ADTALEM GLOBAL EDUCATION INC. In this Quarterly Report on Form 10-Q,Adtalem Global Education Inc. , together with its subsidiaries, is collectively referred to as "Adtalem," "we," "our," "us," or similar references. Discussions within the MD&A may contain forward-looking statements. See the "Forward-Looking Statements" section for details about the uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements. Throughout this MD&A, we sometimes use information derived from the Consolidated Financial Statements and the notes thereto but not presented in accordance withU.S. generally accepted accounting principles ("GAAP"). Certain of these items are considered "non-GAAP financial measurers" under theSecurities and Exchange Commission ("SEC") rules. See the "Non-GAAP Financial Measures and Reconciliations" section for the reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures. Certain items presented in tables may not sum due to rounding. Percentages presented are calculated from the underlying numbers in thousands. Discussions throughout this MD&A are based on continuing operations unless otherwise noted. The MD&A should be read in conjunction with the Consolidated Financial Statements and the notes thereto.
Available Information
Through its website, Adtalem offers its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other reports filed with theSEC . Adtalem's website is http://www.adtalem.com. Except as otherwise stated in these reports, the information contained on our website or available by hyperlink from our website is not incorporated into our Annual Report on Form 10-K, this Quarterly Report on Form 10-Q, or other documents we file with, or furnish to, theSEC .
Segments
During the fourth quarter of fiscal year 2019, Adtalem renamed two of its segments: Professional Education was renamed Financial Services, and Technology and Business was renamed Business and Law.
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As ofSeptember 30, 2019 , Adtalem eliminated its Business and Law reportable segment when Adtalem Education ofBrazil ("Adtalem Brazil") was classified as discontinued operations and assets held for sale. In addition to the potential sale of Adtalem Brazil, during the second quarter of fiscal year 2019, Adtalem divestedDeVry University andCarrington College ("Carrington"). In accordance with GAAP, we have classified theDeVry University , Carrington, and AdtalemBrazil entities as "Held for Sale" and "Discontinued Operations" in all periods presented as applicable. As a result, all financial results, disclosures, and discussions of continuing operations in this Quarterly Report on Form 10-Q excludeDeVry University , Carrington, and Adtalem Brazil operations, unless otherwise noted. See Note 4 "Discontinued Operations and Assets Held for Sale" to the Consolidated Financial Statements for additional discontinued operations information.
We present two reportable segments as follows:
Medical and Healthcare - Offers degree and non-degree programs in the medical and healthcare postsecondary education industry. This segment includes the operations ofChamberlain University ("Chamberlain"),American University of theCaribbean School of Medicine ("AUC"),Ross University School of Medicine ("RUSM"), andRoss University School of Veterinary Medicine ("RUSVM"). Financial Services - Offers test preparation, certifications, conferences, seminars, memberships, and subscriptions to business professionals in the areas of accounting, anti-money laundering, banking, and mortgage industries. This segment includes the operations of theAssociation of Certified Anti-Money Laundering Specialists ("ACAMS"), Becker Professional Education ("Becker"),OnCourse Learning ("OCL"), and EduPristine. "Home Office and Other" includes activity not allocated to a reportable segment. Financial and descriptive information about Adtalem's reportable segments is presented in Note 20 "Segment Information" to the Consolidated Financial Statements. Certain expenses previously allocated to Adtalem Brazil within our former Business and Law segment during fiscal year 2019 have been reclassified to the Home Office and Other segment based on discontinued operations reporting guidance regarding allocation of corporate overhead. For fiscal year 2020, home office costs to support the remaining businesses are being allocated to the Medical and Healthcare and Financial Services segments.
Second Quarter Highlights
Financial and operational highlights for the second quarter of fiscal year 2020 include:
Adtalem revenue grew
? year 2020 compared to the year-ago quarter, driven by increased revenue in both
the Medical and Healthcare and the Financial Services segments.
Net income from continuing operations attributable to Adtalem of
decreased
compared to the year-ago quarter primarily driven by an insurance settlement
gain of
no comparable gain in the current year quarter, and an unrealized
? million loss recorded in the second quarter of fiscal year 2020 on the
deal-contingent foreign currency hedge arrangement entered into in connection
with the announced proposed sale of Adtalem Brazil to economically hedge the
Brazilian Real denominated purchase price through mitigation of the currency
exchange rate risk. The change in value in this hedge does not result in a
change in proceeds, net of the hedge settlement, from the amount originally
expected from the sale transaction.
Net income attributable to Adtalem decreased
second quarter of fiscal year 2020 compared to the year-ago quarter. Net income
? from continuing operations attributable to Adtalem excluding special items of
year 2020 compared to the year-ago quarter.
For the
? increased 3.6% and 1.2%, respectively, compared to the same term last year.
Chamberlain continues to invest in its programs, student services, and campus
locations.
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The acquisition of OCL in May 2019 , contributed to revenue growth in theFinancial Services segment of 9.1% in the second quarter of fiscal year 2020
compared to the year-ago quarter. Revenue was negatively affected by
? million in the second quarter of fiscal year 2020 by the shift of revenue from
the largest annual ACAMS conference from the second quarter of fiscal year 2019
to the first quarter of fiscal year 2020. ACAMS memberships have increased to
more than 77,000 as of
Adtalem continued its eleventh share repurchase program by repurchasing a total
? of 1,755,160 shares of Adtalem's common stock at an average cost of
share during the second quarter of fiscal year 2020.
Results of Operations
The following table presents selected Consolidated Statements of Income data as a percentage of revenue for each of the periods indicated.
Three Months Ended Six Months Ended
December 31, December 31,
2019 2018 2019 2018
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of educational services 47.8 % 46.5 % 49.0 % 46.8 %
Student services and administrative
expense 36.3 % 35.1 % 37.6 % 36.3 %
Restructuring expense 0.7 % 1.4 % 1.6 % 8.8 %
Gain on sale of assets 0.0 % 0.0 % (0.9) % 0.0 %
Settlement gain 0.0 % (6.1) % 0.0 % (3.2) %
Total operating cost and expense 84.9 % 76.9 % 87.3 % 88.7 %
Operating income from continuing
operations 15.1 % 23.1 % 12.7 % 11.3 %
Net other expense (11.8) % (2.0) % (6.9) % (1.8) %
Income from continuing operations
before income taxes 3.3 % 21.2 % 5.8 % 9.5 %
Income tax provision (2.8) % (4.7) % (2.2) % (1.9) %
Income from continuing operations 0.5 % 16.5 % 3.6 % 7.5 %
Income (loss) from discontinued
operations, net of tax 1.5 % (9.6) % 0.2 % (5.9) %
Net income 2.0 % 6.9 % 3.8 % 1.6 %
Net loss (income) attributable to
redeemable noncontrolling interest 0.0 % (0.1) % 0.0 % (0.0) %
Net income attributable to Adtalem 2.1 % 6.8 % 3.8 % 1.6 %
Revenue
The following tables present revenue by segment detailing the changes from the year-ago periods (in thousands):
Three Months Ended December 31, 2019
Medical and Financial Home Office
Healthcare Services and Other Consolidated
Fiscal year 2019 as reported $ 212,627 $ 42,142 $ (808) $ 253,961
Organic growth 7,553 (4,269) 808 4,092
Effect of acquisitions - 8,119 - 8,119
Fiscal year 2020 as reported $ 220,180 $ 45,992 $ - $ 266,172
Fiscal year 2020 % change:
Organic growth 3.6 % (10.1) % NM 1.6 %
Effect of acquisitions - 19.3 % NM 3.2 %Fiscal year 2020 % change as reported 3.6 % 9.1 %
NM 4.8 %
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Six Months Ended December 31, 2019
Medical and Financial Home Office
Healthcare Services and Other Consolidated
Fiscal year 2019 as reported $ 414,727 $ 77,788 $ (1,615) $ 490,900
Organic growth 12,940 (402) 1,615 14,153
Effect of acquisitions - 15,732 - 15,732
Fiscal year 2020 as reported $ 427,667 $ 93,118 $ - $ 520,785
Fiscal year 2020 % change:
Organic growth 3.1 % (0.5) % NM 2.9 %
Effect of acquisitions - 20.2 % NM 3.2 %Fiscal year 2020 % change as reported 3.1 % 19.7 % NM 6.1 % Total consolidated revenue for the second quarter of fiscal year 2020 of$266.2 million increased 4.8%, or$12.2 million , compared to the year-ago quarter. Total consolidated revenue for the first six months of fiscal year 2020 of$520.8 million increased 6.1%, or$29.9 million , compared to the year-ago period. Excluding the revenue added from OCL, which was acquired in the fourth quarter of fiscal year 2019, revenue grew 1.6%, or$4.1 million , in the second quarter and grew 2.9%, or$14.2 million , in the first six months of fiscal year 2020 compared to the year-ago periods.
