CVSA 10-Q
Covista Inc. (CVSA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) | |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
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or | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the transition period from _____ to _____ | |
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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.) |
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(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number; including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 | ||
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| 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 20, 2023, there were
Adtalem Global Education Inc.
Form 10-Q
Table of Contents
| Page | |
Item 1. | 1 | |
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2 | ||
3 | ||
4 | ||
5 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
Item 3. | 47 | |
Item 4. | 48 | |
Item 1. | 48 | |
Item 1A. | 48 | |
Item 2. | 48 | |
Item 3. | 49 | |
Item 4. | 49 | |
Item 5. | 49 | |
Item 6. | 49 | |
50 |
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, | |||||
2023 | 2023 | |||||
Assets: | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Noncurrent assets: |
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Property and equipment, net | | | ||||
Operating lease assets |
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Deferred income taxes |
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Intangible assets, net |
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Goodwill |
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Other assets, net |
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Total noncurrent assets |
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Total assets | $ | | $ | | ||
Liabilities and shareholders' equity: |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued payroll and benefits |
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Accrued liabilities |
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Deferred revenue |
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Current operating lease liabilities |
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Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt |
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Long-term operating lease liabilities |
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Deferred income taxes |
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Other liabilities |
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Total noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies |
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Shareholders' equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Treasury stock, at cost, |
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Total shareholders' equity |
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Total liabilities and shareholders' equity | $ | | $ | | ||
See accompanying Notes to Consolidated Financial Statements.
1
Adtalem Global Education Inc.
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Revenue | $ | | $ | | ||
Operating cost and expense: |
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Cost of educational services |
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Student services and administrative expense |
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Restructuring expense |
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Business integration expense |
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Total operating cost and expense |
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Operating income |
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Interest expense |
| ( |
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Other income, net |
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Income from continuing operations before income taxes |
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Provision for income taxes |
| ( |
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Income from continuing operations |
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Discontinued operations: |
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Loss from discontinued operations before income taxes |
| ( |
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Loss on disposal of discontinued operations before income taxes |
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Benefit from income taxes |
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Loss from discontinued operations |
| ( |
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Net income and comprehensive income | $ | | $ | | ||
Earnings (loss) per share: |
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Basic: |
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Continuing operations | $ | | $ | | ||
Discontinued operations | $ | ( | $ | ( | ||
Total basic earnings per share | $ | | $ | | ||
Diluted: |
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Continuing operations | $ | | $ | | ||
Discontinued operations | $ | ( | $ | ( | ||
Total diluted earnings per share | $ | | $ | | ||
Weighted-average shares outstanding: | ||||||
Basic shares | | | ||||
Diluted shares | | | ||||
See accompanying Notes to Consolidated Financial Statements.
2
Adtalem Global Education Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Operating activities: | ||||||
Net income | $ | | $ | | ||
Loss from discontinued operations |
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Income from continuing operations | | | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Stock-based compensation expense |
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Amortization and impairments to operating lease assets | | | ||||
Depreciation |
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Amortization of intangible assets |
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Amortization and write-off of debt discount and issuance costs | | | ||||
Provision for bad debts | | | ||||
Deferred income taxes |
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Loss on disposals, accelerated depreciation, and impairments to property and equipment |
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Gain on extinguishment of debt |
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Loss on investments | | | ||||
Changes in assets and liabilities: |
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Accounts receivable |
| ( |
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Prepaid expenses and other current assets |
| ( |
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Accounts payable |
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Accrued payroll and benefits | ( | ( | ||||
Accrued liabilities |
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Deferred revenue |
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Operating lease liabilities | ( | ( | ||||
Other assets and liabilities |
| ( |
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Net cash provided by operating activities-continuing operations |
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Net cash provided by (used in) operating activities-discontinued operations |
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Net cash provided by operating activities |
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Investing activities: |
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Capital expenditures |
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Proceeds from sale of marketable securities |
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Purchases of marketable securities |
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Net cash used in investing activities-continuing operations |
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Payment for working capital adjustment for sale of business |
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Net cash used in investing activities |
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Financing activities: |
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Proceeds from exercise of stock options |
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Employee taxes paid on withholding shares |
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Proceeds from stock issued under Colleague Stock Purchase Plan |
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Repurchases of common stock for treasury |
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Repayments of long-term debt |
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Net cash used in financing activities |
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Net decrease in cash, cash equivalents and restricted cash |
| ( |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Non-cash investing and financing activities: | ||||||
Accrued capital expenditures | $ | | $ | | ||
Accrued liability for repurchases of common stock | $ | | $ | | ||
Accrued excise tax on share repurchases | $ | | $ | | ||
See accompanying Notes to Consolidated Financial Statements.
3
Adtalem Global Education Inc.
Consolidated Statements of Shareholders’ Equity
(unaudited)
(in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Total | |||||||||||||||||
June 30, 2022 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||||
Net income |
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Stock-based compensation |
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Net activity from stock-based compensation awards |
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Proceeds from stock issued under Colleague Stock Purchase Plan | ( | ( | | | ||||||||||||||||||||
September 30, 2022 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||||
June 30, 2023 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||||
Net income |
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Stock-based compensation |
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Net activity from stock-based compensation awards |
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Proceeds from stock issued under Colleague Stock Purchase Plan |
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Repurchases of common stock for treasury | | ( | ( | |||||||||||||||||||||
September 30, 2023 | | $ | | $ | | $ | | $ | ( | | $ | ( | $ | | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
Adtalem Global Education Inc.
Notes to Consolidated Financial Statements
(unaudited)
Table of Contents
Note |
| Page |
1 | 6 | |
2 | 6 | |
3 | 8 | |
4 | 9 | |
5 | 11 | |
6 | 12 | |
7 | 12 | |
8 | 12 | |
9 | 13 | |
10 | 16 | |
11 | 16 | |
12 | 18 | |
13 | 20 | |
14 | 23 | |
15 | 24 | |
16 | 26 | |
17 | 27 | |
18 | 29 |
5
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 national leader in post-secondary education and a leading provider of professional talent to the healthcare industry. Our schools consist of Chamberlain University (“Chamberlain”), Walden University (“Walden”), 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.” See Note 18 “Segment Information” for information on our reportable segments.
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, 2023 (“2023 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 2023 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.
Business integration expense was $
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.
Recent Accounting Standards
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-02: “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The guidance was issued as improvements to Accounting Standards Codification (“ASC”) 326. The vintage disclosure changes are relevant to Adtalem and require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. We adopted this guidance on July 1, 2023. The amendments impacted our disclosures and did not otherwise impact Adtalem’s Consolidated Financial Statements.
We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our Consolidated Financial Statements.
6
Revision to Previously Issued Financial Statements
During the third quarter of fiscal year 2023, Adtalem identified an error in its revenue recognition related to certain scholarship programs within its Medical and Veterinary segment. Certain scholarships and discounts offered within that segment provide students a discount on future tuition that constitute a material right under ASC 606 “Revenue from Contracts with Customers” that should be accounted for as a separate performance obligation within a contract. Adtalem assessed the materiality of this error individually and in the aggregate with other previously identified errors to prior periods’ Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99 “Materiality” and SAB 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” codified in ASC 250 “Accounting Changes and Error Corrections.” Adtalem concluded that the errors were not material to prior periods and therefore, amendments of previously filed reports were not required. However, Adtalem determined it was appropriate to revise its previously issued financial statements. Treating the discount on future tuition as a material right results in the deferral of revenue for a portion of tuition to future periods. In accordance with ASC 250, Adtalem corrected the prior period presented herein by revising the financial statement line item amounts previously disclosed in SEC filings in order to achieve comparability in the Consolidated Financial Statements. The impact of this revision of Adtalem’s previously reported Consolidated Financial Statements are detailed below. In connection with this revision, Adtalem also corrected other immaterial errors in the prior period, including certain errors that had previously been adjusted for as out of period corrections in the period identified.
The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Income (in thousands, except per share data):
Three Months Ended September 30, 2022 | |||||||||
As reported | Adjustment | As revised | |||||||
Revenue | $ | | $ | ( | $ | | |||
Operating cost and expense: | |||||||||
Student services and administrative expense |
| | ( |
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Business integration expense |
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Total operating cost and expense |
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Operating income |
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Other income, net | | ( | | ||||||
Income from continuing operations before income taxes |
| | ( |
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Provision for income taxes |
| ( | ( |
| ( | ||||
Income from continuing operations |
| | ( |
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Discontinued operations: | |||||||||
Loss from discontinued operations before income taxes | ( | | ( | ||||||
Benefit from income taxes | | ( | | ||||||
Loss from discontinued operations | ( | ( | ( | ||||||
Net income |
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Earnings (loss) per share: | |||||||||
Basic: | |||||||||
Continuing operations | $ | | $ | ( | $ | | |||
Discontinued operations | $ | ( | $ | ( | $ | ( | |||
Total basic earnings per share | $ | | $ | ( | $ | | |||
Diluted: |
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Continuing operations | $ | | $ | ( | $ | | |||
Discontinued operations | $ | ( | $ | ( | $ | ( | |||
Total diluted earnings per share | $ | | $ | ( | $ | | |||
To conform to current period presentation, the previously reported interest income line is now included within other income, net.
