Business Context and Reporting Period
Company: DeVry Inc. (Note: Input metadata listed "Covista Inc.", but the filing text identifies the registrant as DeVry Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2006
Business Overview: DeVry operates three primary segments: DeVry University (undergraduate and graduate programs in technology, business, and healthcare), Medical and Healthcare (Ross University School of Medicine/Veterinary Medicine and Chamberlain College of Nursing), and Professional and Training (Becker Professional Review for CPA/CFA exams). The company serves students in the U.S., Canada, and the Caribbean.
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 (Restated) |
|---|---|---|
| Total Revenues | $843.3 million | $781.3 million |
| Net Income | $43.1 million | $18.0 million |
| Earnings Per Share (Diluted) | $0.61 | $0.26 |
| Operating Income | $57.5 million (Pre-tax) | $21.7 million (Pre-tax) |
| Cash from Operations | $90.8 million | $87.0 million |
| Total Assets | $872.5 million | $910.0 million |
| Total Debt (Funded) | $125.0 million | $225.0 million |
| Cash and Equivalents | $130.6 million | $161.8 million |
Margins: Net income margin improved to 5.1% in 2006 from 2.3% in 2005. Operating income margin (Income Before Taxes/Revenue) was 6.8% in 2006 compared to 2.8% in 2005.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 7.9% ($62.0 million) driven by enrollment growth and tuition increases across all segments.
- DeVry University: Revenue up 4.9% to $677.2 million. New undergraduate enrollment increased 16.4% in Spring 2006, marking the fifth consecutive term of growth.
- Professional & Training: Revenue up 21.6% to a record $54.0 million, driven by CPA and CFA exam demand.
- Medical & Healthcare: Revenue up 22.7% to $112.1 million, aided by the full-year inclusion of Chamberlain College of Nursing and enrollment growth at Ross University.
- Profitability: Operating profits more than doubled. The DeVry University segment turned a $0.6 million operating loss in 2005 into a $20.1 million operating income in 2006.
- Debt Reduction: Total funded debt decreased by $100 million to $125 million. The company paid down $100 million in debt during fiscal 2006 and an additional $40 million in July 2006.
- Asset Sales: Sold the West Hills, California facility in September 2006 for $36 million, expecting a pre-tax gain of approximately $19.8 million in Q1 2007.
Guidance, Outlook, and Risks
- Management Commentary: Management cites improved marketing execution, better integration of recruiting functions, and a recovery in technology employment as key drivers for enrollment growth. The company plans to open 6-8 new DeVry University Centers in fiscal 2007.
- Capital Allocation: Free cash flow was used to invest in operations and aggressively reduce debt. Capital expenditures for 2006 were $25.3 million, lower than the prior year, but are expected to increase in 2007 to support growth.
- Key Risks:
- Financial Aid Dependency: Approximately 70-75% of revenues at DeVry University and Ross University are derived from government-sponsored financial aid. Changes in regulations or funding levels pose a significant risk.
- Regulatory Compliance: The company must maintain specific financial responsibility ratios (minimum score of 1.5) to participate in federal aid programs. DeVry exceeded this threshold in 2006.
- Competition: Intense competition from public institutions, community colleges, and online programs.
- Enrollment Trends: Reliance on technology and healthcare fields; shifts in student career interests could impact revenue.
- Unusual Items: Fiscal 2005 results included $8.4 million in workforce reduction charges, which were not present in 2006. Fiscal 2005 also included a $1.5 million impairment loss on a Denver facility.
Investor Verification Checklist
- Enrollment Quality: Verify the sustainability of the 16.4% new student growth rate in DeVry University and the 35.7% growth in online coursetakers.
- Financial Aid Exposure: Monitor federal regulatory changes regarding the "90/10 Rule" and financial responsibility tests, given the high reliance on government aid.
- Debt Covenant Compliance: Confirm continued compliance with debt covenants (fixed charge coverage, leverage ratios) following the significant debt paydown.
- Legal Contingencies: Review the status of pending litigation, including the class-action suit regarding the Information Technology program and the $3.0 million construction lien claim at the Fremont campus.
- West Hills Sale Proceeds: Track the realization of the expected $19.8 million gain from the West Hills facility sale in the first quarter of fiscal 2007.