Covista Inc. annual report, FY2012

Business context and reporting period

Entity and period clarification: The supplied filing is DeVry Inc.’s Form 10-K, not a filing identified as Covista Inc. It covers the fiscal year ended June 30, 2012; its fourth quarter is the three months ended June 30, 2012. Accordingly, the filing does not match the requested “2011 Q4” period.

DeVry provides education through DeVry University; medical, nursing and career colleges; and international, K-12 and professional education businesses. Its reportable segments are Business, Technology and Management; Medical and Healthcare; and International, K-12 and Professional Education.

Key financial results

Revenue fell 4.2%. Operating income declined 58.7%, reflecting weaker enrollment and operating leverage, plus $94.4 million of non-cash impairment charges and $7.1 million of restructuring expense. GAAP net margin was 6.8%, versus 15.2% a year earlier. Excluding impairment, restructuring and the gain on asset sale, management’s non-GAAP net income was $217.9 million, or $3.22 per diluted share; these measures are supplemental, not GAAP results.

Fourth quarter: FY2012 revenue was $505.9 million, operating profit $15.2 million, net income attributable to DeVry $8.1 million and diluted EPS $0.12. In FY2011’s fourth quarter, these were $546.8 million, $109.6 million, $75.2 million and $1.08, respectively.

Liquidity and debt: At June 30, 2012, cash and cash equivalents were $174.1 million and marketable securities were $2.6 million; cash, cash equivalents and securities totaled $176.7 million. DeVry had no borrowings outstanding and had a $400 million revolving facility, expandable to $550 million, with $9.3 million of letters of credit outstanding. The company reported compliance with debt covenants. Net accounts receivable was $113.9 million, compared with $114.7 million a year earlier. Operating lease commitments totaled $649.1 million. Approximately $103.3 million of cash was held internationally and intended for reinvestment outside the U.S.

Material changes versus the prior comparable period

• Business, Technology and Management revenue declined 10.7% to $1,303.6 million; undergraduate enrollment weakness and higher scholarships weighed on results.
• Medical and Healthcare revenue rose 9.6% to $612.0 million, driven by Chamberlain, medical-school enrollment and the AUC acquisition; Carrington’s sharp enrollment decline offset part of the growth.
• International, K-12 and Professional Education revenue increased 6.3% to $174.3 million, mainly from DeVry Brasil growth and acquisitions, partly offset by lower Advanced Academics revenue.
• Cost of educational services rose to 46.7% of revenue from 42.4%; student services and administrative expense rose to 38.7% from 34.9%. Both reflected weaker revenue leverage, investments and acquisition-related costs.
• Cash declined from $447.1 million to $174.1 million, principally amid acquisitions, share repurchases and lower operating cash generation. DeVry repurchased approximately 4.26 million shares for $158.1 million and paid $18.4 million in dividends.

Outlook, risks, contingencies and unusual items

• Management expected FY2013 revenue to be slightly lower than FY2012, with DeVry University and Carrington enrollment declines partly offset by growth elsewhere. It described FY2014–FY2016 as a potential recovery and growth period, contingent on modest DeVry University enrollment growth, Carrington recovery and continued growth in other institutions.
• Management expected approximately $50 million of FY2013 expense reductions, principally at DeVry University and Carrington, following a workforce reduction of approximately 570 positions. The FY2012 restructuring charge was $7.1 million; $5.7 million remained accrued at year-end.
• FY2012 impairment charges were $75.0 million at Carrington and $19.4 million at Advanced Academics. Carrington’s year-end fair value was only slightly above carrying value, creating continuing impairment sensitivity. The company reported $550.0 million of goodwill and $285.2 million of intangible assets.
• Management’s capital-spending discussion is unclear: it says FY2013 capital expenditures were expected to increase, but also cites anticipated spending “in the $50 million range,” below FY2012’s $129.1 million. Verify the intended forecast.
• Regulatory exposure is significant: Title IV aid represented 73% of total revenue in FY2011; FY2012 funding-source data were not yet available. The FY2011 Title IV share ranged up to 89% at Ross Veterinary Medicine. The filing discusses extensive federal and state oversight, default-rate and 90/10 requirements, and risks to aid eligibility. A court vacated most gainful-employment rules in June 2012, while certain disclosure requirements remained; the regulatory outcome was uncertain.
• A Department of Education review of DeVry University’s Title IV administration remained open. DeVry also identified and corrected a Perkins loan enrollment-reporting error affecting about 10% of students in that program and recorded an accrual for interest and a reserve for potential uncollectible amounts.
• A shareholder securities lawsuit and related derivative actions remained pending. The shareholder complaint focused on alleged admissions-advisor compensation violations; DeVry had moved to dismiss and said it did not expect the matters to materially affect financial position, results or cash flows.
• Other notable items included a $3.7 million pretax gain on the sale of Becker’s Stalla CFA review operations and a $23 million foreign-currency translation loss recorded in accumulated other comprehensive income. A $2.0 million fourth-quarter stock-compensation adjustment was described as immaterial to prior periods.

Most important facts for investors to verify

• Confirm the intended issuer and reporting period: this filing is DeVry Inc. FY2012, not Covista Inc. or FY2011 Q4.
• Track enrollment, recruiting effectiveness and scholarship levels at DeVry University and Carrington, and progress against the stated recovery assumptions.
• Assess Title IV concentration, the open program review, the Perkins correction and any subsequent regulatory changes or enforcement outcomes.
• Verify whether FY2013 cost reductions and capital-spending expectations were achieved; the capital-expenditure forecast is internally unclear in this text.
• Monitor Carrington’s operating recovery and valuation headroom, as well as further impairment risk at Advanced Academics or other reporting units.
• Review subsequent developments in the shareholder and derivative litigation, and the availability of domestic liquidity given international cash reinvestment intentions, acquisitions, dividends and buybacks.