7
The following table summarizes the effect of the revisions on the affected line items within the previously reported Consolidated Statements of Comprehensive Income (in thousands):
Three Months Ended September 30, 2022 | |||||||||
As reported | Adjustment | As revised | |||||||
Net income | $ | | $ | ( | $ | | |||
Other comprehensive income (loss), net of tax: | |||||||||
Loss on foreign currency translation adjustments | ( | | — | ||||||
Comprehensive income before reclassification |
| | ( |
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Comprehensive income |
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The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Cash Flows (in thousands):
Three Months Ended September 30, 2022 | |||||||||
As reported | Adjustment | As revised | |||||||
Operating activities: | |||||||||
Net income | $ | | $ | ( | $ | | |||
Loss from discontinued operations | | | | ||||||
Income from continuing operations | | ( | | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Loss on investments | — | | | ||||||
Changes in assets and liabilities: | |||||||||
Prepaid expenses and other current assets | ( | ( | ( | ||||||
Accounts payable | | | | ||||||
Accrued payroll and benefits | ( | ( | ( | ||||||
Deferred revenue | | | | ||||||
Net cash provided by operating activities-continuing operations | | ( | | ||||||
Net cash provided by operating activities | | ( | | ||||||
Investing activities: | |||||||||
Proceeds from sales of marketable securities | — | | | ||||||
Purchases of marketable securities | — | ( | ( | ||||||
Net cash used in investing activities-continuing operations | ( | | ( | ||||||
Net cash used in investing activities | ( | | ( | ||||||
The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Shareholders’ Equity (in thousands):
As reported | Adjustment | As revised | |||||||
June 30, 2022 | |||||||||
Retained earnings |
| | ( |
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Accumulated other comprehensive loss |
| ( | ( |
| ( | ||||
Total shareholders' equity |
| | ( |
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September 30, 2022 | |||||||||
Retained earnings |
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Total shareholders' equity |
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Three Months Ended September 30, 2022 | |||||||||
Net income |
| | ( |
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Other comprehensive loss, net of tax |
| ( | |
| — | ||||
3. Discontinued Operations
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 had a major effect on Adtalem’s operations and financial results, DeVry University is presented in Adtalem’s Consolidated Financial Statements as a discontinued operation. The purchase agreement includes an earn-out entitling Adtalem to payments of up to $
8
the second quarter of fiscal year 2023 and 2022, respectively, related to the earn-out, resulting in a total of $
On March 10, 2022, Adtalem completed the sale of the Association of Certified Anti-Money Laundering Specialists (“ACAMS”), Becker Professional Education (“Becker”), and OnCourse Learning (“OCL”) to Wendel Group and Colibri Group (“Purchaser”), pursuant to the Equity Purchase Agreement (“Purchase Agreement”) dated January 24, 2022. Pursuant to the terms and subject to the conditions set forth in the Purchase Agreement, Adtalem sold the issued and outstanding shares of ACAMS, Becker, and OCL to the Purchaser for $
The following is a summary of income statement information of operations reported as discontinued operations, which includes expense from ongoing litigation costs and settlements related to the DeVry University divestiture and a loss on the sale of ACAMS, Becker, and OCL for working capital adjustments to the initial sales prices (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Revenue | $ | | $ | | ||
Operating cost and expense: |
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Student services and administrative expense |
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Total operating cost and expense |
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Loss from discontinued operations before income taxes | ( | ( | ||||
Loss on disposal of discontinued operations before income taxes | | ( | ||||
Benefit from income taxes |
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Loss from discontinued operations | $ | ( | $ | ( | ||
4. Revenue
Revenue is recognized when control of the promised goods or services is transferred to our customers (students), 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, 2023 | ||||||||||||
Chamberlain | Walden |
| Medical and | Consolidated | ||||||||
Tuition and fees |
| $ | |
| $ | |
| $ | |
| $ | |
Other | | | | | ||||||||
Total |
| $ | |
| $ | |
| $ | |
| $ | |
Three Months Ended September 30, 2022 | ||||||||||||
Chamberlain | Walden |
| Medical and | Consolidated | ||||||||
Tuition and fees | $ | |
| $ | |
| $ | |
| $ | | |
Other | | | | | ||||||||
Total |
| $ | |
| $ | |
| $ | |
| $ | |
9
In addition, see Note 18 “Segment Information” for a disaggregation of revenue by geographical region.
Performance Obligations and Revenue Recognition
Tuition and fees: The majority of revenue is derived from tuition and fees, which is recognized on a straight-line basis over the academic term as instruction is delivered.
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.
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 not utilizing Title IV or other financial aid funding may pay after the academic term is complete.
Transaction Price
Revenue, or transaction price, is measured as the amount of consideration expected to be received in exchange for transferring goods or services.
Students may receive discounts, scholarships, or refunds, which gives rise to variable consideration. The amounts of discounts or scholarships are generally applied to individual student accounts when such amounts are awarded. Therefore, the transaction price is immediately reduced directly by these discounts or scholarships from the amount of the standard tuition rate charged. Scholarships and discounts that are only applied to future tuition charged are considered a separate performance obligation if they represent a material right in accordance with ASC 606. In those instances, we defer the value of the related performance obligation associated with the future scholarship or discount based on estimates of future redemption based on our historical experience of student persistence toward completion of study. The contract liability associated with these material rights is presented as deferred revenue within current liabilities and other liabilities within noncurrent liabilities on the Consolidated Balance Sheets based on the amounts expected to be redeemed in the next 12 months. The contract liability amount associated with these material rights within current liabilities is $
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.
Management reassesses collectability on a student-by-student basis throughout the period revenue is recognized. 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.
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.
10
Contract Balances
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 and to provide for any scholarships or discounts that are deemed a material right under ASC 606. As instruction is provided or the deferred value of material rights are redeemed, 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 9 “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.
Deferred revenue within current liabilities is $
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, increases from payments received related to academic terms commencing after the end of the reporting period, and increases from recognizing additional performance liabilities for material rights.
5. Restructuring Charges
During the first quarter of fiscal year 2024, Adtalem recorded restructuring charges primarily driven by prior real estate consolidations at Adtalem’s home office. We continue to incur restructuring charges or reversals related to exited leased space from previous restructuring activities. During the first quarter of fiscal year 2023, Adtalem recorded restructuring charges primarily driven by real estate consolidations at Walden, Medical and Veterinary, and Adtalem’s home office resulting in impairments on operating lease assets and property and equipment. When estimating costs of exiting lease space, estimates are made which could differ materially from actual results and may result in additional restructuring charges or reversals in future periods. Termination benefit charges represent severance pay and benefits for employees impacted by workforce reductions. Adtalem’s home office is classified as “Home Office and Other” in Note 18 “Segment Information.”
Three Months Ended September 30, 2023 | |||||||||
Real Estate | Termination | Total | |||||||
Medical and Veterinary | $ | |
| $ | |
| $ | | |
Home Office and Other | |
| — |
| | ||||
Total | $ | | $ | | $ | | |||
Three Months Ended September 30, 2022 | |||||||||
Real Estate | Termination | Total | |||||||
Chamberlain | $ | |
| $ | |
| $ | | |
Walden | |
| |
| | ||||
Medical and Veterinary | |
| |
| | ||||
Home Office and Other | |
| |
| | ||||
Total | $ | | $ | | $ | | |||
11
The following table summarizes the separation and restructuring plan activity for fiscal years 2023 and 2024, for which cash payments are required (in thousands):
Liability balance as of June 30, 2022 | $ | | |
Increase in liability (separation and other charges) |
| | |
Reduction in liability (payments and adjustments) |
| ( | |
Liability balance as of June 30, 2023 |
| | |
Increase in liability (separation and other charges) |
| | |
Reduction in liability (payments and adjustments) |
| ( | |
Liability balance as of September 30, 2023 | $ | |
The liability balance of $
6. Other Income, Net
Other income, net consists of the following (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Interest and dividend income | $ | | $ | | ||
Investment loss | ( | ( | ||||
Other income, net | $ | | $ | | ||
Investment loss includes trading gains and losses related to the rabbi trust used to fund nonqualified deferred compensation plan obligations.
7. Income Taxes
Our effective tax rates from continuing operations were
8. Earnings per Share
As further described in Note 14 “Share Repurchases,” on March 14, 2022, we entered into an accelerated share repurchase (“ASR”) agreement to repurchase $
12
effect would have been antidilutive.
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Numerator: | ||||||
Net income (loss): |
|
| ||||
Continuing operations | $ | | $ | | ||
Discontinued operations | ( | ( | ||||
Net income | $ | | $ | | ||
Denominator: | ||||||
Weighted-average basic shares outstanding |
| |
| | ||
Effect of dilutive stock awards |
| |
| | ||
Effect of ASR |
| — |
| | ||
Weighted-average diluted shares outstanding |
| |
| | ||
Earnings (loss) per share: | ||||||
Basic: | ||||||
Continuing operations | $ | | $ | | ||
Discontinued operations | $ | ( | $ | ( | ||
Total basic earnings per share | $ | | $ | | ||
Diluted: | ||||||
Continuing operations | $ | | $ | | ||
Discontinued operations | $ | ( | $ | ( | ||
Total diluted earnings per share | $ | | $ | | ||
Weighted-average antidilutive shares | | | ||||
9. Accounts Receivable and Credit Losses
We categorize our accounts receivable balances as trade receivables or financing receivables. Our trade receivables relate to student 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 was as follows (in thousands):
September 30, 2023 | |||||||||
Gross | Allowance | Net | |||||||
Trade receivables, current | $ | | $ | ( | $ | | |||
Financing receivables, current | | ( | | ||||||
Accounts receivable, current | $ | | $ | ( | $ | | |||
Financing receivables, current | $ | | $ | ( | $ | | |||
Financing receivables, noncurrent | | ( | | ||||||
Total financing receivables | $ | | $ | ( | $ | | |||
13
June 30, 2023 | |||||||||
Gross | Allowance | Net | |||||||
Trade receivables, current | $ | | $ | ( | $ | | |||
Financing receivables, current | | ( | | ||||||
Accounts receivable, current | $ | | $ | ( | $ | | |||
Financing receivables, current | $ | | $ | ( | $ | | |||
Financing receivables, noncurrent | | ( | | ||||||
Total financing receivables | $ | | $ | ( | $ | | |||
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, fees, and books, 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 write-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, 2023 was as follows (in thousands):
Amortized Cost Basis by Origination Year | |||||||||||||||||||||
Prior | 2020 | 2021 | 2022 | 2023 | 2024 | Total | |||||||||||||||
1-30 days past due |
| $ | | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
31-60 days past due | | | | | | | | ||||||||||||||
61-90 days past due | | | | | | | | ||||||||||||||
91-120 days past due | | | | | | | | ||||||||||||||
121-150 days past due | | | | | | | | ||||||||||||||
Greater than 150 days past due | | | | | | | | ||||||||||||||
Total past due | | | | | | | | ||||||||||||||
Current | | | | | | | | ||||||||||||||
Financing receivables, gross | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Gross write-offs | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
14
The credit quality analysis of financing receivables as of June 30, 2023 was as follows (in thousands):
Amortized Cost Basis by Origination Year | |||||||||||||||||||||
Prior | 2019 | 2020 | 2021 | 2022 | 2023 | Total | |||||||||||||||
1-30 days past due |
| $ | | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
31-60 days past due | | | | | | | | ||||||||||||||
61-90 days past due | | | | | | | | ||||||||||||||
91-120 days past due | | | | | | | | ||||||||||||||
121-150 days past due | | | | | | | | ||||||||||||||
Greater than 150 days past due | | | | | | | | ||||||||||||||
Total past due | | | | | | | | ||||||||||||||
Current | | | | | | | | ||||||||||||||
Financing receivables, gross | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
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 an aging schedule and 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, while also factoring in delinquency. Students still attending classes, recently graduated, or current on payments are more likely to pay than those who are inactive due to being on a leave of absence, withdrawing from school, or not current on payments.
