Covista Inc. annual report, FY2011

Business context and reporting period

The supplied filing is DeVry Inc.’s Form 10-K for the fiscal year ended June 30, 2011, signed August 26, 2011. This does not match the request metadata naming Covista Inc. and “2010 Q4”; the filing is an annual report, though it includes unaudited fourth-quarter results. DeVry provides education services through DeVry University, medical and healthcare schools, and international, K-12 and professional education businesses.

Financial performance and position

Net margin was 15.2% versus 14.6%. Cost of educational services fell to 42.4% of revenue from 43.1%, and student services and administrative expense fell to 34.9% from 35.4%, supporting operating leverage. The effective tax rate increased to 33.1% from 32.1%.

At June 30, 2011, cash and cash equivalents were $447.1 million, marketable securities were $2.6 million, and net accounts receivable was $114.7 million. DeVry reported no outstanding borrowings and had a $400 million revolving facility, expandable to $550 million, maturing in May 2016; $3.0 million of letters of credit were outstanding. International operations held approximately $273.4 million of cash that management intended to reinvest abroad. The filing reports total liabilities of $454.2 million and shareholders’ equity of $1,389.5 million.

Fourth-quarter results

FY2011 fourth-quarter revenue was $546.8 million, operating profit $109.6 million, net income attributable to DeVry $75.2 million, and diluted EPS $1.08. Compared with FY2010 Q4, revenue increased 7.9%, operating profit 9.0%, net income 5.1%, and diluted EPS 9.1%.

Material changes versus the prior comparable period

• Segment revenue grew across all three segments: Business, Technology and Management $1,460.1 million (+15.6%); Medical and Healthcare $558.3 million (+10.1%); and International, K-12 and Professional Education $163.9 million (+13.3%).
• Segment operating income increased 23.5% in Business, Technology and Management and 64.4% in International, K-12 and Professional Education, but declined 3.7% in Medical and Healthcare, reflecting weaker Ross and Carrington results.
• Growth moderated: consolidated revenue growth slowed from 18.7% in the first half to 9.7% in the second half, which management attributed mainly to lower new-student enrollment at DeVry University and Carrington.
• DeVry repurchased approximately 2.766 million shares for $132.9 million, compared with $41.7 million in FY2010. Declared dividends rose to $0.24 per share from $0.20.
• Becker acquired ATC International on April 30, 2011; its results were included from acquisition. DeVry acquired American University of the Caribbean for $235 million on August 3, 2011, after year-end, so it was not included in FY2011 results.

Outlook, commentary, risks and unusual items

• Management expected FY2012 capital spending of $170–$180 million, above FY2011, for technology systems, campus expansion and facilities, including investments at AUC. The filing gives no specific revenue or earnings guidance.
• Summer 2011 DeVry University undergraduate new-student enrollment fell 25.6% year over year and total undergraduate enrollment fell 5.8%. Carrington total enrollment fell 25.6%; Chamberlain total enrollment rose 40.0%. Management cited economic weakness and lower prospective-student inquiries, and described marketing, recruiting, service and capacity investments.
• Title IV funding is a major exposure: FY2010 funding data show 71% of tuition receipts from Title IV, and institution-level shares ranged from 70% to 89%. FY2011 figures were not yet available. New gainful-employment rules take effect in stages; management’s initial review had not identified programs failing the metrics, but eligibility remains subject to risks outside its control.
• Ross’s planned Freeport expansion was constrained by uncertainty over Title IV aid eligibility for students taking Foundations of Medicine courses there; the location was used only for pre-medical review courses. Carrington and Ross faced enrollment or operating-income pressure.
• DeVry disclosed a shareholder securities class action and three related derivative actions alleging improper recruiting and lending practices. The company disputed the claims, and stated it did not expect a material financial impact, while noting outcomes were uncertain.
• Goodwill and intangible assets totaled approximately $719.1 million, about 39% of total assets. FY2011 impairment testing identified no impairment; management cautioned that estimates depend on assumptions. A $6.2 million Ross prepaid-clinical-rotation balance had a $1.6 million reserve following a hospital group’s closures and contract dispute.
• There were no FY2011 real-estate or litigation-reserve charges; those unusual charges occurred in FY2009. The 2010 auction-rate securities were liquidated at par in July 2010.

Important facts for investors to verify

• Confirm the intended issuer and period: this source is DeVry Inc.’s FY2011 10-K, not a Covista Inc. 2010 Q4 filing.
• Track new-student enrollment, retention and subsequent revenue trends at DeVry University and Carrington, and whether Chamberlain’s growth offsets weakness elsewhere.
• Review Title IV reliance, gainful-employment program results, student loan defaults and any subsequent regulatory or litigation developments.
• Assess the AUC acquisition’s final purchase accounting, integration, funding and contribution to FY2012 results, alongside the planned capital-spending range.
• Monitor cash generation and domestic cash availability, share repurchases, debt-facility covenant compliance, and potential goodwill or intangible-asset impairment.