SEC Filing Summary
Identity and period: The request metadata names Covista Inc., but the filing is Adtalem Global Education Inc.’s Form 10-K, filed August 24, 2017. Adtalem reported the fiscal year ended June 30, 2017; the filing also presents fourth-quarter results. It is an annual report, not a standalone 2016 Q4 filing.
Business context and financial performance
Adtalem provides higher-education and professional-training services across Medical and Healthcare, Professional Education, Technology and Business, and U.S. Traditional Postsecondary. The company changed its name from DeVry Education Group in May 2017 and revised its reportable segments during the year.
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,809.8 million | $1,843.5 million |
| Operating income (loss) | $138.6 million | ($12.1 million) |
| Net income (loss) attributable to Adtalem | $122.3 million | ($3.2 million) |
| Diluted EPS | $1.91 | ($0.05) |
| Operating margin | 7.7% | (0.7%) |
| Operating cash flow | $228.0 million | $228.0 million |
FY2017 net income was $122.3 million; management also reported $178.4 million of continuing-operations net income excluding special items ($2.79 per diluted share), a non-GAAP measure. Cost of educational services was 53.2% of revenue versus 53.5% in FY2016; student services and administrative expense was 34.2% versus 35.5%. Net interest expense was $4.2 million. The effective tax rate was 7.8%, versus 84.1% in FY2016, when impairment charges materially affected the rate.
Segments and changes versus prior year
- Medical and Healthcare: Revenue increased 2.4% to $802.5 million; operating income rose 4.8% to $187.1 million. Chamberlain revenue grew 5.5%, while medical and veterinary school revenue fell 1.6% amid enrollment declines.
- Professional Education: Revenue increased 28.0% to $131.8 million, primarily due to the ACAMS acquisition. Excluding ACAMS, revenue fell 10.4% as fewer candidates took Becker’s CPA review course; segment operating income declined 29.2% to $19.9 million.
- Technology and Business: Adtalem Brazil revenue increased 40.9% to $276.3 million, including acquisitions and a $29.8 million favorable currency effect; constant-currency growth was 25.7%. Operating income rose to $36.2 million.
- U.S. Traditional Postsecondary: Revenue declined 21.2% to $601.9 million, reflecting enrollment declines at DeVry University and Carrington, plus discounting. Segment operating loss was $26.0 million, versus $211.3 million in FY2016, which included substantial impairment and restructuring charges.
Overall revenue decreased 1.8%; organic revenue declined 8.0%, partly offset by acquisitions and Brazilian real appreciation. GAAP operating income improved sharply from FY2016, when Adtalem recorded $147.7 million of impairment charges. Excluding special items, consolidated operating income increased 13.2% year over year, according to management.
Cash, debt, liquidity and capital allocation
- Cash and cash equivalents were $242.0 million at June 30, 2017, down from $308.2 million; accounts receivable, net, was $173.4 million. Current assets were $471.2 million and current liabilities $377.3 million.
- Borrowings under the revolving credit facility were $125.0 million at a 3.18% weighted-average rate; there were no borrowings at FY2016 year-end. The facility totals $400 million, matures March 31, 2020, and may be increased to $550 million subject to conditions. The company reported compliance with its debt covenants.
- Letters of credit outstanding were $68.5 million, including the $68.4 million required under the Department of Education settlement involving DeVry University. The credit agreement permits up to $100 million of letters of credit.
- Operating cash flow was $228.0 million and capital expenditures were $49.0 million. Investing cash outflow was $379.7 million, including $330.6 million, net of acquired cash, for ACAMS.
- Approximately $202.7 million of cash was held internationally and management intended to reinvest international earnings and cash abroad; this cash was not available for domestic general corporate purposes. Management said available unrestricted cash, operating cash flow and the revolver should fund planned operations and the repurchase program.
- The board discontinued cash dividends in February 2017; FY2017 declared dividends totaled $0.18 per share. Adtalem repurchased $48.5 million of stock during the year and authorized a new $300 million buyback program through December 2020.
Outlook, unusual items and principal risks
- For FY2018, management expected revenue to be flat to down 1% and earnings before special items to increase in the low-single-digit range. It expected operating costs to be flat to down 1% and capital spending of $65–$70 million. The stated FY2018 first-quarter revenue outlook is corrupted in the supplied filing text (“flat to down about 4 to 45percent”); the filing text does not provide a clear value.
- Management expected continued DeVry enrollment declines in FY2018, further cost controls and likely additional campus consolidations. DeVry revenue had declined about 50% since FY2014; FY2017 U.S. Traditional Postsecondary revenue was down 21.2%.
- FY2017 special charges included $29.8 million of restructuring expense, $56.3 million of regulatory settlements and a $4.8 million write-down on the Pomona campus held for sale. The FTC settlement included a $49.4 million payment, forgiveness of $30.4 million of institutional loans and $20.2 million of former-student receivables. The NYAG settlement included $2.75 million in payments. The parties settled without admitting wrongdoing.
- DeVry University was placed on provisional Title IV certification for five years under its ED settlement and was required to maintain a letter of credit. A separate ED program review remained open; its potential outcome was not predictable. Numerous consumer, securities and derivative lawsuits concerning DeVry’s graduate-employment representations were pending.
- Regulatory exposure is significant because Title IV funding is an important revenue source. The filing reports that 69% of revenue at Title IV-participating institutions came from Title IV programs. The filing also identifies risk from Gainful Employment rules, possible borrower-defense liabilities, accreditation and state authorization, and changes in U.S. or Brazilian student-aid programs.
- Adtalem Brazil’s FIES program represented approximately 28% of segment revenue. FIES receivables were $53.7 million at year-end, including $22.9 million of 2015 amounts due under a government repayment schedule. Currency volatility also affects reported results and equity.
- Goodwill of $851.3 million and intangible assets of $413.8 million together represented approximately 55% of total assets. DeVry’s impairment review showed fair value above carrying value, but management warned that continued enrollment or financial deterioration could trigger impairment.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management concluded controls were effective. ACAMS was excluded from the internal-control assessment following its acquisition.
Most important facts for investors to verify
- Confirm the issuer and reporting period: this filing is Adtalem Global Education Inc.’s FY2017 10-K, not a Covista Inc. filing or a standalone 2016 Q4 report.
- Track DeVry and Carrington enrollment, revenue, campus closures and cost reductions to assess whether the U.S. Traditional Postsecondary decline is stabilizing.
- Monitor the outcome of the DeVry ED program review and pending litigation, and the continuing availability and terms of Title IV participation and required letters of credit.
- Assess the collectability and timing of FIES receivables, Brazil’s student-aid policy and currency effects.
- Compare FY2018 results with management’s stated revenue and earnings outlook; the first-quarter revenue range is unclear in the supplied text.