For our financing receivables, we primarily use historical loss rates based on an aging schedule. 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 roll-forward of the allowance for credit losses (in thousands):
Three Months Ended September 30, 2023 | |||||||||
Trade | Financing | Total | |||||||
Beginning balance |
| $ | | $ | |
| $ | | |
Write-offs | ( | ( | ( | ||||||
Recoveries | | | | ||||||
Provision for credit losses | | | | ||||||
Ending balance | $ | | $ | | $ | | |||
Three Months Ended September 30, 2022 | |||||||||
Trade | Financing | Total | |||||||
Beginning balance |
| $ | | $ | |
| $ | | |
Write-offs | ( | ( | ( | ||||||
Recoveries | | | | ||||||
Provision for credit losses | | | | ||||||
Ending balance | $ | | $ | | $ | | |||
15
10. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
September 30, | June 30, | |||||
2023 | 2023 | |||||
Land |
| $ | | $ | | |
Building | | | ||||
Equipment | | | ||||
Construction in progress | | | ||||
Property and equipment, gross | | | ||||
Accumulated depreciation |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | | ||
11. 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 March 2036, 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, 2023, we entered into
The components of lease cost were as follows (in thousands):
Three Months Ended | ||||||
| September 30, | |||||
2023 | 2022 | |||||
Operating lease cost | $ | | $ | | ||
Sublease income |
| ( |
| ( | ||
Total lease cost | $ | | $ | | ||
16
Maturities of lease liabilities by fiscal year as of September 30, 2023 were as follows (in thousands):
Operating | |||
Fiscal Year | Leases | ||
2024 (remaining) | $ | | |
2025 | | ||
2026 | | ||
2027 | | ||
2028 | | ||
Thereafter | | ||
Total lease payments |
| | |
Less: tenant improvement allowance not yet received | ( | ||
Less: imputed interest | ( | ||
Present value of lease liabilities | $ | | |
Lease term and discount rate were as follows:
September 30, | |||
2023 | |||
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, | ||||||
2023 | 2022 | |||||
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 an agreement to lease
Fiscal Year | Amount | ||
2024 (remaining) | $ | | |
2025 | | ||
2026 |
| | |
Total lease and sublease rental income | $ | | |
17
12. Goodwill and Intangible Assets
The table below summarizes goodwill balances by reporting unit (in thousands):
September 30, | June 30, | |||||
2023 | 2023 | |||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
AUC |
| |
| | ||
RUSM |
| |
| | ||
RUSVM |
| |
| | ||
Total | $ | | $ | | ||
The table below summarizes goodwill balances by reportable segment (in thousands):
September 30, | June 30, | |||||
2023 | 2023 | |||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
Medical and Veterinary | | | ||||
Total | $ | | $ | | ||
Amortizable intangible assets consisted of the following (in thousands):
September 30, 2023 | June 30, 2023 | |||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | Weighted-Average | ||||||||||
Amount | Amortization | Amount | Amortization | Amortization Period | ||||||||||
Student relationships | $ | | $ | ( |
| $ | | $ | ( |
| ||||
Curriculum |
| |
| ( |
|
| |
| ( |
| ||||
Total | $ | | $ | ( |
| $ | | $ | ( |
| ||||
Indefinite-lived intangible assets consisted of the following (in thousands):
September 30, | June 30, | |||||
2023 | 2023 | |||||
Walden trade name | $ | | $ | | ||
AUC trade name | | | ||||
RUSM trade name | | | ||||
RUSVM trade name | | | ||||
Chamberlain Title IV eligibility and accreditations |
| |
| | ||
Walden Title IV eligibility and accreditations | | | ||||
AUC Title IV eligibility and accreditations |
| |
| | ||
RUSM Title IV eligibility and accreditations | | | ||||
RUSVM Title IV eligibility and accreditations |
| |
| | ||
Total | $ | | $ | | ||
The table below summarizes the indefinite-lived intangible asset balances by reportable segment (in thousands):
September 30, | June 30, | |||||
2023 | 2023 | |||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
Medical and Veterinary | | | ||||
Total | $ | | $ | | ||
18
Amortization expense for amortized intangible assets was $
Fiscal Year | Walden | ||
2024 (remaining) | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Total | $ | | |
Curriculum is amortized on a straight-line basis. Student relationships is amortized based on the estimated retention of the students and considers the revenue and cash flow associated with these existing students.
Indefinite-lived intangible assets related to trade names and Title IV eligibility and accreditations 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 intangible assets 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
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
If economic conditions deteriorate, interest rates continue to rise, or operating performance of our reporting units do not meet expectations such that we revise our long-term forecast, we may recognize impairments of goodwill and other intangible assets in future periods.
19
13. Debt
Long-term debt consisted of the following senior secured credit facilities (in thousands):
September 30, | June 30, | |||||
2023 | 2023 | |||||
Senior Secured Notes due 2028 | $ | | $ | | ||
Term Loan B |
| |
| | ||
Total principal |
| |
| | ||
Unamortized debt discount and issuance costs |
| ( |
| ( | ||
Long-term debt | $ | | $ | | ||
Scheduled future maturities of long-term debt were as follows (in thousands):
Maturity | |||
Fiscal Year | Payments | ||
2024 (remaining) | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 | | ||
2029 | | ||
Total | $ | | |
Senior Secured Notes due 2028
On March 1, 2021, Adtalem issued $
The Notes were issued at
At any time prior to March 1, 2024, we may redeem all or a part of the Notes at a redemption price equal to
On April 11, 2022, we repaid $
20
Accrued interest on the Notes of $
Credit Agreement
On August 12, 2021, in connection with the Walden acquisition, Adtalem entered into its new credit agreement (the “Credit Agreement”) that provides for (1) a $
On June 27, 2023, Adtalem entered into Amendment No. 1 to Credit Agreement, identifying the Secured Overnight Financing Rate (“SOFR”) as the benchmark rate to replace LIBOR for eurocurrency rate loans within the Credit Agreement effective the first quarter of fiscal year 2024.
Term Loan B
Borrowings under the Term Loan B bear interest at Adtalem’s option at a rate per annum equal to SOFR, subject to a SOFR floor of
Revolver
Borrowings under the Revolver bear interest at a rate per annum equal to SOFR, subject to a SOFR floor of
The Credit Agreement requires payment of a commitment fee equal to
Debt Discount and Issuance Costs
The Term Loan B was issued at a price of
21
Notes | Term Loan B | Revolver | Total | |||||||||
Unamortized debt discount and issuance costs as of June 30, 2023 | $ | | $ | | $ | | $ | | ||||
Amortization of debt discount and issuance costs |
| ( |
| ( |
| ( |
| ( | ||||
Unamortized debt discount and issuance costs as of September 30, 2023 | $ | | $ | | $ | | $ | | ||||
Off-Balance Sheet Arrangements
Adtalem had a surety-backed letter of credit outstanding of $
Many states require private-sector postsecondary education institutions to post surety bonds for licensure. In the U.S., Adtalem has posted $
Interest Expense
The components of interest expense were as follows (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Notes interest expense | $ | | $ | | ||
Term Loan B interest expense | | | ||||
Term Loan B debt discount and issuance costs write-off | | | ||||
Notes issuance costs write-off | | | ||||
Gain on extinguishment of debt | | ( | ||||
Amortization of debt discount and issuance costs | | | ||||
Letters of credit fees | | | ||||
Other | | | ||||
Total interest expense | $ | | $ | | ||
Covenants and Guarantees
The Credit Agreement and Notes contain 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.
Under the terms of the Credit Agreement, beginning on the fiscal quarter ending December 31, 2021 and through December 31, 2023, Adtalem is required to maintain a Total Net Leverage Ratio of equal to or less than
22
(b) EBITDA (as defined in the Credit Agreement) for such Test Period. EBITDA for purposes of these restrictive covenants includes incremental adjustments beyond those included in traditional EBITDA calculations. Specifically, the Credit Agreement EBITDA definition includes the pro forma impact of EBITDA to be received from certain acquisition-related synergies and cost optimization activities, subject to a
Obligations under the Credit Agreement are secured by a first-priority lien on substantially all of the assets of Adtalem and certain of its domestic wholly-owned subsidiaries (the “Subsidiary Guarantors”), which Subsidiary Guarantors also guarantee the obligations of Adtalem under the Credit Agreement, subject to certain exceptions. The Credit Agreement contains customary affirmative and negative covenants customary for facilities of its type, which, among other things, generally limit (with certain exceptions): mergers, amalgamations, or consolidations; the incurrence of additional indebtedness (including guarantees); the incurrence of additional liens; the sale, assignment, lease, conveyance or transfer of assets; certain investments; dividends and stock redemptions or repurchases in excess of certain amounts; transactions with affiliates; engaging in materially different lines of business; payments and modifications of indebtedness or the governing documents of Adtalem or any Subsidiary Guarantor; and other activities customarily restricted in such agreements.
The Credit Agreement contains customary events of default for facilities of this type. If an event of default under the Credit Agreement occurs and is continuing, the commitments thereunder may be terminated and the principal amount outstanding thereunder, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable.
The Term Loan B requires mandatory prepayments equal to the net cash proceeds from an asset sale or disposition which is not reinvested in assets within
The Notes contain covenants that limit the ability of Adtalem and each of the Guarantors to incur or guarantee additional debt or issue disqualified stock or preferred stock; pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; create certain restrictions on the Guarantors to make dividends or other payments to Adtalem; designate restricted subsidiaries as unrestricted subsidiaries; and transfer or sell certain assets. These covenants are subject to a number of important exceptions and qualifications. The Indenture and the Notes also provide for certain customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Notes to become or be declared due and payable or would allow the trustee or the holders of at least
Adtalem was in compliance with the debt covenants related to the Credit Agreement and the Notes covenants as of September 30, 2023.
14. Share Repurchases
Open Market Share Repurchase Programs
On March 1, 2022, we announced that the Board of Directors (the “Board”) authorized Adtalem’s thirteenth share repurchase program, which allows Adtalem to repurchase up to $
23
2025. Adtalem made share repurchases under its current share repurchase program as follows, which includes the market price of the shares, commissions, and excise tax (in thousands, except shares and per share data):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Total number of share repurchases | | — | ||||
Total cost of share repurchases | $ | | $ | — | ||
Average price paid per share | $ | | $ | — | ||
As of September 30, 2023, $
ASR Agreement
On March 14, 2022, we entered into an ASR agreement to repurchase $
On March 14, 2022, we recorded the $
15. Stock-Based Compensation
Adtalem’s current stock-based incentive plan is its Fourth Amended and Restated Incentive Plan of 2013, which is administered by the Compensation Committee of the Board. Under the plan, directors, key executives, and managerial employees are eligible to receive stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”), and other forms of stock awards. As of September 30, 2023,
Stock-based compensation expense is recognized on a straight-line basis over the required service period. 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 unvested awards in the period they occur. Adtalem issues new shares of common stock to satisfy stock option exercises, RSU vests, and PSU vests.
