Business context and reporting period
Entity discrepancy: The request metadata identifies Covista Inc., but the supplied Form 10-Q is for DeVry Inc. This summary reflects the filing, not the metadata. It covers DeVry’s unaudited first quarter of fiscal 2011, the three months ended September 30, 2010, compared with the three months ended September 30, 2009.
DeVry provides postsecondary and professional education through four segments: Business, Technology and Management; Medical and Healthcare; Professional Education; and Other Educational Services.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2010 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $521.4 million | $431.1 million | +21.0% |
| Operating income | $111.8 million | $79.4 million | +40.8% |
| Net income attributable to DeVry | $73.6 million | $54.7 million | +34.5% |
| Diluted earnings per share | $1.03 | $0.76 | +$0.27 |
| Operating margin | 21.4% | 18.4% | +3.0 percentage points |
| Net margin attributable to DeVry | 14.1% | 12.7% | +1.4 percentage points |
| Operating cash flow | $196.0 million | $177.2 million | +$18.8 million |
| Capital expenditures | $23.0 million | $26.5 million | -$3.5 million |
Revenue and operating income grew across most operations, led by DeVry University. Educational-services and student-services expenses rose in dollars but declined as a share of revenue, supporting margin expansion. The effective tax rate increased to 34.5% from 32.0%, primarily because a greater share of pretax income came from U.S. operations.
At September 30, 2010, cash and cash equivalents were $451.0 million, marketable securities were $2.3 million, and restricted cash was $11.1 million. Current assets were $680.8 million and current liabilities were $492.4 million. Total debt was zero; the company had $4.5 million of letters of credit outstanding under its revolving facility. Total liabilities were $593.4 million and shareholders’ equity was $1,223.9 million. Approximately $225.9 million of cash was held in international operations and management said it was intended for reinvestment abroad, limiting its availability for domestic general corporate purposes.
Operating cash flow benefited from earnings, higher deferred tuition revenue and improved collections. Financing cash use included $36.3 million of share repurchases and $7.1 million of dividends paid. Cash increased by $143.3 million during the quarter to $451.0 million.
Material changes and segment trends
- Business, Technology and Management: Revenue rose 24.5% to $352.9 million and operating income increased 50.7% to $84.5 million. DeVry University undergraduate enrollment continued to grow; fall 2009, spring 2010 and summer 2010 total enrollment each exceeded the comparable prior-year term.
- Medical and Healthcare: Revenue grew 16.6% to $136.7 million; operating income increased 3.8% to $28.2 million. Chamberlain enrollment growth more than offset weaker new enrollment at Ross University and Carrington.
- Professional Education: Revenue increased 4.2% to $20.0 million, while operating income declined 1.0% to $6.4 million.
- Other Educational Services: Revenue increased 5.3% to $11.9 million, but the segment operating loss widened to $7.5 million from $6.5 million, reflecting lower Advanced Academics revenue and growth-related investment.
- The company completed its third $50 million repurchase program and began a fourth program, also authorized for up to $50 million through June 30, 2012. Quarter repurchases were 816,400 shares for $36.3 million; $38.3 million remained authorized at quarter-end.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2011 capital expenditures of approximately $150 million, including investment in the Project DELTA student information system, campus capacity and facilities.
- Management expected DeVry University total student growth in the fall 2010 enrollment period in the mid-to-high teens, but anticipated a modest decline in new undergraduate enrollment. It also expected modest Becker revenue growth and a modest decline in Carrington new enrollment.
- Ross University’s planned Freeport clinical education site was not teaching students at the time of the filing because of regulatory review delays and student concerns. Management was revising plans to add capacity in Dominica. Ross new enrollment fell 39.5% in May 2010 and 26.4% in September 2010 versus the corresponding prior-year terms.
- The Department of Education issued Title IV program-integrity regulations effective July 1, 2011. Separate proposed gainful-employment rules were not final; the company said their potential effects could be material to eligibility, enrollment, results and cash flows.
- A putative securities class action filed November 1, 2010 alleged failures to disclose recruiting and financial-aid practices. The complaint had not been served; DeVry said it considered the allegations without merit and would defend them. Management did not expect pending proceedings to materially affect financial condition, results or cash flows.
- Ross had a $5.8 million prepaid clinical-rotation balance with a financially troubled hospital group, against which DeVry had recorded a $1.6 million reserve. A related contract lawsuit was pending.
- Advanced Academics revenue and operating profit declined amid school-district budget constraints. Management considered the trend temporary but warned that failure to improve operations could result in future goodwill impairment.
- Fiscal-quarter results are seasonal and not necessarily indicative of full-year results. Management stated that available cash, operating cash flow and the revolving facility were expected to fund operations, growth plans and the current repurchase program for the foreseeable future, absent significant investment opportunities.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is DeVry Inc., notwithstanding the Covista Inc. metadata.
- Track fall enrollment, retention and new-student trends, particularly at DeVry University, Ross and Carrington, against management’s stated expectations.
- Monitor final gainful-employment regulations and other Title IV developments for effects on institutional eligibility, student financing and enrollment.
- Assess the Freeport clinical-site regulatory issue and Ross’s capacity expansion plans, as well as the hospital-group prepaid-fee dispute and reserve.
- Review cash flow quality and liquidity, including deferred tuition’s contribution to operating cash flow and the portion of cash held internationally.
- Follow the securities litigation and any developments in regulatory reviews; the filing does not quantify a potential loss for these matters.
- Evaluate planned capital spending, ongoing repurchases and the potential for goodwill impairment at Advanced Academics if operating trends persist.