Covista Inc. annual report, Q2 FY1998

Business Context and Reporting Period

Company: DeVry Inc. (Note: Input metadata referenced "Covista Inc.", but the filing text identifies the registrant as DeVry Inc.)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 30, 1998
Business Overview: DeVry Inc. operates a system of private, degree-granting, regionally accredited higher education institutions in North America. Its primary segments include the DeVry Institutes of Technology (career-oriented technical education), the Keller Graduate School of Management (graduate degrees), and Becker CPA Review (professional certification preparation).

Key Financial Metrics

Metric Fiscal 1998 Fiscal 1997 Change
Total Revenues $353.5 million $308.3 million +14.6%
Tuition Revenues $321.0 million $280.8 million +14.3%
Net Income $30.7 million $24.2 million +27.0%
Earnings Per Share (Diluted) $0.44 $0.35 +25.7%
Operating Margin 14.5% 13.9% +0.6 pts
Cash from Operations $47.6 million $42.4 million +12.2%
Capital Expenditures $31.8 million $28.8 million +10.4%
Total Assets $223.9 million $208.7 million +7.3%
Total Liabilities $87.6 million $103.4 million -15.3%
Shareholders' Equity $136.3 million $105.3 million +29.4%
Revolving Loan Balance $10.0 million $33.0 million -$23.0 million

Material Changes vs. Prior Period

  • Revenue Growth: Driven by a 9.4% increase in cumulative enrollment at DeVry Institutes and a 17.5% increase at Keller Graduate School. Tuition rate increases of approximately 5.0% also contributed.
  • Profitability: Operating margins improved to 14.5% due to better facility utilization and operational efficiencies. Net income reached a record $30.7 million.
  • Debt Reduction: The company significantly reduced its revolving loan balance by $23.0 million, utilizing cash generated from operations and proceeds from a 1997 stock offering.
  • Capital Spending: Capital expenditures reached a record $31.8 million, funding new campus construction in Fremont, California, and renovations in New York and Chicago.
  • Acquisition Impact: The 1996 acquisition of Becker CPA Review continues to contribute to revenue and margin expansion, with Becker accounting for a significant portion of the "Other Educational Revenues."

Guidance, Outlook, and Risks

Management Commentary and Outlook

  • Enrollment Trends: Management expects continued enrollment growth driven by demographic shifts ("baby boom echo") and the increasing wage gap between college and high school graduates.
  • Expansion Plans: Significant capital spending is expected to continue in fiscal 1999 to complete new campuses in New York and Los Angeles, and expand the Chicago campus.
  • Financial Strength: The company believes cash from operations and its revolving credit facility are sufficient to fund operations and expansion plans.

Risks and Contingencies

  • Financial Aid Dependency: Approximately 70% of DeVry Institutes' U.S. tuition revenue is financed by government-provided financial aid. Changes in federal funding or regulations could materially impact operations.
  • Regulatory Compliance: The company faces strict state and federal regulations regarding financial responsibility, student loan default rates, and the "85/15 rule" (limiting revenue from federal aid). Failure to comply could result in suspension of aid programs.
  • Canadian Operations: Financial aid processing for Toronto-area campuses remains conditionally reinstated pending a final report from the Ontario Ministry of Education regarding past inaccuracies in student applications.
  • Legal Proceedings: A class action lawsuit in Canada regarding educational program quality was rejected for certification in July 1998; management does not expect a material impact.

Investor Verification Checklist

  • Financial Aid Exposure: Verify the stability of federal and state funding sources given the 70% revenue dependency.
  • Default Rates: Monitor student loan cohort default rates (weighted average FFELP rate was 17.0% in 1996) to ensure they remain below regulatory thresholds (25% for three consecutive years).
  • Capital Expenditure ROI: Assess the enrollment uptake and revenue generation from the new Fremont, CA, and Long Island City, NY, campuses opened or planned for fiscal 1999.
  • Canadian Regulatory Status: Confirm the final resolution of the Ontario Ministry of Education audit regarding financial aid eligibility.
  • Debt Covenants: Review the terms of the revolving loan agreement (maturing August 2000) to ensure compliance with financial ratio covenants.