24
Stock-based compensation expense, which is included in student services and administrative expense, and the related income tax benefit were as follows (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Stock-based compensation | $ | | $ | | ||
Income tax benefit |
| ( |
| ( | ||
Stock-based compensation, net of tax | $ | | $ | | ||
There was
Stock Options
The Compensation Committee of the Board determined to no longer grant stock options beginning with the fiscal year 2023 stock-based grants. We granted options generally with a
Weighted-Average | ||||||||||
Number of | Remaining | Aggregate | ||||||||
Stock | Weighted-Average | Contractual Life | Intrinsic Value | |||||||
Options | Exercise Price | (in years) | (in thousands) | |||||||
Outstanding as of July 1, 2023 |
| | $ | |
| |||||
Exercised |
| ( | |
| ||||||
Expired |
| ( | |
| ||||||
Outstanding as of September 30, 2023 |
| |
| |
| $ | | |||
Exercisable as of September 30, 2023 |
| | $ | |
| $ | | |||
The fair value of stock options that vested during the three months ended September 30, 2023 and 2022 was $
RSUs
Prior to fiscal year 2023, we granted RSUs generally with a
Weighted-Average | |||||
Number of | Grant Date | ||||
RSUs | Fair Value | ||||
Unvested as of July 1, 2023 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Unvested as of September 30, 2023 |
| | $ | | |
The weighted-average grant date fair value of RSUs granted in the three months ended September 30, 2023 and 2022 was $
25
stock-based compensation expense related to unvested RSUs is expected to be recognized over a remaining weighted-average period of
PSUs
We issue PSUs generally with a
Weighted-Average | |||||
Number of | Grant Date | ||||
PSUs | Fair Value | ||||
Unvested as of July 1, 2023 |
| | $ | | |
Granted (1) |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Unvested as of September 30, 2023 |
| | $ | | |
(1) Includes incremental PSUs awarded upon achievement of metrics. | |||||
The weighted-average grant date fair value of PSUs granted in the three months ended September 30, 2023 was $
16. 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:
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.
26
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 with investments in stock and bond mutual funds to fund obligations under a nonqualified deferred compensation plan. The fair value of the investments in the rabbi trust included in prepaid expenses and other current assets on the Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023 was $
The carrying value of the credit extension programs, which approximates its fair value, is included in accounts receivable, net and other assets, net on the Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023 of $
Adtalem has a nonqualified deferred compensation plan for highly compensated employees and its Board members. The participant’s “investments” are in a hypothetical portfolio of investments which are tracked by an administrator. Changes in the fair value of the nonqualified deferred compensation obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. Total liabilities under the plan included in accrued liabilities on the Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023 were $
As of September 30, 2023 and June 30, 2023, borrowings under our long-term debt agreements were $
As of September 30, 2023 and June 30, 2023, there were
Assets measured at fair value on a nonrecurring basis include goodwill and indefinite-lived intangible assets arising from a business combination. These assets are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangible assets 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, 2023. See Note 12 “Goodwill and Intangible Assets” for additional information on the impairment review, including valuation techniques and assumptions.
17. 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. 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. 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.
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On April 13, 2018, a putative class action lawsuit was filed by Nicole Versetto, individually and on behalf of others similarly situated, against 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
On March 12, 2021, Travontae Johnson, a Chamberlain student, filed a putative class action against Chamberlain in the Circuit Court of Cook County, Illinois, Chancery Division. The plaintiff claimed that Chamberlain’s use of Respondus Monitor, an online remote proctoring tool for student examinations, violated the Illinois Biometric Information Privacy Act (“BIPA”), 740 ILCS 14/15. More particularly, the plaintiff claimed that Chamberlain required students to use Respondus Monitor, which collected, captured, stored, used, and disclosed students’ biometric identifiers and biometric information without written and informed consent. The plaintiff also alleged that Chamberlain lacked a legally compliant written policy establishing a retention schedule and guidelines for destroying biometric identifiers and biometric information. The potential class purportedly included all students who took an assessment using the proctoring tool, as a student of Chamberlain in Illinois, at any time from March 12, 2016 through January 20, 2021. The plaintiff and the putative class sought damages in excess of $
On January 12, 2022, Walden was served with a complaint filed in the United States District Court for the District of Maryland by Aljanal Carroll, Claudia Provost Charles, and Tiffany Fair against Walden for damages, injunctive relief, and declaratory relief on behalf of themselves and all other similarly-situated individuals alleging violations of Title VI of the Civil Rights Act of 1964, the Equal Credit Opportunity Act, the Minnesota Prevention of Consumer Fraud Act, the Minnesota Uniform Deceptive Trade Practices Act, Minnesota statutes prohibiting false statements in advertising, and for common law fraudulent misrepresentation. Plaintiffs allege that Walden has targeted, deceived, and exploited Black and female Doctor of Business Administration (“DBA”) students by knowingly misrepresenting and understating the number of “capstone” credits required to complete the DBA program and obtain a degree. On March 23, 2022, Walden filed a Motion to Dismiss the Plaintiffs’ claims for failure to state a claim upon which relief can be granted. On November 27, 2022, the Court denied Walden’s motion to dismiss the complaint. Plaintiffs filed an amended complaint to add an additional plaintiff, Tareion Fluker. Walden answered the amended complaint on February 2, 2023. The parties participated in a non-binding mediation on May 4, 2023 and settlement discussions continued. The parties filed a joint motion to stay
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discovery through October 10, 2023 pending the outcome of a second non-binding mediation held on September 21, 2023. At this mediation, the parties agreed on a $
On June 6, 2022, plaintiff Rajesh Verma filed a lawsuit on behalf of himself and a class of similarly situated individuals in the Circuit Court of the Fourth Judicial Circuit, Duval County Florida, against Walden alleging that Walden was placing telephonic sales calls to persons on the National Do-Not-Call Registry, in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. Although originally filed in state court, Walden removed the case to federal court and filed a motion to dismiss plaintiff’s complaint. On August 26, 2022, plaintiff filed a motion to remand Count I of the complaint to state court. On March 2, 2023, plaintiff filed an amended complaint to add a Florida state law claim against Walden under the Florida Telephone Solicitation Act (“FTSA”). On March 16, 2023, Walden filed its answer to the amended complaint. On March 29, 2023, Walden’s motion to dismiss plaintiff’s complaint and plaintiff’s motion to remand Count I of the complaint were denied. A non-binding mediation was held on September 18, 2023. The parties reached a settlement for an immaterial amount, subject to Court approval.
As previously disclosed, pursuant to the terms of the Stock Purchase Agreement (“SPA”) by and between Adtalem and Cogswell, dated as of December 4, 2017, as amended, Adtalem sold DeVry University to Cogswell and Adtalem agreed to indemnify DeVry University for certain losses up to $
18. Segment Information
We present
Chamberlain – Offers degree and non-degree programs in the nursing and health professions postsecondary education industry. This segment includes the operations of Chamberlain.
Walden – Offers online certificate programs and bachelor’s, master’s, and doctoral degrees, including those in nursing, education, counseling, business, psychology, public health, social work and human services, public administration and public policy, and criminal justice. This segment includes the operations of Walden, which was acquired by Adtalem on August 12, 2021.
Medical and Veterinary – Offers degree and non-degree programs in the medical and veterinary postsecondary education industry. This segment includes the operations of AUC, RUSM, and RUSVM, which are collectively referred to as the “medical and veterinary schools.”
These segments are consistent with the method by which the Chief Operating Decision Maker (Adtalem’s President and Chief Executive Officer) evaluates performance and allocates resources. Performance evaluations are based on each segment’s adjusted operating income. Adjusted operating income excludes special items, which consists of restructuring expense, business integration expense, intangible amortization expense, and litigation reserve. 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. “Home Office and Other” includes activities not allocated to a reportable segment and is included to reconcile segment results to the Consolidated Financial Statements. Total assets by segment is not presented as our CODM does not review or allocate resources based on segment assets. The accounting policies of the segments are the same as those described in Note 2 “Summary of Significant Accounting Policies.”
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Summary financial information by reportable segment is as follows (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Revenue: |
|
| ||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
Medical and Veterinary | | | ||||
Total consolidated revenue | $ | | $ | | ||
Adjusted operating income: |
| |||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
Medical and Veterinary | | | ||||
Home Office and Other |
| ( |
| ( | ||
Total consolidated adjusted operating income | | | ||||
Reconciliation to Consolidated Financial Statements: | ||||||
Restructuring expense |
| ( |
| ( | ||
Business integration expense | ( |
| ( | |||
Intangible amortization expense | ( |
| ( | |||
Litigation reserve | ( |
| — | |||
Total consolidated operating income | | | ||||
Interest expense |
| ( |
| ( | ||
Other income, net |
| |
| | ||
Total consolidated income from continuing operations before income taxes | $ | | $ | | ||
Capital expenditures: |
| |||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
Medical and Veterinary | | | ||||
Home Office and Other |
| |
| | ||
Total consolidated capital expenditures | $ | | $ | | ||
Depreciation expense: |
| |||||
Chamberlain | $ | | $ | | ||
Walden | | | ||||
Medical and Veterinary | | | ||||
Home Office and Other |
| |
| | ||
Total consolidated depreciation expense | $ | | $ | | ||
Intangible amortization expense: |
| |||||
Walden | $ | | $ | | ||
Total consolidated intangible amortization expense | $ | | $ | | ||
Adtalem conducts its educational operations in the U.S., Barbados, St. Kitts, and St. Maarten.
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Revenue by geographic area: | ||||||
Domestic operations | $ | | $ | | ||
Barbados, St. Kitts, and St. Maarten |
| |
| | ||
Total consolidated revenue | $ | | $ | | ||
No one customer accounted for more than 10% of Adtalem’s consolidated revenue for all periods presented.
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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
We use our website (www.adtalem.com) as a routine channel of distribution of company information, including press releases, presentations, and supplemental information, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website in addition to following press releases, SEC filings, and public conference calls and webcasts. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts. You may also access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as well as other reports relating to us that are filed with or furnished to the SEC, free of charge in the investor relations section of our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The content of the websites mentioned above is not incorporated into and should not be considered a part of this report.
Segments
We present three reportable segments as follows:
Chamberlain – Offers degree and non-degree programs in the nursing and health professions postsecondary education industry. This segment includes the operations of Chamberlain University (“Chamberlain”).
Walden – Offers online certificate programs and bachelor’s, master’s, and doctoral degrees, including those in nursing, education, counseling, business, psychology, public health, social work and human services, public administration and public policy, and criminal justice. This segment includes the operations of Walden University (“Walden”), which was acquired by Adtalem on August 12, 2021.
Medical and Veterinary – Offers degree and non-degree programs in the medical and veterinary postsecondary education industry. This segment includes the operations of American University of the Caribbean School of Medicine (“AUC”), Ross University School of Medicine (“RUSM”), and Ross University School of Veterinary Medicine (“RUSVM”), which are collectively referred to as the “medical and veterinary schools.”
“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 18 “Segment Information” to the Consolidated Financial Statements.
