UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) | |
| |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
| |
or | |
| |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| |
For the transition period from _____ to _____ | |
| |
Commission file number: |
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
|
|
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number; including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
þ | Accelerated filer | ☐ | ||
Non-accelerated filer | ◻ | Smaller reporting company | ||
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 29, 2020, there were
Adtalem Global Education Inc.
Form 10-Q
Table of Contents
| Page | |
Item 1. | 1 | |
1 | ||
2 | ||
3 | ||
4 | ||
5 | ||
6 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 |
Item 3. | 54 | |
Item 4. | 55 | |
Item 1. | 55 | |
Item 1A. | 55 | |
Item 2. | 57 | |
Item 3. | 57 | |
Item 4. | 57 | |
Item 5. | 57 | |
Item 6. | 58 | |
59 |
Part I. Financial Information
Item 1. Financial Statements
Adtalem Global Education Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except par value)
September 30, | June 30, | September 30, | |||||||
2020 | 2020 | 2019 | |||||||
Assets: | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | | $ | | $ | | |||
Investments in marketable securities |
| |
| |
| | |||
Restricted cash |
| |
| |
| | |||
Accounts receivable, net |
| |
| |
| | |||
Prepaid expenses and other current assets |
| |
| |
| | |||
Current assets held for sale |
| |
| |
| | |||
Total current assets |
| |
| |
| | |||
Noncurrent assets: |
|
|
|
| |||||
Property and equipment, net | | | | ||||||
Operating lease assets |
| |
| |
| | |||
Deferred income taxes |
| |
| |
| | |||
Intangible assets, net |
| |
| |
| | |||
Goodwill |
| |
| |
| | |||
Other assets, net |
| |
| |
| | |||
Noncurrent assets held for sale |
| |
| |
| | |||
Total noncurrent assets |
| |
| |
| | |||
Total assets | $ | | $ | | $ | | |||
Liabilities and shareholders' equity: |
| ||||||||
Current liabilities: |
| ||||||||
Accounts payable | $ | | $ | | $ | | |||
Accrued payroll and benefits |
| |
| |
| | |||
Accrued liabilities |
| |
| |
| | |||
Deferred revenue |
| |
| |
| | |||
Current operating lease liabilities |
| |
| |
| | |||
Current portion of long-term debt |
| |
| |
| | |||
Current liabilities held for sale |
| |
| |
| | |||
Total current liabilities |
| |
| |
| | |||
Noncurrent liabilities: |
|
|
|
|
|
| |||
Long-term debt |
| |
| |
| | |||
Long-term operating lease liabilities |
| |
| |
| | |||
Deferred income taxes |
| |
| |
| | |||
Other liabilities |
| |
| |
| | |||
Noncurrent liabilities held for sale |
| |
| |
| | |||
Total noncurrent liabilities |
| |
| |
| | |||
Total liabilities |
| |
| |
| | |||
Commitments and contingencies (Note 18) |
|
|
|
|
|
| |||
Redeemable noncontrolling interest |
| |
| |
| | |||
Shareholders' equity: |
|
|
|
|
|
| |||
Common stock, $ |
| |
| |
| | |||
Additional paid-in capital |
| |
| |
| | |||
Retained earnings |
| |
| |
| | |||
Accumulated other comprehensive loss |
| ( |
| ( |
| ( | |||
Treasury stock, at cost, |
| ( |
| ( |
| ( | |||
Total shareholders' equity |
| |
| |
| | |||
Total liabilities and shareholders' equity | $ | | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
1
Adtalem Global Education Inc.
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Revenue | $ | | $ | | |||
Operating cost and expense: |
| ||||||
Cost of educational services |
| |
| | |||
Student services and administrative expense |
| |
| | |||
Restructuring expense |
| |
| | |||
Business acquisition and integration expense |
| |
| | |||
Gain on sale of assets |
| |
| ( | |||
Total operating cost and expense |
| |
| | |||
Operating income |
| |
| | |||
Other income (expense): |
| ||||||
Interest and dividend income |
| |
| | |||
Interest expense |
| ( |
| ( | |||
Investment gain | | | |||||
Net other expense |
| ( |
| ( | |||
Income from continuing operations before income taxes |
| |
| | |||
Provision for income taxes |
| ( |
| ( | |||
Income from continuing operations |
| |
| | |||
Discontinued operations: |
| ||||||
Loss from discontinued operations before income taxes |
| ( |
| ( | |||
Benefit from (provision for) income taxes |
| |
| ( | |||
Loss from discontinued operations |
| ( |
| ( | |||
Net income |
| |
| | |||
Net loss attributable to redeemable noncontrolling interest |
| |
| | |||
Net income attributable to Adtalem Global Education | $ | | $ | | |||
Amounts attributable to Adtalem Global Education: |
| ||||||
Net income from continuing operations | $ | | $ | | |||
Net loss from discontinued operations |
| ( |
| ( | |||
Net income attributable to Adtalem Global Education | $ | | $ | | |||
Earnings (loss) per share attributable to Adtalem Global Education: |
| ||||||
Basic: |
| ||||||
Continuing operations | $ | | $ | | |||
Discontinued operations | $ | ( | $ | ( | |||
Net | $ | | $ | | |||
Diluted: |
|
| |||||
Continuing operations | $ | | $ | | |||
Discontinued operations | $ | ( | $ | ( | |||
Net | $ | | $ | | |||
Weighted-average shares outstanding: | |||||||
Basic shares | | | |||||
Diluted shares | | |
The accompanying notes are an integral part of these consolidated financial statements.
2
Adtalem Global Education Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(in thousands)
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Net income | $ | | $ | | |||
Other comprehensive income (loss), net of tax |
|
|
|
| |||
Gain (loss) on foreign currency translation adjustments |
| |
| ( | |||
Unrealized (loss) gain on marketable securities |
| ( |
| | |||
Unrealized gain on interest rate swap | | | |||||
Comprehensive income (loss) |
| |
| ( | |||
Comprehensive loss attributable to redeemable noncontrolling interest |
| |
| | |||
Comprehensive income (loss) attributable to Adtalem Global Education | $ | | $ | ( |
The accompanying notes are an integral part of these consolidated financial statements.
3
Adtalem Global Education Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Operating activities: | ||||||
Net income | $ | | $ | | ||
Loss from discontinued operations |
| |
| | ||
Income from continuing operations | | | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| ||||
Stock-based compensation expense |
| |
| | ||
Amortization and adjustments to operating lease assets | | | ||||
Depreciation |
| |
| | ||
Amortization of intangible assets |
| |
| | ||
Amortization of deferred debt issuance costs | | | ||||
Provision for bad debts | | | ||||
Deferred income taxes |
| |
| | ||
Loss on disposals, accelerated depreciation, and adjustments to property and equipment |
| |
| | ||
Realized and unrealized gain on investments | ( | ( | ||||
Realized gain on sale of assets | | ( | ||||
Changes in assets and liabilities: |
|
| ||||
Accounts receivable |
| ( |
| ( | ||
Prepaid expenses and other current assets |
| ( |
| ( | ||
Accounts payable |
| |
| ( | ||
Accrued payroll and benefits | ( | ( | ||||
Accrued liabilities |
| ( |
| ( | ||
Deferred revenue |
| |
| | ||
Operating lease liabilities | ( | ( | ||||
Other assets and liabilities |
| ( |
| | ||
Net cash provided by operating activities-continuing operations |
| |
| | ||
Net cash (used in) provided by operating activities-discontinued operations |
| ( |
| | ||
Net cash provided by operating activities |
| |
| | ||
Investing activities: |
| |||||
Capital expenditures |
| ( |
| ( | ||
Proceeds from sales of marketable securities | | | ||||
Purchases of marketable securities |
| ( |
| ( | ||
Proceeds from sale of assets |
| |
| | ||
Net cash used in investing activities-continuing operations |
| ( |
| ( | ||
Net cash used in investing activities-discontinued operations |
| |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Financing activities: |
| |||||
Proceeds from exercise of stock options |
| |
| | ||
Employee taxes paid on withholding shares |
| ( |
| ( | ||
Proceeds from stock issued under Colleague Stock Purchase Plan |
| |
| | ||
Repurchases of common stock for treasury |
| |
| ( | ||
Borrowings under credit facility |
| |
| | ||
Repayments under credit facility |
| ( |
| ( | ||
Proceeds from down payment on seller loan | | | ||||
Payment for purchase of redeemable noncontrolling interest of subsidiary |
| |
| ( | ||
Net cash used in financing activities-continuing operations |
| ( |
| ( | ||
Net cash used in financing activities-discontinued operations |
| |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| |
| ( | ||
Net increase (decrease) in cash, cash equivalents and restricted cash |
| |
| ( | ||
Cash, cash equivalents and restricted cash at beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash at end of period |
| |
| | ||
Less: cash, cash equivalents and restricted cash of discontinued operations at end of period |
| |
| | ||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
4
Adtalem Global Education Inc.
Consolidated Statements of Shareholders’ Equity
(unaudited)
(in thousands)
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Treasury | ||||||||||||||
Stock | Capital | Earnings | Loss | Stock | Total | |||||||||||||
June 30, 2019 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income attributable to Adtalem Global Education |
|
|
| |
|
|
| | ||||||||||
Other comprehensive loss, net of tax |
|
|
|
| ( |
|
| ( | ||||||||||
Stock-based compensation |
|
| |
|
|
|
| | ||||||||||
Net activity from stock-based compensation awards |
| |
| |
|
|
| ( |
| ( | ||||||||
Repurchases of common shares for treasury |
|
|
|
|
| ( |
| ( | ||||||||||
September 30, 2019 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
June 30, 2020 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income attributable to Adtalem Global Education |
| |
| | ||||||||||||||
Other comprehensive gain, net of tax |
| |
| | ||||||||||||||
Stock-based compensation |
| |
| | ||||||||||||||
Net activity from stock-based compensation awards |
| | | ( |
| ( | ||||||||||||
Proceeds from stock issued under Colleague Stock Purchase Plan |
| ( | |
| | |||||||||||||
September 30, 2020 | $ | | $ | | $ | | $ | ( | $ | ( | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
5
Adtalem Global Education Inc.
Notes to Consolidated Financial Statements
(unaudited)
Table of Contents
Note |
| Page |
1 | 7 | |
2 | 8 | |
3 | 9 | |
4 | 11 | |
5 | 13 | |
6 | 14 | |
7 | 15 | |
8 | 15 | |
9 | 18 | |
10 | 18 | |
11 | 20 | |
12 | 23 | |
13 | 25 | |
14 | 26 | |
15 | 27 | |
16 | 27 | |
17 | 29 | |
18 | 31 | |
19 | 33 |
6
1. Nature of Operations
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.
Adtalem is a leading workforce solutions provider. We present
Medical and Healthcare – Offers degree and non-degree programs in the medical and healthcare postsecondary education industry. This segment includes the operations of Chamberlain University (“Chamberlain”), American University of the Caribbean School of Medicine (“AUC”), Ross University School of Medicine (“RUSM”), and Ross University School of Veterinary Medicine (“RUSVM”). AUC, RUSM, and RUSVM are collectively referred to as the “medical and veterinary schools.”
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 lending. This segment includes the operations of the Association of Certified Anti-Money Laundering Specialists (“ACAMS”), Becker Professional Education (“Becker”), OnCourse Learning (“OCL”), and EduPristine.
“Home Office and Other” includes activities not allocated to a reportable segment. See Note 19 “Segment Information” for additional information.
Adtalem Education of Brazil (“Adtalem Brazil”), Carrington College (“Carrington”), and DeVry University are presented as discontinued operations and assets held for sale in all periods presented as applicable. See Note 3 “Discontinued Operations and Assets Held for Sale” for additional information.
On September 11, 2020, Adtalem entered into a Membership Interest Purchase Agreement (the “Agreement”) with Laureate Education, Inc., a Delaware public benefit corporation (“Seller”), pursuant to which Adtalem has agreed to acquire from Seller all of the issued and outstanding equity interest in Walden e-Learning, LLC, a Delaware limited liability company (“e-Learning”), and its subsidiary, Walden University, LLC, a Florida limited liability company (together with e-Learning, “Walden”), in exchange for a purchase price of $
Also on September 11, 2020, to provide future funding for the Acquisition, Adtalem entered into a commitment letter (the “Commitment Letter”) with Morgan Stanley Senior Funding, Inc. (“MSSF”), Barclays Bank PLC (“Barclays”), Credit Suisse AG, Cayman Islands Branch (“CS”) and Credit Suisse Loan Funding LLC (“CSLF” and, together with CS and their respective affiliates, “Credit Suisse”), and MUFG Bank, Ltd. (together with MSSF, Barclays and Credit Suisse, the “Commitment Parties”), pursuant to which the Commitment Parties committed to provide to Adtalem (i)(A) a senior secured term loan facility in an aggregate principal amount of $
On September 16, 2020, Laureate Education, Inc. (“Laureate”) advised Adtalem that Walden University had received a letter from the U.S. Department of Justice (the “DOJ”) indicating that the DOJ, along with several other government
7
agencies, is conducting an investigation into allegations that Walden University may have violated the federal False Claims Act by misrepresenting its compliance with provisions of its Program Participation Agreement with the U.S. Department of Education relating, generally, to potential false representations to the Commission on Collegiate Nursing Education and false advertising to students about (1) the content and cost of Walden’s Masters of Science in Nursing program, or (2) the availability of clinical site placements required for mandatory practicum courses for such program (collectively, the “DOJ Investigation”). Subsequently, Walden disclosed the DOJ Investigation to the Higher Learning Commission (the “HLC”). On October 13, 2020, Laureate advised Adtalem that Walden University had received a letter from the HLC notifying Walden University that the HLC seeks to assign a public Governmental Investigation designation to Walden University. If imposed, the status would remain in place until the President of the HLC determines that it is no longer required because the institution has resolved the issues that led to the designation. Pursuant to HLC policy, on October 26, 2020, Walden University exercised its opportunity respond to the notice before the Governmental Investigation designation would be assigned and made public.