Medical and Healthcare
Revenue in the Medical and Healthcare segment increased 3.6%, or$7.6 million , to$220.2 million in the second quarter and increased 3.1%, or$12.9 million , to$427.7 million in the first six months of fiscal year 2020 compared to the year-ago periods. The increase in revenue in the second quarter and first six months of fiscal year 2020 is driven primarily by a revenue increase at Chamberlain primarily due to increasing total student enrollment and a revenue increase at the medical and veterinary schools primarily due to increased housing revenue at RUSM from itsBarbados campus.
Chamberlain
Chamberlain Student Enrollment:
Fiscal Year 2020
Term July 2019 Sept. 2019 Nov. 2019
New students 2,396 5,595 2,711
% change from prior year (5.0) % 2.9 % 3.6 %
Total students 28,691 31,736 31,215
% change from prior year 2.3 % 1.4 % 1.2 %
Fiscal Year 2019
Term July 2018 Sept. 2018 Nov. 2018 Jan. 2019 Mar. 2019 May 2019
New students 2,523 5,435 2,617 4,759 2,726 3,997
% change from prior year 1.0 % 9.5 % (6.7) % 6.4 % (3.7) % 2.6 %
Total students 28,037 31,295 30,833 32,354 32,104 30,867
% change from prior year 4.6 % 4.1 % 3.7 % 3.3 % 3.4 % 1.8 %
Chamberlain revenue increased 2.7%, or $3.2 million , to $125.5 million in the
second quarter and increased 2.6%, or $6.1 million , to $242.0 million in the
first six months of fiscal year 2020 compared to the year-ago periods, driven by
increases in total student enrollment in the July 2019 , September 2019 , and
November 2019 sessions. Chamberlain admitted its largest class of campus
students in September 2019 .
Chamberlain currently operates 22 campuses in 15 states. Chamberlain's newest
campus in
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Tuition Rates:
Tuition for the Bachelor of Science in Nursing ("BSN") onsite degree program is
$675 per credit hour. Tuition for the Registered Nurse to BSN ("RN-to-BSN")
online degree program is $590 per credit hour. Tuition for the online Master of
Science in Nursing ("MSN") degree program is $650 per credit hour. Tuition for
the Family Nurse Practitioner ("FNP") degree program is $665 per credit hour.
Tuition for the online Doctor of Nursing Practice ("DNP") degree program is $750
per credit hour. Tuition for the Master of Public Health ("MPH") degree program
is $550 per credit hour. Tuition for the online Master of Social Work ("MSW")
degree program, which began in September 2019 , is $695 per credit hour. All of
these tuition rates are unchanged from the prior year. These tuition rates do
not include the cost of books, supplies, transportation, or living expenses.
Medical and Veterinary Schools
Medical and Veterinary Schools Student Enrollment:
Fiscal Year 2020
Term Sept. 2019
New students 872
% change from prior year (1.9) %
Total students 5,608
% change from prior year (4.7) %
Fiscal Year 2019
Term Sept. 2018 Jan. 2019 May 2019
New students 889 471 496
% change from prior year 9.5 % (8.5) % (0.6) %
Total students 5,887 5,548 5,220
% change from prior year 2.5 % (6.6) % (6.0) %
The medical and veterinary schools' revenue increased 4.8%, or $4.3 million , to
$94.7 million in the second quarter and increased 3.8%, or $6.8 million , to
$185.7 million in the first six months of fiscal year 2020 compared to the
year-ago periods. The principal driver of the increases were higher housing
revenue at the new Barbados campus of RUSM. These increases were partially
offset by lower tuition revenue at AUC and RUSM driven by lower enrollment and
increased discounts and scholarships from listed tuition rates.
In the September 2019 semester, total student enrollment declined at AUC, RUSM,
and RUSVM, and new student enrollment increased at AUC and RUSVM and declined at
RUSM. The lower enrollment is the result of heightened competition. Management
is executing its plan to differentiate the medical and veterinary schools from
the competition, with a core goal of increasing international students,
increasing RUSM affiliations with historically black colleges and universities
("HBCU") and Hispanic-serving institutions ("HSI"), expanding AUC's medical
education program based in the U.K. in partnership with the University of
Central Lancashire ("UCLAN"), and improving the effectiveness of marketing
investments. Management believes the demand for medical and veterinary education
remains strong and can support management's longer-term expectations to grow new
enrollments in the low-single digit range; however, heightened competition may
continue to adversely affect the medical and veterinary schools' ability to
continue to attract qualified students to its programs resulting in lower
tuition revenue.
In September 2019 , AUC opened its medical education program in the U.K. in
partnership with UCLAN. The program offers students a postgraduate diploma in
International Medical Sciences ("PGDip-IMS") from UCLAN, followed by their
Doctor of Medicine degree from AUC. Students will then be eligible to do
clinical rotations at AUC's clinical sites, which include hospitals in the U.S. ,
the U.K. , and Canada . This program is aimed at preparing students for the U.S.
Medical Licensing Examination ("USMLE").
In January 2019 , RUSM moved its basic science instruction to a new location in
Barbados . The academic facility is located in Bridgetown and student housing is
located close to the academic facility in the parish of Christ Church and
includes amenities, student services, and convenient transportation to campus.
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Tuition Rates:
Effective for semesters beginning in
? beginning basic sciences and final clinical rotation portions of AUC's medical
program are
rates represent a 3.5% increase over the prior academic year.
Effective for semesters beginning in
beginning basic sciences and Internal Medicine Foundations/final clinical
? portion of the programs at RUSM are
semester. These tuition rates represent a 4.0% increase over the prior academic
year.
For students who entered the RUSVM program in
tuition rate for the pre-clinical (Semesters 1-7) and clinical curriculum
(Semesters 8-10) is
? who entered RUSVM before
clinical curriculum are
effective
a 2.8% increase over the prior academic year.
The respective tuition rates for AUC, RUSM, and RUSVM do not include the cost of transportation, living expenses, or health insurance.
Financial Services
Revenue in the Financial Services segment increased 9.1%, or$3.9 million , to$46.0 million in the second quarter and increased 19.7%, or$15.3 million , to$93.1 million in the first six months of fiscal year 2020 compared to the year-ago periods. Excluding the revenue added from OCL, which was acquired in the fourth quarter of fiscal year 2019, revenue declined 10.1%, or$4.3 million , in the second quarter and declined 0.5%, or$0.4 million , in the first six months of fiscal year 2020 compared to the year-ago periods. The decrease in revenue in the second quarter of fiscal year 2020 was impacted by$5.3 million due to the timing of the largest ACAMS conference of the year, which took place in the first quarter of fiscal year 2020 compared to it taking place in the second quarter of fiscal year 2019. The divestiture of Becker's courses for healthcare students, which was completed inAugust 2019 , also decreased revenue by$1.5 million and$2.8 million in the second quarter and the first six months of fiscal year 2020, respectively. These revenue decreases were partially offset by growth in other ACAMS product sales. ACAMS memberships have increased to more than 77,000 as ofDecember 31, 2019 , driven by strong domestic growth as well as expansion in theAsia Pacific and European regions.
