Covista Inc. — 2011 Q1 Form 10-Q Summary
Registrant and period: The supplied filing identifies the registrant as DeVry Inc., not Covista Inc. It covers the unaudited quarter ended September 30, 2011, DeVry’s first quarter of fiscal 2012. The filing says interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $519.0 million | $521.4 million | -0.5% |
| Operating income | $79.9 million | $111.8 million | -28.6% |
| Net income attributable to DeVry | $57.5 million | $73.6 million | -21.9% |
| Diluted EPS | $0.83 | $1.03 | -19.4% |
| Operating margin | 15.4% | 21.4% | -6.0 percentage points |
| Operating cash flow | $186.6 million | $196.0 million | -4.8% |
- Operating costs rose to $439.2 million from $409.6 million. Cost of educational services was 45.9% of revenue versus 43.7%; student services and administrative expense was 38.7% versus 34.8%.
- Effective tax rate declined to 27.9% from 34.5%, mainly due to a greater share of income from international operations and favorable tax resolutions and treatment of online revenue.
- Revenue by segment: Business, Technology and Management $337.6 million, down 4.3%; Medical and Healthcare $147.5 million, up 7.9%; International, K-12 and Professional Education $34.0 million, up 6.7%. Segment operating income was $61.4 million, $23.3 million, and a $3.0 million loss, respectively.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $322.9 million at September 30, 2011, down from $447.1 million at June 30. Cash plus marketable securities was $325.3 million. Current assets were $545.2 million and current liabilities $462.7 million.
- DeVry reported no outstanding borrowings and had a $400 million revolving credit facility, expandable to $550 million, maturing in May 2016. Letters of credit outstanding were $1.9 million; the company reported compliance with facility covenants.
- Operating cash flow of $186.6 million was more than offset by $261.7 million of investing outflows, including $227.8 million paid for the AUC acquisition and $33.8 million of capital expenditures. Financing outflows were $49.5 million, including $44.5 million of share repurchases and $8.3 million of dividends.
- Management forecast fiscal 2012 capital spending of approximately $170 million. It said existing unrestricted cash, operating cash flow and the credit facility should fund operations and current growth plans, absent another significant investment opportunity.
- Approximately $81.5 million of cash was held by international operations and was intended to be reinvested outside the United States. Total liabilities were $606.0 million; the filing reports no debt borrowings.
Material changes, outlook and risks
- Management attributed weaker results to enrollment declines at DeVry University and Carrington, reduced operating leverage, and increased spending on advertising, recruiting, student services, new locations and acquired businesses. It cited the prolonged economic downturn as a factor reducing prospective-student inquiries.
- DeVry acquired American University of the Caribbean (AUC) on August 3, 2011, adding medical education operations and contributing to Medical and Healthcare revenue. Goodwill increased to $589.8 million and intangible assets to $321.3 million, largely reflecting the acquisition. The filing gives $228 million as cash paid in the acquisition disclosures, while the overview describes the acquisition as $235 million.
- Enrollment trends were mixed: DeVry University undergraduate new enrollment declined, including a 25.6% year-over-year decline for summer 2011; Carrington total enrollment declined 25.6% for July 2011. Chamberlain and DeVry Brasil reported strong enrollment growth. Management described efforts to improve marketing, admissions, student services and program offerings.
- Carrington revenue fell approximately 24% year over year and the segment had an operating loss. Management said the decline could be temporary but warned that continued underperformance could lead to impairment of some or all of Carrington’s goodwill. No interim impairment review was performed; the prior annual review found no impairment.
- Risks include dependence on federal student aid and compliance with the 90/10 rule, regulatory and accreditation requirements, enrollment and collection trends, and goodwill/intangible-asset impairment. Goodwill and intangible assets together represented approximately 45% of total assets. Ross’s Freeport clinical location continued to face restrictions related to Title IV eligibility.
- A putative securities class action and three related derivative actions alleged undisclosed abusive recruiting and financial-aid lending practices. DeVry disputed the allegations, was defending the matters, and said it did not then expect a material financial effect; outcomes were described as difficult to predict.
- After quarter-end, the board declared a $0.15 per-share dividend payable January 10, 2012, and authorized a further $100 million share-repurchase program. The filing provides no earnings or revenue guidance.
Important facts for investors to verify
- Confirm the intended issuer: the provided filing is for DeVry Inc., not Covista Inc.
- Reconcile the AUC purchase price: the acquisition note and cash-flow statement indicate $228 million, while the overview says $235 million.
- Track enrollment, particularly at DeVry University and Carrington, and whether management’s planned marketing and operational changes improve results.
- Monitor federal aid eligibility, 90/10 compliance, litigation developments and the carrying values of goodwill and intangible assets.
- Assess cash available for domestic use separately from international cash designated for reinvestment, and compare future capital spending and buybacks with operating cash generation.