Pursuant to its access rights under the terms of the Agreement, Adtalem is conducting its own investigation of the matters addressed in the DOJ and HLC correspondence, including reviewing relevant documents and other information and interviewing relevant Laureate and/or Walden University personnel. As a condition to closing the acquisition, certain designated regulatory authorities, including the HLC, must consent to the acquisition. Pursuant to Section 5.05(a) of the Agreement, the parties are required to cooperate and use reasonable best efforts to obtain those designated pre-closing consents from, among others, the HLC. Consistent with the HLC’s policies and procedures, a Governmental Investigation designation by the HLC could delay or prevent the HLC’s approval of a substantive change application to approve the proposed acquisition of Walden University. We are in the early stages of evaluating these regulatory developments and the potential impact, if any, on our planned acquisition of Walden University.
2. Summary of Significant Accounting Policies
Basis of Presentation
A full listing of our significant accounting policies is described in Note 2 “Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“2020 Form 10-K”). We have prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature) considered necessary for a fair presentation have been included. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto included in our 2020 Form 10-K.
We use the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
Certain prior period amounts have been reclassified for consistency with the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Although our current estimates contemplate current conditions, including the impact of the novel coronavirus (“COVID-19”) pandemic, and how we anticipate them to change in the future, as appropriate, it is reasonably possible that actual conditions could differ from what was anticipated in those estimates, which could materially affect our results of operations and financial condition. On March 11, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization, which recommended containment and mitigation measures worldwide. The outbreak and the response of
8
governmental and public health organizations in dealing with the pandemic included restricting general activity levels within communities, the economy, and operations of our customers. While we have experienced an impact to our business, operations, and financial results as a result of the COVID-19 pandemic, it may have even more far-reaching impacts on many aspects of our operations including the impact on customer behaviors, business operations, our employees, and the market in general. The extent to which the COVID-19 pandemic ultimately impacts our business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, actions taken to contain the virus, as well as, how quickly and to what extent normal economic and operating conditions can resume.
Recent Accounting Standards
Recently adopted accounting standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13: “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The guidance was issued to provide financial statement users with more decision-useful information about the expected losses on financial instruments by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses by requiring a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We adopted this guidance, along with the related clarifications and improvements, effective July 1, 2020 using the modified-retrospective approach without adjusting prior comparative periods. The adoption of this standard did not have a material impact on Adtalem’s Consolidated Financial Statements, and therefore, no adjustments were made to retained earnings.
Recently issued accounting standards not yet adopted
None.
3. 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 $
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 $
9
On April 24, 2020, Adtalem completed the sale of Adtalem Brazil to Estácio Participações S.A. (“Estácio”) and Sociedade de Ensino Superior Estaćio de Sá Ltda, a wholly owned subsidiary of Estácio (“Purchaser”), pursuant to the Stock Purchase Agreement dated October 18, 2019. As the sale represented a strategic shift that has a major effect on Adtalem’s operations and financial results, Adtalem Brazil is presented in Adtalem’s financial reporting as a discontinued operation. Pursuant to the terms and subject to the conditions set forth in the purchase agreement, Adtalem sold the issued and outstanding shares of Adtalem Brasil Holding S.A. (a/k/a Adtalem Brazil) to the Purchaser for R$
The following is a summary of balance sheet information of assets and liabilities reported as held for sale as of September 30, 2019, which includes only Adtalem Brazil balances as Carrington and DeVry University were sold prior to that date (in thousands):
September 30, | |||
2019 | |||
Assets: |
| ||
Current assets: |
| ||
Cash and cash equivalents | $ | | |
Accounts receivable, net |
| | |
Prepaid expenses and other current assets |
| | |
Total current assets held for sale |
| | |
Noncurrent assets: |
| ||
Property and equipment, net | | ||
Operating lease assets |
| | |
Deferred income taxes |
| | |
Intangible assets, net |
| | |
Goodwill |
| | |
Other assets, net |
| | |
Total noncurrent assets held for sale |
| | |
Total assets held for sale | $ | | |
Liabilities: |
| ||
Current liabilities: |
| ||
Accounts payable | $ | | |
Accrued payroll and benefits |
| | |
Accrued liabilities |
| | |
Deferred revenue |
| | |
Current operating lease liabilities |
| | |
Total current liabilities held for sale |
| | |
Noncurrent liabilities: |
| ||
Long-term operating lease liabilities |
| | |
Deferred income taxes |
| | |
Other liabilities |
| | |
Total noncurrent liabilities held for sale |
| | |
Total liabilities held for sale | $ | |
10
The following is a summary of income statement information of operations reported as discontinued operations, which includes Adtalem Brazil’s, Carrington’s, and DeVry University’s operations through the date of each respective sale (in thousands):
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Revenue | $ | | $ | | |||
Operating cost and expense: |
|
| |||||
Cost of educational services |
| |
| | |||
Student services and administrative expense |
| |
| | |||
Restructuring expense |
| |
| | |||
Total operating cost and expense |
| |
| | |||
Operating loss |
| ( |
| ( | |||
Other income (expense): | |||||||
Interest and dividend income | | | |||||
Interest expense | | ( | |||||
Net other expense |
| |
| ( | |||
Loss from discontinued operations before income taxes | ( | ( | |||||
Benefit from (provision for) income taxes |
| |
| ( | |||
Net loss from discontinued operations attributable to Adtalem | $ | ( | $ | ( |
We continue to incur costs, principally attorney fees, associated with ongoing litigation and settlements related to the DeVry University divestiture, which was completed during fiscal year 2019, and are classified as expense within discontinued operations.
4. Revenue
Revenue is recognized when control of the promised goods or services is transferred to our customers (students and members), in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following tables disaggregate revenue by source (in thousands):
Three Months Ended September 30, 2020 | |||||||||
Medical and | Financial | Consolidated | |||||||
Higher education | $ | | $ | | $ | | |||
Test preparation/certifications | | | | ||||||
Conferences/seminars | | | | ||||||
Memberships/subscriptions | | | | ||||||
Other | | | | ||||||
Total |
| $ | |
| $ | |
| $ | |
Three Months Ended September 30, 2019 | |||||||||
Medical and | Financial | Consolidated | |||||||
Higher education | $ | | $ | | $ | | |||
Test preparation/certifications | | | | ||||||
Conferences/seminars | | | | ||||||
Memberships/subscriptions | | | | ||||||
Other | | | | ||||||
Total |
| $ | |
| $ | |
| $ | |
In addition, see Note 19 “Segment Information” for a disaggregation of revenue by geographical region.
11
Performance Obligations and Revenue Recognition
Higher education: Higher education revenue consists of tuition, fees, books, and other educational products. The majority of revenue is derived from tuition and fees, which is recognized on a straight-line basis over the term as instruction is delivered. Books and other educational product revenue are recognized when products are shipped or students receive access to electronic materials. Under certain circumstances, we report revenue from these books and other educational products on a net basis because our performance obligation is to facilitate a transaction between the student and a vendor. These amounts were not significant for the three months ended September 30, 2020 and 2019.
Test preparation/certifications: Test preparation revenue consists of sales of self-study materials and test preparation course instruction. Becker test preparation revenue is primarily derived from self-study materials and is recognized when access to the materials is delivered to the customer. EduPristine test preparation revenue is primarily derived from course instruction and is recognized on a straight-line basis over the applicable instruction delivery period. Certification revenue consists of exam preparation guides, seminars, exam sitting fees, and recertification fees and is recognized when the applicable performance obligation is satisfied.
Conferences/seminars: Conference revenue consists of revenue from attendees, sponsors, and exhibitors. We recognize revenue for all items related to conferences at the time of the conference. Seminar revenue consists of seminars delivered in live, live-online, or on-demand online formats. We recognize revenue for live and live-online seminars on the day of the seminar. We recognize revenue for on-demand online seminars when customers are granted access to a webcast of the seminar.
Memberships/subscriptions: Membership revenue is recognized on a straight-line basis over the membership period. Subscription revenue is recognized on a straight-line basis over the subscription period.
Other: Other revenue consists of housing and other miscellaneous services. Other revenue is recognized over the period in which the applicable performance obligation is satisfied.
Customer contracts generally have separately stated prices for each performance obligation contained in the contract. Therefore, each performance obligation generally has its own standalone selling price. For higher education students, arrangements for payment are agreed to prior to registration of the student’s first academic term. The majority of U.S. students obtain Title IV or other financial aid resulting in institutions receiving a significant amount of the transaction price at the beginning of the academic term. Students utilizing private funding or funding through Adtalem’s credit extension programs (see Note 8 “Accounts Receivable and Credit Losses” for additional information) generally pay after the academic term is complete. For non-higher education customers, payment is typically due and collected at the time a customer places an order.
Transaction Price
Revenue, or transaction price, is measured as the amount of consideration expected to be received in exchange for transferring goods or services.
For higher education, students may receive discounts, scholarships, or refunds, which gives rise to variable consideration. The amounts of discounts or scholarships are applied to individual student accounts when such amounts are awarded. Therefore, the transaction price is reduced directly by these discounts or scholarships from the amount of the standard tuition rate charged. Upon withdrawal, a student may be eligible to receive a refund or partial refund, the amount of which is dependent on the timing of the withdrawal during the academic term. If a student withdraws prior to completing an academic term, federal and state regulations and accreditation criteria permit Adtalem to retain only a set percentage of the total tuition received from such student, which varies with, but generally equals or exceeds, the percentage of the academic term completed by such student. Payment amounts received by Adtalem in excess of such set percentages of tuition are refunded to the student or the appropriate funding source. For contracts with similar characteristics and historical data on refunds, the expected value method is applied in determining the variable consideration related to refunds. Estimates of Adtalem’s expected refunds are determined at the outset of each academic term, based upon actual refunds in previous academic terms. Reserves related to refunds are presented as refund liabilities within accrued liabilities on the Consolidated Balance Sheets. All refunds are netted against revenue during the applicable academic term.
12
Management reassesses collectability throughout the period revenue is recognized by the Adtalem institutions, on a student-by-student basis. This reassessment is based upon new information and changes in facts and circumstances relevant to a student’s ability to pay. Management also reassesses collectability when a student withdraws from the institution and has unpaid tuition charges. Such unpaid charges do not meet the threshold of reasonably collectible and are recognized as revenue on a cash basis.
For test preparation and other Financial Services products, the transaction price is equal to the amount charged to the customer, which is the standard rate, less any discounts, and an estimate for returns or refunds.
We believe it is probable that no significant reversal will occur in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is subsequently resolved. Therefore, the estimate of variable consideration is not constrained.
Contract Balances
For our higher education institutions, students are billed at the beginning of each academic term and payment is due at that time. Adtalem’s performance obligation is to provide educational services in the form of instruction during the academic term. As instruction is provided, deferred revenue is reduced. A significant portion of student payments are from Title IV financial aid and other programs and are generally received during the first month of the respective academic term. For students utilizing Adtalem’s credit extension programs (see Note 8 “Accounts Receivable and Credit Losses”), payments are generally received after the academic term, and the corresponding performance obligation, is complete. When payments are received, accounts receivable is reduced.
For our Financial Services businesses, customers are billed and payment is due at the time of order placement. In most cases, performance obligations are delivered subsequent to payments received. Delivering our performance obligations reduces deferred revenue, and accounts receivable is reduced upon payments received. Becker offers flexible payment plans with terms of up to 12-months as a financing option for the Becker CPA Exam Review Course (see Note 8 “Accounts Receivable and Credit Losses”). In this case, payment is received after satisfying the performance obligation.
Revenue of $
The difference between the opening and closing balances of deferred revenue includes decreases from revenue recognized during the period, increases from charges related to the start of academic terms beginning during the period, and increases from payments received related to academic terms commencing after the end of the reporting period.
Practical Expedients
As our performance obligations have an original expected duration of
5. Restructuring Charges
During the first quarter of fiscal year 2021, Adtalem recorded restructuring charges primarily related to Adtalem’s home office and ACAMS real estate consolidations. During the first quarter of fiscal year 2020, Adtalem recorded restructuring charges primarily related to the sale of Becker’s courses for healthcare students and Adtalem’s home office real estate consolidations. When estimating costs of exiting lease space, estimates are made which could differ materially from actual results and result in additional restructuring charges or reversals in future periods. Termination benefit charges represented severance pay and benefits for these employees. Adtalem’s home office is classified as “Home Office and Other” in Note 19 “Segment Information.”
13
Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||
Real Estate | Termination | Total | Real Estate | Termination | Total | |||||||||||||
Medical and Healthcare | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Financial Services |
| |
| |
| | |
| |
| | |||||||
Home Office and Other |
| |
| |
| | |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | |
The following table summarizes the separation and restructuring plan activity for the fiscal years 2020 and 2021, for which cash payments are required (in thousands):
Liability balance as of June 30, 2019 | $ | | |
ASC 842 (leases) adjustment (1) | ( | ||
Liability balance as of July 1, 2019 |
| | |
Increase in liability (separation and other charges) |
| | |
Reduction in liability (payments and adjustments) |
| ( | |
Liability balance as of June 30, 2020 |
| | |
Increase in liability (separation and other charges) |
| | |
Reduction in liability (payments and adjustments) |
| ( | |
Liability balance as of September 30, 2020 | $ | |
(1) Reflects amounts reclassified out of the opening balance of restructuring reserve accruals as of June 30, 2019 to operating lease assets that was recorded with the adoption of ASC 842.
The liability balance of $
6. Income Taxes
Our effective income tax rates from continuing operations were
14
7. Earnings per Share
The following table sets forth the computations of basic and diluted earnings per share and stock awards not included in the computation of diluted earnings per share when their effect is anti-dilutive (in thousands, except per share data):
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Numerator: | |||||||
Net income (loss) attributable to Adtalem: |
|
| |||||
Continuing operations | $ | | $ | | |||
Discontinued operations | ( | ( | |||||
Net | $ | | $ | | |||
Denominator: | |||||||
Weighted-average shares outstanding |
| |
| | |||
Unvested participating RSUs |
| |
| | |||
Weighted-average basic shares outstanding |
| |
| | |||
Effect of dilutive stock awards |
| |
| | |||
Weighted-average diluted shares outstanding |
| |
| | |||
Earnings (loss) per share attributable to Adtalem: | |||||||
Basic: | |||||||
Continuing operations | $ | | $ | | |||
Discontinued operations | $ | ( | $ | ( | |||
Net | $ | | $ | | |||
Diluted: | |||||||
Continuing operations | $ | | $ | | |||
Discontinued operations | $ | ( | $ | ( | |||
Net | $ | | $ | | |||
Weighted-average anti-dilutive stock awards | | |
8. Accounts Receivable and Credit Losses
We categorize our accounts receivable balances as trade receivables or financing receivables. Our trade receivables relate to student or customer balances occurring in the normal course of business. Trade receivables have a term of less than one year and are included in accounts receivable, net on our Consolidated Balance Sheets. Our financing receivables relate to credit extension programs where the student is provided payment terms in excess of one year with their respective school and are included in accounts receivable, net and other assets, net on our Consolidated Balance Sheets.