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Revision to Previously Issued Financial Statements
During the third quarter of fiscal year 2023, Adtalem identified an error in its revenue recognition related to certain scholarship programs within its Medical and Veterinary segment. Certain scholarships and discounts offered within that segment provide students a discount on future tuition that constitute a material right under Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers” that should be accounted for as a separate performance obligation within a contract. Adtalem assessed the materiality of this error individually and in the aggregate with other previously identified errors to prior periods’ Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99 “Materiality” and SAB 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” codified in ASC 250 “Accounting Changes and Error Corrections.” Adtalem concluded that the errors were not material to prior periods and therefore, amendments of previously filed reports were not required. However, Adtalem determined it was appropriate to revise its previously issued financial statements. Treating the discount on future tuition as a material right results in the deferral of revenue for a portion of tuition to future periods. In accordance with ASC 250, Adtalem corrected the prior period presented herein by revising the financial statement line item amounts previously disclosed in SEC filings in order to achieve comparability in the Consolidated Financial Statements. In connection with this revision, Adtalem also corrected other immaterial errors in the prior period, including certain errors that had previously been adjusted for as out of period corrections in the period identified. See Note 2 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements for additional information.
First Quarter Highlights
Financial and operational highlights for the first quarter of fiscal year 2024 include:
| ● | Adtalem revenue increased $14.6 million, or 4.1%, in the first quarter of fiscal year 2024 compared to the year-ago period driven by increased revenue at Chamberlain and Walden, partially offset by a revenue decline at Medical and Veterinary. |
| ● | Net income of $10.6 million ($0.25 diluted earnings per share) increased $10.1 million ($0.24 diluted earnings per share) in the first quarter of fiscal year 2024 compared to net income of $0.6 million in the year-ago period. This increase was primarily driven by increased revenue and decreased intangible amortization expense, restructuring expense, and business integration expense in the first quarter of fiscal year 2024, partially offset by increased litigation reserve in the first quarter of fiscal year 2024. Adjusted net income of $39.4 million decreased $2.2 million, or 5.3%, in the first quarter of fiscal year 2024 compared to the year-ago period. This decrease was due to increased incentive compensation expense and investments to support growth initiatives. Diluted adjusted earnings per share of $0.93 increased $0.03, or 3.3%, in the first quarter of fiscal year 2024 compared to the year-ago period driven by lower diluted shares due to share repurchases which offset the lower adjusted net income. |
| ● | For the July 2023 and September 2023 sessions, total student enrollment at Chamberlain increased 2.6% and 5.2%, respectively, compared to the same sessions last year. |
| ● | As of September 30, 2023, total student enrollment at Walden increased 0.5% compared to September 30, 2022. |
| ● | For the September 2023 semester, total student enrollment at the medical and veterinary schools decreased 7.5% compared to the same semester last year. |
| ● | Adtalem repurchased a total of 2,158,398 shares of Adtalem’s common stock under its share repurchase program at an average cost of $42.57 per share during the first quarter of fiscal year 2024. The timing and amount of any future repurchases will be determined based on an evaluation of market conditions and other factors. |
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Results of Operations
The following table presents selected Consolidated Statements of Income data as a percentage of revenue:
Three Months Ended | |||||
September 30, | |||||
2023 | 2022 | ||||
Revenue | 100.0 | % | 100.0 | % | |
Cost of educational services | 45.7 | % | 45.1 | % | |
Student services and administrative expense | 45.0 | % | 41.3 | % | |
Restructuring expense | 0.2 | % | 4.3 | % | |
Business integration expense | 1.4 | % | 2.7 | % | |
Total operating cost and expense | 92.4 | % | 93.3 | % | |
Operating income | 7.6 | % | 6.7 | % | |
Interest expense | (4.2) | % | (5.0) | % | |
Other income, net | 0.6 | % | 0.2 | % | |
Income from continuing operations before income taxes | 4.0 | % | 1.9 | % | |
Provision for income taxes | (0.8) | % | (0.3) | % | |
Income from continuing operations | 3.2 | % | 1.6 | % | |
Loss from discontinued operations, net of tax | (0.4) | % | (1.4) | % | |
Net income | 2.9 | % | 0.2 | % | |
Revenue
The following table presents revenue by segment detailing the changes from the year-ago period (in thousands):
Three Months Ended September 30, 2023 |
| ||||||||||||
Chamberlain |
| Walden |
| Medical and |
| Consolidated |
| ||||||
Fiscal year 2023 | $ | 135,405 | $ | 130,901 | $ | 87,963 | $ | 354,269 | |||||
Growth (decline) | 7,191 | 10,707 | (3,322) | 14,576 | |||||||||
Fiscal year 2024 | $ | 142,596 | $ | 141,608 | $ | 84,641 | $ | 368,845 | |||||
% change from prior year | 5.3 | % | 8.2 | % | (3.8) | % | 4.1 | % | |||||
Chamberlain
Chamberlain Student Enrollment:
Fiscal Year 2024 | |||||||||||||
Session | July 2023 | Sept. 2023 | |||||||||||
Total students | 32,175 | 34,889 | |||||||||||
% change from prior year | 2.6 | % | 5.2 | % | |||||||||
Fiscal Year 2023 | |||||||||||||
Session | July 2022 | Sept. 2022 | Nov. 2022 | Jan. 2023 | Mar. 2023 | May 2023 |
| ||||||
Total students | 31,371 | 33,153 | 33,390 | 34,760 | 34,847 | 33,284 | |||||||
% change from prior year | (4.1) | % | (4.0) | % | (0.8) | % | 1.8 | % | 2.0 | % | 1.2 | % | |
Chamberlain revenue increased 5.3%, or $7.2 million, to $142.6 million in the first quarter of fiscal year 2024 compared to the year-ago period, driven by an increase in enrollment and higher tuition rates. Enrollment has improved in several graduate and doctoral programs and the undergraduate Bachelor of Science in Nursing (“BSN”) programs. These improvements have been partially offset by a decrease in total student enrollment in the Registered Nurse to Bachelor of Science in Nursing (“RN-to-BSN”) online degree program.
33
Tuition Rates:
Tuition for the BSN onsite and online degree program ranges from $675 to $753 per credit hour. Tuition for the RN-to-BSN online degree program is $590 per credit hour. Tuition for the online Master of Science in Nursing (“MSN”) degree program is $675 per credit hour. Tuition for the online Family Nurse Practitioner (“FNP”) degree program is $690 per credit hour. Tuition for the online Doctor of Nursing Practice (“DNP”) degree program is $800 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. Tuition for the onsite Master of Physician Assistant Studies (“MPAS”) is $8,000 per session. In some cases, these tuition rates increased by approximately 3% to 4% from the prior year for new students. These tuition rates do not include the cost of course fees, books, supplies, transportation, clinical fees, living expenses, or other fees as listed in the Chamberlain academic catalog.
Walden
Walden Student Enrollment:
Fiscal Year 2024 | |||||||||
September 30, | |||||||||
Period | 2023 | ||||||||
Total students | 40,975 | ||||||||
% change from prior year | 0.5 | % | |||||||
Fiscal Year 2023 | |||||||||
September 30, | December 31, | March 31, | June 30, | ||||||
Period | 2022 | 2022 | 2023 | 2023 | |||||
Total students | 40,772 | 37,956 | 39,427 | 37,582 | |||||
% change from prior year | (9.2) | % | (7.8) | % | (7.9) | % | (4.8) | % | |
Walden total student enrollment represents those students attending instructional sessions as of the dates identified above. Walden revenue increased 8.2%, or $10.7 million, to $141.6 million in the first quarter of fiscal year 2024 compared to the year-ago period, driven by an increase in enrollment, higher tuition rates, and an increase in average credit hours per student. Management believes its marketing efforts to differentiate the Walden brand have driven the turnaround in enrollment in the first quarter of fiscal year 2024.
Tuition Rates:
On a per credit hour basis, tuition for Walden programs range from $130 per credit hour to $1,060 per credit hour, with the wide range due to the nature of the programs. General education courses are charged at $333 per credit hour. Other programs such as those with a subscription-based learning modality or those billed on a subscription period or term basis range from $1,500 to $7,180 per term. Students are charged a program fee that ranges from $50 to $230 per term as well as a clinical fee of $160 per course for specific programs. Some programs require students to attend residencies, skills labs, and pre-practicum labs, which are charged at a range of $1,000 to $2,550 per event. In most cases, these tuition rates, event charges, and fees represent increases of approximately 3% to 7% from the prior year. These tuition rates, event charges, and fees do not include the cost of books or personal technology, supplies, transportation, or living expenses.
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Medical and Veterinary
Medical and Veterinary Student Enrollment:
Fiscal Year 2024 | |||||||
Semester | Sept. 2023 | ||||||
Total students | 5,209 | ||||||
% change from prior year | (7.5) | % | |||||
Fiscal Year 2023 | |||||||
Semester | Sept. 2022 | Jan. 2023 | May 2023 |
| |||
Total students | 5,634 | 5,312 | 4,869 | ||||
% change from prior year | 3.4 | % | 1.6 | % | (8.2) | % | |
Medical and Veterinary revenue decreased 3.8%, or $3.3 million, to $84.6 million in the first quarter of fiscal year 2024 compared to the year-ago period, driven by decreased enrollment, partially offset by tuition rate increases at all three institutions in this segment.
Management’s plan to increase enrollment centers around the core goals of increasing international students, increasing 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 and enrollment investments.
Tuition Rates:
| ● | Effective for semesters beginning in September 2023, for students first enrolled prior to May 2022, tuition rates for the beginning basic sciences and final clinical rotation portions of AUC’s medical program are $26,680 and $31,328, respectively, per semester, which represents a 6.8% and 12.0% increase, respectively, from the prior academic year. Effective for semesters beginning in September 2023, for students first enrolled in May 2022 and after, tuition rates for the beginning basic sciences and final clinical rotation portions of AUC’s medical program are $21,568 and $28,146, respectively, per semester, which represents a 6.8% and 12.0% increase, respectively, from the prior academic year. In addition, students first enrolled in May 2022 and after are charged administrative fees of $5,430 and $3,841 for the basic sciences and final clinical rotation portions of the program, respectively, per semester, which represents a 6.8% and 12.0% increase, respectively, from the prior academic year. |
| ● | Effective for semesters beginning in September 2023, for students first enrolled prior to May 2022, tuition rates for the beginning basic sciences and final clinical rotation portions of RUSM’s medical program are $27,547 and $30,397, respectively, per semester. These tuition rates represent a 6.0% increase from the prior academic year. Effective for semesters beginning in September 2023, for students first enrolled in May 2022 and after, tuition rates for the beginning basic sciences and final clinical rotation portions of RUSM’s medical program are $23,284 and $27,447, respectively, per semester. In addition, students first enrolled in May 2022 and after are charged administrative fees ranging from $5,883 to $6,662 for the basic sciences portion of the program and $3,420 for the final clinical rotation portion of the program, per semester. These tuition rates and fees represent a 6.0% increase from the prior academic year. |
| ● | Effective for semesters beginning in September 2023, for students who first enrolled prior to September 2018, tuition rates for the pre-clinical (semesters 1-7) and clinical curriculum (semesters 8-10) of RUSVM’s veterinary program are $22,334 and $28,034, respectively, per semester. Effective for semesters beginning in September 2023, for students first enrolled in September 2018 and after, tuition rates for the pre-clinical and clinical curriculum of RUSVM’s veterinary program are $24,044 per semester. All of these tuition rates represent a 6.0% increase 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.