Cost of Educational Services
The largest component of cost of educational services is the cost of faculty and
staff who support educational operations. This expense category also includes
the costs of facilities, adjunct faculty, supplies, housing, bookstore, other
educational materials, student education-related support activities, and the
provision for bad debts. The following tables present cost of educational
services by segment detailing the changes from the year-ago periods (in
thousands):
Three Months Ended December 31, 2019
Medical and Financial Home Office
Healthcare Services and Other Consolidated
Fiscal year 2019 as reported $ 109,142 $ 9,084 $ (149) $ 118,077
Cost increase (reduction) 8,845 (3,140) 716 6,421
Effect of acquisitions - 2,760 - 2,760
Fiscal year 2020 as reported $ 117,987 $ 8,704 $ 567 $ 127,258
Fiscal year 2020 % change:
Cost increase (reduction) 8.1 % (34.6) % NM 5.4 %
Effect of acquisitions - 30.4 % NM 2.3 %
Fiscal year 2020 % change as
reported 8.1 % (4.2) % NM 7.8 %
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Six Months Ended December 31, 2019
Medical and Financial Home Office
Healthcare Services and Other Consolidated
Fiscal year 2019 as reported $ 214,782 $ 15,028 $ (199) $ 229,611
Cost increase (reduction) 19,944 (44) 1,382 21,282
Effect of acquisitions - 4,399 - 4,399
Fiscal year 2020 as reported $ 234,726 $ 19,383 $ 1,183 $ 255,292
Fiscal year 2020 % change:
Cost increase (reduction) 9.3 % (0.3) % NM 9.3 %
Effect of acquisitions - 29.3 % NM 1.9 %
Fiscal year 2020 % change as
reported 9.3 % 29.0 % NM 11.2 %
Cost of educational services increased 7.8%, or $9.2 million , to $127.3 million
in the second quarter and increased 11.2%, or $25.7 million , to $255.3 million
in the first six months of fiscal year 2020 compared to the year-ago periods.
Excluding the costs added with the acquisition of OCL, which occurred in the
fourth quarter of fiscal year 2019, cost of educational services increased 5.4%,
or $6.4 million , in the second quarter and increased 9.3%, or $21.3 million , in
the first six months of fiscal year 2020 compared to the year-ago periods. Cost
increased in the second quarter and first six months of fiscal year 2020 due to
increased housing costs at RUSM's Barbados campus, increased investment in
growth across all reportable segments and increased institutional loan program
bad debt expense of $4.3 million and $7.4 million for the second quarter and
first six months of fiscal year 2020, respectively, primarily at the medical and
veterinary schools. Management evaluates the collectability of receivable
balances monthly and quarterly and bad debt reserves incorporate the most recent
facts and analytics. During the last several quarters management instituted
changes in how the institutional loan portfolio is managed. During the last
quarter, changes in collection efforts have resulted in greater insight as to
the underlying performance of the portfolio. These insights coupled with our
most recent set of circumstances, facts and analytics, resulted in management
increasing the bad debt reserve. Cost increases in the second quarter of fiscal
year 2020 were partially offset by a decrease in costs of $1.3 million
associated with the largest ACAMS conference of the year, which took place in
the first quarter of fiscal year 2020 compared to it taking place in the second
quarter of fiscal year 2019.
As a percentage of revenue, cost of educational services was 47.8% and 49.0% in
the second quarter and first six months of fiscal year 2020, respectively,
compared to 46.5% and 46.8% during the year-ago periods, respectively. The
increases in the percentage were primarily the result of revenue growth in the
lower margin source of RUSM housing and the increase in bad debt expense,
primarily at the medical and veterinary schools.
Student Services and Administrative Expense
The student services and administrative expense category includes expenses
related to sales, student admissions, marketing and advertising, general and
administrative, curriculum development, and amortization expense of finite-lived
intangible assets related to business acquisitions. The following tables present
student services and administrative expense by segment detailing the changes
from the year-ago periods (in thousands):
Three Months Ended December 31, 2019
Medical and Financial Home Office
Healthcare Services and Other ConsolidatedFiscal year 2019 as reported$ 55,964 $ 23,425 $
9,862$ 89,251 Cost increase (reduction) 4,630 2,082 (5,416) 1,296 Effect of acquisitions - 6,101 - 6,101 Fiscal year 2020 as reported$ 60,594 $ 31,608 $ 4,446 $ 96,648 Fiscal year 2020 % change: Cost increase 8.3 % 8.9 % NM 1.5 % Effect of acquisitions - 26.0 % NM 6.8 % Fiscal year 2020 % change as reported 8.3 % 34.9 % NM 8.3 % 44 Table of Contents Six Months Ended December 31, 2019 Medical and Financial Home Office Healthcare Services and Other Consolidated Fiscal year 2019 as reported$ 111,752 $ 48,376 $ 18,287 $ 178,415 Cost increase (reduction) 10,962 3,317 (9,215) 5,064 Effect of acquisitions - 12,256 - 12,256 Fiscal year 2020 as reported$ 122,714 $ 63,949 $ 9,072 $ 195,735 Fiscal year 2020 % change: Cost increase 9.8 % 6.9 % NM 2.8 % Effect of acquisitions - 25.3 % NM 6.9 % Fiscal year 2020 % change as reported 9.8 % 32.2 % NM 9.7 % Student services and administrative expense increased 8.3%, or$7.4 million , to$96.6 million in the second quarter and increased 9.7%, or$17.3 million , to$195.7 million in the first six months of fiscal year 2020 compared to the year-ago periods. Excluding the costs added with the acquisition of OCL, which occurred in the fourth quarter of fiscal year 2019, student services and administrative expense increased 1.5%, or$1.3 million , in the second quarter and increased 2.8%, or$5.1 million , in the first six months of fiscal year 2020 compared to the year-ago periods. Cost increases to support future enrollment growth at Chamberlain, the medical and veterinary schools, ACAMS, and Becker were the primary drivers of the increase in expense in the second quarter and first six months of fiscal year 2020. Amortization of finite-lived intangible assets increased$1.0 million and$1.9 million in the second quarter and first six months of fiscal year 2020, respectively, compared to the year-ago periods, driven by OCL intangible asset amortization. In the tables above, approximately$4.5 and$9.1 million in the second quarter and first six months of fiscal year 2020, respectively, of the cost reduction at home office was driven by reallocation of costs from Home Office and Other to the segments.
As a percentage of revenue, student services and administrative expense was 36.3% and 37.6% in the second quarter and first six months of fiscal year 2020, respectively, compared to 35.1% and 36.3% during the year-ago periods, respectively. Amortization expense for OCL intangible assets and costs to support enrollment growth caused the increases in this percentage.
Restructuring Expense
Restructuring expense decreased 44.7%, or$1.6 million , to$2.0 million in the second quarter and decreased 80.3%, or$34.5 million , to$8.5 million in the first six months of fiscal year 2020 compared to the year-ago periods. The primary driver of the decreased restructure expense was the result of the impairment of property and equipment at theDominica campus of RUSM and severance related to workforce reductions inDominica recorded during the fiscal year 2019 periods. See Note 6 "Restructuring Charges" to the Consolidated Financial Statements for additional information on restructuring charges.
Additional restructuring expense is expected to be recorded during the remainder of fiscal year 2020 as Adtalem plans to continue to reduce costs.
Gain on Sale of Assets
OnSeptember 27, 2019 , Adtalem closed on the sale of itsColumbus, Ohio , campus facility. Net proceeds from the sale of$6.4 million resulted in a gain on the sale of$4.8 million in the first six months of fiscal year 2020. This gain was recorded at Adtalem's home office, which is classified as "Home Office and Other" in Note 20 "Segment Information" to the Consolidated Financial Statements. There was no corresponding gain in the first six months of fiscal year 2019. Settlement Gain InDecember 2018 , AUC and RUSM received the final insurance settlement proceeds related to the property damage and disruption of operations caused by Hurricanes Irma and Maria in fiscal year 2018. AUC and RUSM have completed substantially all planned repairs and replacement of damaged facilities and equipment. AUC and RUSM received total insurance proceeds of$110.0 million to fully cover the cumulative expense incurred for the evacuation process, temporary 45
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housing, and transportation of students, faculty and staff, incremental costs of teaching at alternative sites, and cumulative impairment write-downs. These costs totaled$106.7 million , less$12.3 million in deductibles, which were adjusted in the second quarter of fiscal year 2019 from$13.4 million recorded in the first quarter of fiscal year 2018. The resulting gain of$15.6 million was recorded in the second quarter of fiscal year 2019. There is no corresponding gain in the first six months of fiscal year 2020.
