DeVry Inc. Form 10-Q — Quarter Ended December 31, 2011
Filing identity: The supplied metadata names Covista Inc., but the filing identifies the registrant as DeVry Inc. This summary reflects the filing itself. The period is DeVry’s fiscal 2012 second quarter; comparative figures are for the quarter and six months ended December 31, 2010. Amounts are in U.S. dollars.
Business context and reporting period
DeVry provides secondary and post-secondary education through Business, Technology and Management; Medical and Healthcare; and International, K-12 and Professional Education segments. The quarter included American University of the Caribbean (AUC), acquired in August 2011. Management said results reflected continued revenue deceleration and were below its expectations.
Key financial metrics
| Metric | Quarter 2011 | Quarter 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $524.0 million | $551.5 million | $1,043.1 million | $1,072.9 million |
| Operating income | $13.8 million | $135.6 million | $93.6 million | $247.4 million |
| Net income attributable to DeVry | $8.9 million | $88.7 million | $66.3 million | $162.3 million |
| Diluted EPS | $0.13 | $1.25 | $0.97 | $2.28 |
| Operating margin | 2.6% | 24.6% | 9.0% | 23.1% |
- Quarterly revenue fell 5.0%; six-month revenue fell 2.8%. Quarterly operating income declined 89.9%, and six-month operating income declined 62.2%.
- Quarterly cost of educational services was $241.2 million; student services and administrative expense was $194.0 million. For the six months, these costs were $479.5 million and $395.0 million, respectively.
- Operating cash flow was $219.3 million for the six months, down from $273.9 million. Capital expenditures were $63.0 million; investing cash flow was negative $284.5 million, including $225.9 million paid for AUC, net of cash acquired. Financing cash flow was negative $95.8 million, including $92.0 million of share repurchases and $8.3 million of dividends paid.
- Cash and cash equivalents were $285.7 million at December 31, down from $447.1 million at June 30, 2011. Restricted cash was $30.8 million. Cash plus marketable securities totaled $288.2 million, as reported by management.
- There were no borrowings outstanding. DeVry had a $400 million revolving credit facility, expandable to $550 million, with $9.3 million of letters of credit outstanding; the company reported compliance with its covenants.
- Total assets were $1.924 billion and total liabilities were $562.7 million. Current assets were $528.8 million and current liabilities $427.1 million. The balance sheet included $553.5 million of goodwill and $276.4 million of net intangible assets.
Material changes versus the prior comparable period
- A $75.0 million non-cash impairment charge at Carrington comprised a $41.2 million write-down of its accreditation and Title IV eligibility intangible asset and a $33.8 million goodwill impairment. Excluding the impairment and the asset-sale gain, management reported non-GAAP diluted EPS of $0.92 for the quarter and $1.74 for the six months, versus $1.25 and $2.28, respectively, a year earlier.
- DeVry University revenue fell 12.2% in the quarter and 8.4% for the six months, principally amid lower undergraduate enrollment. New undergraduate enrollment declined across the reported spring, summer and fall terms; fall total undergraduate enrollment was down 12.8% year over year.
- Medical and Healthcare revenue grew 8.0% in both periods, reflecting growth at Ross and Chamberlain and AUC’s contribution. Carrington enrollment weakened sharply: November total enrollment was down 28.4% year over year, and its quarterly revenue fell 27%. The segment reported an operating loss, largely due to the impairment; excluding it, segment operating income still declined.
- International, K-12 and Professional Education revenue increased 16.5% for the quarter and 12.1% for the six months, led by DeVry Brasil and supported by Becker.
- The company recorded a $3.7 million pre-tax gain on sale of Becker’s Stalla CFA review operations. AUC’s acquisition also increased goodwill and intangible assets.
- Costs rose faster than revenue: cost of educational services increased 4.9% in the quarter and student services and administrative expense increased 4.3%. Both expense categories increased as a share of revenue, reflecting lower operating leverage, acquisition costs and investments in locations, marketing and student services.
Outlook, commentary, risks and contingencies
- Management gave fiscal 2012 capital-spending guidance of $150 million to $160 million. It said liquidity, operating cash flow and the revolving facility should fund current operations, growth plans and the current repurchase program, absent significant investment opportunities; no specific revenue or earnings forecast was provided.
- Management described initiatives to improve enrollment and performance, including new programs and locations at DeVry University, brand and service investments, and a Carrington turnaround focused on marketing, recruiting and admissions processes. It acknowledged uncertainty about the timing of Carrington’s recovery.
- Key risks include enrollment and economic weakness, competition, reliance on Title IV federal student aid, regulatory and accreditation requirements, and potential impairment of goodwill and intangibles. Title IV funding represented 73% of company revenue in fiscal 2011; the reported institution-level percentages ranged up to 89% at Ross University School of Veterinary Medicine.
- A securities class action and related derivative suits allege improper recruiting and financial-aid practices and disclosure failures. DeVry disputes the allegations; the class-action motion to dismiss was pending, and derivative suits were stayed. The company said it did not expect a material financial effect, while noting outcomes are uncertain.
- Other disclosed matters include a $6.2 million prepaid clinical-rotation balance subject to a $1.6 million reserve and ongoing litigation with the hospital group; $9.1 million of unrecognized tax benefits; and the IRS examination of the 2010 federal return. International cash is intended to be reinvested abroad and is not available for general domestic purposes.
Important facts for investors to verify
- Confirm the registrant’s identity: the filing is DeVry Inc., not Covista Inc.
- Track enrollment, revenue and operating performance at DeVry University and Carrington, and whether management’s turnaround actions produce improvement.
- Review the impairment assumptions and sensitivity of Carrington’s goodwill and indefinite-lived intangible asset valuations to future cash flows and discount rates.
- Reconcile reported GAAP results with management’s non-GAAP results, including the impairment charge and Stalla sale gain.
- Monitor Title IV eligibility, regulatory developments, litigation status, liquidity and the use of the remaining $99.7 million share-repurchase authorization.