Covista Inc. quarterly report, Q2 FY2018

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Adtalem Global Education Inc. — Form 10-Q

Reporting period: Quarter and six months ended December 31, 2017 (second quarter of fiscal 2018). The supplied filing is for Adtalem Global Education Inc., not Covista Inc. Unless noted otherwise, dollar amounts below are in millions. DeVry University is presented as discontinued operations for all periods shown.

Financial performance

  • Revenue: Continuing-operations revenue was $337.2 in the quarter, up 1.0% year over year; six-month revenue was $662.5, down 0.1%. Professional Education and Technology and Business grew, while Carrington revenue declined. Medical and Healthcare’s six-month revenue was affected by the hurricanes.
  • Operating results: Continuing-operations operating income was $55.4 for the quarter (16.4% operating margin), versus a $1.5 loss in the prior-year quarter, which included $52.2 of regulatory-settlement expense. Excluding those settlements, quarterly operating income increased 9.3%. Six-month operating income was $81.1 (12.2% margin), versus $33.3 (5.0% margin); excluding prior-year settlements, six-month operating income decreased 5.0%, mainly due to hurricane effects.
  • Net income and EPS: Net loss attributable to Adtalem was $81.2, or $1.33 per diluted share, for the quarter; six-month net loss was $68.4, or $1.10 per diluted share. Results include a $101.2 one-time tax charge related to the Tax Act and discontinued-operation losses, including $47.2 of DeVry impairment charges. Excluding discontinued operations and disclosed special items, continuing-operations income was $47.3 ($0.76 diluted EPS) for the quarter and $71.3 ($1.14 diluted EPS) for six months; these are non-GAAP measures.
  • Cash flow and investment: Six-month operating cash flow was $49.6, including $42.9 from continuing operations. Investing activities used $25.1 net; capital expenditures were $32.6. Financing activities used $55.0, including $93.2 in share repurchases. Cash and cash equivalents were $212.2 at December 31, down from $240.4 at June 30, 2017.
  • Liquidity and debt: The company had $165.0 outstanding under its revolving credit facility, at a 3.42% weighted-average rate, and $68.5 in letters of credit. The $400 facility expires March 31, 2020; borrowings may be increased to $550 subject to conditions. Adtalem reported compliance with debt covenants. Total current assets were $469.8 and current liabilities $296.8. Some cash is held internationally; $67.3 in Brazil was not available for general company purposes under the company’s stated reinvestment policy.
  • Balance sheet: Total assets were $2,210.7 and total liabilities $683.4. Goodwill of $832.9 and net intangible assets of $407.0 together represented approximately 56% of total assets.

Material changes versus prior comparable period

  • DeVry revenue fell 25.9% to $90.6 in the quarter and 23.4% to $186.4 for six months. Its results are now discontinued operations following the agreement to sell it; the company recorded $47.2 of impairment charges and reported a $25.4 after-tax discontinued-operations loss for the quarter.
  • Continuing-operations revenue was nearly flat for the six-month period, while the mix shifted: Professional Education revenue rose 13.4%, Technology and Business rose 4.5%, Medical and Healthcare fell 1.6%, and U.S. Traditional Postsecondary (Carrington) fell 11.9%.
  • Hurricanes Irma and Maria disrupted AUC and RUSM operations. Management reported $21.6 of reduced revenue and additional costs over six months, including $13.4 of net hurricane-related expense after insurance offsets. Most facility repair costs were expected to be insured, subject to deductibles.
  • The Tax Act drove the $101.2 tax charge, including a $96.3 transition-tax provision payable over eight years. Adtalem suspended cash dividends in February 2017 and continued buybacks, repurchasing $93.2 of shares during the first six months.
  • Cash flow comparisons reflect retrospective adoption of accounting guidance on restricted cash and stock-based compensation cash flows.

Outlook, commentary, risks and unusual items

  • Near-term outlook: Management expected third-quarter fiscal 2018 revenue to increase 3%–4% year over year and operating costs to increase 1%–2%. Cost guidance excluded potential restructuring and DeVry-sale charges and timing effects from hurricane insurance recoveries. Full-year capital spending, excluding hurricane-related spending, was expected to be $60–$65. No full-year earnings guidance is provided in the supplied filing text.
  • DeVry sale: The agreement provides for a de minimis purchase price, transfer of at least $7.5 of working capital (potentially up to $20.1 under specified conditions), and an earn-out of up to $20 over ten years based on free cash flow. Closing was expected in early fiscal 2019 and remained subject to regulatory, accreditor and other conditions. Adtalem said it would continue posting DeVry’s $68.4 letter of credit after closing.
  • Operational risks: The filing identifies reliance on government student aid and complex regulation, enrollment pressure at Carrington and DeVry, Brazil’s economic and FIES-funding conditions, and possible Title IV eligibility consequences. RUSVM’s veterinary program remained at risk under gainful-employment rules; an appeal was filed February 1, 2018.
  • Contingencies: The company disclosed securities, student and derivative litigation related to DeVry advertising claims, as well as an ongoing Department of Education program review. Outcomes and potential financial effects could not be predicted. The filing also notes DeVry’s provisional Title IV certification and required letter of credit.
  • Other unusual items: Adtalem recorded $4.9 of continuing-operations restructuring expense for six months and expected additional charges. The company acquired São Judas Tadeu in Brazil for approximately $6.0, with about $5.0 payable over four years. Management warned that goodwill and intangible-asset valuations depend on estimates and could be impaired if results deteriorate.

Key facts investors should verify

  • Progress and closing conditions for the DeVry divestiture, including working-capital obligations, earn-out terms and continuing letter-of-credit support.
  • Final accounting for the Tax Act, including the transition-tax estimate, GILTI treatment and subsequent cash-tax payments.
  • Hurricane insurance recoveries, repair spending, enrollment retention and return-to-campus approvals for AUC and RUSM.
  • Enrollment, revenue and cost trends at Carrington, Adtalem Brazil and RUSVM, including FIES exposure and gainful-employment appeal outcomes.
  • Cash availability by geography, revolving-facility capacity after letters of credit, debt-covenant headroom and the pace of share repurchases.
  • Developments in DeVry-related litigation and the Department of Education’s program review and Title IV requirements.