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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. We have not experienced significant inflationary pressures on wages or other costs of delivering our educational services; however, should inflation persist in the overall economy, cost increases could affect our results of operations in the future. The following table presents cost of educational services by segment detailing the changes from the year-ago period (in thousands):
Three Months Ended September 30, 2023 |
| ||||||||||||
| Chamberlain |
| Walden |
| Medical and |
| Consolidated | ||||||
Fiscal year 2023 |
| $ | 60,173 | $ | 48,453 |
| $ | 51,019 | $ | 159,645 | |||
Cost increase (decrease) |
|
| 5,233 |
| 5,577 |
| (1,837) |
| 8,973 | ||||
Fiscal year 2024 |
| $ | 65,406 | $ | 54,030 |
| $ | 49,182 | $ | 168,618 | |||
% change from prior year |
| 8.7 | % |
| 11.5 | % | (3.6) | % | 5.6 | % | |||
Cost of educational services increased 5.6%, or $9.0 million, to $168.6 million in the first quarter of fiscal year 2024 compared to the year-ago period. This cost increase was primarily driven by an increase in provision for bad debts and an increase in labor costs to support increased enrollment, partially offset by a decrease in clinical costs at Medical and Veterinary.
As a percentage of revenue, cost of educational services was 45.7% and 45.1% in the first quarter of fiscal year 2024 and 2023, respectively. The increase in the percentage was primarily the result of the increase in the provision for bad debts.
Student Services and Administrative Expense
The student services and administrative expense category includes expenses related to student admissions, marketing and advertising, general and administrative, and amortization expense of finite-lived intangible assets related to business acquisitions. We have not experienced significant inflationary pressures on wages or other costs of providing services to our students and educational institutions; however, should inflation persist in the overall economy, cost increases could affect our results of operations in the future. The following table presents student services and administrative expense by segment detailing the changes from the year-ago period (in thousands):
Three Months Ended September 30, 2023 |
| |||||||||||||||
| Chamberlain |
| Walden |
| Medical and |
| Home Office | Consolidated | ||||||||
Fiscal year 2023 | $ | 48,231 | $ | 76,435 | $ | 19,880 | $ | 1,839 | $ | 146,385 | ||||||
Cost increase (decrease) |
| 4,634 |
| (1,444) |
| 1,102 |
| 4,769 |
| 9,061 | ||||||
Intangible amortization expense change | — | (7,851) | — | — | (7,851) | |||||||||||
Litigation reserve change | — | 18,500 | — | — | 18,500 | |||||||||||
Fiscal year 2024 | $ | 52,865 | $ | 85,640 | $ | 20,982 | $ | 6,608 | $ | 166,095 | ||||||
Fiscal year 2024 % change: |
|
| ||||||||||||||
Cost increase (decrease) | 9.6 | % |
| (1.9) | % | 5.5 | % |
| NM | 6.2 | % | |||||
Effect of intangible amortization expense change |
| — |
| (10.3) | % |
| — |
| NM |
| (5.4) | % | ||||
Effect of litigation reserve change |
| — |
| 24.2 | % |
| — |
| NM |
| 12.6 | % | ||||
Fiscal year 2024 % change |
| 9.6 | % |
| 12.0 | % |
| 5.5 | % |
| NM |
| 13.5 | % | ||
Student services and administrative expense increased 13.5%, or $19.7 million, to $166.1 million in the first quarter of fiscal year 2024 compared to the year-ago period. Excluding intangible amortization expense and litigation reserve, student services and administrative expense increased 6.2%, or $9.1 million. This cost increase was primarily driven by an increase in incentive compensation, severance, and investments to support growth initiatives.
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As a percentage of revenue, student services and administrative expense was 45.0% and 41.3% in the first quarter of fiscal year 2024 and 2023, respectively. The increase in the percentage was primarily the result of the litigation reserve in the first quarter of fiscal year 2024.
Restructuring Expense
Restructuring expense was $0.7 million and $15.1 million in the first quarter of fiscal year 2024 and 2023, respectively. The decreased restructure expense in the first quarter of fiscal year 2024 was primarily driven by higher real estate consolidations in the first quarter of fiscal year 2023 at Walden, Medical and Veterinary, and Adtalem’s home office resulting in impairments on operating lease assets and property and equipment. See Note 5 “Restructuring Charges” to the Consolidated Financial Statements for additional information on restructuring charges. We continue to incur restructuring charges or reversals related to exited leased space from previous restructuring activities.
Business Integration Expense
Business integration expense was $5.3 million and $9.5 million in the first quarter of fiscal year 2024 and 2023, respectively. These are costs associated with integrating Walden into Adtalem. In addition, during the first quarter of fiscal year 2023, we initiated transformation initiatives to accelerate growth and organizational agility. Certain costs relating to this transformation are included in business integration expense in the Consolidated Statements of Income. We expect to incur additional integration expense through the remainder of fiscal year 2024.
Operating Income
The following table presents operating income by segment detailing the changes from the year-ago period (in thousands):
Three Months Ended September 30, 2023 | |||||||||||||||
Chamberlain |
| Walden |
| Medical and |
| Home Office | Consolidated | ||||||||
Fiscal year 2023 | $ | 26,184 | $ | 2,933 | $ | 10,238 | $ | (15,721) | $ | 23,634 | |||||
Organic change | (2,678) | 6,574 | (2,587) | (4,767) | (3,458) | ||||||||||
Restructuring expense change | 818 | 3,080 | 6,712 | 3,779 | 14,389 | ||||||||||
Business integration expense change | — | — | — | 4,278 | 4,278 | ||||||||||
Intangible amortization expense change | — | 7,851 | — | — | 7,851 | ||||||||||
Litigation reserve change | — | (18,500) | — | — | (18,500) | ||||||||||
Fiscal year 2024 | $ | 24,324 | $ | 1,938 | $ | 14,363 | $ | (12,431) | $ | 28,194 | |||||
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The following table presents a reconciliation of operating income (GAAP) to adjusted operating income (non-GAAP) by segment (in thousands):
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
Increase/(Decrease) | ||||||||||||
2023 | 2022 | $ | % | |||||||||
Chamberlain: | ||||||||||||
Operating income (GAAP) | $ | 24,324 | $ | 26,184 | $ | (1,860) | (7.1) | % | ||||
Restructuring expense | — | 818 | (818) | |||||||||
Adjusted operating income (non-GAAP) | $ | 24,324 | $ | 27,002 | $ | (2,678) | (9.9) | % | ||||
Operating margin (GAAP) | 17.1 | % | 19.3 | % | ||||||||
Operating margin (non-GAAP) | 17.1 | % | 19.9 | % | ||||||||
Walden: | ||||||||||||
Operating income (GAAP) | $ | 1,938 | $ | 2,933 | $ | (995) | (33.9) | % | ||||
Restructuring expense | — | 3,080 | (3,080) | |||||||||
Intangible amortization expense | 10,677 | 18,528 | (7,851) | |||||||||
Litigation reserve | 18,500 | — | 18,500 | |||||||||
Adjusted operating income (non-GAAP) | $ | 31,115 | $ | 24,541 | $ | 6,574 | 26.8 | % | ||||
Operating margin (GAAP) | 1.4 | % | 2.2 | % | ||||||||
Operating margin (non-GAAP) | 22.0 | % | 18.7 | % | ||||||||
Medical and Veterinary: | ||||||||||||
Operating income (GAAP) | $ | 14,363 | $ | 10,238 | $ | 4,125 | 40.3 | % | ||||
Restructuring expense | 114 | 6,826 | (6,712) | |||||||||
Adjusted operating income (non-GAAP) | $ | 14,477 | $ | 17,064 | $ | (2,587) | (15.2) | % | ||||
Operating margin (GAAP) | 17.0 | % | 11.6 | % | ||||||||
Operating margin (non-GAAP) | 17.1 | % | 19.4 | % | ||||||||
Home Office and Other: | ||||||||||||
Operating loss (GAAP) | $ | (12,431) | $ | (15,721) | $ | 3,290 | 20.9 | % | ||||
Restructuring expense | 562 | 4,341 | (3,779) | |||||||||
Business integration expense | 5,262 | 9,540 | (4,278) | |||||||||
Adjusted operating loss (non-GAAP) | $ | (6,607) | $ | (1,840) | $ | (4,767) | (259.1) | % | ||||
Adtalem Global Education: | ||||||||||||
Operating income (GAAP) | $ | 28,194 | $ | 23,634 | $ | 4,560 | 19.3 | % | ||||
Restructuring expense | 676 | 15,065 | (14,389) | |||||||||
Business integration expense | 5,262 | 9,540 | (4,278) | |||||||||
Intangible amortization expense | 10,677 | 18,528 | (7,851) | |||||||||
Litigation reserve | 18,500 | — | 18,500 | |||||||||
Adjusted operating income (non-GAAP) | $ | 63,309 | $ | 66,767 | $ | (3,458) | (5.2) | % | ||||
Operating margin (GAAP) | 7.6 | % | 6.7 | % | ||||||||
Operating margin (non-GAAP) | 17.2 | % | 18.8 | % | ||||||||
Consolidated operating income increased 19.3%, or $4.6 million, to $28.2 million in the first quarter of fiscal year 2024 compared to the year-ago period. The primary drivers of the operating income increase in the first quarter of fiscal year 2024 were decreased restructuring expense, intangible amortization expense, and business integration expense, partially offset by increased litigation reserve, provision for bad debts, and incentive compensation expense. The decrease in intangible amortization expense is driven by the decrease in amortization relating to the Walden student relationships intangible asset. This intangible asset is amortized based on the estimated retention of the students and considers the revenue and cash flow associated with these existing students, which are concentrated at the beginning of the asset’s useful life.
Consolidated adjusted operating income decreased 5.2%, or $3.5 million, to $63.3 million in the first quarter of fiscal year 2024 compared to the year-ago period. The primary drivers of the decrease in adjusted operating income were the increase in costs to support the growth of the business, provision for bad debts, incentive compensation expense, and severance costs, partially offset by an increase in revenue.
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Chamberlain
Chamberlain operating income decreased 7.1%, or $1.9 million, to $24.3 million in the first quarter of fiscal year 2024 compared to the year-ago period. Segment adjusted operating income decreased 9.9%, or $2.7 million, to $24.3 million in the first quarter of fiscal year 2024 compared to the year-ago period. The decrease in adjusted operating income in the first quarter of fiscal year 2024 was primarily driven by increased labor costs and provision for bad debts, partially offset by the increase in revenue.
