Covista Inc. quarterly report, Q3 FY2012

Full document

Business context and reporting period

The supplied filing text is DeVry Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012, covering its fiscal third quarter and first nine months of fiscal 2012. This does not match the request metadata, which identifies Covista Inc. and 2011 Q3; verify the issuer and period before relying on this summary. DeVry operates education businesses in three segments: Business, Technology and Management; Medical and Healthcare; and International, K-12 and Professional Education. Unless otherwise stated, dollar amounts below are in millions.

Financial performance and position

  • Third-quarter revenue: $540.8, down 3.9% from $562.7. Tuition revenue was $505.7 versus $521.5.
  • Third-quarter operating income and margin: $95.5, down 30.4%; margin was 17.7% versus 24.4%. Net income attributable to DeVry was $67.1 versus $92.9, and diluted EPS was $1.00 versus $1.32.
  • First-nine-month revenue: $1,583.9, down 3.2% from $1,635.6. Operating income was $189.1 versus $384.6; net income attributable to DeVry was $133.5 versus $255.2; diluted EPS was $1.96 versus $3.60. The current period includes a $75.0 impairment charge.
  • First-nine-month adjusted results: Excluding the impairment charge and a $3.7 pretax asset-sale gain, the company reported non-GAAP net income of $187.0 and diluted EPS of $2.74, versus GAAP net income of $133.5 and EPS of $1.96. These are company-defined non-GAAP measures.
  • Segment trends, third quarter: Business, Technology and Management revenue fell 10.5% to $338.8 and operating income fell to $64.7 from $99.4. Medical and Healthcare revenue grew 12.6% to $160.5, while segment operating income declined 11.4% to $26.0. International, K-12 and Professional Education revenue was nearly flat at $41.5; operating income declined 29.7% to $7.2.
  • Cash flow and investment: Operating cash flow for nine months was $355.1 versus $485.2. Capital expenditures were $92.2 versus $91.3. Investing cash outflow was $337.9, including $250.2 for business acquisitions; financing cash outflow was $134.6, including $124.2 of share repurchases and $18.4 of dividends.
  • Liquidity and debt: At March 31, cash and cash equivalents were $329.4, marketable securities $2.7, and restricted cash $13.2. Current assets were $665.4 and current liabilities $554.4, implying working capital of approximately $110.9. DeVry had no borrowings outstanding; its revolving facility had $400 million of capacity, $9.3 million of letters of credit outstanding, and could be increased to $550 million. The company reported compliance with covenants.
  • Balance sheet: Total assets were $2,112.2, including goodwill of $567.3 and intangible assets of $292.1. Total liabilities were $709.5. Cash declined from $447.1 at June 30, 2011; the filing attributes cash use in part to acquisitions and repurchases.

Changes, outlook, risks and unusual items

  • Management cited weaker enrollment at DeVry University and Carrington amid economic weakness, persistent unemployment and competition. DeVry University undergraduate new enrollment declined 19.7% for spring 2012; Carrington total enrollment declined 28.4% for March 2012. Growth at Chamberlain, Ross and DeVry Brasil, plus the AUC acquisition, partly offset the declines.
  • Cost of educational services and student services and administrative expense rose faster than revenue. Their shares of quarterly revenue increased to 45.2% and 37.2%, respectively, from 41.4% and 34.2%. Management cited lower operating leverage, acquisitions, additional locations and investment in recruiting, advertising and student services.
  • In the second quarter, Carrington’s weaker enrollment and revised forecasts led to a non-cash $75.0 impairment: $41.2 on its Title IV eligibility/accreditation intangible asset and $33.8 on goodwill. The filing reports no further impairment indicators at Carrington in the third quarter. Advanced Academics also had declining revenue and operating losses; management warned that further weakness could result in future goodwill impairment.
  • DeVry acquired AUC in August 2011 and Faculdade Boa Viagem (FBV) in February 2012. FBV required approximately $24.2 in cash plus $21.9 of installment payments over four years. A subsequent April 2, 2012 acquisition of Falcon Physician Reviews was described as immaterial to financial position.
  • Outlook: Management expected fiscal 2013 revenue to be flat to slightly down versus fiscal 2012, driven primarily by enrollment declines at DeVry University and Carrington, partly offset by growth elsewhere. It anticipated recovery and growth in fiscal 2014–2016, assuming modest DeVry University enrollment growth, Carrington recovery and continued growth at other institutions. Expected fiscal 2012 capital spending was $145–$150.
  • Key risks include reliance on federal student aid and regulatory compliance, enrollment and retention trends, competition, wage and benefit costs, foreign currency exposure, and goodwill/intangible valuation assumptions. Title IV funding represented 73% of company cash receipts in fiscal 2011; individual institution 90/10 ratios included 89% at Ross Veterinary Medicine and 85% at Carrington College California.
  • A shareholder securities case was dismissed without prejudice in March 2012, with leave to amend; related derivative cases were stayed. DeVry said it considered the claims without merit and did not expect a material financial effect, while acknowledging that litigation outcomes are uncertain. The filing also describes a $6.2 prepaid clinical-rotation balance subject to a $1.6 reserve and ongoing litigation with the hospital group.

Important facts for investors to verify

  1. Confirm the filing is the intended company and period: the document identifies DeVry Inc., fiscal Q3 ended March 31, 2012—not Covista Inc. or 2011 Q3.
  2. Assess whether enrollment declines at DeVry University and Carrington have stabilized, and whether the stated Carrington turnaround and fiscal 2014–2016 recovery assumptions are being achieved.
  3. Review the $75.0 impairment, non-GAAP adjustment methodology, and the sensitivity of Carrington and Advanced Academics goodwill and intangible asset valuations to forecasts and discount rates.
  4. Track operating cash flow, receivables and timing of financial-aid receipts, acquisition-related payments, planned capital spending, and share repurchases against liquidity.
  5. Monitor Title IV eligibility, 90/10 compliance, regulatory reviews and the status of shareholder and derivative litigation.