Business context and reporting period
The supplied filing is Adtalem Global Education Inc.’s unaudited Form 10-Q for the three months ended September 30, 2019 (fiscal Q1 2020), not a filing identified as Covista Inc. The filing reports continuing operations in Medical and Healthcare and Financial Services; Brazil, DeVry University and Carrington are presented as discontinued operations.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue from continuing operations | $254.6 million | $236.9 million |
| Operating income (loss), continuing operations | $25.7 million | ($3.2 million) |
| Income (loss) from continuing operations attributable to Adtalem | $17.5 million | ($4.8 million) |
| Net income (loss) attributable to Adtalem, including discontinued operations | $14.4 million | ($9.5 million) |
| Diluted earnings (loss) per share | $0.26 | ($0.16) |
| Cash from operating activities, continuing operations | $33.3 million | $53.5 million |
| Cash from operating activities, including discontinued operations | $47.5 million | $78.0 million |
- Revenue rose 7.5% year over year; organic growth was 4.2%, with the balance mainly reflecting the OnCourse Learning acquisition. Medical and Healthcare revenue increased 2.7% to $207.5 million; Financial Services revenue increased 32.2% to $47.1 million, or 10.8% excluding acquisitions.
- Reported operating margin from continuing operations was 10.1%, versus negative 1.4%. The comparison reflects substantially lower restructuring expense and a $4.8 million asset-sale gain. Excluding special items, management reported continuing-operations net income of $18.9 million, down 29.2% from $26.7 million; adjusted diluted EPS was $0.34 versus $0.44.
- Cost of educational services rose 14.8% to $128.0 million, faster than revenue; it was 50.3% of revenue versus 47.1%. Student services and administrative expense increased 11.1% to $99.1 million, or 38.9% of revenue versus 37.6%.
- Operating cash flow from continuing operations declined to $33.3 million. The filing cites higher receivables and timing of operating payments; deferred revenue increased $72.6 million and partly offset these uses. Capital expenditures were $10.4 million.
- At September 30, cash and cash equivalents were $121.1 million, excluding $96.9 million classified as held for sale; current assets were $456.1 million and current liabilities $412.5 million. Cash, cash equivalents and restricted cash were $121.8 million. These measures include different classifications and should not be treated as interchangeable.
- Debt principal outstanding was $336.3 million ($296.3 million Term B loan and $40.0 million revolver); its reported carrying amount, net of issuance costs, was $330.6 million. The company reported $191.6 million of revolver availability after accounting for letters of credit and was in compliance with debt covenants.
Material changes and management commentary
- Reported operating results improved from a prior-year loss, but management said operating income excluding the restructuring-expense decrease and asset-sale gain fell 24.1%. Drivers included higher bad-debt expense, growth investment and costs associated with operating at the Barbados RUSM campus and returning AUC operations to normal.
- Chamberlain September-session new enrollment increased 2.9% and total enrollment 1.4%. Medical and veterinary school total enrollment declined 4.7%; management cited heightened competition and described plans to differentiate programs and expand recruitment.
- Financial Services growth benefited from the OCL acquisition and ACAMS’s largest conference occurring in Q1 rather than Q2 as in the prior year. Becker’s healthcare-student courses were sold in August 2019.
- Adtalem adopted lease accounting standard ASC 842 on July 1, 2019. It recognized operating lease assets and liabilities; at September 30, operating lease assets were $195.2 million and lease liabilities totaled $246.1 million. Adoption materially increased reported balance-sheet assets and liabilities, but did not affect the income statement.
- On October 18, 2019, after quarter-end, Adtalem agreed to sell Adtalem Brazil for approximately $465 million cash, with an expected additional $74 million settlement of cash balances, for stated total proceeds of approximately $539 million. Closing was expected in the first half of fiscal 2021, subject to conditions including Brazilian antitrust approval. The Brazil business remained in discontinued operations and held-for-sale balances.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided in the supplied filing. Management expected FY2020 capital spending of $45 million to $50 million and additional restructuring expense during the remainder of the year as it continued home-office cost reductions.
- Management said cash, operating cash generation and credit-facility capacity should fund operations, growth plans and the current repurchase program for the foreseeable future, absent significant investment opportunities. The company repurchased 918,807 shares for $40.3 million in the quarter.
- The proposed Brazil sale may be delayed or fail to close; the filing identifies potential adverse effects on valuation, growth prospects and financial resources. Brazil’s currency movements also affect reported results and accumulated translation losses. The company entered into deal-contingent foreign-exchange forwards, with fair-value changes expected to run through earnings rather than hedge accounting.
- Risks include dependence on government financial aid and related regulation, student enrollment competition, student-loan credit losses, and the ability to maintain Title IV eligibility and meet financial-responsibility requirements. A 100-basis-point rise in short-term rates was estimated to increase annual interest expense by $3.4 million.
- Adtalem disclosed multiple pending DeVry-related lawsuits and arbitrations, and a Department of Justice False Claims Act inquiry concerning alleged recruitment practices and federal GI Bill and tuition-assistance funds involving Chamberlain and former subsidiary DeVry University. The company said it could not predict the inquiry’s duration or outcome. It also disclosed continuing contingent lease exposure related to divested operations.
- Unusual quarter items included $6.5 million of restructuring expense and a $4.8 million gain on the Columbus campus sale. The Chicago campus transaction was accounted for as financing rather than a completed sale; Adtalem retained the related assets and recorded a note receivable and financing payable.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is Adtalem’s Q1 FY2020 10-Q, despite the request metadata naming Covista Inc. and 2019 Q1.
- Review the Brazil sale’s regulatory approvals, closing conditions, timing, proceeds and foreign-exchange exposure.
- Track enrollment trends, bad-debt provisions and operating performance excluding special items and acquisition or conference timing effects.
- Assess liquidity using cash available to continuing operations, revolver availability, debt maturities, lease commitments and retained or contingent obligations.
- Monitor the DOJ inquiry, DeVry litigation and the status and potential financial effects of related matters; the filing does not provide a clear quantified estimate of their possible outcomes.