The classification of our accounts receivable balances were as follows (in thousands):
September 30, 2020 | |||||||||
Gross | Allowance | Net | |||||||
Trade receivables, current | $ | | $ | ( | $ | | |||
Financing receivables, current | | ( | | ||||||
Accounts receivable, current | $ | | $ | ( | $ | | |||
Financing receivables, current | $ | | $ | ( | $ | | |||
Financing receivables, noncurrent | | ( | | ||||||
Total financing receivables | $ | | $ | ( | $ | |
15
Our financing receivables relate to credit extension programs available to students at Chamberlain, AUC, RUSM, and RUSVM. These credit extension programs are designed to assist students who are unable to completely cover educational costs consisting of tuition, books, and fees, and are available only after all other student financial assistance has been applied toward those purposes. In addition, AUC, RUSM, and RUSVM allow students to finance their living expenses. Repayment plans for financing agreements are developed to address the financial circumstances of the particular student. Interest charges at rates from
Credit Quality
The primary credit quality indicator for our financing receivables is delinquency. Balances are considered delinquent when contractual payments on the loan become past due. We charge-off financing receivable balances after they have been sent to a third party collector, the timing of which varies by the institution granting the loan, but in most cases is when the financing agreement is at least 181 days past due. Payments are applied first to outstanding interest and then to the unpaid principal balance.
The credit quality analysis of financing receivables as of September 30, 2020 was as follows (in thousands):
Amortized Cost Basis by Origination Year | |||||||||||||||||||||
Prior | 2017 | 2018 | 2019 | 2020 | 2021 | Total | |||||||||||||||
1-30 days past due |
| $ | | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
31-60 days past due | | | | | | — | | ||||||||||||||
61-90 days past due | | | | | | — | | ||||||||||||||
Greater than 90 days past due | | | | | | — | | ||||||||||||||
Total past due | | | | | | | | ||||||||||||||
Current | | | | | | | | ||||||||||||||
Financing receivables, gross | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
The following table includes our financing receivables credit risk profile disclosures for prior periods before we adopted ASC 326 on July 1, 2020 (in thousands):
Over | Total | ||||||||||||||||||||
1-30 Days | 31-60 Days | 61-90 Days | 90 Days | Total | Financing | ||||||||||||||||
Past Due | Past Due | Past Due | Past Due | Past Due | Current | Receivables | |||||||||||||||
Financing receivables: | |||||||||||||||||||||
June 30, 2020 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
September 30, 2019 | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
Allowance for Credit Losses
The allowance for credit losses represents an estimate of the lifetime expected credit losses inherent in our accounts receivable balances as of each balance sheet date. In evaluating the collectability of all our accounts receivable balances, we utilize historical events, current conditions, and reasonable and supportable forecasts about the future.
For our trade receivables, we primarily use historical loss rates based on a student’s status to determine the allowance for credit losses. As these trade receivables are short-term in nature, management believes a student’s status provides the best credit loss estimate. Students still attending classes and recently graduated are more likely to pay than those who are inactive due to being on a leave of absence or withdrawing from school.
16
For our financing receivables, we primarily use historical loss rates based on an aging schedule specific to each school. As these financing receivables are based on long-term financing agreements offered by Adtalem, management believes that delinquency provides the best credit loss estimate. As the financing receivable balances become further past due, it is less likely we will receive payment, causing our estimate of credit losses to increase.
The following tables provide a rollforward of the allowance for credit losses (in thousands):
Three Months Ended September 30, 2020 | |||||||||
Trade | Financing | Total | |||||||
Beginning balance |
| $ | | $ | |
| $ | | |
Write-offs | ( | ( | ( | ||||||
Recoveries | | | | ||||||
Provision for credit losses | | | | ||||||
Ending balance | $ | | $ | | $ | |
Three Months Ended September 30, 2019 | |||||||||
Trade | Financing | Total | |||||||
Beginning balance |
| $ | | $ | |
| $ | | |
Write-offs | ( | ( | ( | ||||||
Recoveries | | | | ||||||
Provision for credit losses | | | | ||||||
Ending balance | $ | | $ | | $ | |
Allowance for bad debts on short-term and long-term receivables as of September 30, 2020, June 30, 2020, and September 30, 2019 were $
Accounts receivable, net decreased with an offsetting increase in other assets, net on the Consolidated Balance Sheet as of September 30, 2020 compared to the prior periods presented primarily due to a correction in the methodology on how we classify financing receivable balances between current and noncurrent assets.
Other Financing Receivables
In connection with the sale of DeVry University, Adtalem loaned $
On July 31, 2019, Adtalem sold its Chicago, Illinois, campus facility to DePaul College Prep Foundation (“DePaul College Prep”). In connection with the sale, Adtalem holds a mortgage from DePaul College Prep for $
17
9. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
September 30, | June 30, | September 30, | |||||||
2020 | 2020 | 2019 | |||||||
Land |
| $ | | $ | |
| $ | | |
Building | | | | ||||||
Equipment | | | | ||||||
Construction in progress | | | | ||||||
Property and equipment, gross | | | | ||||||
Accumulated depreciation |
| ( |
| ( |
| ( | |||
Property and equipment, net | $ | | $ | | $ | |
On July 31, 2019, Adtalem sold its Chicago, Illinois, campus facility to DePaul College Prep for $
On September 27, 2019, Adtalem closed on the sale of its Columbus, Ohio, campus facility. Net proceeds from the sale of $
10. Leases
We determine if a contract contains a lease at inception. We have entered into operating leases for academic sites, housing facilities, and office space which expire at various dates through January 2031, most of which include options to
Operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets represent our right to use an underlying asset during the lease term. Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. Operating lease assets are adjusted for any prepaid or accrued lease payments, lease incentives, initial direct costs, and impairments. Our incremental borrowing rate is utilized in determining the present value of the lease payments based upon the information available at the commencement date. Our incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease. Operating lease expense is recognized on a straight-line basis over the lease term.
As of September 30, 2020, we entered into
18
The components of lease cost were as follows (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Operating lease cost | $ | | $ | | ||
Sublease income |
| ( |
| ( | ||
Total lease cost | $ | | $ | |
Maturities of lease liabilities by fiscal year as of September 30, 2020 were as follows (in thousands):
Operating | |||
Fiscal Year | Leases | ||
2021 (remaining) | $ | | |
2022 | | ||
2023 | | ||
2024 | | ||
2025 | | ||
Thereafter | | ||
Total lease payments |
| | |
Less: imputed interest | ( | ||
Present value of lease liabilities | $ | |
Lease term and discount rate were as follows:
September 30, | |||
2020 | |||
Weighted-average remaining operating lease term (years) | |||
Weighted-average operating lease discount rate |
Supplemental disclosures of cash flow information related to leases were as follows (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Cash paid for amounts in the measurement of operating lease liabilities (net of sublease receipts) | $ | | $ | | ||
Operating lease assets obtained in exchange for operating lease liabilities | $ | | $ | |
Adtalem maintains agreements to lease either a portion or the full space of
19
Fiscal Year | Amount | ||
2021 (remaining) | $ | | |
2022 | | ||
2023 |
| | |
2024 |
| | |
2025 |
| | |
Thereafter | | ||
Total lease and sublease rental income | $ | |
11. Goodwill and Intangible Assets
The table below summarizes goodwill balances by reporting unit (in thousands):
September 30, | June 30, | September 30, | |||||||
Reporting Unit | 2020 | 2020 | 2019 | ||||||
Chamberlain | $ | | $ | | $ | | |||
AUC |
| |
| |
| | |||
RUSM and RUSVM |
| |
| |
| | |||
Financial Services |
| |
| |
| | |||
Total | $ | | $ | | $ | |
The table below summarizes goodwill balances by reportable segment (in thousands):
September 30, | June 30, | September 30, | |||||||
Reportable Segment | 2020 | 2020 | 2019 | ||||||
Medical and Healthcare | $ | | $ | | $ | | |||
Financial Services |
| |
| |
| | |||
Total | $ | | $ | | $ | |
The table below summarizes the changes in goodwill balances by reportable segment (in thousands):
Medical and | Financial | ||||||||
Healthcare | Services | Total | |||||||
June 30, 2019 | $ | | $ | | $ | | |||
Foreign exchange rate changes |
| |
| ( |
| ( | |||
September 30, 2019 | | | | ||||||
Purchase accounting adjustments |
| |
| ( |
| ( | |||
Foreign exchange rate changes | | ( | ( | ||||||
June 30, 2020 | | | | ||||||
Foreign exchange rate changes |
| |
| |
| | |||
September 30, 2020 | $ | | $ | | $ | |
The change in the Financial Services segment goodwill balance from June 30, 2020 is the result of a change in the foreign currency exchange rates on the EduPristine goodwill balance recorded in the Indian Rupee compared to the U.S. dollar.
20
Intangible assets consisted of the following (in thousands):
September 30, 2020 | ||||||||
Gross Carrying | Accumulated | Weighted-Average | ||||||
Amount | Amortization | Amortization Period | ||||||
Amortizable intangible assets: |
| |||||||
Customer relationships | $ | | $ | ( |
| |||
Curriculum/software |
| |
| ( |
| |||
Course delivery technology |
| |
| ( |
| |||
Total | $ | | $ | ( |
| |||
Indefinite-lived intangible assets: |
|
|
| |||||
Trade names | $ | |
|
| ||||
Chamberlain Title IV eligibility and accreditations |
| |
|
| ||||
AUC Title IV eligibility and accreditations |
| |
|
| ||||
Ross Title IV eligibility and accreditations |
| |
|
| ||||
Intellectual property |
| |
|
| ||||
Total | $ | |
|
|
June 30, 2020 | ||||||
Gross Carrying | Accumulated | |||||
Amount | Amortization | |||||
Amortizable intangible assets: | ||||||
Customer relationships | $ | | $ | ( | ||
Curriculum/software | | ( | ||||
Course delivery technology | | ( | ||||
Total | $ | | $ | ( | ||
Indefinite-lived intangible assets: |
|
| ||||
Trade names | $ | |
| |||
Chamberlain Title IV eligibility and accreditations |
| |
| |||
AUC Title IV eligibility and accreditations |
| |
| |||
Ross Title IV eligibility and accreditations |
| |
| |||
Intellectual property |
| |
| |||
Total | $ | |
|
September 30, 2019 | ||||||
Gross Carrying | Accumulated | |||||
Amount | Amortization | |||||
Amortizable intangible assets: |
|
| ||||
Customer relationships | $ | | $ | ( | ||
Curriculum/software | | ( | ||||
Course delivery technology | | ( | ||||
Total | $ | | $ | ( | ||
Indefinite-lived intangible assets: | ||||||
Trade names | $ | | ||||
Chamberlain Title IV eligibility and accreditations | | |||||
AUC Title IV eligibility and accreditations | | |||||
Ross Title IV eligibility and accreditations | | |||||
Intellectual property | | |||||
Total | $ | |
21
The table below summarizes the indefinite-lived intangible asset balances by reportable segment (in thousands):
September 30, | June 30, | September 30, | |||||||
Reportable Segment | 2020 | 2020 | 2019 | ||||||
Medical and Healthcare | $ | | $ | | $ | | |||
Financial Services |
| |
| |
| | |||
Total | $ | | $ | | $ | |
Amortization expense for amortized intangible assets was $
Financial | ||||
Fiscal Year | Services | |||
2021 (remaining) | $ | | ||
2022 |
| | ||
2023 |
| | ||
2024 |
| | ||
2025 |
| | ||
Thereafter |
| | ||
Total | $ | |
All amortizable intangible assets except ACAMS customer relationships are amortized on a straight-line basis. The amount amortized for ACAMS customer relationships is based on the estimated retention of the customers, giving consideration to the revenue and cash flow associated with these existing customers.
Indefinite-lived intangible assets related to trade names, Title IV eligibility and accreditations, and intellectual property are not amortized, as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity.
Goodwill and indefinite-lived intangibles are not amortized, but are tested for impairment annually and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Our annual testing date is May 31.
Adtalem has
Adtalem has
These interim triggering event conclusions were based on the fact that the annual impairment review of Adtalem’s reporting units and indefinite-lived intangible assets resulted in
22
the effects are considered significant enough to create a triggering event. The effects are currently projected to be short-term and would not significantly decrease long-term cash flow projections; however, should economic conditions continue to deteriorate, the revenue and operating results could also deteriorate to the point where a triggering event would exist and require reassessment of the fair values of goodwill and intangible assets and potential impairments.
Determining the fair value of a reporting unit or an intangible asset involves the use of significant estimates and assumptions. Management bases its fair value estimates on assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates, which could lead to future impairments of goodwill or intangible assets.
12. Debt
Long-term debt consisted of the following senior secured credit facility (in thousands):
September 30, | June 30, | September 30, | |||||||
2020 | 2020 | 2019 | |||||||
Total debt: |
| ||||||||
Term B Loan | $ | | $ | | $ | | |||
Revolver |
| — |
| |
| | |||
Total principal payments due |
| |
| |
| | |||
Deferred debt issuance costs |
| ( |
| ( |
| ( | |||
Total amount outstanding |
| |
| |
| | |||
Less current portion: |
| ||||||||
Term B Loan |
| ( |
| ( |
| ( | |||
Noncurrent portion | $ | | $ | | $ | |
Scheduled future maturities of long-term debt were as follows (in thousands):
Maturity | |||
Fiscal Year | Payments | ||
2021 (remaining) | $ | | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
Total | $ | |
On
Interest on the Term B Loan and the Revolver is set based on LIBOR, which is based on observable market transactions. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of calendar year 2021, but that it will not use its powers to compel contributions beyond such date. Various parties, including government agencies, are seeking to identify an alternative rate to replace LIBOR. Management is monitoring their efforts, and evaluating the need for an amendment to the Credit Agreement to accommodate a replacement rate. The Credit Agreement does not specify a replacement rate for LIBOR.
