Covista Inc. quarterly report, Q2 FY2017

Business context and reporting period

The supplied filing identifies the registrant as DeVry Education Group Inc., not Covista Inc. It is an unaudited Form 10-Q for the quarter and six months ended December 31, 2016 (fiscal 2017 second quarter). DeVry provides postsecondary education through Medical and Healthcare, International and Professional Education, and Business, Technology and Management segments.

Financial performance and liquidity

Metric	Three months ended Dec. 31, 2016	Six months ended Dec. 31, 2016
Revenue	$456.4 million	$906.2 million
Operating income	$4.8 million	$38.0 million
Net income attributable to DeVry	$14.4 million; $0.23 per diluted share	$39.6 million; $0.62 per diluted share
Operating cash flow	Not separately reported for the quarter	$34.9 million

Quarterly operating and attributable net margins were approximately 1.1% and 3.2%; six-month margins were approximately 4.2% and 4.4%. The quarter included $56.3 million of regulatory settlement expense, a $4.8 million loss on assets held for sale, and $5.1 million of restructuring expense. Management’s non-GAAP reconciliation reported attributable net income excluding these and other specified special charges of $54.7 million for the quarter and $83.4 million for the six months; these measures are not GAAP results.

At December 31, cash and cash equivalents were $199.9 million, restricted cash $11.1 million, current assets $427.4 million, and current liabilities $325.6 million. The current ratio was approximately 1.31. Revolver borrowings were $225 million at a weighted average rate of 2.73%; the $400 million facility matures March 31, 2020. Outstanding letters of credit were $68.5 million, including the $68.4 million required for the Department of Education settlement. The company reported covenant compliance. About $158.8 million of cash was held internationally and management said it was not available for domestic general corporate purposes.

Six-month operating cash flow fell to $34.9 million from $76.5 million a year earlier. Investing used $351.0 million, including $330.6 million for the ACAMS acquisition; financing provided $207.9 million, including revolver borrowings. Cash declined $108.2 million from fiscal year-end. Capital expenditures were $20.4 million, and management expected fiscal 2017 spending of $65–70 million.

Material changes versus the prior comparable period

• Quarterly revenue was essentially flat year over year; six-month revenue increased 1.0%. Excluding currency effects, revenue declined 1.5% for the quarter and 0.3% for the six months.
• DeVry University revenue fell 23.6% for the quarter and 23.9% for the six months, reflecting lower enrollment and increased discounting. In contrast, International and Professional Education benefited from the ACAMS, Grupo Ibmec, and Facimp acquisitions and currency; Medical and Healthcare six-month revenue rose 2.7%.
• Reported operating results improved substantially from prior-year losses, when the company recorded a $99.5 million impairment charge. Lower restructuring costs also helped; current-period regulatory settlement and asset-sale charges partly offset the improvement. Excluding specified special charges, operating income increased 26.6% for the quarter and 23.5% for the six months, according to management.
• Student Services and Administrative Expense declined 8.5% for the quarter and 5.1% for the six months, reflecting cost reductions. ACAMS acquisition costs partly offset savings.
• ACAMS was acquired July 1, 2016 for $330.6 million net of cash acquired. Goodwill rose to $854.8 million from $588.0 million at June 30, 2016, primarily because of that acquisition.

Outlook, management commentary, risks, and unusual items

• Management expected third-quarter fiscal 2017 revenue to decline 3–4% year over year and full-year revenue to be flat to down approximately 1%. Growth in Medical and Healthcare and International and Professional Education, together with expected currency benefit, was expected to be offset by continuing DeVry University declines.
• Management expected third-quarter operating costs to decline 1–2% year over year and projected an additional $5–10 million of restructuring charges in the remainder of fiscal 2017. It also expected further cost controls and indicated additional DeVry University consolidations or closures were likely.
• The FTC settlement required $49.4 million in cash payments, forgiveness of $30.4 million of institutional loans, and forgiveness of $20.2 million in former-student receivables, plus advertising substantiation and compliance measures. The company recorded $56.3 million of settlement expense, including the FTC cash payment, $4.1 million of unreserved loans, and a $2.75 million NYAG settlement accrual. The NYAG agreement required $2.25 million in consumer restitution and $0.5 million in penalties, fees, and costs. The company said it settled without admitting wrongdoing (the NYAG agreement without admitting or denying allegations).
• Under its Department of Education settlement, DeVry University entered five-year provisional certification, must post a letter of credit tied to Title IV disbursements, and may not make specified historical graduate-employment representations. The filing said student access to Title IV funds was not otherwise limited, but provisional status carries fewer due-process protections and requires ED approval for certain substantial changes.
• Other risks include pending federal and state reviews and lawsuits concerning advertising and graduate outcomes; substantial reliance on federal student aid; and enrollment, pricing, and competitive pressures. DeVry University enrollment declines, Carrington enrollment weakness, and Brazilian economic conditions and FIES funding changes are notable operating risks. Chamberlain’s Houston campus was placed on conditional approval, barring new admissions through September 2017; management expected to seek a return to full approval.
• Goodwill and intangible assets totaled approximately 55% of assets. Management reported no interim impairment trigger, but warned that materially weaker performance, especially at DeVry University or Carrington, could result in further impairment. The Pomona campus was classified as held for sale and written down by $4.8 million.
• Management stated that DeVry University’s revenue had declined nearly 50% since fiscal 2014 and described a transformation and cost-reduction program. Chamberlain’s November 2016 enrollment increased 10.2%; DeVry University total undergraduate enrollment remained down roughly 20–23% across reported recent sessions.

Important facts for investors to verify

• Confirm the issuer and filing identity: the provided 10-Q is for DeVry Education Group Inc., although the request metadata names Covista Inc.
• Track DeVry University enrollment, revenue, discounting, and whether cost reductions can offset continued declines.
• Verify the cash, revolver, letter-of-credit, and covenant position, including the domestic availability of cash held by international operations.
• Monitor the effects of FTC, NYAG, and Department of Education settlements, provisional certification, and unresolved investigations and litigation.
• Assess impairment sensitivity given the concentration of goodwill and intangible assets, alongside Carrington and DeVry University operating performance.
• Check the progress of the stated revenue outlook, restructuring plans, capital spending, and the Chamberlain Houston campus approval process.