Covista Inc. annual report, Q2 FY2006

Business Context and Reporting Period

Company: DeVry Inc. (Note: Input metadata listed "Covista Inc.", but the filing text identifies the registrant as DeVry Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2006
Business Overview: DeVry operates three primary segments: DeVry University (undergraduate and graduate programs in technology, business, and healthcare), Medical and Healthcare (Ross University School of Medicine/Veterinary Medicine and Chamberlain College of Nursing), and Professional and Training (Becker Professional Review for CPA/CFA exams). The company serves students in the U.S., Canada, and the Caribbean.

Key Financial Metrics

Metric Fiscal 2006 Fiscal 2005 (Restated)
Total Revenues $843.3 million $781.3 million
Net Income $43.1 million $18.0 million
Earnings Per Share (Diluted) $0.61 $0.26
Operating Income $57.5 million (Pre-tax) $21.7 million (Pre-tax)
Cash from Operations $90.8 million $87.0 million
Total Assets $872.5 million $910.0 million
Total Debt (Funded) $125.0 million $225.0 million
Cash and Equivalents $130.6 million $161.8 million

Margins: Net income margin improved to 5.1% in 2006 from 2.3% in 2005. Operating income margin (Income Before Taxes/Revenue) was 6.8% in 2006 compared to 2.8% in 2005.

Material Changes vs. Prior Period

  • Revenue Growth: Total revenue increased 7.9% ($62.0 million) driven by enrollment growth and tuition increases across all segments.
    • DeVry University: Revenue up 4.9% to $677.2 million. New undergraduate enrollment increased 16.4% in Spring 2006, marking the fifth consecutive term of growth.
    • Professional & Training: Revenue up 21.6% to a record $54.0 million, driven by CPA and CFA exam demand.
    • Medical & Healthcare: Revenue up 22.7% to $112.1 million, aided by the full-year inclusion of Chamberlain College of Nursing and enrollment growth at Ross University.
  • Profitability: Operating profits more than doubled. The DeVry University segment turned a $0.6 million operating loss in 2005 into a $20.1 million operating income in 2006.
  • Debt Reduction: Total funded debt decreased by $100 million to $125 million. The company paid down $100 million in debt during fiscal 2006 and an additional $40 million in July 2006.
  • Asset Sales: Sold the West Hills, California facility in September 2006 for $36 million, expecting a pre-tax gain of approximately $19.8 million in Q1 2007.

Guidance, Outlook, and Risks

  • Management Commentary: Management cites improved marketing execution, better integration of recruiting functions, and a recovery in technology employment as key drivers for enrollment growth. The company plans to open 6-8 new DeVry University Centers in fiscal 2007.
  • Capital Allocation: Free cash flow was used to invest in operations and aggressively reduce debt. Capital expenditures for 2006 were $25.3 million, lower than the prior year, but are expected to increase in 2007 to support growth.
  • Key Risks:
    • Financial Aid Dependency: Approximately 70-75% of revenues at DeVry University and Ross University are derived from government-sponsored financial aid. Changes in regulations or funding levels pose a significant risk.
    • Regulatory Compliance: The company must maintain specific financial responsibility ratios (minimum score of 1.5) to participate in federal aid programs. DeVry exceeded this threshold in 2006.
    • Competition: Intense competition from public institutions, community colleges, and online programs.
    • Enrollment Trends: Reliance on technology and healthcare fields; shifts in student career interests could impact revenue.
  • Unusual Items: Fiscal 2005 results included $8.4 million in workforce reduction charges, which were not present in 2006. Fiscal 2005 also included a $1.5 million impairment loss on a Denver facility.

Investor Verification Checklist

  • Enrollment Quality: Verify the sustainability of the 16.4% new student growth rate in DeVry University and the 35.7% growth in online coursetakers.
  • Financial Aid Exposure: Monitor federal regulatory changes regarding the "90/10 Rule" and financial responsibility tests, given the high reliance on government aid.
  • Debt Covenant Compliance: Confirm continued compliance with debt covenants (fixed charge coverage, leverage ratios) following the significant debt paydown.
  • Legal Contingencies: Review the status of pending litigation, including the class-action suit regarding the Information Technology program and the $3.0 million construction lien claim at the Fremont campus.
  • West Hills Sale Proceeds: Track the realization of the expected $19.8 million gain from the West Hills facility sale in the first quarter of fiscal 2007.