Term B Loan
For Eurocurrency rate loans, Term B Loan interest is equal to LIBOR or a
23
installments of $
On March 24, 2020, we executed a pay-fixed, receive-variable interest rate swap agreement (the “Swap”) with a multinational financial institution to mitigate risks associated with the variable interest rate on our Term B Loan debt. We pay interest at a fixed rate of
During the operating term of the Swap, the annual interest rate on the amount of the Term B Loan is fixed at
The Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive loss on the Consolidated Balance Sheet and are reclassified into the Consolidated Statements of Income within interest expense in the periods in which the hedged transactions affect earnings.
Revolver
Revolver interest is equal to LIBOR or a LIBOR-equivalent rate for Eurocurrency rate loans or a base rate, plus an applicable rate based on Adtalem’s consolidated leverage ratio, as defined in the Credit Agreement. The applicable rate ranges from
Adtalem had a letter of credit outstanding of $
Debt Issuance Costs
Adtalem incurred $
Term B Loan | Revolver | Total | |||||||
Deferred debt issuance costs as of June 30, 2020 | $ | | $ | | $ | | |||
Amortization of deferred debt issuance costs |
| ( |
| ( |
| ( | |||
Deferred debt issuance costs as of September 30, 2020 | $ | | $ | | $ | |
24
Covenants and Guarantees
The Credit Agreement contains customary covenants, including restrictions on our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interest on assets, make acquisitions, loans, advances or investments, or sell or otherwise transfer assets.
The Credit Agreement contains covenants that, among other things, require maintenance of certain financial ratios. Maintenance of these financial ratios could place restrictions on Adtalem’s ability to pay dividends. Adtalem has not paid a dividend since December 2016. These financial ratios include a consolidated fixed charge coverage ratio, a consolidated leverage ratio, and a U.S. Department of Education financial responsibility ratio based upon a composite score of an equity ratio, a primary reserve ratio, and a net income ratio. Failure to maintain any of these ratios or to comply with other covenants contained in the Credit Agreement would constitute an event of default and could result in termination of the Credit Agreement and require payment of all outstanding borrowings and replacement of outstanding letters of credit. Adtalem was in compliance with the debt covenants as of September 30, 2020.
The Term B Loan requires mandatory prepayments equal to a percentage of excess cash flow or equal to the net cash proceeds in excess of $
The stock of all U.S. and certain foreign subsidiaries of Adtalem is pledged as collateral for borrowings under the Credit Agreement. Our borrowings under the Credit Facility are guaranteed by us and all of our domestic subsidiaries (subject to certain exceptions) and secured by a first lien on our assets and the assets of our guarantor subsidiaries (excluding real estate), including capital stock of the subsidiaries.
13. Redeemable Noncontrolling Interest
As of June 30, 2019, Adtalem maintained a
In addition, Adtalem maintains a
Since the put options are out of the control of Adtalem, authoritative guidance requires the noncontrolling interests, which includes the value of the put options, to be displayed outside of the equity section of the Consolidated Balance Sheets.
On July 1, 2019, the Adtalem Brazil management noncontrolling members exercised their put option and sold their remaining ownership interest in Adtalem Brazil to Adtalem resulting in Adtalem owning
The adjustment to increase or decrease the EduPristine noncontrolling interest for their respective proportionate share of EduPristine’s profit (loss) flows through the Consolidated Statements of Income each reporting period based on Adtalem’s noncontrolling interest accounting policy.
25
The following is a reconciliation of the redeemable noncontrolling interest balance (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Balance at beginning of period | $ | | $ | | ||
Net loss attributable to redeemable noncontrolling interest |
| ( |
| ( | ||
Payment for purchase of redeemable noncontrolling interest of subsidiary | — | ( | ||||
Balance at end of period | $ | | $ | |
14. Share Repurchases
On November 8, 2018, we announced that the Board authorized Adtalem’s current share repurchase program, which allows Adtalem to repurchase up to $
Three Months Ended | Life-to-Date | ||||||||
September 30, | Current Share | ||||||||
2020 | 2019 | Repurchase Program | |||||||
Total number of share repurchases | — | | | ||||||
Total cost of share repurchases | $ | — | $ | | $ | | |||
Average price paid per share | $ | — | $ | | $ | |
On February 4, 2020, we announced that the Board authorized Adtalem’s twelfth share repurchase program, which allows Adtalem to repurchase up to $
26
15. Accumulated Other Comprehensive Loss
The following table shows the changes in accumulated other comprehensive loss by component (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Foreign currency translation adjustments | ||||||
Beginning balance | $ | ( | $ | ( | ||
Gain (loss) on foreign currency translation | | ( | ||||
Ending balance | $ | ( | $ | ( | ||
Marketable securities | ||||||
Beginning balance, gross | $ | | $ | | ||
Beginning balance, tax effect | ( | ( | ||||
Beginning balance, net of tax | | | ||||
Unrealized (loss) gain on marketable securities | ( | | ||||
Tax effect | | ( | ||||
Ending balance | $ | | $ | | ||
Interest rate swap | ||||||
Beginning balance, gross | $ | ( | $ | — | ||
Beginning balance, tax effect | | — | ||||
Beginning balance, net of tax | ( | — | ||||
Unrealized gain on interest rate swap | | — | ||||
Tax effect | ( | — | ||||
Ending balance | $ | ( | $ | — | ||
Total ending balance at September 30 | $ | ( | $ | ( |
16. Stock-Based Compensation
Adtalem maintains
Stock-based compensation expense is measured at the grant date based on the fair value of the award. Adtalem accounts for stock-based compensation granted to retirement eligible employees that fully vests upon an employee’s retirement under the non-substantive vesting period approach. Under this approach, the entire stock-based compensation expense is recognized at the grant date for stock-based grants issued to retirement eligible employees. For non-retirement eligible employees, stock-based compensation expense is recognized as expense over the employee requisite service period. We account for forfeitures of outstanding but unvested grants in the period they occur.
As of September 30, 2020,
27
The following is a summary of options activity for the three months ended September 30, 2020:
Weighted-Average | ||||||||||
Remaining | Aggregate | |||||||||
Number of | Weighted-Average | Contractual Life | Intrinsic Value | |||||||
Options | Exercise Price | (in years) | (in thousands) | |||||||
Outstanding as of July 1, 2020 |
| | $ | |
| |||||
Granted |
| |
| |
| |||||
Exercised |
| ( |
| |
| |||||
Forfeited |
| |
| |
| |||||
Expired |
| ( |
| |
| |||||
Outstanding as of September 30, 2020 |
| |
| |
| $ | | |||
Exercisable as of September 30, 2020 |
| | $ | |
| $ | |
The total intrinsic value of options exercised for the three months ended September 30, 2020 and 2019 was $
The fair value of Adtalem’s stock option awards was estimated using a binomial model. This model uses historical cancellation and exercise experience of Adtalem to determine the option value. It also takes into account the illiquid nature of employee options during the vesting period.
The weighted-average estimated grant date fair value of options granted at market price under Adtalem’s stock-based incentive plans during the first three months of fiscal years 2021 and 2020 was $
Fiscal Year | |||||
2021 | 2020 | ||||
Expected life (in years) |
|
|
| ||
Expected volatility |
| | % | | % |
Risk-free interest rate |
| | % | | % |
Dividend yield |
| | % | | % |
The expected life of the options granted is based on the weighted-average exercise life with age and salary adjustment factors from historical exercise behavior. Adtalem’s expected volatility is computed by combining and weighting the implied market volatility, the most recent volatility over the expected life of the option grant, and Adtalem’s long-term historical volatility.
If factors change and different assumptions are employed in the valuation of stock-based grants in future periods, the stock-based compensation expense that Adtalem records may differ significantly from what was recorded in previous periods.
During the first three months of fiscal year 2021, Adtalem granted
28
Weighted-Average | |||||
Number of | Grant Date | ||||
RSUs | Fair Value | ||||
Outstanding as of July 1, 2020 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Outstanding as of September 30, 2020 |
| | $ | |
The weighted-average estimated grant date fair values of RSUs granted at market price under Adtalem’s stock-based incentive plans during the first three months of fiscal years 2021 and 2020 were $
The following table shows total stock-based compensation expense included in the Consolidated Statements of Income (in thousands):
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Cost of educational services | $ | | $ | | |||
Student services and administrative expense |
| |
| | |||
| |
| | ||||
Income tax benefit |
| ( |
| ( | |||
Net stock-based compensation expense | $ | | $ | |
As of September 30, 2020, $
There was
Adtalem has an established practice of issuing new shares of common stock to satisfy stock-based grant exercises. However, Adtalem also may issue treasury shares to satisfy stock-based grant exercises under certain of its stock-based incentive plans.
17. Fair Value Measurements
Adtalem has elected not to measure any assets or liabilities at fair value other than those required to be measured at fair value on a recurring basis. Assets measured at fair value on a nonrecurring basis include goodwill, intangible assets, and assets of businesses where the long-term value of the operations have been impaired.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The guidance specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The guidance establishes fair value measurement classifications under the following hierarchy:
29
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Observable inputs other than prices included in Level 1, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
Level 3 –Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
When available, Adtalem uses quoted market prices to determine fair value, and such measurements are classified within Level 1. In cases where market prices are not available, Adtalem makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates and yield curves. These measurements are classified within Level 3.
Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
The carrying value of our cash and cash equivalents approximates fair value because of their short-term nature and is classified as Level 1.
Adtalem maintains a rabbi trust to fund obligations under a non-qualified deferred compensation plan. The rabbi trust investments in stock and bond mutual funds, which are carried at fair value and classified as marketable securities on the Consolidated Balance Sheets. All investments in marketable securities are recorded at fair value based upon quoted market prices using Level 1 inputs.
The fair value of the credit extension programs included in accounts receivable, net and other assets, net on the Consolidated Balance Sheets as of September 30, 2020, June 30, 2020, and September 30, 2019 of $
In connection with the sale of DeVry University, Adtalem loaned $
On July 31, 2019, Adtalem sold its Chicago, Illinois, campus facility to DePaul College Prep. In connection with the sale, Adtalem holds a mortgage from DePaul College Prep for $
As of September 30, 2020, June 30, 2020, and September 30, 2019, borrowings under our Credit Facility were $
On March 24, 2020, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution to fully mitigate risks associated with the variable interest rate on our Term B Loan debt with an effective date of March 31, 2020. The fair value of our Swap is based in part on data received from the counterparty, and
30
represents the estimated amount we would receive or pay to settle the Swap, taking into consideration current and projected future interest rates as well as the creditworthiness of the counterparty, all of which can be validated through readily observable data from external sources, in which case the measurements are classified within Level 2. The fair value of the Swap is represented within other liabilities on the Consolidated Balance Sheet with a balance of $
As of September 30, 2020, June 30, 2020, and September 30, 2019, there were no assets or liabilities measured at fair value using Level 3 inputs.
Assets measured at fair value on a nonrecurring basis include goodwill and indefinite-lived intangibles arising from a business combination. These assets are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed annually for impairment or more frequently if circumstances arise indicating potential impairment. This impairment review was most recently completed as of May 31, 2020. See Note 11 “Goodwill and Intangible Assets” for additional information on the impairment review, including valuation techniques and assumptions.
18. Commitments and Contingencies
Adtalem is subject to lawsuits, administrative proceedings, regulatory reviews, and investigations associated with financial assistance programs and other matters arising in the normal conduct of its business. As of September 30, 2020, Adtalem believes it has adequately reserved for potential losses. The following is a description of pending legal and regulatory matters that may be considered other than ordinary, routine, and incidental to the business. Descriptions of certain matters from prior SEC filings may not be carried forward in this report to the extent we believe such matters no longer are required to be disclosed or there has not been, to our knowledge, significant activity relating to them. We have recorded accruals for those matters where management believes a loss is probable and can be reasonably estimated as of September 30, 2020. For those matters for which we have not recorded an accrual, their possible impact on Adtalem’s business, financial condition, or results of operations, cannot be predicted at this time. The continued defense, resolution, or settlement of any of the following matters could require us to expend significant resources and could have a material adverse effect on our business, financial condition, results of operations, and cash flows, and result in the imposition of significant restrictions on us and our ability to operate.
On April 13, 2018, a putative class action lawsuit was filed by Nicole Versetto, individually and on behalf of others similarly situated, against the Adtalem, DeVry University Inc., and DeVry/New York Inc. (collectively the “Adtalem Parties”) in the Circuit Court of Cook County, Illinois, Chancery Division. The complaint was filed on behalf of herself and
31
to be made from the escrow account during fiscal year 2021. This loss contingency estimate could differ from actual results and result in additional charges or reversals in future periods. The Court issued an order finally approving the settlement on October 7, 2020, and dismissed the action with prejudice. On November 2, 2020, Stoltmann Law Offices filed on behalf of objector Jose David Valderrama a notice to appeal the Court’s order approving the settlement.
On May 8, 2018, the Carlson Law Firm (“Carlson”) filed a lawsuit against Adtalem and DeVry University, Inc., on behalf of
On April 4, 2019, the Carlson Law Firm sent notice pursuant to California Legal Remedies Act, Civil Code § 1750, of
32
On June 21, 2018, Stoltmann Law Offices filed a lawsuit against Adtalem in Cook County Circuit Court, alleging that Adtalem breached a contract with Stoltmann Law Offices to pay filing fees associated with arbitration claims Stoltmann Law Offices has filed with the Judicial Arbitration and Mediation Services, Inc. (“JAMS”). Stoltmann Law Offices is seeking specific performance from the court. Adtalem moved to dismiss this complaint on August 3, 2018. Prior to the court ruling on Adtalem’s motion to dismiss, Stoltmann Law Offices and
Stoltmann Law Offices is representing hundreds of individuals who have filed claims with JAMS alleging fraud-based claims based on DeVry University’s graduate employment statistics. Stoltmann Law Offices has paid the filing fees for certain of these arbitrations to move forward. JAMS has sent commencement letters in several waves. Respondents have filed answers in response to certain of these arbitration demands. These arbitrations are in various stages of litigation.
