Filing Summary
Entity and period: The supplied filing is Adtalem Global Education Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2018 (fiscal 2019 Q2), not a Covista Inc. filing. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Business Context and Reporting Period
Adtalem provides higher education and professional education through its Medical and Healthcare, Professional Education, and Technology and Business segments. Results exclude Carrington College and DeVry University, which were sold in December 2018 and reported as discontinued operations. Comparisons are with the three and six months ended December 31, 2017.
Financial Results and Liquidity
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $316.6; up 2.7% year over year | $600.8; down 0.1% |
| Operating income from continuing operations | $70.3; margin 22.2% | $67.8; margin 11.3% |
| Continuing income attributable to Adtalem | $52.4 | $47.6 |
| Net income attributable to Adtalem | $17.3, or $0.29 diluted per share | $7.8, or $0.13 diluted per share |
| Net income from continuing operations excluding special items (non-GAAP) | $44.5; down 11.4% year over year | $71.8; versus $76.5 |
| Cash provided by operating activities | Not separately stated for the quarter | $23.0 total, including continuing operations of $31.1 and discontinued operations using $8.1 |
For context, prior-year reported net income attributable to Adtalem was a loss of $81.2 million for Q2 and $68.4 million for the six-month period. The prior-year results included a substantial Tax Act-related tax charge; reported net income comparisons therefore do not by themselves indicate underlying operating trends.
- Margins and costs: Q2 cost of educational services was 50.0% of revenue, down from 51.1%; student services and administrative expense rose to 31.6% from 29.0%. For six months, restructuring expense was $43.2 million, compared with $2.6 million a year earlier.
- Cash, debt, and liquidity: At December 31, cash and cash equivalents were $294.8 million; current assets were $506.5 million and current liabilities $244.3 million. Debt principal was $298.5 million, with $292.1 million reported net of debt issuance costs and the current portion. The $300 million revolving facility had $231.6 million undrawn availability after letters of credit. Adtalem reported compliance with debt covenants.
- Cash uses: Six-month capital expenditures were $35.4 million. Share repurchases used $115.9 million, and total cash, cash equivalents, and restricted cash decreased $148.8 million during the period.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased $8.4 million; on a constant-currency basis, management reported growth of 6.2%. The six-month reported revenue decline was largely affected by the weaker Brazilian real; constant-currency revenue increased 3.8%.
- Medical and Healthcare revenue rose 4.6% in Q2 and Professional Education rose 38.8%, including a favorable shift in the timing of ACAMS’s largest annual conference. Technology and Business revenue fell 16.6% as reported, including a $10.7 million currency impact; its constant-currency decline was 2.4%.
- Q2 operating income increased year over year, but included a $15.6 million hurricane insurance settlement gain. Excluding currency, that gain, and the increase in restructuring expense, management said Q2 operating income declined $0.8 million, or 1.3%. Six-month operating income fell 24.5%, principally reflecting higher restructuring charges.
- Q2 net other expense increased to $4.5 million from $1.1 million, primarily due to higher interest expense. Six-month interest expense was $11.8 million versus $4.4 million.
- Cash and cash equivalents declined from $430.7 million at June 30, 2018, while long-term debt principal declined from $300 million to $298.5 million. The period included the transfers of cash with the divestitures and substantial share repurchases.
Outlook, Commentary, Risks, and Unusual Items
- Outlook: Management anticipated fiscal 2019 capital spending of $65–$70 million, including approximately $20–$25 million for relocating Ross University School of Medicine (RUSM) to Barbados. It also expected additional restructuring expense in the remainder of fiscal 2019 as it continued home-office cost reductions. Management stated that cash, operating cash generation, and the credit facility were expected to fund operations, growth plans, and the current repurchase program for the foreseeable future. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- Divestitures: Carrington and DeVry University were sold for de minimis consideration, with reported pre-tax disposal losses of $11.1 million and $21.7 million, respectively. Adtalem retained or remained contingently liable on certain leases. It also loaned DeVry University $10 million at 4% interest, due January 1, 2022, and may receive earn-out payments of up to $20 million over ten years based on DeVry’s free cash flow.
- RUSM relocation and restructuring: Adtalem decided not to return to the Dominica campus and moved RUSM basic-science instruction to Barbados for the January 2019 semester. The Dominica campus property and equipment were fully impaired; six-month restructuring expense was $43.2 million, including $40.1 million associated with the impairment. The filing reports 201 employees reduced in the first six months and $28.2 million of restructuring liabilities remaining, with payments extending up to seven years.
- Hurricane settlement: Final insurance proceeds related to Hurricanes Irma and Maria generated the $15.6 million Q2 gain. The company reported $110.0 million in cumulative insurance proceeds and said substantially all planned repairs and replacements were complete.
- Key operating and regulatory risks: Adtalem depends in part on government student-aid programs and is exposed to changes in U.S. Title IV and Brazilian FIES funding, regulatory compliance, enrollment and competition, and foreign exchange. Brazilian currency translation reduced reported revenue by $23.3 million for the six-month period; the company did not have foreign-exchange hedges. RUSVM’s veterinary program was in the “zone” under gainful-employment measures; continued adverse determinations could put Title IV access at risk. The filing also describes ongoing litigation, including DeVry-related securities and student claims, and states that outcomes cannot be predicted.
- Other exposures: A 100-basis-point increase in short-term interest rates would add approximately $3.0 million to annual interest expense at the reported debt balance. The company’s leases, including leases associated with divested operations, and its $68.4 million DeVry-related letter of credit are relevant to liquidity and contingent exposure.
Most Important Facts for Investors to Verify
- Confirm the filing identity: the source is Adtalem Global Education Inc., despite the request metadata naming Covista Inc.
- Separate reported results from underlying performance: assess the $15.6 million insurance gain, $43.2 million six-month restructuring expense, divestiture losses, and prior-year Tax Act charge.
- Review enrollment, retention, tuition and student-aid trends, especially Brazilian FIES exposure and the potential Title IV implications for RUSVM’s veterinary program.
- Track the RUSM Barbados relocation, remaining Dominica-related costs, capital spending, and whether restructuring estimates or payments change.
- Assess liquidity after divestiture-related cash transfers and share repurchases, including revolving-facility availability, the DeVry letter of credit, and contingent lease obligations.
- Monitor the DeVry loan and earn-out, retained lease exposure, pending litigation, and the effect of currency and interest-rate movements.