Operating Income from Continuing Operations
The following tables present operating income from continuing operations by segment detailing the changes from the year-ago periods (in thousands):
Three Months Ended December 31, 2019
Medical and Financial Home Office
Healthcare Services and Other Consolidated
Fiscal year 2019 as reported $ 60,647 $ 9,633 $ (11,611) $ 58,669
Organic change (5,921) (3,212) 5,508 (3,625)
Effect of acquisitions - (742) - (742)Restructuring expense change 2,028 (1,137) 689
1,580
Settlement gain (15,571) - -
(15,571)
Fiscal year 2020 as reported$ 41,183 $ 4,542 $ (5,414) $ 40,311 Six Months Ended December 31, 2019 Medical and Financial Home Office Healthcare Services and Other Consolidated
Fiscal year 2019 as reported
$ 55,437 Organic change (17,965) (3,674) 9,446 (12,193) Effect of acquisitions - (923) - (923)
Restructuring expense change 40,916 (3,116) (3,277)
34,523
Gain on sale of assets change - - 4,779
4,779
Settlement gain (15,571) - -
(15,571)
Fiscal year 2020 as reported
$ 66,052 46 Table of Contents
The following table presents a reconciliation of operating income from continuing operations (GAAP) to operating income from continuing operations excluding special items (non-GAAP) by segment (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
Increase Increase
2019 2018 (Decrease) 2019 2018 (Decrease)
Medical and Healthcare:
Operating income (GAAP) $ 41,183 $ 60,647 (32.1) % $ 69,683 $ 62,303 11.8 %
Restructuring expense 417 2,445 (82.9) % 544 41,460 (98.7) %
Settlement gain - (15,571) NM - (15,571) NM
Operating income excluding
special items (non-GAAP) $ 41,600 $ 47,521 (12.5) % $ 70,227 $ 88,192 (20.4) %
Financial Services:
Operating income (GAAP) $ 4,542 $ 9,633 (52.8) % $ 6,670 $ 14,383 (53.6) %
Restructuring expense 1,137 - NM 3,116 - NM
Operating income excluding
special items (non-GAAP) $ 5,679 $ 9,633 (41.0) % $ 9,786 $ 14,383 (32.0) %
Home Office and Other:
Operating loss (GAAP) $ (5,414) $ (11,611) 53.4 % $ (10,301) $ (21,249) 51.5 %
Restructuring expense 401 1,090 (63.2) % 4,825 1,548 211.7 %
Gain on sale of assets - - NM (4,779) - NM
Operating loss excluding special
items (non-GAAP) $ (5,013) $ (10,521) 52.4 % $ (10,255) $ (19,701) 47.9 %
Adtalem Global Education :
Operating income (GAAP) $ 40,311 $ 58,669 (31.3) % $ 66,052 $ 55,437 19.1 %
Restructuring expense 1,955 3,535 (44.7) % 8,485 43,008 (80.3) %
Gain on sale of assets - - NM (4,779) - NM
Settlement gain - (15,571) NM - (15,571) NM
Operating income excluding
special items (non-GAAP) $ 42,266 $ 46,633 (9.4) % $ 69,758 $ 82,874 (15.8) %
Total consolidated operating income from continuing operations decreased $18.4
million , to $40.3 million in the second quarter and increased $10.6 million , to
$66.1 million in the first six months of fiscal year 2020 compared to the
year-ago periods.
The primary driver of the decreased operating income from continuing operations
in the second quarter of fiscal year 2020 was the $15.6 million hurricane
insurance settlement gain in the second quarter of fiscal year 2019.
Consolidated operating income from continuing operations excluding special items
decreased 9.4%, or $4.4 million , in the second quarter of fiscal year 2020
compared to the year-ago quarter. The primary drivers of this decrease were an
increase in bad debt expense at the medical and veterinary schools of $4.3
million and the loss of operating income at ACAMS due to the timing of their
largest conference of the year taking place in the first quarter of fiscal year
2020 compared to it taking place in the second quarter of fiscal year 2019. In
addition, cost increases to support future enrollment growth at Chamberlain, the
medical and veterinary schools, ACAMS, and Becker were also drivers of the
decrease in operating income in the second quarter of fiscal year 2020.
The primary driver of the increased operating income from continuing operations
in the first six months of fiscal year 2020 was the decrease in restructuring
expense of $34.5 driven by the impairment of property and equipment at the
Dominica campus of RUSM and severance related to workforce reductions in
Dominica recorded during the first six months of fiscal year 2019. This decrease
was partially offset by the $15.6 million hurricane insurance settlement gain
recorded in the first six months of fiscal year 2019. Consolidated operating
income from continuing operations excluding special items decreased 15.8%, or
$13.1 million , in the first six months of fiscal year 2020 compared to the
year-ago period. The primary drivers of this decrease were an increase in bad
debt expense at the medical and veterinary schools of $7.4 million and higher
costs at RUSM of operating in Barbados compared to the post-hurricane temporary
location in Tennessee . In addition, cost increases to support future enrollment
growth at Chamberlain, the medical and veterinary schools, ACAMS, and Becker
were also drivers of the decrease in operating income in the first six months of
fiscal year 2020.
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Medical and Healthcare
Medical and Healthcare segment operating income decreased 32.1%, or $19.5
million , to $41.2 million in the second quarter and increased 11.8%, or $7.4
million , to $69.7 million in the first six months of fiscal year 2020 compared
to the year-ago periods. Segment operating income excluding special items
decreased 12.5%, or $5.9 million , in the second quarter and decreased 20.4%, or
$18.0 million , in the first six months of fiscal year 2020 compared to the
year-ago periods. The primary drivers of the decreases in segment operating
income excluding special items relate to increased marketing expense to drive
future enrollment growth, increased bad debt expense for the institutional loan
programs, primarily at the medical and veterinary schools, higher costs at RUSM
of operating in Barbados compared to the post-hurricane temporary location in
Tennessee , and an increase of approximately $3.7 million in the second quarter
and $7.4 million in the first six months of fiscal year 2020 in home office
costs reallocated from Home Office and Other to the Medical and Healthcare
segment compared to the year-ago periods.
Financial Services
Financial Services segment operating income decreased 52.8%, or$5.1 million , to$4.5 million in the second quarter and decreased 53.6%, or$7.7 million , to$6.7 million in the first six months of fiscal year 2020 compared to the year-ago periods. Segment operating income excluding special items decreased 41.0%, or$4.0 million , in the second quarter and decreased 32.0%, or$4.6 million , in the first six months of fiscal year 2020 compared to the year-ago periods. Operating income decreased at Becker and ACAMS driven by increased costs to support future growth and an operating loss generated by OCL. Operating income in the second quarter was negatively affected at ACAMS by$4.0 million , due to the timing of their largest conference of the year taking place in the first quarter of fiscal year 2020 compared to it taking place in the second quarter of fiscal year 2019. In addition, approximately$0.8 million in the second quarter and$1.7 million in the first six months of fiscal year 2020 in home office costs were reallocated from Home Office and Other to the Financial Services segment compared to the year-ago periods.
Net Other Expense
Net other expense in the second quarter and first six months of fiscal year 2020 was$31.4 million and$36.1 million , respectively, compared to net other expense of$5.0 million and$8.9 million in the year-ago periods, respectively. The net other expense increases were primarily the result of an unrealized$28.0 million loss on the deal-contingent foreign currency hedge arrangement entered into in connection with the announced proposed sale of Adtalem Brazil (as discussed in Note 4 "Discontinued Operations and Assets Held for Sale" to the Consolidated Financial Statements) to economically hedge the Brazilian Real denominated purchase price through mitigation of the currency exchange rate risk. The hedge agreement has a total notional amount ofR$2,154 million (approximately$536 million as ofDecember 31, 2019 ). Fees associated with this arrangement are payable upon closing of the sale, only if the sale closes, and will vary based on the closing date, based on a pre-defined schedule in the hedge agreement. The derivative associated with the hedge agreement does not qualify for hedge accounting treatment under Accounting Standards Codification ("ASC") 815, and as a result, all changes in fair value are recorded within the income statement. The change in value in this hedge does not result in a change in proceeds, net of the hedge settlement, from the amount originally expected from the sale transaction.