On or about April 1, 2019, Adtalem, Chamberlain and DeVry University received similar Civil Investigative Demands (“CID”) from the U.S. Department of Justice (the “DOJ”). The CIDs were issued pursuant to a False Claims Act inquiry concerning allegations that Adtalem, in particular Chamberlain and Adtalem’s former subsidiary DeVry University, submitted or caused the submission of false claims to the U.S. Department of Defense and U.S. Department of Veteran Affairs for federal funds under the GI Bill Programs and Tuition Assistance Program from 2011 to the date of the CIDs. It is specifically alleged that Chamberlain and DeVry University engaged in unlawful recruitment tactics, and provided incentive payments based directly or indirectly on securing federal financial aid. Adtalem cooperated with this DOJ inquiry and provided documents and other information requested by the DOJ. On February 27, 2020, the DOJ notified the U.S. District Court for the Northern District of Georgia that it would decline to intervene in two qui tam False Claims Act actions filed by former DeVry University employees related to the subject matter of the CIDs. Those actions were unsealed on March 2, 2020. The complaints had been filed by former employees Ashley Vandiver (2017 complaint) and Laura Moriarty (2018 complaint). Both complaints seek damages and relief allowed by law under the False Claims Act, 31 U.S.C. § 3729 et seq. Vandiver’s complaint is filed against Adtalem and DeVry University. Moriarty’s complaint is filed against Adtalem, Chamberlain, DeVry University, and others. In October 2020, Adtalem, DeVry University, and Moriarty reached an agreement in principle to settle the matter and dismiss the 2018 complaint. The settlement agreement does not need to be approved by the Court or any regulatory body. The 2017 complaint brought by Vandiver is not impacted by the pending Moriarty settlement and we cannot predict the outcome of the Vandiver matter.
19. Segment Information
Beginning in the first quarter of fiscal year 2020, Adtalem Brazil operations were classified as discontinued operations. See Note 3 “Discontinued Operations and Assets Held for Sale” for additional information. Segment information presented excludes the results of Adtalem Brazil. Adtalem eliminated its Business and Law reportable segment during the first quarter of fiscal year 2020 when Adtalem Brazil was classified as discontinued operations. Discontinued operations assets are included in the table below to reconcile to total consolidated assets presented on the Consolidated Balance Sheets.
We present
Medical and Healthcare – Offers degree and non-degree programs in the medical and healthcare postsecondary education industry. This segment includes the operations of Chamberlain, AUC, RUSM, and RUSVM. AUC, RUSM, and RUSVM are collectively referred to as the “medical and veterinary schools.”
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 lending. This segment includes the operations of ACAMS, Becker, OCL, and EduPristine.
33
These segments are consistent with the method by which the Chief Operating Decision Maker (Adtalem’s Chairman, President and Chief Executive Officer) evaluates performance and allocates resources. Performance evaluations are based on each segment’s operating income excluding special items. Operating income excludes special items, which consists of restructuring expense, business acquisition and integration expense, and gain on sale of assets. Adtalem’s management excludes these items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers and are eliminated in consolidation. “Home Office and Other” includes activities not allocated to a reportable segment and is included to reconcile segment results to the Consolidated Financial Statements. Segments may have allocated depreciation expense related to depreciable assets reported as an asset in a different segment. The accounting policies of the segments are the same as those described in Note 2 “Summary of Significant Accounting Policies.”
Summary financial information by reportable segment is as follows (in thousands):
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Revenue: |
|
|
| ||||
Medical and Healthcare | $ | | $ | | |||
Financial Services |
| |
| | |||
Total consolidated revenue | $ | | $ | | |||
Operating income excluding special items: |
|
| |||||
Medical and Healthcare | $ | | $ | | |||
Financial Services |
| |
| | |||
Home Office and Other |
| ( |
| ( | |||
Total consolidated operating income excluding special items | | | |||||
Reconciliation to Consolidated Financial Statements: | |||||||
Restructuring expense |
| ( |
| ( | |||
Business acquisition and integration expense | ( |
| — | ||||
Gain on sale of assets | |
| | ||||
Total consolidated operating income | | | |||||
Net other expense |
| ( |
| ( | |||
Total consolidated income from continuing operations before income taxes | $ | | $ | | |||
Segment assets: |
| ||||||
Medical and Healthcare | $ | | $ | | |||
Financial Services |
| |
| | |||
Home Office and Other |
| |
| | |||
Discontinued Operations |
| — |
| | |||
Total consolidated assets | $ | | $ | | |||
Capital expenditures: |
| ||||||
Medical and Healthcare | $ | | $ | | |||
Financial Services |
| |
| | |||
Home Office and Other |
| |
| | |||
Total consolidated capital expenditures | $ | | $ | | |||
Depreciation expense: |
| ||||||
Medical and Healthcare | $ | | $ | | |||
Financial Services |
| |
| | |||
Home Office and Other |
| |
| | |||
Total consolidated depreciation expense | $ | | $ | | |||
Intangible asset amortization expense: |
| ||||||
Financial Services | $ | | $ | | |||
Total consolidated intangible asset amortization expense | $ | | $ | |
34
Adtalem conducts its educational and financial services operations in the U.S., Barbados, St. Kitts, St. Maarten, India, Europe, China, Canada, and the Middle East.
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Revenue from unaffiliated customers: |
|
|
| ||||
Domestic operations | $ | | $ | | |||
International operations: |
|
| |||||
Barbados, St. Kitts, and St. Maarten |
| |
| | |||
Other |
| |
| | |||
Total international |
| |
| | |||
Total consolidated revenue | $ | | $ | | |||
Long-lived assets: |
|
| |||||
Domestic operations | $ | | $ | | |||
International operations: |
|
| |||||
Barbados, St. Kitts, and St. Maarten |
| |
| | |||
Other |
| |
| | |||
Total international |
| |
| | |||
Total consolidated long-lived assets | $ | | $ | |
Prior period amounts within domestic operations and other international operations revenue in the above table have been reclassified for consistency with the current period presentation. We previously classified certain sales dependent upon the location of the legal entity reporting the sale. We have changed our methodology to classify these sales within the geographic area category where the sale originates. We believe this better reflects the usefulness of this disclosure.
No one customer accounted for more than 10% of Adtalem’s consolidated revenue for all periods presented.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), Adtalem Global Education Inc., together with its subsidiaries, is collectively referred to as “Adtalem,” “we,” “our,” “us,” or similar references.
Discussions within this 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 with U.S. generally accepted accounting principles (“GAAP”). Certain of these items are considered “non-GAAP financial measures” under the Securities 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 the SEC. 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, the SEC.
35
Segments
As of September 30, 2019, Adtalem eliminated its Business and Law reportable segment when Adtalem Education of Brazil (“Adtalem Brazil”) was classified as discontinued operations and assets held for sale. In addition to the sale of Adtalem Brazil, which was completed on April 24, 2020, during the second quarter of fiscal year 2019, Adtalem divested Carrington College (“Carrington”) and DeVry University. In accordance with GAAP, we have classified the Adtalem Brazil, Carrington, and DeVry University entities as “Assets 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 exclude Adtalem Brazil, Carrington, and DeVry University operations, unless otherwise noted. See Note 3 “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 of Chamberlain University (“Chamberlain”), American University of the Caribbean School of Medicine (“AUC”), Ross University School of Medicine (“RUSM”), and Ross University School of Veterinary Medicine (“RUSVM”). AUC, RUSM, and RUSVM are collectively referred to as the “medical and veterinary schools.”
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 lending. This segment includes the operations of the Association of Certified Anti-Money Laundering Specialists (“ACAMS”), Becker Professional Education (“Becker”), OnCourse Learning (“OCL”), and EduPristine.
“Home Office and Other” includes activities not allocated to a reportable segment. Financial and descriptive information about Adtalem’s reportable segments is presented in Note 19 “Segment Information” to the Consolidated Financial Statements.
On September 11, 2020, Adtalem entered into a Membership Interest Purchase Agreement (the “Agreement”) with Laureate Education, Inc., a Delaware public benefit corporation (“Seller”), pursuant to which Adtalem has agreed to acquire from Seller all of the issued and outstanding equity interest in Walden e-Learning, LLC, a Delaware limited liability company (“e-Learning”), and its subsidiary, Walden University, LLC, a Florida limited liability company (together with e-Learning, “Walden”), in exchange for a purchase price of $1.48 billion in cash, subject to certain adjustments set forth in the Agreement (the “Acquisition”). Walden owns and operates Walden University, an online for-profit university headquartered in Minneapolis, Minnesota. The Board of Directors of Adtalem (the “Board”) has unanimously approved the Acquisition. The closing of the Acquisition is expected to occur in mid-calendar year 2021 and is subject to certain closing conditions, including regulatory approval by the U.S. Department of Education and the Higher Learning Commission and required antitrust approvals.
Also on September 11, 2020, to provide future funding for the Acquisition, Adtalem entered into a commitment letter (the “Commitment Letter”) with Morgan Stanley Senior Funding, Inc. (“MSSF”), Barclays Bank PLC (“Barclays”), Credit Suisse AG, Cayman Islands Branch (“CS”) and Credit Suisse Loan Funding LLC (“CSLF” and, together with CS and their respective affiliates, “Credit Suisse”), and MUFG Bank, Ltd. (together with MSSF, Barclays and Credit Suisse, the “Commitment Parties”), pursuant to which the Commitment Parties committed to provide to Adtalem (i)(A) a senior secured term loan facility in an aggregate principal amount of $1 billion (the “Term Facility”) and (B) a senior secured revolving loan facility in an aggregate commitment amount of $400 million (the “Revolving Facility”) and (ii) to the extent one or more series of senior secured notes pursuant to a Rule 144A offering or other private placement in an aggregate principal amount of $650 million are not issued (in escrow or otherwise) prior to the consummation of the Acquisition, a senior secured bridge term loan credit facility in an aggregate principal amount of up to $650 million (together with the Term Facility and the Revolving Facility, the “Facilities”). The proceeds of the Facilities will be used, among other things, to finance the Acquisition, refinance Adtalem’s existing credit agreement, pay fees and expenses related to the Acquisition, and in the case of the Revolving Facility, to finance ongoing working capital and general corporate purposes. The commitments under the Commitment Letter are subject to customary closing conditions. The risks and uncertainties related
36
to the Acquisition are described in Item 1A. “Risk Factors.” Refer to the Form 8-K filed with the SEC on September 16, 2020 for additional information on the Acquisition and Commitment Letter.
On September 16, 2020, Laureate Education, Inc. (“Laureate”) advised Adtalem that Walden University had received a letter from the U.S. Department of Justice (the “DOJ”) indicating that the DOJ, along with several other government agencies, is conducting an investigation into allegations that Walden University may have violated the federal False Claims Act by misrepresenting its compliance with provisions of its Program Participation Agreement with the U.S. Department of Education relating, generally, to potential false representations to the Commission on Collegiate Nursing Education and false advertising to students about (1) the content and cost of Walden’s Masters of Science in Nursing program, or (2) the availability of clinical site placements required for mandatory practicum courses for such program (collectively, the “DOJ Investigation”). Subsequently, Walden disclosed the DOJ Investigation to the Higher Learning Commission (the “HLC”). On October 13, 2020, Laureate advised Adtalem that Walden University had received a letter from the HLC notifying Walden University that the HLC seeks to assign a public Governmental Investigation designation to Walden University. If imposed, the status would remain in place until the President of the HLC determines that it is no longer required because the institution has resolved the issues that led to the designation. Pursuant to HLC policy, on October 26, 2020, Walden University exercised its opportunity respond to the notice before the Governmental Investigation designation would be assigned and made public.
Pursuant to its access rights under the terms of the Agreement, Adtalem is conducting its own investigation of the matters addressed in the DOJ and HLC correspondence, including reviewing relevant documents and other information and interviewing relevant Laureate and/or Walden University personnel. As a condition to closing the acquisition, certain designated regulatory authorities, including the HLC, must consent to the acquisition. Pursuant to Section 5.05(a) of the Agreement, the parties are required to cooperate and use reasonable best efforts to obtain those designated pre-closing consents from, among others, the HLC. Consistent with the HLC’s policies and procedures, a Governmental Investigation designation by the HLC could delay or prevent the HLC’s approval of a substantive change application to approve the proposed acquisition of Walden University. We are in the early stages of evaluating these regulatory developments and the potential impact, if any, on our planned acquisition of Walden University.
First Quarter Highlights
Financial and operational highlights for the first quarter of fiscal year 2021 include:
● | Adtalem revenue grew $13.6 million, or 5.4%, in the first quarter of fiscal year 2021 compared to the year-ago quarter. Both the Medical and Healthcare and Financial Services segments saw increased revenue. |
● | Net income attributable to Adtalem of $19.9 million increased $5.6 million, or 38.8%, in the first quarter of fiscal year 2021 compared to the year-ago quarter. This increase was primarily driven by the $13.6 million revenue increase, a reduction in bad debt expense of $3.8 million, and cost containment measures across all institutions and Adtalem’s home office, partially offset by $13.4 million in business acquisition and integration expense recorded in the first quarter of fiscal year 2021. Net income from continuing operations attributable to Adtalem excluding special items of $41.2 million increased $22.3 million, or 117.7%, in the first quarter of fiscal year 2021 compared to the year-ago quarter. This increase was principally attributable to revenue growth at Chamberlain and OCL, the reduction in bad debt expense, and cost containment measures across all institutions and Adtalem’s home office. |
● | For the September 2020 session, new and total student enrollment at Chamberlain increased 13.2% and 11.9%, respectively, compared to the same session last year. Chamberlain continues to invest in its programs, student services, and campus locations. |
● | For the September 2020 semester, new and total student enrollment at the medical and veterinary schools increased 5.5% and 4.3%, respectively, compared to the same semester last year. |
● | ACAMS memberships have increased to more than 82,000 as of September 30, 2020 compared to more than 75,000 as of September 30, 2019. |
37
● | OCL experienced strong revenue growth in its mortgage loan officer training and continuing education business, attributable to increased demand in the current strong mortgage market. |
Overview of the Impact of COVID-19
On March 11, 2020, the novel coronavirus (“COVID-19”) outbreak was declared a pandemic by the World Health Organization. COVID-19 has had tragic consequences across the globe and is altering business and consumer activity across many industries. Management has initiated several changes to the operations of our institutions and administrative functions in order to protect the health of Adtalem employees, students, and customers and to mitigate the financial effects of COVID-19 and its resultant economic slowdown. We will continue to evaluate, and if appropriate, adopt other measures in the future required for the ongoing safety of our students, customers, and employees.
