Discontinued Operations and Assets Held for Sale

6 Months Ended

Dec. 31, 2019

Discontinued Operations and Assets Held for Sale

Discontinued Operations and Assets Held for Sale

4. Discontinued Operations and Assets Held for Sale

On December 4, 2018, Adtalem completed the sale of Carrington to San Joaquin Valley College, Inc. (“SJVC”) for de minimis consideration. As the sale represented a strategic shift that has a major effect on Adtalem’s operations and financial results, Carrington is presented in Adtalem’s financial reporting as a discontinued operation. Adtalem has retained certain leases associated with the Carrington operations. Adtalem remains the primary lessee on these leases and subleases to Carrington. Adtalem records the proceeds from these subleases as an offset to operating costs. Adtalem also assigned certain leases to Carrington but remains contingently liable under these leases. Adtalem recorded a pre-tax loss of $11.1 million on the sale of Carrington and transferred $9.9 million of cash and restricted cash balances to Carrington in the second quarter of fiscal year 2019, subject to post-closing adjustments to be completed in fiscal year 2020.

On December 11, 2018, Adtalem completed the sale of DeVry University to Cogswell Education, LLC (“Cogswell”) for de minimis consideration. As the sale represented a strategic shift that has a major effect on Adtalem’s operations and financial results, DeVry University is presented in Adtalem’s financial reporting as a discontinued operation. The purchase agreement includes an earn-out entitling Adtalem to payments of up to $20 million over a ten-year period payable based on DeVry University’s free cash flow. In connection with the closing of the sale, Adtalem loaned to DeVry University $10.0 million under the terms of the promissory note, dated as of December 11, 2018 (the “Note”). The Note bears interest at a rate of 4% per annum, payable annually in arrears, and has a maturity date of January 1, 2022. DeVry University may make prepayments on the Note. This loan is recorded as other assets, net on the Consolidated Balance Sheets. Adtalem has retained certain leases associated with DeVry University operations. Adtalem remains the primary lessee on these leases and subleases to DeVry University. In addition, Adtalem owns the buildings for certain DeVry University operating and administrative office locations and leases space to DeVry University under one-year operating leases, renewable annually at DeVry University’s option. Adtalem records the proceeds from these leases and subleases as an offset to operating costs. Adtalem also assigned certain leases to DeVry University but remains contingently liable under these leases. Adtalem recorded a pre-tax loss of $21.7 million on the sale of DeVry University and transferred $39.0 million of cash and restricted cash balances to DeVry University in the second quarter of fiscal year 2019.

On October 18, 2019, Adtalem entered into a Stock Purchase Agreement (“Purchase Agreement”) with Estácio Participações S.A. (“Estácio”) and Sociedade de Ensino Superior Estaćio de Sá Ltda, a wholly owned subsidiary of Estácio (“Purchaser”). Pursuant to the terms and subject to the conditions set forth in the Purchase Agreement, Adtalem will sell all of the issued and outstanding shares of Adtalem Brasil Holding S.A. (a/k/a Adtalem Brazil) to the Purchaser for R$1,920 million (approximately $465 million as of October 18, 2019). In addition, Adtalem expects to receive approximately $74 million in settlement of cash balances as of June 30, 2019 of $89 million, net of indebtedness of $15 million. 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 of R$2,154 million (approximately $536 million as of December 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. Adtalem recorded a pre-tax unrealized loss on the hedge agreement derivative based on the foreign exchange forward spot rate as of December 31, 2019 of $28.0 million in the second quarter of fiscal year 2020 (see Note 18 “Fair Value Measurements” for additional information) and is included within accrued liabilities on the December 31, 2019 Consolidated Balance Sheet. This transaction is expected to be completed in the first half of fiscal year 2021. This sale advances Adtalem’s strategy to become a leading workforce solutions provider in the medical and healthcare and financial services industries, aligning

Adtalem’s portfolio to better address the global workforce skills gap, and serve its markets in a more competitive and comprehensive way. As the potential sale represents a strategic shift that will have a major effect on Adtalem’s operations and financial results, Adtalem Brazil is presented in Adtalem’s financial reporting as a discontinued operation. All prior periods presented disclose Adtalem Brazil’s assets and liabilities as held for sale, and operations and cash flows of Adtalem Brazil, which were previously included as the only component of the Business and Law reportable segment, as discontinued operations.

The following is a summary of balance sheet information of assets and liabilities reported as held for sale, which includes only Adtalem Brazil balances as Carrington and DeVry University were sold as of each period presented below (in thousands):

	December 31,		June 30,		December 31,
	2019		2019		2018
Assets:
Current assets:
Cash and cash equivalents	$	104,040	$	95,243	$	86,506
Accounts receivable, net		60,494		74,269		56,718
Prepaid expenses and other current assets		6,750		8,411		9,795
Total current assets held for sale		171,284		177,923		153,019
Noncurrent assets:
Property and equipment, net		74,939		81,250		82,753
Operating lease assets		72,665		—		—
Intangible assets, net		114,296		120,108		119,802
Goodwill		179,199		187,195		185,582
Other assets, net		12,108		10,338		8,900
Total noncurrent assets held for sale		453,207		398,891		397,037
Total assets held for sale	$	624,491	$	576,814	$	550,056
Liabilities:
Current liabilities:
Accounts payable	$	2,936	$	4,242	$	2,083
Accrued salaries, wages and benefits		13,273		17,828		15,074
Accrued liabilities		6,484		10,193		7,721
Deferred revenue		3,096		3,846		4,076
Current operating lease liabilities		10,905		—		—
Total current liabilities held for sale		36,694		36,109		28,954
Noncurrent liabilities:
Long-term operating lease liabilities		62,345		—		—
Other liabilities		13,488		16,146		20,804
Total noncurrent liabilities held for sale		75,833		16,146		20,804
Total liabilities held for sale	$	112,527	$	52,255	$	49,758

The following is a summary of income statement information of operations reported as discontinued operations, which includes Adtalem Brazil operations and includes Carrington’s and DeVry University’s operations through the date of each respective sale (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2019		2018		2019		2018
Revenue	$	55,153	$	146,046	$	100,805	$	305,600
Operating cost and expense:
Cost of educational services		35,717		88,231		69,665		186,690
Student services and administrative expense		15,706		54,658		30,079		119,363
Restructuring expense (gain)		391		129		426		(313)
Asset impairment charge - building and equipment		—		(289)		—		1,953
Total operating cost and expense		51,814		142,729		100,170		307,693
Operating income (loss) from discontinued operations		3,339		3,317		635		(2,093)
Other income (expense):
Interest and dividend income		761		1,001		1,739		1,976
Interest expense		(806)		(550)		(1,963)		(1,834)
Net other (expense) income		(45)		451		(224)		142
Income (loss) from discontinued operations before income taxes		3,294		3,768		411		(1,951)
Loss on disposal of discontinued operations before income taxes		—		(32,714)		—		(32,714)
Income tax benefit		823		4,595		550		5,580
Income (loss) from discontinued operations		4,117		(24,351)		961		(29,085)
Net income attributable to redeemable noncontrolling interest		—		(299)		—		(308)
Income (loss) from discontinued operations attributable to Adtalem	$	4,117	$	(24,650)	$	961	$	(29,393)