Covista Inc. quarterly report, Q2 FY2014

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Business context and reporting period

This filing is DeVry Education Group Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2013, the second quarter of its fiscal year 2014. The filing does not identify Covista Inc. as the registrant. DeVry operated post-secondary education businesses across three segments: Business, Technology and Management; Medical and Healthcare; and International and Professional Education.

Financial performance and position

Unless otherwise noted, dollar amounts are in millions. Second-quarter results compared with the quarter ended December 31, 2012:

  • Revenue was $491.3, down 1.9%; tuition revenue was $457.9 and other educational revenue was $33.4.
  • Operating income was $58.6, down 12.8%; operating margin was 11.9%, compared with 13.4%.
  • Net income attributable to DeVry was $48.2, compared with $50.3; diluted EPS was $0.74 versus $0.78. Continuing-operations diluted EPS was $0.75 versus $0.79.
  • Continuing-operations pretax income was $57.8. The effective tax rate was 14.7%, versus 21.9%.
  • Net cash provided by operating activities for the six months was $113.1, down from $180.2. Capital expenditures were $33.4, versus $47.2; cash and cash equivalents increased to $262.0 at December 31.
  • Total assets were $1,889.1 and total liabilities were $458.1. There were no borrowings under the credit facility; $13.2 of letters of credit were outstanding. The $400 facility expires May 2016, and the company was in compliance with its covenants.
  • Cash dividends declared were $0.17 per share. The company reported $11.9 of restricted cash and $117.8 of net accounts receivable.

For the six months ended December 31, revenue was $942.2, down 3.9%; operating income was $68.8, down 41.0%; and net income attributable to DeVry was $41.0, versus $82.3. Six-month diluted EPS was $0.63, versus $1.27. Six-month operating margin was 7.3%, versus 11.9%.

Material changes versus the prior comparable period

  • DeVry University revenue fell 14.4% in the quarter and 16.4% for the six months, reflecting enrollment declines and increased scholarships. Its segment reported a six-month operating loss of $1.1, compared with income of $64.4 a year earlier.
  • Medical and Healthcare revenue rose 13.5% in the quarter and 12.3% for the six months; six-month segment operating income increased 17.2% to $60.8. Chamberlain’s November enrollment reached 15,732, up 28.5% year over year.
  • International and Professional Education revenue grew 16.6% in the quarter and 17.3% for the six months, with recent Brazilian acquisitions contributing. Six-month segment operating income was $17.5, compared with $18.6.
  • Higher educational-service costs as a share of revenue and lower operating leverage pressured margins. DeVry recorded $16.3 of restructuring expense for the six months, including workforce reductions and real-estate consolidation.
  • AAI’s assets were sold for $2.0 in December after a $13.5 pretax impairment in the first quarter. AAI is reported as discontinued operations; the six-month discontinued-operations loss was $16.2 after tax.
  • The company changed its name from DeVry Inc. to DeVry Education Group Inc. during the quarter.

Outlook, commentary, risks and contingencies

  • Management expected fiscal 2014 revenue to decline year over year, driven by continued DeVry University enrollment weakness, partly offset by growth at other institutions. It expected $75 of fiscal 2014 expense savings at DeVry University and Carrington, and full-year capital spending of $90–$100.
  • Management said DeVry University’s turnaround included aligning costs with enrollment, improving its value proposition and using scholarships to attract and retain students. Tuition rates there remained unchanged for fiscal 2014. Management warned that additional campus consolidations and cost controls might be needed if enrollment continued to fall.
  • Management reported that DeVry Medical International enrollment trends were expected to grow at a low-single-digit pace, while noting competition risk. Carrington’s December 2013 total enrollment was slightly below the prior-year term. Brazilian admissions restrictions affecting three programs at one institution had been lifted for two; management expected to seek removal of the remaining restriction.
  • Goodwill and intangible assets totaled approximately $808.5, about 40% of total assets. Prior impairment charges included $57.0 for Carrington in fiscal 2013 and $13.5 for AAI in fiscal 2014. Further impairment is possible if results deteriorate; management identified DeVry University and Carrington as areas requiring attention.
  • Key risks include potential changes to federal student-aid and gainful-employment rules, accreditation and regulatory requirements, enrollment and competition, and foreign-currency movements. DeVry reported a $9.8 currency-translation loss for the first six months in accumulated other comprehensive income.
  • Pending matters included an appeal in a dismissed shareholder case, state investigations concerning compensation practices and student-aid matters, and a False Claims Act action involving AAI. The company said an agreement in principle was reached to resolve the latter claims, with completion expected in fiscal Q3; it could not predict the investigations’ timing or outcome.
  • Approximately $198.4 of cash was held in international operations and management intended to reinvest international earnings abroad. The filing said this cash would not be available for general domestic purposes. Fiscal 2013 funding-source disclosures showed 66% of receipts from Title IV federal assistance.

Important facts for investors to verify

  1. Confirm the intended issuer and period: this source is DeVry Education Group Inc.’s quarter ended December 31, 2013, not a filing naming Covista Inc.
  2. Track DeVry University enrollment, revenue, scholarship costs and turnaround progress, including whether the stated expense savings materialize.
  3. Assess the sustainability of cash generation, the location and availability of cash, capital-spending plans and continued covenant compliance.
  4. Monitor federal financial-aid and gainful-employment developments, accreditation or enrollment restrictions, and the status and potential impact of legal matters.
  5. Review impairment assumptions for goodwill and intangible assets, as well as the results and integration costs of Brazilian acquisitions.