Results of Operations
COVID-19 resulted in estimated revenue losses of approximately $14 million, operating income losses of approximately $7 million, and loss of earnings per share of approximately $0.11 in the first quarter of fiscal year 2021. Management anticipates further negative COVID-19 effects to consolidated revenue, operating income, net income, and earnings per share further into fiscal year 2021 or as long as social distancing and other measures established to combat COVID-19 continue. We also expect higher variable expenses associated with bringing students back to campus and additional costs with providing a safe environment in the context of COVID-19 as we begin to move back to in-person instruction across both segments. COVID-19 effects on the first quarter of fiscal year 2021 results of operations of the Adtalem institutions are described below.
38
39
Although COVID-19 has had a negative effect on the operating results of all four reporting units that contain goodwill and indefinite-lived intangible assets as of September 30, 2020, at this time none of the effects are considered significant enough to create an impairment triggering event since our annual goodwill impairment assessment on May 31, 2020. While management has considered the effects of the COVID-19 pandemic in evaluating the existence of an impairment triggering event, it is possible that effects to revenue and cash flows will be more significant than currently expected if the effects of the COVID-19 pandemic and social distancing measures established to combat the virus continue for an extended period of time. Should economic conditions deteriorate beyond expectations further into fiscal year 2021, an impairment triggering event could arise and require reassessment of the fair values of goodwill and intangible assets.
Liquidity
Adtalem’s cash and cash equivalents balance was $561.2 million as of September 30, 2020. Adtalem generated $84.7 million in operating cash flow from continuing operations in the first three months of fiscal year 2021. In the event of unexpected market conditions or negative economic changes, including those caused by COVID-19, that could negatively affect Adtalem’s earnings and/or operating cash flow, Adtalem maintains a $300 million revolving credit facility with availability of $231.6 million as of September 30, 2020. Management currently projects that COVID-19 will continue to have an effect on operations; however, we believe the current balances of cash, cash generated from operations, and our credit facility will be sufficient to fund both Adtalem’s current domestic and international operations and growth plans in the foreseeable future, except in relation to the Acquisition of Walden as discussed in the previous section of this MD&A titled “Segments.” See further discussion on the future financing of the Acquisition in the section of this MD&A titled “Financing Activities” in the “Liquidity and Capital Resources” section.
As noted above, Adtalem maintains a credit agreement (the “Credit Agreement”) that provides for (1) a $300 million revolving facility (“Revolver”) with a maturity date of April 13, 2023 and (2) a $300 million senior secured Term B loan (“Term B Loan”) with a maturity date of April 13, 2025. We refer to the Revolver and Term B Loan collectively as the “Credit Facility.” With interest rates at historically low levels, management entered into an interest rate swap agreement in March 2020 with a multinational financial institution that effectively converts the variable rate interest on the Term B Loan borrowings to a fixed rate of 3.946% for essentially the remaining term of the Term B Loan. The Credit Facility contains covenants that, among other things, require maintenance of certain financial ratios, as defined in the Credit Agreement (see the Credit Agreement, as filed under Form 8-K dated April 13, 2018). These financial ratios include a consolidated fixed charge coverage ratio, a consolidated leverage ratio, and a U.S. Department of Education financial responsibility ratio based upon a composite score of an equity ratio, a primary reserve ratio, and a net income ratio. Failure to maintain any of these ratios or to comply with other covenants contained in the Credit Agreement would constitute an event of default and could result in termination of the Credit Agreement and require payment of all outstanding borrowings and replacement of outstanding letters of credit. Adtalem was in compliance with the debt covenants as of September 30, 2020.
40
Results of Operations
The following table presents selected Consolidated Statements of Income data as a percentage of revenue:
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Revenue | 100.0 | % | 100.0 | % | ||
Cost of educational services | 42.4 | % | 50.3 | % | ||
Student services and administrative expense | 37.3 | % | 38.9 | % | ||
Restructuring expense | 1.6 | % | 2.6 | % | ||
Business acquisition and integration expense | 5.0 | % | 0.0 | % | ||
Gain on sale of assets | 0.0 | % | (1.9) | % | ||
Total operating cost and expense | 86.3 | % | 89.9 | % | ||
Operating income | 13.7 | % | 10.1 | % | ||
Net other expense | (0.8) | % | (1.8) | % | ||
Income from continuing operations before income taxes | 12.9 | % | 8.3 | % | ||
Provision for income taxes | (2.6) | % | (1.5) | % | ||
Income from continuing operations | 10.2 | % | 6.8 | % | ||
Loss from discontinued operations, net of tax | (2.8) | % | (1.2) | % | ||
Net income | 7.4 | % | 5.6 | % | ||
Net loss attributable to redeemable noncontrolling interest | 0.0 | % | 0.0 | % | ||
Net income attributable to Adtalem | 7.4 | % | 5.6 | % |
Revenue
The following table presents revenue by segment detailing the changes from the year-ago quarter (in thousands):
Three Months Ended September 30, 2020 |
| |||||||||
Medical and |
| Financial | Consolidated |
| ||||||
Fiscal year 2020 as reported | $ | 207,487 | $ | 47,126 | $ | 254,613 | ||||
Organic growth | 11,339 | 2,289 | 13,628 | |||||||
Fiscal year 2021 as reported | $ | 218,826 | $ | 49,415 | $ | 268,241 | ||||
Fiscal year 2021 % change: | ||||||||||
Organic growth | 5.5 | % | 4.9 | % | 5.4 | % |
Medical and Healthcare
Revenue in the Medical and Healthcare segment increased 5.5%, or $11.3 million, to $218.8 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. The increase in revenue in the first quarter of fiscal year 2021 is driven primarily by student enrollment increases at Chamberlain. This increase was partially offset by the estimated loss of approximately $5 million in housing and student transportation revenue, primarily at RUSM as basic science students were not on campus due to COVID-19 remote learning, and $4 million of clinical revenue at AUC and RUSM due to the COVID-19 related clinical program limitations at partner hospitals, which were gradually eased during the first quarter of fiscal year 2021.
41
Chamberlain
Chamberlain Student Enrollment:
Fiscal Year 2021 |
| ||||||||||||
Session | July 2020 | Sept. 2020 | |||||||||||
New students | 2,768 | 6,333 | |||||||||||
% change from prior year | 15.5 | % | 13.2 | % | |||||||||
Total students | 32,198 | 35,525 | |||||||||||
% change from prior year | 12.2 | % | 11.9 | % | |||||||||
Fiscal Year 2020 | |||||||||||||
Session | July 2019 | Sept. 2019 | Nov. 2019 | Jan. 2020 | Mar. 2020 | May 2020 |
| ||||||
New students | 2,396 | 5,595 | 2,711 | 5,293 | 3,073 | 4,213 | |||||||
% change from prior year | (5.0) | % | 2.9 | % | 3.6 | % | 11.2 | % | 12.7 | % | 5.4 | % | |
Total students | 28,691 | 31,736 | 31,215 | 33,850 | 33,748 | 33,407 | |||||||
% change from prior year | 2.3 | % | 1.4 | % | 1.2 | % | 4.6 | % | 5.1 | % | 8.2 | % |
Chamberlain revenue increased 14.8%, or $17.2 million, to $133.8 million in the first quarter of fiscal year 2021 compared to the year-ago quarter, driven by increases in total student enrollment during each fiscal year 2021 enrollment session as well as non-tuition fee price increases. Chamberlain admitted its largest class of campus students in September 2020.
Chamberlain currently operates 22 campuses in 15 states. Chamberlain’s newest campus in San Antonio, Texas, began instruction in October 2019.
Tuition Rates:
Tuition for the Bachelor of Science in Nursing (“BSN”) onsite degree program ranges from $675 to $720 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 online Family Nurse Practitioner (“FNP”) degree program is $665 per credit hour. Tuition for the online Doctor of Nursing Practice (“DNP”) degree program is $775 per credit hour. Tuition for the online Master of Public Health (“MPH”) degree program is $550 per credit hour. Tuition for the online Master of Social Work (“MSW”) degree program 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 2021 | |||||||
Semester | Sept. 2020 | ||||||
New students | 920 | ||||||
% change from prior year | 5.5 | % | |||||
Total students | 5,850 | ||||||
% change from prior year | 4.3 | % | |||||
Fiscal Year 2020 | |||||||
Semester | Sept. 2019 | Jan. 2020 | May 2020 |
| |||
New students | 872 | 486 | 544 | ||||
% change from prior year | (1.9) | % | 3.2 | % | 9.7 | % | |
Total students | 5,608 | 5,643 | 5,186 | ||||
% change from prior year | (4.7) | % | 1.7 | % | (0.7) | % |
42
The medical and veterinary schools’ revenue decreased 6.5%, or $5.9 million, to $85.1 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. The principal drivers of the decrease was an estimated loss of $5 million in housing and student transportation revenue, primarily at RUSM as basic science students were not on campus due to COVID-19 remote learning, and $4 million of clinical revenue at AUC and RUSM due to the COVID-19 related clinical program limitations at partner hospitals, which were gradually eased during the first quarter of fiscal year 2021. These decreases were partially offset with student enrollment and revenue increases in the basic science programs at AUC and RUSVM.
In the September 2020 semester, total student enrollment increased at AUC, RUSM, and RUSVM. New student enrollment increased at AUC and RUSM but slightly declined at RUSVM due to the large cohort of May 2020 Vet Prep students progressing to September 2020, which was at maximum enrollment capacity. 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, competition may continue to adversely affect the medical and veterinary schools’ ability to continue to attract qualified students to its programs resulting in lower revenue.
In September 2019, AUC opened its medical education program in the U.K. in partnership with UCLAN. The program offers students a Post Graduate Diploma in International Medical Sciences 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”).
Tuition Rates:
● | Effective for semesters beginning in September 2020, tuition rates for the beginning basic sciences and final clinical rotation portions of AUC’s medical program are $23,240 and $26,000, respectively, per semester. These tuition rates are unchanged from the prior academic year. |
● | Effective for semesters beginning in September 2020, tuition rates for the beginning basic sciences and Internal Medicine Foundations/final clinical portion of the programs at RUSM are $24,170 and $26,676, respectively, per semester. These tuition rates are unchanged from the prior academic year. |
● | For students who entered the RUSVM program in September 2018 or later, the tuition rate for the pre-clinical (Semesters 1-7) and clinical curriculum (Semesters 8-10) is $20,873 per semester effective September 2020. For students who entered RUSVM before September 2018, tuition rates for the pre-clinical and clinical curriculum are $19,387 and $24,339, respectively, per semester effective September 2020. These tuition rates are unchanged from 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 4.9%, or $2.3 million, to $49.4 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. The principal drivers of the increase were a result of increased revenue at OCL and an increase in ACAMS memberships, subscriptions, and certification revenue. In addition, Becker revenue increased through growth in both CPA and continuing education program offerings. The revenue increase was partially offset by a $5.4 million decline in ACAMS conference related revenue in the first quarter of fiscal year 2021 compared to the year-ago quarter, driven by the estimated loss of approximately $5 million of revenue from the COVID-19 related replacement of the Las Vegas live conference with a virtual conference. The remaining decline in conference revenue relates to the timing of conferences between comparable quarters. The entire Las Vegas conference was in the first quarter
43
of fiscal year 2020, where one day out of the now three day virtual conference takes place in the second quarter of fiscal year 2021. ACAMS memberships have increased to more than 82,000 as of September 30, 2020 compared to more than 75,000 as of September 30, 2019, driven by strong growth in the European region.
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 table presents cost of educational services by segment detailing the changes from the year-ago quarter (in thousands):
Three Months Ended September 30, 2020 |
| ||||||||||||
| Medical and |
| Financial |
| Home Office | Consolidated | |||||||
Fiscal year 2020 as reported |
| $ | 116,739 | $ | 10,678 |
| $ | 617 |
| $ | 128,034 | ||
Cost decrease |
|
| (11,628) |
| (2,673) |
|
| (35) |
|
| (14,336) | ||
Fiscal year 2021 as reported |
| $ | 105,111 | $ | 8,005 |
| $ | 582 |
| $ | 113,698 | ||
Fiscal year 2021 % change: |
| ||||||||||||
Cost decrease |
| (10.0) | % |
| (25.0) | % |
| NM |
| (11.2) | % |
Cost of educational services decreased 11.2%, or $14.3 million, to $113.7 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. Cost decreased due to lower operating expenses driven by cost control initiatives across all institutions, lower costs of approximately $7 million associated with not delivering in-person instruction and clinical and other services, including ACAMS live conferences, due to the COVID-19 related revenue losses as noted above, and decreased bad debt expense of $3.8 million in the first quarter of fiscal year 2021, primarily related to the credit extension programs at the medical and veterinary schools.
As a percentage of revenue, cost of educational services was 42.4% in the first quarter of fiscal year 2021 compared to 50.3% in the year-ago quarter. The decrease in the percentage was primarily the result of cost reduction efforts and the increased revenue in the first quarter of fiscal year 2021.
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 table presents student services and administrative expense by segment detailing the changes from the year-ago quarter (in thousands):
Three Months Ended September 30, 2020 |
| ||||||||||||
| Medical and |
| Financial |
| Home Office | Consolidated | |||||||
Fiscal year 2020 as reported | $ | 62,120 | $ | 32,341 | $ | 4,626 | $ | 99,087 | |||||
Cost increase (decrease) |
| (1,415) |
| 382 |
| 2,124 |
| 1,091 | |||||
Fiscal year 2021 as reported | $ | 60,705 | $ | 32,723 | $ | 6,750 | $ | 100,178 | |||||
Fiscal year 2021 % change: |
| ||||||||||||
Cost increase (decrease) | (2.3) | % |
| 1.2 | % |
| NM |
| 1.1 | % |
Student services and administrative expense increased 1.1%, or $1.1 million, to $100.2 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. As a percentage of revenue, student services and administrative expense was 37.3% in the first quarter of fiscal year 2021 compared to 38.9% in the year-ago quarter. The decrease in the percentage was primarily the result of the increased revenue and cost control initiatives across all institutions in the first quarter of fiscal year 2021.