Walden
Walden operating income decreased 33.9%, or $1.0 million, to $1.9 million in the first quarter of fiscal year 2024 compared to the year-ago period. Segment adjusted operating income increased 26.8%, or $6.6 million, to $31.1 million in the first quarter of fiscal year 2024 compared to the year-ago period. The increase in adjusted operating income in the first quarter of fiscal year 2024 was primarily driven by the increase in revenue, partially offset by increased labor costs, provision for bad debts, and graduation expense.
Medical and Veterinary
Medical and Veterinary operating income increased 40.3%, or $4.1 million, to $14.4 million in the first quarter of fiscal year 2024 compared to the year-ago period. Segment adjusted operating income decreased 15.2%, or $2.6 million, to $14.5 million in the first quarter of fiscal year 2024 compared to the year-ago period. The decrease in adjusted operating income in the first quarter of fiscal year 2024 was primarily driven by the decrease in revenue, partially offset by decreased clinical costs.
Interest Expense
Interest expense was $15.7 million and $17.8 million in the first quarter of fiscal year 2024 and 2023, respectively. The decrease in interest expense was primarily the result of the year-ago period incurring charges due to the write-off of debt discount and issuance costs on the Term Loan B (as defined and discussed in Note 13 “Debt” to the Consolidated Financial Statements) upon repayment of a portion of the debt. This decrease in interest expense was partially offset by rising interest rates on outstanding Term Loan B debt. The interest rate for borrowings under the Term Loan B debt was 9.43% and 7.05% as of September 30, 2023 and 2022, respectively.
Other Income, Net
Other income, net was $2.2 million and $0.8 million in the first quarter of fiscal year 2024 and 2023, respectively. The increase in other income, net was primarily the result of an increase in interest income.
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 tax on global intangible low-taxed income (“GILTI”), limitation of tax benefits on certain executive compensation, the rate of tax applied by state and local jurisdictions, the rate of tax applied to earnings outside the U.S., tax incentives, tax credits related to research and development expenditures, changes in valuation allowance, liabilities for uncertain tax positions, and tax benefits on stock-based compensation awards.
Our effective tax rates from continuing operations were 18.9% and 16.9% in the three months ended September 30, 2023 and 2022, respectively. The income tax provision for the first quarter of fiscal year 2024 increased compared to the year-ago period due to a decrease in the percentage of earnings from foreign operations, which are generally taxed at lower rates than domestic earnings.
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) requires taxpayers to capitalize and subsequently amortize research and experimental (“R&E”) expenditures that fall within the scope of Internal Revenue Code Section 174 for tax years starting after December 31, 2021. This rule became effective for Adtalem during fiscal year 2023 and resulted in the deferred tax asset for capitalization of R&E costs of $8.1 million, based on interpretation of the law as currently enacted.
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Adtalem will capitalize and amortize these costs for tax purposes over 5 years for R&E performed in the U.S. and over 15 years for R&E performed outside of the U.S.
Discontinued Operations
Beginning in the second quarter of fiscal year 2022, the Association of Certified Anti-Money Laundering Specialists (“ACAMS”), Becker Professional Education (“Becker”), OnCourse Learning (“OCL”), and EduPristine operations were classified as discontinued operations. In addition, we continue to incur costs 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.
Net loss from discontinued operations in the first quarter of fiscal year 2024 was $1.3 million. This loss consisted of the following: (i) $1.8 million of expense primarily from ongoing litigation costs and settlements related to the DeVry University divestiture; and (ii) a benefit from income taxes of $0.5 million associated with the items listed above.
Net loss from discontinued operations in the first quarter of fiscal year 2023 was $4.9 million. This loss consisted of the following: (i) loss of $3.3 million of expense primarily from ongoing litigation costs and settlements related to the DeVry University divestiture; (ii) a loss on the sale of ACAMS, Becker, and OCL of $3.4 million for working capital adjustments to the initial sales prices; and (iii) a benefit from income taxes of $1.7 million associated with the items listed above.
Regulatory Environment
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 2023 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.
Chamberlain was most recently recertified and issued an unrestricted PPA in September 2020, with an expiration date of March 31, 2024. Walden was issued a Temporary Provisional PPA (“TPPPA”) on September 17, 2021 in connection with their acquisition by Adtalem. 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 lengthy PPA recertification process is such that ED allows unhampered continued access to Title IV funding after PPA expiration, so long as materially complete applications are submitted at least 90 days in advance of expiration. Complete applications for PPA recertification have been timely submitted to ED. The provisional nature of the existing agreements for AUC, RUSM, and RUSVM stemmed from increased and/or repeated Title IV compliance audit findings. Walden’s TPPPA included financial requirements, which were in place prior to acquisition, such as a letter of credit, heightened cash monitoring, and additional reporting. No similar requirements were imposed on AUC, RUSM, or RUSVM. 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
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could have a material adverse effect on the businesses, financial condition, results of operations, and cash flows. ED may alternatively issue new PPAs for continued Title IV participation.
Walden must apply periodically to ED for continued certification to participate in Title IV programs. Such recertification generally is required every six years, but may be required earlier, including when an institution undergoes a change in control. ED may place an institution on provisional certification status if it finds that the institution does not fully satisfy all of the eligibility and certification standards and in certain other circumstances, such as when an institution is certified for the first time or undergoes a change in control. During the period of provisional certification, the institution must comply with any additional conditions included in the institution’s PPA. In addition, ED may more closely review an institution that is provisionally certified if it applies for recertification or approval to open a new location, add an educational program, acquire another institution, or make any other significant change. Students attending provisionally certified institutions remain eligible to receive Title IV program funds. If ED determines that a provisionally certified institution is unable to meet its responsibilities under its PPA, it may seek to revoke the institution’s certification to participate in Title IV programs without advance notice or opportunity for the institution to challenge the action. Walden is currently on a TPPPA which is required for participation in Title IV programs on a month-to-month basis. Walden’s provisional certification prior to acquisition was due to Walden’s prior parent company (Laureate Education Inc.) failing composite score under ED’s financial responsibility standards and ED’s approval of Laureate’s initial public offering in February 2017, which it viewed as a change in control. As a result of Adtalem’s acquisition of Walden, the provisional nature of Walden’s PPA remains in effect on a month-to-month basis while ED reviews the change in ownership application relating to the acquisition of Walden by Adtalem. Walden also is subject to a letter of credit and is subject to additional cash management requirements with respect to its disbursements of Title IV funds, as well as a restriction on changes to its educational programs, including a prohibition on the addition of new programs or locations that had not been approved by ED prior to the change in ownership during the period in which Walden participates under provisional certification (either as a result of the change in ownership or because of the continuation of the financial responsibility letter of credit). Adtalem had a surety-backed letter of credit outstanding of $84.0 million as of September 30, 2023 in favor of ED on behalf of Walden, which allows Walden to participate in Title IV programs. On January 18, 2023, we received a letter from ED, requiring Adtalem to provide a letter of credit in the amount of $76.2 million related to ED’s review of the Same Day Balance Sheet, which is the consolidated Adtalem balance sheet as of August 12, 2021, the date of the Walden acquisition. On February 21, 2023, Adtalem provided the $76.2 million letter of credit to ED.
As indicated in the earlier refence to Laureate Education Inc., passage of an ED-defined financial responsibility test, also known as a “composite score,” is required for continued participation by an institution in Title IV aid programs. For Adtalem’s institutions, this test is calculated at the consolidated Adtalem level. Applying various financial elements from the fiscal year audited financial statements, 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 institutions 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, an institution 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 institution 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 had exceeded the required minimum of 1.5. However, on September 25, 2023, Adtalem was notified by ED that the fiscal year 2022 composite score had declined to 0.2. As previously disclosed, this was expected due to the acquisition of Walden. ED advised that Adtalem’s five institutions will be permitted to continue to participate in Title IV under provisional certifications with heightened cash monitoring and continued reporting. A letter of credit in the amount of $157.9 million, representing 10% of the consolidated Title IV funds Adtalem’s institutions received during fiscal year 2022, must be delivered to ED by November 9, 2023. Management does not believe these conditions will have a material adverse effect on Adtalem’s operations.
On September 27, 2023, ED announced final Gainful Employment (“GE”) rules effective July 1, 2024. The regulation applies to all Title IV certificate programs at all institutions and to all Title IV degree programs at proprietary institutions. Programs must meet a debt-to-earnings test in which graduates’ annual debt payments must not exceed 8% of their annual
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earnings or 20% of their discretionary earnings. Programs must also pass an earnings premium test in which graduates’ earnings must exceed those of a typical high school graduate. Under the rule, programs that fail either metric must provide warnings to students and prospective students that the program is at risk of losing Title IV eligibility and programs that fail the same measure in two out of three consecutive years lose Title IV eligibility. We are reviewing the rule to determine what impact, if any, it will have on our programs. The GE rules also include a transparency framework in which debt-to-earnings, earnings premium, and a wide range of other program outcomes are disclosed on a website to be hosted by ED.
An ED regulation known as the “90/10 Rule” affects only proprietary postsecondary institutions, such as Chamberlain, Walden, 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 American Rescue Plan Act of 2021 (the “Rescue Act”) enacted on March 11, 2021 amended the 90/10 rule to require that a proprietary institution derive no more than 90% of its revenue from federal education assistance funds, including but not limited to previously excluded U.S. Department of Veterans Affairs and military tuition assistance benefits. This change was subject to negotiated rulemaking, which ended in March 2022. The amended rule applies to institutional fiscal years beginning on or after January 1, 2023. The following table details the percentage of revenue on a cash basis from federal financial assistance programs as calculated under the current regulations (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 2022 and 2021. Final data for fiscal year 2023 is not yet available. As an institution’s 90/10 compliance must be calculated using the financial results of an entire fiscal year, we are including Walden’s amounts for the full fiscal year 2022 in the table below, including the portion of the year not under Adtalem’s ownership.
Fiscal Year |
| ||||
2022 | 2021 |
| |||
Chamberlain University |
| 65 | % | 66 | % |
Walden University |
| 73 | % | n/a | |
American University of the Caribbean School of Medicine |
| 81 | % | 80 | % |
Ross University School of Medicine |
| 85 | % | 85 | % |
Ross University School of Veterinary Medicine |
| 81 | % | 82 | % |
Consolidated |
| 72 | % | 73 | % |
Liquidity and Capital Resources
Adtalem’s primary source of liquidity is the cash received from payments for student tuition, fees, books, and other educational materials. These payments include funds originating as financial aid from various federal and state loan and grant programs, student and family educational 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 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.
