Business context and reporting period
The supplied filing is DeVry Inc.’s unaudited Form 10-Q for the three months ended September 30, 2012 (fiscal first quarter 2013), not a filing identified as Covista Inc. Investors should verify the issuer and period against the original filing. DeVry operates education businesses across three segments: Business, Technology and Management; Medical and Healthcare; and International, K-12 and Professional Education.
Key financial metrics
Amounts below are in millions of dollars except per-share data. Comparisons are with the three months ended September 30, 2011.
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $482.7 | $519.0 | Down 7.0% |
| Operating income / margin | $45.8 / 9.5% | $79.9 / 15.4% | Income down 42.7% |
| Net income attributable to DeVry | $32.0 | $57.5 | Down 44.3% |
| Diluted EPS | $0.49 | $0.83 | Down $0.34 |
| Operating cash flow | $164.1 | $186.6 | Down $22.5 |
| Capital expenditures | $26.2 | $33.8 | Down $7.6 |
Cost of educational services was $242.5 million, or 50.2% of revenue, versus $238.2 million, or 45.9%. Student services and administrative expense was $194.4 million, or 40.3% of revenue, versus $200.9 million, or 38.7%. The effective tax rate rose to 29.1% from 27.9%.
At September 30, cash and cash equivalents were $247.6 million and marketable securities were $2.8 million. Current assets were $546.1 million and current liabilities $474.2 million. DeVry had no revolving-credit borrowings; $9.3 million of letters of credit were outstanding. The facility provides up to $400 million of commitments, expandable to $550 million, and matures in May 2016. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue and earnings declined, driven chiefly by lower DeVry University enrollments and continued enrollment weakness at Carrington. DeVry University segment revenue fell 15.7% and operating income fell 58.3%.
- Medical and Healthcare revenue rose 7.4% and operating income rose 8.1%, supported by Chamberlain and medical-school enrollment growth and a full quarter of AUC results. International, K-12 and Professional Education revenue rose 17.0%; its operating loss narrowed to $0.3 million from $3.0 million.
- Operating cash flow was lower, partly reflecting reduced net income and higher receivables, including timing of financial-aid receipts and receivables from acquisitions. Deferred tuition revenue provided a substantial operating cash inflow in both periods.
- Investing cash outflow was $55.8 million versus $261.7 million, largely because the prior-year period included the $227.8 million AUC acquisition payment. Current-period investing included the $29.5 million net payment for FAVIP.
- DeVry repurchased 1.13 million shares for $25.7 million and paid $9.8 million of dividends. Shares outstanding at September 30 were 63.8 million issued and outstanding before treasury shares; the filing reports 10.5 million treasury shares.
Outlook, management commentary, risks and unusual items
- Management expected full-year FY2013 revenue to be slightly below FY2012, mainly because of prior enrollment declines at DeVry University and Carrington. It described FY2014–FY2016 as a prospective recovery and growth period, assuming enrollment improvement and continued growth at other institutions.
- Management expected $60 million in total cost and expense savings and value-creation opportunities in FY2013. It anticipated approximately $150 million of FY2013 capital spending.
- Management reported improving enrollment indicators: new Carrington enrollment rose 33.3% in the September 2012 period, Chamberlain total enrollment rose 20.2%, and the rate of decline in DeVry University new undergraduate enrollment improved for a second consecutive quarter. DeVry University and Carrington nevertheless remained exposed to weak enrollment and operating performance.
- A workforce reduction initiated in FY2012 resulted in an additional $0.7 million pretax severance charge in Q1 FY2013. In late October, DeVry decided to close and sell its Wood Dale, Illinois facility; it expected a $9–$10 million loss charge in Q2 FY2013 and approximately $2 million in annual savings.
- FAVIP acquisition consideration included approximately $30.3 million paid and a contingent payment of approximately $3.9 million if the school obtained university-center status. A separate fair-value contingent consideration liability of $2.8 million was recorded.
- Goodwill and intangible assets totaled approximately $861.9 million, about 43% of total assets. Management cited enrollment declines and impairment sensitivity; Carrington’s prior-year impairment-test fair value exceeded carrying value by less than 5%. DeVry University’s revenue declined approximately 16% year over year, while Carrington’s declined 10%.
- Pending shareholder and derivative litigation concerns alleged disclosures and admissions-advisor compensation practices. DeVry said it believed the claims were without merit and did not expect a material financial effect, while acknowledging outcomes are difficult to predict.
- Federal student-aid rules and funding are material risks. FY2011 Title IV revenue was 89% at Ross University School of Veterinary Medicine, close to the 90/10 Rule threshold; FY2012 data were not yet available. DeVry also disclosed $23 million of gross unrecognized tax benefits. Possible extension of a tax rule affecting foreign subsidiaries could change the effective tax rate.
- Approximately $123.8 million of cash was held by international operations and intended to be indefinitely reinvested, so it was not available for general domestic purposes. Management said domestic cash generation and the credit facility were expected to support operations and planned investment.
Most important facts for investors to verify
- Confirm that the intended company is DeVry Inc.; the request metadata names Covista Inc., but the supplied filing identifies DeVry Inc.
- Review enrollment and revenue trends at DeVry University and Carrington, and whether management’s stated recovery assumptions and $60 million savings target were achieved.
- Assess the quality and timing of operating cash flow, especially receivables, student-aid funding timing, and deferred tuition balances.
- Monitor impairment risks for goodwill and intangible assets, particularly at Carrington, and the expected Wood Dale closure charge and savings.
- Track Title IV compliance, regulatory developments, litigation, the tax-rule extension and unrecognized tax benefits, and the availability of cash held internationally.
- Check acquisition-related contingent payments and the status of FAVIP’s university-center application, along with remaining repurchase authorization and future capital spending.