44
Restructuring Expense
Restructuring expense in the first quarter of fiscal year 2021 was $4.2 million compared to $6.5 million in the year-ago quarter. The primary driver of the decreased restructure expense was the result of lower real estate consolidation charges at Adtalem’s home office. See Note 5 “Restructuring Charges” to the Consolidated Financial Statements for additional information on restructuring charges.
We have substantially completed our current restructuring plans. We will continue to incur restructuring charges or reversals related to exiting leased space from previous restructuring activities. Management may institute future restructuring plans.
Business Acquisition and Integration Expense
Business acquisition and integration expense in the first quarter of fiscal year 2021 was $13.4 million. These are transaction costs associated with entering into the Agreement to acquire Walden and costs associated with integrating Walden into Adtalem. We expect to incur additional integration costs through the remainder of fiscal year 2021.
Gain on Sale of Assets
On September 27, 2019, Adtalem closed on the sale of its Columbus, Ohio, campus facility. Net proceeds of $6.4 million from the sale of this facility resulted in a gain on the sale of $4.8 million in the first quarter of fiscal year 2020. This gain was recorded at Adtalem’s home office, which is classified as “Home Office and Other” in Note 19 “Segment Information” to the Consolidated Financial Statements. There was no corresponding gain in the first quarter of fiscal year 2021.
Operating Income
The following table presents operating income by segment detailing the changes from the year-ago quarter (in thousands):
Three Months Ended September 30, 2020 | ||||||||||||
Medical and |
| Financial |
| Home Office | Consolidated | |||||||
Fiscal year 2020 as reported | $ | 28,500 | $ | 2,128 | $ | (4,887) | $ | 25,741 | ||||
Organic change | 24,383 | 4,580 | (2,090) | 26,873 | ||||||||
Restructuring expense change | 127 | 564 | 1,616 | 2,307 | ||||||||
Business acquisition and integration expense change | — | — | (13,436) | (13,436) | ||||||||
Gain on sale of assets change | — | — | (4,779) | (4,779) | ||||||||
Fiscal year 2021 as reported | $ | 53,010 | $ | 7,272 | $ | (23,576) | $ | 36,706 |
45
The following table presents a reconciliation of operating income (GAAP) to operating income excluding special items (non-GAAP) by segment (in thousands):
Three Months Ended | |||||||||
September 30, | |||||||||
2020 | 2019 | Increase | |||||||
Medical and Healthcare: | |||||||||
Operating income (GAAP) | $ | 53,010 | $ | 28,500 | 86.0 | % | |||
Restructuring expense | — | 127 | NM | ||||||
Operating income excluding special items (non-GAAP) | $ | 53,010 | $ | 28,627 | 85.2 | % | |||
Financial Services: | |||||||||
Operating income (GAAP) | $ | 7,272 | $ | 2,128 | 241.7 | % | |||
Restructuring expense | 1,415 | 1,979 | (28.5) | % | |||||
Operating income excluding special items (non-GAAP) | $ | 8,687 | $ | 4,107 | 111.5 | % | |||
Home Office and Other: | |||||||||
Operating loss (GAAP) | $ | (23,576) | $ | (4,887) | (382.4) | % | |||
Restructuring expense | 2,808 | 4,424 | (36.5) | % | |||||
Business acquisition and integration expense | 13,436 | — | NM | ||||||
Gain on sale of assets | — | (4,779) | NM | ||||||
Operating loss excluding special items (non-GAAP) | $ | (7,332) | $ | (5,242) | (39.9) | % | |||
Adtalem Global Education: | |||||||||
Operating income (GAAP) | $ | 36,706 | $ | 25,741 | 42.6 | % | |||
Restructuring expense | 4,223 | 6,530 | (35.3) | % | |||||
Business acquisition and integration expense | 13,436 | — | NM | ||||||
Gain on sale of assets | — | (4,779) | NM | ||||||
Operating income excluding special items (non-GAAP) | $ | 54,365 | $ | 27,492 | 97.7 | % |
Total consolidated operating income increased $11.0 million, to $36.7 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. Consolidated operating income excluding special items increased 97.7%, or $26.9 million, in the first quarter of fiscal year 2021 compared to the year-ago quarter. The primary drivers of this increase were an increase in revenue of $13.6 million, primarily at Chamberlain and OCL, which generated higher incremental operating income than the lost revenue sources due to COVID-19, decreased bad debt expense of $3.8 million, primarily related to the credit extension programs at the medical and veterinary schools, and efforts to manage salary, travel, and discretionary spending across the organization.
Medical and Healthcare
Medical and Healthcare segment operating income increased 86.0%, or $24.5 million, to $53.0 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. The primary drivers of this increase related to increased revenue at Chamberlain of $17.2 million, which generated higher incremental operating income than the lost revenue sources due to COVID-19 as discussed below, decreased bad debt expense of $2.7 million, primarily related to the credit extension programs at the medical and veterinary schools, and efforts to manage salary, travel, and discretionary spending at all institutions. Lower revenue at AUC and RUSM due to the estimated COVID-19 related loss of clinical revenue contributed to approximately $2 million in lost operating income in the first quarter of fiscal year 2021. Lower COVID-19 related housing and student transportation revenue, primarily at RUSM as described above, resulted in approximately $3 million in lost operating income.
Financial Services
Financial Services segment operating income increased 241.7%, or $5.1 million, to $7.3 million in the first quarter of fiscal year 2021 compared to the year-ago quarter. Segment operating income excluding special items increased 111.5%, or $4.6 million, in the first quarter of fiscal year 2021 compared to the year-ago quarter. The primary driver of this increase was an increase in revenue at OCL. Conference revenue decreases at ACAMS due to COVID-19, as described above, contributed to $3 million in lost operating income in the first quarter of fiscal year 2021.
46
Net Other Expense
Net other expense in the first quarter of fiscal year 2021 was $2.2 million compared to $4.6 million in the year-ago quarter. The decrease in net other expense was primarily the result of decreased borrowings under Adtalem’s Credit Facility (as discussed in Note 12 “Debt” to the Consolidated Financial Statements).
Provision for 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-based compensation awards. Additionally, our ETR is 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 consider any new regulations or guidance that may be released.
The ETR from continuing operations for the first quarter of fiscal year 2021 was 20.5% compared to 17.6% in the year-ago quarter. The increase is primarily due to an increase in earnings from domestic operations and a reduction in tax benefits for stock-based compensation.
Discontinued Operations
Beginning in the second quarter of fiscal year 2018, DeVry University operations were classified as discontinued operations. Beginning in the fourth quarter of fiscal year 2018, Carrington operations were classified as discontinued operations. Beginning in the first quarter of fiscal year 2020, Adtalem Brazil operations were classified as discontinued operations. The divestitures of Carrington and DeVry University operations were completed in the second quarter of fiscal year 2019 and the divestiture of Adtalem Brazil operations was completed in the fourth quarter of fiscal year 2020. We continue to incur costs associated with ongoing litigation and settlements related to the DeVry University divestiture which is classified as expense within discontinued operations. Management no longer discloses other discussions of operating results of these entities as comparable results are no longer meaningful.
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 credit extension programs.
The following table, which excludes Adtalem Brazil, Carrington, and DeVry University revenue, summarizes Adtalem’s revenue by fund source as a percentage of total revenue for fiscal years 2019 and 2018. Final data for fiscal year 2020 is not yet available.
Fiscal Year |
| ||||
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 institution’s term.
47
Financial Aid
Like other higher education companies, 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 the U.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 Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“2020 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 the U.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 the U.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.
During the fourth quarter of fiscal year 2020 and the first quarter of fiscal year 2021, ED provisionally recertified AUC, RUSM, and RUSVM’s Title IV PPAs with expiration dates of December 31, 2022, March 31, 2023, and June 30, 2023, respectively. The provisional nature of the agreements stemmed from increased and/or repeated Title IV compliance audit findings. No financial ramifications, such as a letter of credit, heightened cash monitoring, or student enrollment limitations, were imposed on any of these institutions. While corrective actions have been taken to resolve past compliance matters and eliminate the incidence of repetition, if AUC, RUSM, or RUSVM fail to maintain administrative capability as defined by ED while under provisional status or otherwise fail to comply with ED requirements, the institution(s) could lose eligibility to participate in Title IV programs or have that eligibility adversely conditioned, which could have a material adverse effect on the businesses, financial condition, results of operations, and cash flows.
On October 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 the Multi-Regional and Foreign School Participation Division of the Federal Student Aid office of the Department 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, that DeVry University’s participation in Title IV programs is subject to provisional certification for five years and that DeVry University is required to post a letter of credit equal to the greater of 10% of DeVry University’s annual Title IV disbursements or $68.4 million for a five-year period. The posted letter of credit continues to be posted by Adtalem following the closing of the sale of DeVry University and reduces Adtalem’s borrowing capacity dollar-for-dollar under its Credit Facility (as defined in Note 12 “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 the U.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. Final data for fiscal year 2020 is not yet available.
Fiscal Year |
| ||||
2019 | 2018 |
| |||
Chamberlain University |
| 62 | % | 62 | % |
American University of the Caribbean School of Medicine |
| 75 | % | 74 | % |
Ross University School of Medicine |
| 83 | % | 81 | % |
Ross University School of Veterinary Medicine |
| 83 | % | 82 | % |
48
In September 2016, Adtalem committed to voluntarily limit to 85% the amount of revenue that each of its 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. Changes to the manner in which the composite score is calculated that are effective on July 1, 2020 will negatively affect future Adtalem scores; however, management does not believe these changes by themselves will result in the score falling below 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 our institutions 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 $561.2 million, $500.5 million, and $121.1 million as of September 30, 2020, June 30, 2020, and September 30, 2019, respectively, included cash and cash equivalents held at Adtalem’s international operations of $82.0 million, $70.1 million, and $102.1 million as of September 30, 2020, June 30, 2020, and September 30, 2019, respectively, which is available to Adtalem for general company purposes.
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 $0.9 million, $0.6 million, and $0.7 million was held in restricted bank accounts as of September 30, 2020, June 30, 2020, and September 30, 2019, respectively.
49
Cash Flow Summary
Operating Activities
The following table provides a summary of cash flows from operating activities (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Income from continuing operations | $ | 27,446 | $ | 17,408 | ||
Non-cash items |
| 37,565 |
| 34,106 | ||
Changes in assets and liabilities |
| 19,643 |
| (18,038) | ||
Net cash provided by operating activities-continuing operations | $ | 84,654 | $ | 33,476 |
Net cash provided by operating activities from continuing operations in the three months ended September 30, 2020 was $84.7 million compared to $33.5 million in the year-ago period. The increase of $51.2 million in cash generated from continuing operating activities between the three months ended September 30, 2020 and the three months ended September 30, 2019 was primarily due to (i) higher income from continuing operations; (ii) more timely collection of accounts receivable and application of financial aid funds to student accounts in the first three months of fiscal year 2021, primarily at the medical and veterinary schools; (iii) a decrease in prepaid expenses in the first three months of fiscal year 2021 compared to an increase in the first three months of fiscal year 2020; and (iv) timing of accounts payable and accrued expense disbursements.
Investing Activities
Capital expenditures in the first three months of fiscal year 2021 were $14.4 million compared to $10.4 million in the year-ago period. The capital expenditures in fiscal year 2021 include spending for Chamberlain new campus development, maintenance, and Adtalem’s home office. Capital spending for the remainder of fiscal year 2021 will support continued investment for new campus development at Chamberlain, maintenance at the medical and veterinary schools, and Adtalem’s home office. Management anticipates full fiscal year 2021 capital spending to be in the $50 to $55 million range, including $14.4 million spent during the first three months of fiscal year 2021. The source of funds for this capital spending will be from operations or the Credit Facility (as defined and discussed in Note 12 “Debt” to the Consolidated Financial Statements).
On September 27, 2019, Adtalem closed on the sale of its Columbus, Ohio, campus facility. Net proceeds of $6.4 million from the sale of this facility resulted in a gain on the sale of $4.8 million in the first three months of fiscal year 2020. This gain was recorded at Adtalem’s home office, which is classified as “Home Office and Other” in Note 19 “Segment Information” to the Consolidated Financial Statements.
Financing Activities
The following table provides a summary of cash flows from financing activities (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2020 | 2019 | |||||
Repurchase of common stock for treasury | $ | — | $ | (40,255) | ||
Net payments under credit facility |
| (750) |
| (70,750) | ||
Payment for purchase of redeemable noncontrolling interest of subsidiary | — | (6,247) | ||||
Other |
| (3,835) |
| 983 | ||
Net cash used in financing activities-continuing operations | $ | (4,585) | $ | (116,269) |
On February 4, 2020, we announced that the Board authorized Adtalem’s twelfth share repurchase program, which allows Adtalem to repurchase up to $300 million of its common stock through December 31, 2021. The new program will commence when the repurchases from the current program are complete. As of September 30, 2020, $345.2 million of
50
authorized share repurchases were remaining under the current and twelfth share repurchase programs. Repurchases were suspended on March 12, 2020 due to the economic uncertainty caused by the COVID-19 pandemic. In October 2020, Adtalem determined to end the suspension of its current share repurchase program, and we may resume repurchases in accordance with the securities laws if market conditions are favorable. The timing and amount of any future repurchases will be determined based on an evaluation of market conditions and other factors. See Note 14 “Share Repurchases” to the Consolidated Financial Statements for additional information on our share repurchase programs.
As of September 30, 2020, the amount of debt outstanding under our credit facility was $293.3 million. See Note 12 “Debt” to the Consolidated Financial Statements for additional information on our credit agreement.
Management currently projects that COVID-19 will have an effect on operations and, as a result, liquidity, as discussed in the previous section of this MD&A titled “Overview of the Impact of COVID-19”; however, we believe the current balances of cash, cash generated from operations, and our Credit Facility (as defined and discussed in Note 12 “Debt” to the Consolidated Financial Statements) will be sufficient to fund both Adtalem’s current domestic and international operations and growth plans for the foreseeable future, except in relation to the Acquisition of Walden as discussed below.