Income Taxes
Our effective income tax rate ("ETR") from continuing operations can differ from
the 21% U.S. federal statutory rate due to several factors, including the rate
of tax applied to earnings outside the U.S. , tax incentives, changes in
valuation allowances, liabilities for uncertain tax positions, and tax benefits
on stock compensation awards. Additionally, our ETR may be impacted by the
provisions from the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), which include
primarily a tax on global intangible low-taxed income ("GILTI"), a deduction for
foreign derived intangible income ("FDII"), and a limitation of tax benefits on
certain executive compensation. The impact of the Tax Act may be revised in
future periods as we obtain additional data and any new regulations or guidance
that may be released.
The ETR from continuing operations for the three months ended December 31, 2019
was 85.3%, an increase from 22.1% for the three months ended December 31, 2018 .
This increase is primarily due to the inability to record a tax benefit on a
pre-tax unrealized loss of $28.0 million from a derivative contract related to
the deal-contingent hedge agreement on the pending Adtalem Brazil sale (see Note
4 "Discontinued Operations and Assets Held for Sale" for additional
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information). Also contributing to the increase were a reduction in the percentage of earnings from foreign operations, which are taxed at rates lower than those applied to domestic earnings, and a reduction in tax benefits for stock-based compensation, offset by various impacts due to the sale ofDeVry University in the comparable period. Excluding the one-time effects of the derivative contract and sale ofDeVry University (a non-GAAP financial measure), the ETR from continuing operations for the three months endedDecember 31, 2019 andDecember 31, 2018 , was 20.5% and 19.2%, respectively. The ETR for the six months endedDecember 31, 2019 was 37.6%, an increase from 20.5% for the six months endedDecember 31, 2018 . This increase is primarily due to the derivative contract related to the deal-contingent hedge agreement on the pending Adtalem Brazil sale, a decrease in the percentage of earnings from foreign operations versus the comparable period, and an increased net charge associated with the impact of GILTI & FDII. Excluding the one-time effects of the derivative contract and sale ofDeVry University (a non-GAAP financial measure), the ETR from continuing operations for the six months endedDecember 31, 2019 andDecember 31, 2018 , was 19.4% and 17.2%, respectively.
Discontinued Operations
Income (loss) from discontinued operations includes$7.6 million in the second quarter and$13.6 million in the first six months of fiscal year 2020, respectively, in costs primarily consisting of ongoing litigation costs, settlements, and other divestiture costs related to theDeVry University , Carrington, and Adtalem Brazil divestitures. See Note 4 "Discontinued Operations and Assets Held for Sale" to the Consolidated Financial Statements for additional information. Beginning in the second quarter of fiscal year 2018,DeVry University operations were classified as discontinued operations. In addition, beginning in the fourth quarter of fiscal year 2018, Carrington operations were classified as discontinued operations. See Note 2 "Discontinued Operations" to the Consolidated Financial Statements in Item 8 of Adtalem's Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 ("2019 Form 10-K") for additional information. The divestiture of both of these operations was completed in the second quarter of fiscal year 2019. As a result, management discontinued discussion of theDeVry University and Carrington operating results beginning with the second quarter of fiscal year 2019 Quarterly Report on Form 10-Q as comparable results are no longer meaningful. Management will continue to disclose and discuss Adtalem Brazil operations in its public filings until the period in which the sale closes as Adtalem Brazil operations continue to have an effect on Adtalem's reported net income.
Adtalem Brazil
The following table presents revenue for Adtalem Brazil detailing the changes from the year-ago periods (in thousands):
Three Months Ended Six Months Ended
December 31, 2019 December 31, 2019 Fiscal year 2019 as reported $ 62,633
$ 109,884 Organic growth (2,990) (4,010) Effect of currency change (4,490) (5,069)
Fiscal year 2020 as reported $ 55,153 $ 100,805 Fiscal year 2020 % change: Organic growth (constant currency, non-GAAP) (4.8) % (3.6) % Effect of currency change (7.2) % (4.6) % Fiscal year 2020 % change as reported (11.9) % (8.3) % Revenue at Adtalem Brazil decreased 11.9%, or$7.5 million , to$55.2 million in the second quarter and decreased 8.3%, or$9.1 million , to$100.8 million in the first six months of fiscal year 2020 compared to the year-ago periods. The decrease in value of the Brazilian Real compared to theU.S. dollar decreased reported revenue in the second quarter and first six months of fiscal year 2020 by$4.5 million and$5.1 million , respectively, compared to the year-ago periods. Constant currency calculations assume conversions of local currency amounts at exchange rates in effect in the year-ago period compared to those conversions at exchange rates in effect during the current fiscal year period. On a constant currency basis (a non-GAAP financial measure), revenue decreased 4.8% in the second quarter and decreased 3.6% in the first six months of fiscal year 2020 compared to the year-ago periods. Declines in enrollment at Wyden
Educational
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institutions ("Wyden") and in law exam test preparation courses, along with increased discounting were the primary drivers of the revenue decreases.
Brazil's economy presented challenges for enrollment growth and created pricing pressures in the education sector. Adtalem Brazil's revenue results have been negatively impacted by these conditions as well as reductions inBrazil's government-funded loan program, "Fundo de Financiamento Estudantil" or "Students Financing Fund " ("FIES") and increased competition. Adtalem Brazil students are eligible for loans under the FIES program, which is financed by the Brazilian government. The Brazilian government has stated that it is supportive of the FIES program, which is an important factor in helping to increase the number of college graduates. However, the changes enacted during fiscal year 2018 reducing the number of contracts available for grant under the FIES program by approximately 31% to all higher education institutions inBrazil , have impacted Adtalem Brazil's growth. Adtalem Brazil institutions have increased efforts to attract more non-FIES program students in order to diversify their payer mix. Also, Adtalem Brazil is working with private lenders to increase funding sources for prospective students. Management believes Adtalem Brazil institutions offer programs of study and operate in areas of the country that the Brazilian government favors in issuing loans under the FIES program. Should economic conditions continue to weaken and additional austerity measures be instituted by the Brazilian government, Adtalem Brazil's ability to grow its student enrollment may be further impacted.
Adtalem Brazil Student Enrollment:
Fiscal Year 2020 Fiscal Year 2019
Term Sept. 2019 Sept. 2018 Mar. 2019
New students 17,588 17,956 27,505
% change from prior year (2.0) % 23.8 % 17.7 %
Total students 76,904 81,088 79,919
% change from prior year (5.2) % 3.5 % 5.6 %
These enrollment figures include students enrolled in degree-granting programs
and exclude students enrolled in test preparation programs at Damásio
Educacional ("Damasio"). The decrease in enrollment in the September 2019 term
is driven by a decline in new and continuing onsite enrollment at Wyden and the
degree granting operations of Damasio, partially offset with increases in new
and continuing online enrollment and enrollment increases at Grupo Ibmec
Educacional S.A. ("Ibmec"). Enrollment increases in online students are less
beneficial to revenue growth due to lower tuition pricing of the online
programs.
The following table presents operating income for Adtalem Brazil detailing the changes from the year-ago periods (in thousands):
Three Months Ended Six Months Ended
December 31, 2019 December 31, 2019
Fiscal year 2019 as reported $ 11,630 $ 12,354
Organic change 533 3,407
Restructuring expense change (282) (241)
Effect of currency change (983) (1,311)
Fiscal year 2020 as reported $ 10,898 $ 14,209
Adtalem Brazil operating income decreased$0.7 million to$10.9 million in the second quarter and increased$1.9 million to$14.2 million in the first six months of fiscal year 2020 compared to the year-ago periods. Operating income was reduced by the effect of exchange rate changes by$1.0 million in the second quarter and$1.3 million in the first six months of fiscal year 2020. On a constant currency basis and excluding the effect of restructuring charges (a non-GAAP financial measure), Adtalem Brazil operating income increased$0.5 million in the second quarter and increased$3.4 million in the first six months of fiscal year 2020 compared to the year-ago periods, primarily driven by cost reduction measures implemented to offset declining enrollment and the need for higher discounting. These operating income amounts in fiscal years 2020 and 2019 have been adjusted for the reduction in home office expenses allocated to Adtalem Brazil within discontinued operations and now allocated to continuing operations. For fiscal year 2020, home office costs to support the remaining businesses are being allocated to the Medical and Healthcare and Financial
Services segments.
