Covista Inc. annual report, FY2016

Business context and reporting period

Filing identity and period: The supplied filing is DeVry Education Group Inc.’s Form 10-K for the fiscal year ended June 30, 2016, filed August 25, 2016. It does not identify Covista Inc. or report a 2015 Q4 period; verify the company and filing requested before relying on this summary.

DeVry provided postsecondary and professional education through Medical and Healthcare, International and Professional Education, and Business, Technology and Management segments. Its schools included Chamberlain, Carrington, DeVry University, DeVry Brasil, Becker, and the Ross and AUC medical and veterinary schools.

Financial performance and liquidity

Metric	FY 2016	FY 2015
Revenue	$1,843.5 million	$1,909.9 million
Operating income (loss), continuing operations	$(12.1) million	$156.9 million
Net income attributable to DeVry	$(3.2) million	$139.9 million
Diluted EPS	$(0.05)	$2.14
Operating cash flow	$231.6 million	$203.3 million
Capital expenditures	$69.4 million	$88.7 million

Revenue declined 3.5%; excluding Brazilian real depreciation, management reported a decline of approximately 1.2%. Cost of educational services was 53.5% of revenue versus 52.4%; student services and administrative expense was 35.5% versus 37.1%. Reported operating margin was approximately negative 0.7%.
Reported results included $147.7 million of impairment charges and $74.2 million of restructuring expense, partly offset by $7.0 million of gains on asset sales. Excluding restructuring, impairment and asset-sale gains, continuing-operations net income was $155.3 million, or $2.41 diluted EPS, versus $162.4 million, or $2.49, in FY 2015 (company-provided non-GAAP measures).
Cash and equivalents were $308.2 million at year-end, down from $353.0 million; current assets were $518.1 million and current liabilities $361.8 million. Net accounts receivable was $162.4 million, up from $139.2 million, including increased Brazilian government FIES receivables.
No revolving-credit borrowings were outstanding at June 30, 2016. The facility provided $400 million of capacity, with up to $50 million for letters of credit; the company reported covenant compliance. On July 1, 2016, it borrowed $175 million to fund the ACAMS acquisition. Operating leases totaled $627.6 million in future minimum commitments.
At year-end, $95.3 million of cash was held internationally and management intended to reinvest it abroad. The company paid $0.36 per share in FY 2016 dividends; future dividends remained subject to board discretion and debt covenants.

Material changes versus comparable periods

DeVry University revenue fell 23.0% to $611.1 million as enrollment weakened; total undergraduate students at the May 2016 term were down 23.3% year over year. Management expected enrollment declines to continue into FY 2017.
Medical and Healthcare revenue rose 8.9% to $936.3 million, led by Chamberlain, whose FY 2016 revenue increased 20.5%. Carrington revenue fell 3.8%; its new-student enrollment declined 14.2% for the year.
International and Professional Education revenue increased 15.5% to $299.0 million. DeVry Brasil revenue rose 23.2% reported, or approximately 51% excluding currency effects, with acquisitions contributing materially; Becker revenue grew 3.3%.
DeVry acquired Grupo Ibmec and Facimp in Brazil. Carrington impairments totaled $147.7 million, following weaker-than-planned enrollment and revised forecasts. The company also recorded $74.2 million of restructuring charges and reduced its workforce by approximately 761 positions.
Fourth-quarter revenue was $471.7 million versus $473.2 million a year earlier. The quarter recorded an operating loss of $24.9 million and net loss attributable to DeVry of $10.0 million, compared with operating income of $33.8 million and net income of $29.9 million in FY 2015 Q4.

Outlook, management commentary, and risks

Management forecast FY 2017 revenue approximately level with FY 2016 and earnings before special items up in the mid-single digits. It expected first-quarter FY 2017 revenue to increase 1%–2% year over year and operating costs to decline approximately 1%. FY 2017 capital spending was expected to be about $80 million; restructuring charges were expected at $15–25 million.
Management planned further cost reductions and DeVry University campus consolidations. It described the university’s transformation priorities as improving student experience, affordability, program flexibility, marketing, and corporate relationships.
Regulatory and litigation exposure was significant. ED had issued DeVry University a Notice of Intent to Limit over graduate-outcome representations, and a preliminary program review identified findings involving fiscal administration, student eligibility, and administrative capability. The FTC sued over employment and earnings advertising claims; state inquiries and other student and shareholder claims were also pending. Outcomes and potential costs were not predictable from the filing.
ED program reviews of DeVry University, RUSM, Carrington-Phoenix, and Carrington-California remained open. Possible consequences described included letters of credit, heightened cash monitoring, provisional certification, repayment obligations, or limits on Title IV participation. The filing says 59% of revenue came from Title IV funding in FY 2015; FY 2016 funding-source data was not yet available.
New gainful-employment and proposed borrower-defense rules created risks to program eligibility, potential liabilities, and letter-of-credit requirements. Management estimated fewer than 10% of Carrington and DeVry University programs were at risk of failing under its available data, while some programs—including RUSVM veterinary medicine—were at risk of being in the “zone.”
DeVry Brasil had $67.1 million of FIES receivables at year-end. The government scheduled installments for the $29.9 million calendar-year 2015 balance through 2018; the first $7.2 million payment arrived July 1, 2016. Brazilian policy, economic weakness, currency movements, and student-financing availability could affect growth and collections.
Goodwill and intangible assets totaled $930.9 million, about 44% of total assets. DeVry University’s estimated fair value exceeded carrying value by only 6%; management said a 100-basis-point increase in its discount rate would put fair value below carrying value. A further impairment was therefore a disclosed risk.
On July 1, 2016, the company acquired ACAMS for approximately $330 million, net of cash acquired, expanding Becker’s professional education business. The acquisition and related $175 million borrowing occurred after the reporting date.

Important facts for investors to verify

Confirm the intended issuer and period: the source is DeVry Education Group FY 2016, not Covista Inc. or 2015 Q4.
Check subsequent developments and quantified exposure for the ED Notice, open program reviews, FTC action, state inquiries, and related litigation.
Verify actual FY 2017 enrollment, revenue, cost savings, and restructuring against management’s forecasts, especially at DeVry University and Carrington.
Review collection timing and recoverability of the $67.1 million FIES receivable, and the effect of Brazilian currency and financing-policy changes.
Assess the ACAMS purchase price, integration, financing, and resulting debt and covenant headroom after the July 2016 borrowing.
Evaluate impairment sensitivity for DeVry University and the carrying values of goodwill and intangible assets; confirm whether further charges were recorded.