As discussed in the previous section of this MD&A titled “Segments,” Adtalem agreed to acquire all of the issued and outstanding equity interest in Walden, in exchange for a purchase price of $1.48 billion in cash, subject to certain adjustments set forth in the Agreement. On September 11, 2020, to provide future funding for the Acquisition, Adtalem entered into a Commitment Letter with the Commitment Parties to provide to Adtalem the Facilities. The proceeds of the Facilities will be used, among other things, to finance the Acquisition, refinance Adtalem’s existing credit agreement, pay fees and expenses related to the Acquisition, and in the case of the Revolving Facility, to finance ongoing working capital and general corporate purposes. The commitments under the Commitment Letter are subject to customary closing conditions.
Contractual Obligations
Adtalem’s long-term contractual obligations consist of its $600 million Credit Facility (as defined and discussed in Note 12 “Debt” to the Consolidated Financial Statements), operating leases (discussed in Note 10 “Leases” to the Consolidated Financial Statements) on facilities, and agreements for various services.
As discussed in the previous section of this MD&A titled “Financing Activities,” Adtalem entered into a Commitment Letter with the Commitment Parties to provide funding for the Acquisition, refinance Adtalem’s existing credit agreement, pay fees and expenses related to the Acquisition, and in the case of the Revolving Facility, to finance ongoing working capital and general corporate purposes. The commitments under the Commitment Letter are subject to customary closing conditions.
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. In fiscal year 2020, Adtalem recorded an adjustment to the one-time transition tax, increasing the liability by $0.6 million to $9.4 million, and is payable over eight years. The first installment will be required in fiscal year 2022.
On December 11, 2018, Adtalem completed the sale of DeVry University to Cogswell. 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.
On July 31, 2019, Adtalem sold its Chicago, Illinois, campus facility to DePaul 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, from DePaul College Prep for $46.8 million. The mortgage is due on July 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 maintains agreements to lease either a portion or the full space of three facilities owned by Adtalem to DeVry University and to sublease either a portion of the full leased space of an additional 21 facilities, most of which are subleased to DeVry University and/or Carrington. Adtalem remains the primary lessee on the 21 underlying leases. These lease and
51
sublease agreements were entered into at comparable market rates and the terms range from one to five years. Future minimum lease and sublease rental income under these agreements as of September 30, 2020, were as follows (in thousands):
Fiscal Year | Amount | ||
2021 (remaining) | $ | 14,270 | |
2022 | 16,816 | ||
2023 |
| 16,078 | |
2024 |
| 10,261 | |
2025 |
| 5,121 | |
Thereafter | 2,038 | ||
Total lease and sublease rental income | $ | 64,584 |
Adtalem also assigned certain leases to Carrington and DeVry University but remains contingently liable under these leases.
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.
On March 24, 2020, we executed a pay-fixed, receive-variable interest rate swap agreement (the “Swap”) with a multinational financial institution to mitigate risks associated with the variable interest rate on our Term B Loan debt. We pay interest at a fixed rate of 0.946% and receive variable interest of one-month LIBOR (subject to a minimum of 0.00%), on a notional amount equal to the amount outstanding under the Term B Loan. The effective date of the Swap was March 31, 2020 and settlements with the counterparty occur on a monthly basis. The Swap will terminate on February 28, 2025. During the operating term of the Swap, the annual interest rate on the amount of the Term B Loan is fixed at 3.946% (including the impact of our current 3% interest rate margin on LIBOR loans) for the applicable interest rate period. The Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive loss on the Consolidated Balance Sheet and are reclassified into the Consolidated Statements of Income within interest expense in the periods in which the hedged transactions affect earnings. As of September 30, 2020, the fair value of the Swap was a loss of $10.2 million.
Adtalem did not enter into any other derivatives, swaps, futures contracts, calls, hedges, or non-exchange traded contracts during the first three months of fiscal year 2021.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates as disclosed in our 2020 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.
52
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, which includes statements regarding the future impact of the COVID-19 pandemic and the pending Walden University acquisition. 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 described in the statements. These risk and uncertainties include the risk factors described in Item 1A. “Risk Factors” of our 2020 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 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, business acquisition and integration expense, gain on sale of assets, and loss from discontinued operations.
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, business acquisition and integration expense, gain on sale of assets, and loss from discontinued operations.
Operating income excluding special items (most comparable GAAP measure: operating income) – Measure of Adtalem’s operating income adjusted for restructuring expense, business acquisition and integration expense, and gain on sale of assets. This measure is applied on a consolidated and segment basis, depending on the context of the discussion.
A description of special items in our non-GAAP financial measures described above are as follows:
● | Restructuring charges primarily related to real estate consolidations at Adtalem’s home office and ACAMS and the sale of Becker’s courses for healthcare students. |
● | Business acquisition and integration expense include expenses related to the pending Walden University acquisition. |
● | Gain on the sale of Adtalem’s Columbus, Ohio, campus facility. |
● | Loss from discontinued operations include the operations of Adtalem Brazil, Carrington, and DeVry University. |
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 within this MD&A.
53
Net income attributable to Adtalem reconciliation to net income from continuing operations attributable to Adtalem excluding special items (in thousands):
Three Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Net income attributable to Adtalem (GAAP) | $ | 19,930 | $ | 14,361 | |||
Restructuring expense | 4,223 | 6,530 | |||||
Business acquisition and integration expense | 13,436 | — | |||||
Gain on sale of assets | — | (4,779) | |||||
Income tax impact on non-GAAP adjustments (1) | (3,998) | (343) | |||||
Loss from discontinued operations | 7,607 | 3,156 | |||||
Net income from continuing operations attributable to Adtalem excluding special items (non-GAAP) | $ | 41,198 | $ | 18,925 |
(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 | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
Earnings per share, diluted (GAAP) | $ | 0.38 | $ | 0.26 | |||
Effect on diluted earnings per share: | |||||||
Restructuring expense | 0.08 | 0.12 | |||||
Business acquisition and integration expense | 0.25 | - | |||||
Gain on sale of assets | - | (0.09) | |||||
Income tax impact on non-GAAP adjustments (1) | (0.08) | (0.01) | |||||
Loss from discontinued operations | 0.14 | 0.06 | |||||
Earnings per share from continuing operations excluding special items, diluted (non-GAAP) | $ | 0.78 | $ | 0.34 | |||
Diluted shares used in EPS calculation | 52,797 | 56,140 |
(1) | Represents the income tax impact of non-GAAP continuing operations adjustments that is recognized in our GAAP financial statements. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
On March 24, 2020, we executed a pay-fixed, receive-variable interest rate swap agreement (the “Swap”) with a multinational financial institution to mitigate risks associated with the variable interest rate on our Term B Loan debt. We pay interest at a fixed rate of 0.946% and receive variable interest of one-month LIBOR (subject to a minimum of 0.00%), on a notional amount equal to the amount outstanding under the Term B Loan. The effective date of the Swap was March 31, 2020 and settlements with the counterparty occur on a monthly basis. The Swap will terminate on February 28, 2025. During the operating term of the Swap, the annual interest rate on the amount of the Term B Loan is fixed at 3.946% (including the impact of our current 3% interest rate margin on LIBOR loans) for the applicable interest rate period. The Swap is designated as a cash flow hedge and as such, changes in its fair value are recognized in accumulated other comprehensive loss on the Consolidated Balance Sheet and are reclassified into the Consolidated Statements of Income within interest expense in the periods in which the hedged transactions affect earnings. As of September 30, 2020, the fair value of the Swap was a loss of $10.2 million. As of September 30, 2020, a 100 basis point increase in short-term interest rates would result in a $12.7 million change in value of the Swap.
There have been no other material changes in Adtalem’s market risk exposure during the first three months of fiscal year 2021. For a discussion of Adtalem’s exposure to market risk, refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” contained in Adtalem’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
54
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of Adtalem’s management, Adtalem’s Chief Executive Officer and Chief Financial Officer have concluded that Adtalem’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of September 30, 2020 to ensure that information required to be disclosed by Adtalem in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to Adtalem’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, Adtalem’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 18 “Commitments and Contingencies” to the Consolidated Financial Statements included in Item 1. “Financial Statements.”
Item 1A. Risk Factors
In addition to the other information set forth in this report, the factors discussed in Item 1A. “Risk Factors” in Adtalem’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, which could materially affect Adtalem’s business, financial condition, or future results, should be carefully considered. Such risks are not the only risks facing Adtalem. Additional risks and uncertainties not currently known to Adtalem or that management currently deems to be immaterial also may materially adversely affect its business, financial condition, and/or operating results. Except for the risk factors discussed below, there have been no material changes to Adtalem’s risk factors since its Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
Completion of the Acquisition is subject to the conditions contained in the Agreement and if these conditions are not satisfied or waived, the Acquisition will not be completed.
Our obligation to complete the Acquisition is subject to the satisfaction or waiver of a number of conditions, including, among others, the receipt of certain regulatory approvals including the U.S. Department of Education, the Higher Learning Commission (the “HLC”), and the expiration or termination of any applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Act.
Many of the conditions to the closing of the Acquisition are not within Adtalem’s or Seller’s control, and neither company can predict with certainty when or if these conditions will be satisfied. The failure to satisfy all of the required conditions could delay the completion of the Acquisition for a significant period of time or prevent it from occurring. Any delay in completing the Acquisition could cause us not to realize some or all of the benefits that we expect to achieve if the Acquisition is successfully completed within the expected time frame. There can be no assurance that the conditions to the closing of the Acquisition will be satisfied or waived or that the Acquisition will be completed.
The Acquisition is subject to the conditions contained in the Agreement, and if these conditions are not satisfied or waived, the Acquisition will not be completed.
Our obligation to complete the Acquisition is subject to the satisfaction or waiver of a number of conditions, including, among others, the receipt of certain regulatory approvals including the U.S. Department of Education and the HLC, and we cannot guarantee that we or the Seller will be able to obtain any of these approvals. For example, a “Governmental
55
Investigation” designation by HLC could delay or prevent approval by HLC of a substantive change application on behalf of Walden University. There can be no assurance that any consents, clearances or approvals necessary or advisable to be obtained in connection with the Acquisition will be obtained in a timely manner or at all, or whether they will be subject to actions, conditions, limitations or restrictions that may jeopardize or delay the completion of the Acquisition, materially reduce or delay the anticipated benefits of the transaction or allow the parties to terminate the Agreement.
Additionally, many of the conditions to the closing of the Acquisition are not within Adtalem’s or Seller’s control, and we cannot predict when or if these conditions will be satisfied. The failure to satisfy all the required conditions could delay the completion of the Acquisition for a significant period of time or prevent it from occurring. Any delay or failure to consummate the Acquisition could cause us not to realize some or all of the financial and operational benefits that we expect to achieve.
Failure to complete the Acquisition could negatively impact our stock price and our future business and financial results.
If the Acquisition is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Acquisition, we could be subject to a number of negative consequences, including, among others: (i) we may experience negative reactions from the financial markets, including negative impacts on our stock price; (ii) we will still be required to pay certain significant costs relating to the Acquisition, including legal, accounting, and financial advisor costs; (iii) we may be required to pay a cash termination fee as required by the Agreement; and (iv) matters related to the Acquisition (including integration planning) require substantial commitments or our time and resources, which could have resulted in our inability to pursue other opportunities that could have been beneficial to us.
If the Acquisition is not completed, any of these risks may materialize and may adversely affect our businesses, financial condition, financial results, and stock price.
The Acquisition will involve substantial costs.
We have incurred, and expect to continue to incur, a number of non-recurring costs associated with the Acquisition. The substantial majority of the non-recurring expenses will consist of transaction and regulatory costs related to the Acquisition. We will also incur transaction fees and costs related to formulating and implementing integration plans, including system consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred from the Acquisition and integration. Although we anticipate that the elimination of duplicative costs and the realization of other efficiencies and synergies related to the integration should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
In connection with the Acquisition, we will incur additional indebtedness, which could adversely affect Adtalem, including our business flexibility and will increase our interest expense.
We will have increased indebtedness following completion of the Acquisition in comparison to our recent historical basis, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our interest expense. We will also incur various costs and expenses related to the financing of the Acquisition. The amount of cash required to pay interest on our increased indebtedness following completion of the Acquisition and thereby the demands on our cash resources will be greater than the amount of cash flow required to service our indebtedness prior to the Acquisition. The increased levels of indebtedness following completion of the Acquisition could also reduce funds available for working capital, capital expenditures, and other general corporate purposes, and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected synergies and cost savings from the Acquisition, or if our financial performance after the Acquisition does not meet our current expectations, then our ability to service the indebtedness may be adversely impacted.
56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||
July 1, 2020 - July 31, 2020 | — | $ | — | — | $ | 345,231,045 | ||||
August 1, 2020 - August 31, 2020 | — | — | — | 345,231,045 | ||||||
September 1, 2020 - September 30, 2020 | — | — | — | 345,231,045 | ||||||
Total | — | $ | — | — | $ | 345,231,045 |
(1) On November 8, 2018, we announced that the Board of Directors of Adtalem (the “Board”) authorized the current share repurchase program to repurchase up to $300 million of Adtalem common stock through December 31, 2021. On February 4, 2020, we announced that the Board authorized Adtalem’s twelfth share repurchase program, which allows Adtalem to repurchase up to $300 million of its common stock through December 31, 2021. The new program will commence when the repurchases from the current program are complete. Repurchases were suspended on March 12, 2020 due to the economic uncertainty caused by the COVID-19 pandemic. In October 2020, Adtalem determined to end the suspension of its current share repurchase program, and we may resume repurchases in accordance with the securities laws if market conditions are favorable. The timing and amount of any future repurchases will be determined based on an evaluation of market conditions and other factors.
Other Purchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
July 1, 2020 - July 31, 2020 | 2,173 | $ | 31.92 | NA | NA | ||||
August 1, 2020 - August 31, 2020 | 116,196 | 33.14 | NA | NA | |||||
September 1, 2020 - September 30, 2020 | 22 | 29.04 | NA | NA | |||||
Total | 118,391 | $ | 33.12 | NA | NA |
(1) Represents shares delivered back to Adtalem for payment of withholding taxes from employees for vesting restricted stock units and shares swapped for payment on exercise of incentive stock options pursuant to terms of Adtalem’s stock incentive plans.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
57
Item 6. Exhibits
2.1 | ||
10.1 | ||
31.1 | ||
31.2 | ||
32 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Furnished herewith.
58
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Adtalem Global Education Inc. | ||
Date: November 5, 2020 | By: | /s/ Michael O. Randolfi |
Michael O. Randolfi | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) |
59