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For fiscal year 2019, these costs were allocated to Home Office and Other. See Note 20 "Segment Information" to the Consolidated Financial Statements for additional information.
Regulatory Environment
Student Payments
Adtalem's primary source of liquidity is the cash received from payments for
student tuition, books, other educational materials, and fees. These payments
include funds originating as financial aid from various federal and state loan
and grant programs, student and family educational loans ("private loans"),
employer educational reimbursements, scholarships, and student and family
financial resources. Adtalem continues to provide financing options for its
students, including Adtalem's institutional loan programs.
The following table, which excludes DeVry University , Carrington, and Adtalem
Brazil revenue, summarizes Adtalem's revenue by fund source as a percentage of
total revenue for fiscal years 2019 and 2018:
Fiscal Year
Funding source: 2019 2018
Federal assistance (Title IV) program funding (grants and
loans) 59 % 59 %
Private loans 2 % 2 % Student accounts, cash payments, private scholarships, employer and military provided tuition assistance, and other 39 %
39 % Total 100 % 100 %
The pattern of cash receipts during the year is seasonal. Adtalem's cash collections on accounts receivable peak at the start of each institution's term. Accounts receivable reach their lowest level at the end of each term.
Financial Aid
Like other higher education institutions, Adtalem is highly dependent upon the timely receipt of federal financial aid funds. All financial aid and assistance programs are subject to political and governmental budgetary considerations. In theU.S. , the Higher Education Act ("HEA") guides the federal government's support of postsecondary education. If there are changes to financial aid programs that restrict student eligibility or reduce funding levels, Adtalem's financial condition and cash flows could be materially and adversely affected. See Item 1A "Risk Factors" in our 2019 Form 10-K for a discussion of student financial aid related risks. In addition, government-funded financial assistance programs are governed by extensive and complex regulations in theU.S. Like any other educational institution, Adtalem's administration of these programs is periodically reviewed by various regulatory agencies and is subject to audit or investigation by other governmental authorities. Any violation could be the basis for penalties or other disciplinary action, including initiation of a suspension, limitation, or termination proceeding. If theU.S. Department of Education ("ED") determines that we have failed to demonstrate either financial responsibility or administrative capability in any pending program review, or otherwise determines that an institution has violated the terms of its Program Participation Agreement ("PPA"), we could be subject to sanctions including: fines, penalties, reimbursement for discharged loan obligations, a requirement to post a letter of credit, and/or suspension or termination of our eligibility to participate in the Title IV programs. OnOctober 13, 2016 ,DeVry University and ED reached a negotiated agreement (the "ED Settlement") to settle the claims asserted in a Notice of Intent to Limit from theMulti-Regional andForeign School Participation Division of the Federal Student Aid office of theDepartment of Education ("ED FSA"). Under the terms of the ED Settlement, among other things, without admitting wrongdoing,DeVry University agreed to certain compliance requirements regarding its past and future advertising, thatDeVry University's participation in Title IV programs is subject to provisional certification for five years and thatDeVry University is required to post a letter of credit equal to the greater of 10% ofDeVry University's annual Title IV disbursements or$68.4 million for a five-year period. The posted letter of credit continues to 51
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be posted by Adtalem following the closing of the sale ofDeVry University and reduces Adtalem's borrowing capacity dollar-for-dollar under its Credit Facility (as defined in Note 13 "Debt" to the Consolidated Financial Statements). An ED regulation known as the "90/10 Rule" affects only proprietary postsecondary institutions, such as Chamberlain, AUC, RUSM, and RUSVM. Under this regulation, an institution that derives more than 90% of its revenue on a cash basis from Title IV student financial assistance programs in two consecutive fiscal years loses eligibility to participate in these programs for at least two fiscal years. The following table details the percentage of revenue on a cash basis from federal financial assistance programs (excluding theU.S. Department of Veterans Affairs and military tuition assistance benefits) for each of Adtalem's Title IV-eligible institutions for fiscal years 2019 and
2018:
Fiscal Year
2019 2018
Chamberlain University 62 % 62 %
83 % 81 %
Ross University School of Veterinary Medicine 83 % 82 %
In September 2016 , Adtalem committed to voluntarily limit to 85% the amount of
revenue that each of its four Title IV-eligible institutions derive from federal
funding, including the U.S. Department of Veterans Affairs and military tuition
assistance benefits. As disclosed in the third party review reports that have
been made publicly available, Adtalem's institutions have met this lower
threshold for each fiscal year since the commitment was made. Adtalem is
committed to implementing measures to promote responsible recruitment and
enrollment, successful student outcomes, and informed student choice. Management
believes students deserve greater transparency to make informed choices about
their education. This commitment builds upon a solid foundation and brings
Adtalem to a new self-imposed level of public accountability and transparency.
A financial responsibility test is required for continued participation by an
institution's students in U.S. federal financial assistance programs. For
Adtalem's participating institutions, this test is calculated at the
consolidated Adtalem level. The test is based upon a composite score of three
ratios: an equity ratio that measures the institution's capital resources; a
primary reserve ratio that measures an institution's ability to fund its
operations from current resources; and a net income ratio that measures an
institution's ability to operate profitably. A minimum score of 1.5 is necessary
to meet ED's financial standards. Institutions with scores of less than 1.5 but
greater than or equal to 1.0 are considered financially responsible, but require
additional oversight. These schools are subject to heightened cash monitoring
and other participation requirements. An institution with a score of less than
1.0 is considered not financially responsible. However, a school with a score of
less than 1.0 may continue to participate in the Title IV programs under
provisional certification. In addition, this lower score typically requires that
the school be subject to heightened cash monitoring requirements and post a
letter of credit (equal to a minimum of 10% of the Title IV aid it received in
the institution's most recent fiscal year).
For the past several years, Adtalem's composite score has exceeded the required
minimum of 1.5. If Adtalem becomes unable to meet requisite financial
responsibility standards or otherwise demonstrate, within the regulations, its
ability to continue to provide educational services, then Adtalem could be
subject to heightened cash monitoring or be required to post a letter of credit
to enable its students to continue to participate in federal financial
assistance programs.
Liquidity and Capital Resources
Adtalem's consolidated cash and cash equivalents balance of$67.3 million ,$204.2 million , and$208.3 million as ofDecember 31, 2019 ,June 30, 2019 , andDecember 31, 2018 , respectively, included cash and cash equivalents held at Adtalem's international operations of$37.8 million ,$75.3 million , and$30.0 million as ofDecember 31, 2019 ,June 30, 2019 , andDecember 31, 2018 , respectively, which is available to Adtalem for general company purposes. As ofDecember 31, 2019 , the cash and cash equivalents balance attributable to AdtalemBrazil was$104.0 million , which is excluded from theDecember 31, 2019 balances above as they are classified as assets held for sale and are not available for Adtalem general company purposes. In accordance with the terms of the AdtalemBrazil purchase agreement (see Note 4 "Discontinued Operations and Assets Held for Sale" to the Consolidated Financial Statements), Adtalem expects to receive approximately$74 million in settlement of cash balances at Adtalem Brazil as ofJune 30, 2019 of$89 million , net of indebtedness of$15 million 52
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Under the terms of Adtalem institutions' participation in financial aid programs, certain cash received from state governments and ED is maintained in restricted bank accounts. Adtalem receives these funds either after the financial aid authorization and disbursement process for the benefit of the student is completed, or just prior to that authorization. Once the authorization and disbursement process for a particular student is completed, the funds may be transferred to unrestricted accounts and become available for Adtalem to use in operations. This process generally occurs during the academic term for which such funds have been authorized. Cash in the amount of$3.5 million ,$1.0 million , and$0.8 million was held in restricted bank accounts as ofDecember 31, 2019 ,June 30, 2019 , andDecember 31, 2018 , respectively.
