Adtalem Global Education Inc. (NYSE: ATGE) — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020. The request metadata says “2019 Q4,” but the supplied filing is Adtalem’s FY2020 annual report, not a 2019 quarterly filing; the filing identifies Adtalem, not Covista Inc., as the registrant.
Business context
Adtalem reported continuing operations in two segments: Medical and Healthcare (Chamberlain University, AUC, Ross University School of Medicine and Ross University School of Veterinary Medicine) and Financial Services (ACAMS, Becker, OnCourse Learning and EduPristine). Results exclude Brazil, Carrington College and DeVry University, which were classified as discontinued operations. Adtalem completed the sale of Adtalem Brazil on April 24, 2020.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,052.0 million | $1,013.8 million |
| Operating income | $142.3 million | $155.8 million |
| Operating margin | 13.5% | 15.4% |
| Continuing-operations income attributable to Adtalem | $244.0 million | $107.2 million |
| Net income (loss) attributable to Adtalem, including discontinued operations | $(85.3) million | $95.2 million |
| Diluted EPS from continuing operations | $4.51 | $1.81 |
| Diluted EPS, total | $(1.58) | $1.60 |
| Cash and cash equivalents at year-end | $500.5 million | $204.2 million |
| Long-term debt principal | $294.0 million | $407.0 million |
| Cash provided by continuing operations | $149.6 million | $185.5 million |
| Capital expenditures | $44.1 million | $57.6 million |
Revenue rose 3.8% overall; excluding OnCourse Learning’s acquisition contribution, growth was 0.9%. Medical and Healthcare revenue increased 1.9% to $866.4 million; Financial Services revenue increased 11.0% to $185.6 million, including the acquisition contribution. Consolidated operating income excluding special items, a non-GAAP measure, fell 9.1% to $166.1 million. Cost of educational services was 46.6% of revenue, versus 46.5%; student services and administrative expense rose to 37.6% from 35.4%.
The large difference between continuing-operations income and total net loss primarily reflects discontinued operations, including a $287.6 million pre-tax loss on the Brazil sale. Continuing-operations results also included a $110.7 million pre-tax gain on the Brazil-related currency hedge and a $25.7 million tax benefit related to a former subsidiary investment loss. These items materially affect comparisons with recurring performance.
FY2020 cash provided by all operations was $107.7 million, including cash used by discontinued operations; continuing-operations cash flow was $149.6 million. Cash less debt principal was approximately $206.5 million at year-end. The $300 million revolving facility had $231.6 million of availability, after considering outstanding letters of credit. The company reported compliance with debt covenants. Operating lease liabilities were $227.7 million. Adtalem paid no dividends in FY2019 or FY2020 and said it did not expect cash dividends in the foreseeable future.
Material changes and notable items
- Adtalem Brazil sale proceeds were $345.9 million, plus $56.0 million of Brazil cash transferred at closing; the company also received $110.7 million from settlement of the currency hedge. The Brazil disposal generated a reported $287.6 million pre-tax loss, including a $293.4 million foreign-currency translation loss reclassified from accumulated other comprehensive loss.
- Adtalem repurchased 3.84 million shares for $136.9 million during FY2020, at an average $35.66 per share. Repurchases were suspended on March 12, 2020 amid pandemic uncertainty.
- OnCourse Learning, acquired in May 2019 for approximately $118.3 million net of acquired cash, contributed $29.2 million of FY2020 revenue. Its acquisition also resulted in significant acquired goodwill and intangible assets.
- Bad-debt provision increased to $16.2 million from $9.8 million, primarily related to student credit-extension programs. Net financing receivables declined to $34.3 million from $41.6 million, while the allowance for credit losses rose to $15.7 million from $6.3 million.
- The company adopted lease accounting standard ASC 842 in FY2020, adding right-of-use assets and lease liabilities to the balance sheet; prior-year comparative balances were not adjusted.
Outlook, management commentary and risks
- Management gave no quantified FY2021 revenue or earnings guidance in the supplied filing. It expected COVID-19 to continue pressuring revenue, net income and EPS while social-distancing measures persisted. Expected FY2021 capital spending was $45–$55 million.
- Management estimated that COVID-19 reduced FY2020 revenue by about $29 million, operating income by about $19 million and EPS by approximately $0.27–$0.29. AUC and RUSM clinical rotations were suspended beginning in March 2020, reducing combined revenue by an estimated $13 million and operating income by $10 million; ACAMS conference cancellations and weaker Becker demand also reduced results. Management expected further pressure in FY2021, particularly from lost live conferences and continued weakness in Becker demand.
- Management said cash, operating cash generation and revolver availability should fund current operations and growth plans for the foreseeable future, absent significant investment opportunities. It expected FY2021 capital spending to support Chamberlain campus development and maintenance at the medical and veterinary schools.
- Regulatory and litigation exposure remains material. AUC and RUSM received provisional Title IV recertification during FY2020 through 2022 and 2023, respectively, following repeated or increased compliance audit findings; no letter of credit, heightened cash monitoring or enrollment limits were imposed. The company disclosed numerous DeVry-related lawsuits and government matters. A $44.95 million settlement fund was escrowed and accrued in FY2020 for a proposed class settlement, subject to final approval.
- Title IV funding represented 59% of revenue in FY2019, the latest disclosed figure; FY2020 data was not yet available. Management cited significant risks from changes to student-aid rules, accreditation or state authorization, investigations and litigation, student credit losses, enrollment and employment trends, and COVID-19. Goodwill and intangible assets totaled approximately $973.7 million at June 30, 2020, making impairment a potential risk if performance weakens.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The audit identified valuation of OnCourse Learning customer relationships as a critical audit matter, focusing on discount-rate and terminal-growth assumptions.
Important facts for investors to verify
- Confirm the intended issuer and period: the supplied document is Adtalem’s FY2020 Form 10-K, rather than a Covista filing or a 2019 Q4 report.
- Review the sustainability of earnings by separating recurring continuing-operations performance from the Brazil hedge gain, tax benefit, restructuring costs and discontinued-operation losses.
- Track FY2021 enrollment, clinical-placement availability, ACAMS conference revenue and Becker demand as pandemic-related effects evolve.
- Review the final approval and payment status of the $44.95 million proposed settlement, and updates on other litigation, government inquiries and AUC/RUSM provisional certification.
- Check subsequent student-credit loss experience and the adequacy of reserves, along with Title IV funding percentages and covenant headroom.
- Assess whether cash, debt, lease commitments, buybacks and planned capital spending remain consistent with management’s liquidity outlook.