately $274.2 million of cash was held by international operations and management said it was intended for reinvestment abroad, not general domestic use. Currency translation losses of $16.6 million reduced other comprehensive income in the quarter.
Material changes and business trends
- Medical and Healthcare revenue rose 17.1% to $206.0 million; segment operating income increased 53.2% to $37.6 million. Chamberlain revenue grew nearly 36%, with September enrollment up 33.3% to 20,920.
- International and Professional Education revenue increased 21.7% to $53.2 million. DeVry Brasil revenue grew 24.8%; new September enrollment rose 37.8%. Becker revenue benefited from the Becker One launch, which shifted about $4.5 million of revenue into this quarter from the expected second quarter.
- Business, Technology and Management, comprising DeVry University, saw revenue fall 12.3% to $203.6 million. September undergraduate enrollment declined 15.1% and graduate coursetakers declined 13.4%. Segment operating loss was $12.5 million, including restructuring charges; excluding special items, the segment reported $0.1 million operating income versus a $5.0 million loss.
- Cost of educational services rose 1.9% to $246.3 million, but fell to 53.3% of revenue from 53.6%. Student services and administrative expense declined 6.0% to $177.8 million, or 38.5% of revenue versus 42.0% in the prior-year comparison.
Outlook, risks and unusual items
- Management expected second-quarter fiscal 2015 revenue to decrease slightly year over year, principally because of continuing DeVry University enrollment-related declines and the Becker One timing shift. It expected operating costs also to decline slightly.
- Management expected at least $90 million of fiscal 2015 expense reductions from restructuring and other cost initiatives, primarily at DeVry University, and projected fiscal-year capital spending of $100–$110 million. Additional restructuring charges were anticipated.
- First-quarter restructuring charges were $13.3 million, including $12.2 million for workforce reductions and $1.1 million for real-estate consolidations. DeVry University reduced 114 positions; nine location consolidations were announced, pending regulatory approval. The remaining restructuring liability was $28.1 million, expected to be paid within 12 months.
- Management described DeVry University’s turnaround plan as focused on program relevance, cost alignment, student service, technology, recruitment and pricing. Tuition rates were frozen for fiscal 2015 under a fixed-tuition promise. Management said enrollment stabilization was expected over several years, but acknowledged continued declines and impairment risk.
- At September 30, goodwill was $514.2 million and intangible assets were $288.6 million, together about 38% of total assets. Management identified a 5% fair-value cushion over carrying value for Carrington at the latest annual review; DeVry University’s cushion was 24% but was declining. A future DeVry University impairment could reach $23.8 million, subject to assumptions and business performance.
- Key risks include dependence on government student aid, extensive education regulation, enrollment weakness and competition, student loan collection/refund exposure, foreign exchange movements, and uncertain outcomes of investigations. Pending matters included Illinois and Massachusetts inquiries into incentive compensation/student aid, an FTC information demand concerning education marketing, and a New York inquiry into DeVry University advertising. Their outcomes and potential effects were not predictable.
- New federal gainful-employment rules were to take effect July 1, 2015. The filing said the company could not yet reliably predict program-level effects; programs failing specified debt-to-earnings tests could lose Title IV eligibility. The Department of Education had ongoing program reviews at several institutions, with no material findings identified at the filing date.
- DeVry Brasil completed a roughly $16 million acquisition on October 1, 2014, after quarter-end. The company also resumed share repurchases in September; it repurchased 57,152 shares for $2.5 million, with $77.2 million remaining authorized.
Important facts for investors to verify
- Whether DeVry University enrollment and revenue declines stabilize, and whether its cost reductions can be sustained without harming student outcomes.
- Actual fiscal 2015 expense savings, restructuring costs and capital spending compared with management’s stated expectations.
- Enrollment growth and regulatory status at Chamberlain, Carrington, DeVry Brasil and the medical schools, including applicable Title IV and gainful-employment outcomes.
- Collections, refund provisions and institutional loan performance: reserves for refunds and uncollectible accounts were $64.2 million, up from $50.4 million a year earlier; nonperforming institutional loans were $17.2 million.
- Developments in the state, FTC and other regulatory inquiries, and any changes to financial-aid eligibility or compliance reviews.
- Goodwill and intangible-asset impairment assumptions, particularly the limited Carrington valuation cushion and the declining DeVry University cushion.
- Availability of cash for domestic purposes: international cash is intended for reinvestment abroad, and repatriation could incur U.S. taxes.