Cash Flow Summary
Operating Activities
The following table provides a summary of cash flows from operations (in
thousands):
Six Months Ended
December 31,
2019 2018Income from continuing operations$ 18,711 $
37,006
Non-cash items 90,425
78,349
Changes in assets and liabilities (133,432)
(113,291)
Net cash (used in) provided by operating activities-continuing operations$ (24,296) $
2,064
Cash used in operating activities by continuing operations in the first six
months of fiscal year 2020 was
The increase in non-cash items of
A decrease of
? equipment. This was primarily the result of recording
impairment write-downs of property and equipment at RUSM's
the first six months of fiscal year 2019.
? An increase of
assets which results from the implementation of ASC 842 on
? A decrease of
timing of deductions.
An increase of
derivative contracts driven by an unrealized loss on the deal-contingent
? foreign currency hedge arrangement entered into in the second quarter of fiscal
year 2020 to economically hedge the Brazilian Real denominated sales price of
Adtalem Brazil through mitigation of the currency exchange rate risk.
A decrease of
? fiscal year 2019 resulting from final settlement of hurricane claims which were
in excess of expense recorded for hurricane related costs.
? An increase of
reserves for institutional student loans.
? An increase in realized gain on the sale of assets of
sale of the
Changes in assets and liabilities from
A
balances (excluding provisions for bad debts) due to higher accounts receivable
balances at the Medical and Healthcare and Financial Services segments. These
balances are seasonally higher at
? compared to
basic science enrollment in the fall semester. The increase in accounts
receivable at the Financial Services segment is driven by an increase in
accounting firm receivables at Becker due to higher firm revenue compared to
the year-ago period.
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A
? due to the timing of the AUC, RUSM, and RUSVM academic terms at
2019, which is the end of a term, compared to
middle of a term.
A
? payments under operating lease liabilities recorded upon the implementation of
ASC 842 on
A
? current assets, accounts payable, accrued payroll and benefits, and accrued
liabilities balances due to the timing of disbursements in the normal
processing cycles. Investing Activities
Capital expenditures in the first six months of fiscal year 2020 were
Capital spending for the remainder of fiscal year 2020 will support continued investment for new campus development at Chamberlain and maintenance at the medical and veterinary schools. Management anticipates full fiscal year 2020 capital spending to be in the$45 to$50 million range, including$20.3 million spent during the first six months of fiscal year 2020. The source of funds for this capital spending will be from operations or the Credit Facility (as defined and discussed in Note 13 "Debt" to the Consolidated Financial Statements). OnSeptember 27, 2019 , Adtalem closed on the sale of itsColumbus, Ohio , campus facility. Net proceeds from the sale of$6.4 million resulted in a gain on the sale of$4.8 million . This gain was recorded at Adtalem's home office, which is classified as "Home Office and Other" in Note 20 "Segment Information" to the Consolidated Financial Statements. In the second quarter of fiscal year 2019, AUC and RUSM received the final insurance proceeds in settlement of claims made related to Hurricanes Irma and Maria. The total proceeds received from insurance settlements were in excess of expense recorded for hurricane-related evacuation processes, temporary housing, and transportation of students, faculty and staff, and incremental costs of teaching at alternative sites, less deductibles. The resulting excess proceeds of$35.7 million were applied against asset damages and capital repairs and replacement in the second quarter of fiscal year 2019, which requires classification of the gain as an investing activity. OnDecember 4, 2018 , Adtalem completed the sale of its ownership of all the outstanding equity interests inU.S. Education Holdings LLC , the holding company of Carrington, toSan Joaquin Valley College, Inc. ("SJVC"), pursuant to terms and conditions of the Membership Interest Purchase Agreement ("MIPA"), datedJune 28, 2018 . The equity interests were sold for de minimis consideration, subject to customary adjustments for working capital and required transfer of$9.9 million of cash and restricted cash balances in the second quarter fiscal year 2019. OnDecember 11, 2018 , Adtalem completed the sale of the equity interest ofDeVry University toCogswell Education, LLC ("Cogswell") under the terms of the purchase agreement datedDecember 4, 2017 . The equity interests were sold for de minimis consideration, subject to customary adjustments for working capital and required$39.0 million of cash and restricted cash balances in the second quarter of fiscal year 2019. In connection with the completion of the sale, Adtalem loaned$10.0 million toDeVry University under the terms of the promissory note, datedDecember 11, 2018 (the "Note"). The Note bears interest at a rate of 4% per annum, payable annually in arrears, and has a maturity
date ofJanuary 1, 2022 . 54 Table of Contents Financing Activities The following table provides a summary of cash flows from financing activities (in thousands): Six Months EndedDecember 31, 2019 2018
Proceeds from exercise of stock options$ 2,028 $
16,784
Repurchase of common stock for treasury (100,019)
(115,933)
Net borrowings (payments) under credit facility 13,500
(1,500)
Payment for purchase of redeemable noncontrolling interest of subsidiary (6,247)
-
Other (32)
(6,089)
Net cash used in financing activities-continuing operations$ (90,770) $
(106,738)
As ofDecember 31, 2019 , the amount available under the current share repurchase program, announced onNovember 7, 2018 , totaled$82.1 million . OnJanuary 31, 2020 , the Board of Directors (the "Board") authorized Adtalem's twelfth share repurchase program, which allows Adtalem to repurchase up to$300 million of its common stock throughDecember 31, 2021 . The new program will commence when the repurchases from the current program are complete. See Note 15 "Share Repurchases" to the Consolidated Financial Statements for additional information on our current share repurchase program.
As of
Management believes current balances of unrestricted cash, cash generated from operations, and our credit facility will be sufficient to fund both Adtalem's current domestic and international operations, growth plans, and current share repurchase program for the foreseeable future unless significant investment opportunities should arise.
Contractual Arrangements
Adtalem's long-term contractual obligations consist of its$600 million Credit Facility (as defined and discussed in Note 13 "Debt" to the Consolidated Financial Statements), operating leases (discussed in Note 11 "Leases" to the Consolidated Financial Statements) on facilities, and agreements for various services. In fiscal year 2018, Adtalem recorded a liability of$96.3 million for the one-time transition tax on the deemed repatriation of foreign earnings, pursuant to the Tax Act. This amount was reduced to$8.7 million after utilization of tax credits and current and prior year tax losses, and is payable over eight years. The first installment will be required in fiscal year 2021. OnDecember 11, 2018 , Adtalem completed the sale ofDeVry University to Cogswell. In connection with the closing of the sale, Adtalem loaned toDeVry University $10.0 million under the terms of the promissory note, dated as ofDecember 11, 2018 . The Note bears interest at a rate of 4% per annum, payable annually in arrears, and has a maturity date ofJanuary 1, 2022 .DeVry University may make prepayments on the Note. OnJuly 31, 2019 , Adtalem sold itsChicago, Illinois , campus facility toDePaul College Prep Foundation ("DePaul College Prep ") for$52.0 million . Adtalem received$5.2 million of cash at the time of closing and holds a mortgage, secured by the property, fromDePaul College Prep for$46.8 million . The mortgage is due onJuly 31, 2024 as a balloon payment and bears interest at a rate of 4% per annum, payable monthly. The buyer has an option to make prepayments. Adtalem is leasing space toDeVry University at four facilities owned by Adtalem and subleasing space, in full or in part, at an additional 24 facilities, of which 16 are subleased toDeVry University and/or Carrington. Adtalem remains the primary lessee on the 24 underlying leases. These lease and sublease agreements were entered into at comparable market rates and the terms range from one to six years. Future minimum lease and sublease rental income under these agreements as ofDecember 31, 2019 , were as follows (in thousands): 55 Table of Contents Fiscal Year Amount 2020 (remaining)$ 12,131 2021 19,859 2022 16,935 2023 16,195 2024 10,434 Thereafter 7,307
Total lease and sublease rental income
Adtalem also assigned certain leases to
Seasonality
The seasonal pattern of Adtalem's enrollments and its educational programs' starting dates affect the results of operations and the timing of cash flows. Therefore, management believes that comparisons of its results of operations should primarily be made to the corresponding period in the preceding year. Comparisons of financial position should be made to both the end of the previous fiscal year and to the end of the corresponding quarterly period in the preceding year.
Off-Balance Sheet Arrangements
Adtalem is not a party to any off-balance sheet financing or contingent payment arrangements, nor are there any unconsolidated subsidiaries. Adtalem has not extended any loans to any officer, director, or other affiliated person. Adtalem has not entered into any synthetic leases, and there are no residual purchase or value commitments related to any facility lease. In connection with the announced proposed sale of Adtalem Brazil, Adtalem entered into a deal-contingent foreign currency hedge arrangement to economically hedge the Brazilian Real denominated sales price through mitigation of the currency exchange rate risk. The hedge agreement has a total notional amount ofR$2,154 million (approximately$536 million as ofDecember 31, 2019 ). Fees associated with this arrangement are payable upon closing of the sale, only if the sale closes, and will vary based on the closing date, based on a pre-defined schedule in the hedge agreement. The derivative associated with the hedge agreement does not qualify for hedge accounting treatment under ASC 815, and as a result, all changes in fair value are recorded within the income statement. Adtalem recorded a pre-tax unrealized loss on the hedge agreement derivative based on the foreign exchange forward spot rate as ofDecember 31, 2019 of$28.0 million in the second quarter of fiscal year 2020. The change in value in this hedge does not result in a change in proceeds, net of the hedge settlement, from the amount originally expected from the sale transaction. Adtalem did not enter into any other derivatives, swaps, futures contracts, calls, hedges, or non-exchange traded contracts during the first six months of fiscal year 2020.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates as disclosed in our 2019 Form 10-K.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 "Summary of Significant Accounting Policies" to the Consolidated Financial Statements.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations of future events based
on certain assumptions and include any statement that does not directly relate
to any historical or current fact. Forward-looking statements can also be
identified by words such as "future," "believe," "expect," "anticipate,"
"estimate," "plan," "intend," "may," "will," "would," "could," "can,"
"continue," "preliminary," "range," and similar terms. These forward-looking
statements are subject to risk and uncertainties that could cause actual results
to differ materially from those
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described in the statements. These risk and uncertainties include the risk factors described in Item 1A "Risk Factors" of our 2019 Form 10-K and this Quarterly Report on Form 10-Q, which should be read in conjunction with the forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements are based on information available to us as of the date any such statements are made, and we do not undertake any obligation to update any forward-looking statement, except as required by law.
Non-GAAP Financial Measures and Reconciliations
We believe that certain non-GAAP financial measures provides investors with useful supplemental information regarding the underlying business trends and performance of Adtalem's ongoing operations and is useful for period-over-period comparisons. We use these supplemental non-GAAP financial measures internally in our assessment of performance and budgeting process. However, these non-GAAP financial measures should be not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The following are non-GAAP financial measures used in this Quarterly Report on Form 10-Q:
Net income from continuing operations attributable to Adtalem excluding special
items (most comparable GAAP measure: net income attributable to Adtalem) -
Measure of Adtalem's net income attributable to Adtalem adjusted for
restructuring expense, gain on sale of assets, settlement gain, tax charges
related to the divestiture of
Earnings per share from continuing operations excluding special items (most comparable GAAP measure: earnings per share) - Measure of Adtalem's diluted earnings per share adjusted for restructuring expense, gain on sale of assets, settlement gain, tax charges related to the divestiture ofDeVry University , loss on derivative, and discontinued operations. Operating income from continuing operations excluding special items (most comparable GAAP measure: operating income from continuing operations) - Measure of Adtalem's operating income from continuing operations adjusted for restructuring expense, gain on sale of assets, and settlement gain. This measure is applied on a consolidated and segment basis, depending on the context of the discussion. Effective income tax rate from continuing operations excluding special items (most comparable GAAP measure: effective income tax rate from continuing operations) - Measure of Adtalem's effective tax rate adjusted for tax effect on loss on derivative and tax charges related to the divestiture ofDeVry University .
A description of special items in our non-GAAP financial measures described above are as follows:
Restructuring charges primarily related to the sale of Becker's courses for
? healthcare students, real estate consolidations at Adtalem's home office, and
the closing of the RUSM campus in
? Gain on the sale of Adtalem's
? Settlement gain related to the final insurance settlement related to Hurricanes
Irma and Maria at AUC and RUSM.
Loss on the deal-contingent foreign currency hedge arrangement entered into in
? connection with the announced proposed sale of Adtalem Brazil to economically
hedge the Brazilian Real denominated purchase price through mitigation of the
currency exchange rate risk.
? Tax charges related to the divestiture of
? Discontinued operations include the operations of Adtalem Brazil, Carrington,
andDeVry University . Constant currency - Certain information for Adtalem Brazil, which is classified as a discontinued operation, is presented on a constant currency basis, which is a non-GAAP measure, along with the nearest GAAP measure. The following tables provide a reconciliation from the most directly comparable GAAP measure to these non-GAAP financial measures. The operating income reconciliation is included in the results of operations section above and the constant currency disclosures are located within the Adtalem Brazil results of operations discussion above. 57
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Net income attributable to Adtalem reconciliation to net income from continuing operations attributable to Adtalem excluding special items (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2019 2018 2019 2018Net income attributable to Adtalem (GAAP)$ 5,525 $ 17,295 $
19,886$ 7,765 Restructuring expense 1,955 3,535 8,485 43,008 Gain on sale of assets - - (4,779) - Settlement gain - (15,571) - (15,571) Loss on derivative 28,006 - 28,006 - Tax charges related to the divestiture of DeVry University - 1,526 - 1,526 Income tax impact on non-GAAP adjustments (1) (461) 2,829 (804) (5,123) Loss from discontinued operations (4,117) 24,650 (961) 29,393 Net income from continuing operations attributable to Adtalem excluding special items (non-GAAP)$ 30,908 $ 34,264 $
49,833
(1) Represents the income tax impact of non-GAAP continuing operations
adjustments that is recognized in our GAAP financial statements.
Earnings per share reconciliation to earnings per share from continuing operations excluding special items (shares in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2019 2018 2019 2018Earnings per share, diluted (GAAP)$ 0.10 $ 0.29 $ 0.36 $ 0.13 Effect on diluted earnings per share: Restructuring expense 0.04 0.06 0.15 0.71 Gain on sale of assets - - (0.09) - Settlement gain - (0.26) - (0.26) Loss on derivative 0.52 - 0.51 - Tax charges related to the divestiture of DeVry University - 0.03 - 0.03 Income tax impact on non-GAAP adjustments (1) (0.01) 0.05 (0.01) (0.08) Loss from discontinued operations (0.08) 0.41 (0.02) 0.49 Earnings per share from continuing operations excluding special items, diluted (non-GAAP)$ 0.57 $ 0.57 $ 0.90 $ 1.01 Diluted shares used in EPS calculation 54,280 60,000
55,192 60,598
(1) Represents the income tax impact of non-GAAP continuing operations
adjustments that is recognized in our GAAP financial statements.
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Effective income tax rate from continuing operations reconciliation to effective
income tax rate from continuing operations excluding special items (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2019 2018 2019 2018
Pre-tax results:Income from continuing operations before income taxes (GAAP)$ 8,873 $ 53,714 $ 29,987 $ 46,533 Loss on derivative 28,006 - 28,006 -
Income from continuing operations before income taxes excluding special items (non-GAAP)
$ 36,879 $ 53,714 $ 57,993 $ 46,533 Taxes: Income tax provision (GAAP)$ (7,570) $ (11,857) $ (11,276) $ (9,527)
Tax charges related to the divestiture of DeVry University - 1,526 - 1,526
Income tax provision excluding special items (non-GAAP)
Tax rate: Effective income tax rate (GAAP) 85.3 % 22.1 % 37.6 % 20.5 % Effective income tax rate excluding special items (non-GAAP) 20.5 %
19.2 % 19.4 % 17.2 %
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