Adtalem’s consolidated cash and cash equivalents balance of $262.4 million and $273.7 million as of September 30, 2023 and June 30, 2023, respectively, included cash and cash equivalents held at Adtalem’s international operations of $14.5 million and $7.2 million as of September 30, 2023 and June 30, 2023, respectively, which is available to Adtalem for general corporate 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 $2.0 million and $1.4 million was held in these restricted bank accounts as of September 30, 2023 and June 30, 2023, respectively.
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Cash Flow Summary
Operating Activities
The following table provides a summary of cash flows from operating activities (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Income from continuing operations | $ | 11,959 | $ | 5,513 | ||
Non-cash items |
| 50,706 |
| 72,346 | ||
Changes in assets and liabilities |
| 28,061 |
| 13,617 | ||
Net cash provided by operating activities-continuing operations | $ | 90,726 | $ | 91,476 | ||
Net cash provided by operating activities from continuing operations in the three months ended September 30, 2023 was $90.7 million compared to $91.5 million in the year-ago period. The decrease was driven by lower non-cash items, partially offset by an increase in income from continuing operations and changes in working capital. The decrease of $21.6 million in non-cash items between the three months ended September 30, 2023 and the three months ended September 30, 2022 was principally driven by decreases in impairments to operating lease assets and amortization of intangible assets. The increase of $14.4 million in cash generated from changes in assets and liabilities was primarily due to timing differences in accounts receivable, prepaid assets, prepaid income taxes, accounts payable, accrued payroll and benefits, accrued liabilities, accrued interest, and deferred revenue.
Investing Activities
Capital expenditures in the first three months of fiscal year 2024 and 2023 were $15.0 million and $5.6 million, respectively. The capital expenditures in fiscal year 2024 primarily consisted of spending for information technology investments and Chamberlain’s campus development. For the remainder of fiscal year 2024, we expect capital spending on information technology, new campus development at Chamberlain, and facility improvements at the medical and veterinary schools. Management anticipates full fiscal year 2024 capital spending to be in the $50 to $60 million range, including $15.0 million spent during the first three months of fiscal year 2024. The source of funds for this capital spending will be from operations or the Credit Facility (as defined and discussed in Note 13 “Debt” to the Consolidated Financial Statements).
During the first three months of fiscal year 2024 and 2023, we received proceeds from the sale of marketable securities held in a Rabbi Trust of $0.4 million and $0.4 million, respectively, and made additional investments in marketable securities held by this trust of $0.3 million and $0.3 million, respectively.
During the first quarter of fiscal year 2023, we paid $0.8 million for a working capital adjustment to the initial sales price for ACAMS.
Financing Activities
The following table provides a summary of cash flows from financing activities (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Repurchases of common stock for treasury | $ | (90,477) | $ | — | ||
Repayments of long-term debt | — | (100,861) | ||||
Other |
| (4,911) |
| (2,113) | ||
Net cash used in financing activities | $ | (95,388) | $ | (102,974) | ||
On March 1, 2022, we announced that the Board authorized Adtalem’s thirteenth share repurchase program, which allows Adtalem to repurchase up to $300.0 million of its common stock through February 25, 2025. As of September 30, 2023, after repurchases that were made during the three months ended September 30, 2023, there remained $80.9 million
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for additional share repurchases under the current share repurchase program. 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.
On March 14, 2022, we entered into an ASR agreement to repurchase $150.0 million of common stock. We received an initial delivery of 4,709,576 shares of common stock representing approximately 80% of the total shares expected to be delivered at the time of executing the ASR based on the per share price on the day prior to the execution date. The final number of shares to be repurchased was based on the volume-weighted average price of Adtalem’s common stock during the term of the ASR agreement, less a discount and subject to adjustments pursuant to the terms of the ASR agreement. The ASR agreement ended on October 14, 2022. Based on the volume-weighted average price of Adtalem’s common stock during the term of the ASR agreement, Adtalem owed the counter party 332,212 shares of common stock. We elected to settle the contract in cash instead of delivering shares by making a cash payment of $13.2 million on November 2, 2022.
On March 1, 2021, we issued $800.0 million aggregate principal amount of 5.50% Senior Secured Notes due 2028 (the “Notes”), which mature on March 1, 2028. On August 12, 2021, Adtalem entered into its new credit agreement (the “Credit Agreement”) that provides for (1) a $850.0 million senior secured term loan (“Term Loan B”) with a maturity date of August 12, 2028 and (2) a $400.0 million senior secured revolving loan facility (“Revolver”) with a maturity date of August 12, 2026. We refer to the Term Loan B and Revolver collectively as the “Credit Facility.” The Revolver will be used to finance ongoing working capital and for general corporate purposes. During fiscal year 2022, we made a prepayment of $396.7 million on the Term Loan B. With that prepayment, we are no longer required to make quarterly installment payments. On April 11, 2022, we repaid $373.3 million of Notes at a price equal to 100% of the principal amount of the Notes. During June 2022, we repurchased on the open market an additional $20.8 million of Notes at a price equal to approximately 90% of the principal amount of the Notes. In July 2022, we repurchased an additional $0.9 million of Notes, on September 22, 2022, we made a prepayment of $100.0 million on the Term Loan B, and on November 22, 2022, we made a prepayment of $50.0 million on the Term Loan B. As of September 30, 2023, the principal balance of the Notes and Term Loan B was $405.0 million and $303.3 million, respectively. See Note 13 “Debt” to the Consolidated Financial Statements for additional information on the Notes and our Credit Agreement.
In the event of unexpected market conditions or negative economic changes that could negatively affect Adtalem’s earnings and/or operating cash flow, Adtalem maintains a $400.0 million revolving credit facility with availability of $323.8 million as of September 30, 2023. This availability will be reduced to $165.9 million in November 2023 upon issuance of the letter of credit to ED as described above.
Material Cash Requirements
Long-Term Debt – We have principal balances of $405.0 million of Notes and $303.3 million of Term Loan B, which requires interest payments. With the prepayment noted above, we are no longer required to make quarterly principal installment payments on the Term Loan B. In addition, we maintain a $400.0 million revolving credit facility with availability of $323.8 million as of September 30, 2023. Adtalem has a letter of credit outstanding under this revolving credit facility of $76.2 million as of September 30, 2023, in favor of ED on behalf of Walden, which allows Walden to participate in Title IV programs. On September 25, 2023, we received a letter from ED, requiring Adtalem to provide a letter of credit in the amount of $157.9 million to be provided by November 9, 2023. See Note 13 “Debt” to the Consolidated Financial Statements for additional information on our Notes and Credit Agreement.
Adtalem had a surety-backed letter of credit outstanding of $84.0 million as of September 30, 2023, in favor of ED on behalf of Walden, which allows Walden to participate in Title IV programs.
Many states require private-sector postsecondary education institutions to post surety bonds for licensure. In the U.S., Adtalem has posted $31.4 million of surety bonds as of September 30, 2023 with regulatory authorities on behalf of Chamberlain, Walden, AUC, RUSM, and RUSVM.
Operating Lease Obligations – We have operating lease obligations for the minimum payments required under various lease agreements which are recorded on the Consolidated Balance Sheets. In addition, we sublease certain space to third parties, which partially offsets the lease obligations at these facilities. See Note 11 “Leases” to the Consolidated Financial Statements for additional information on our lease agreements.
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Critical Accounting Estimates
There have been no material changes in our critical accounting estimates as disclosed in our 2023 Form 10-K.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements.
Forward-Looking Statements
Certain statements contained 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 Adtalem’s future growth. 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 risks and uncertainties include the risk factors described in Item 1A. “Risk Factors” of our 2023 Form 10-K and that might be contained in this Quarterly Report on Form 10-Q, which should be read in conjunction with these forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and Adtalem assumes no obligation to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized, except as required by law.
Non-GAAP Financial Measures and Reconciliations
We believe that certain non-GAAP financial measures provide investors with useful supplemental information regarding the underlying business trends and performance of Adtalem’s ongoing operations as seen through the eyes of management and are 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:
Adjusted net income (most comparable GAAP measure: net income) – Measure of Adtalem’s net income adjusted for restructuring expense, business integration expense, intangible amortization expense, write-off of debt discount and issuance costs, gain on extinguishment of debt, litigation reserve, and net loss from discontinued operations.
Adjusted earnings per share (most comparable GAAP measure: earnings per share) – Measure of Adtalem’s diluted earnings per share adjusted for restructuring expense, business integration expense, intangible amortization expense, write-off of debt discount and issuance costs, gain on extinguishment of debt, litigation reserve, and net loss from discontinued operations.
Adjusted operating income (most comparable GAAP measure: operating income) – Measure of Adtalem’s operating income adjusted for restructuring expense, business integration expense, intangible amortization expense, and litigation reserve. This measure is applied on a consolidated and segment basis, depending on the context of the discussion.
Adjusted EBITDA (most comparable GAAP measure: net income) – Measure of Adtalem’s net income adjusted for net loss from discontinued operations, interest expense, other income, net, provision for income taxes, depreciation and amortization, stock-based compensation, restructuring expense, business integration expense, and litigation reserve. This measure is applied on a consolidated and segment basis, depending on the context of the discussion. Income taxes, interest expense, and other income, net is not recorded at the reportable segments, and therefore, the segment adjusted EBITDA reconciliations begin with operating income.
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A description of special items in our non-GAAP financial measures described above are as follows:
| ● | Restructuring expense primarily related to real estate consolidations at Walden, Medical and Veterinary, and Adtalem’s home office. We do not include normal, recurring, cash operating expenses in our restructuring expense. |
| ● | Business integration expense include expenses related to the Walden acquisition and certain costs related to growth transformation initiatives. We do not include normal, recurring, cash operating expenses in our business integration expense. |
| ● | Intangible amortization expense on acquired intangible assets. |
| ● | Write-off of debt discount and issuance costs and gain on extinguishment of debt related to prepayments of debt, and reserves related to significant litigation. |
| ● | Net loss from discontinued operations includes expense from ongoing litigation costs and settlements related to the DeVry University divestiture and a loss on the sale of ACAMS, Becker, and OCL for working capital adjustments to the initial sales prices. |
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.
Net income reconciliation to adjusted net income (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Net income (GAAP) | $ | 10,646 | $ | 592 | ||
Restructuring expense | 676 | 15,065 | ||||
Business integration expense | 5,262 | 9,540 | ||||
Intangible amortization expense | 10,677 | 18,528 | ||||
Write-off of debt discount and issuance costs, gain on extinguishment of debt, and litigation reserve | 18,500 | 2,824 | ||||
Income tax impact on non-GAAP adjustments (1) | (7,693) | (9,871) | ||||
Net loss from discontinued operations | 1,313 | 4,921 | ||||
Adjusted net income (non-GAAP) | $ | 39,381 | $ | 41,599 | ||
| (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 adjusted earnings per share (shares in thousands):
Three Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Earnings per share, diluted (GAAP) | $ | 0.25 | $ | 0.01 | ||
Effect on diluted earnings per share: | ||||||
Restructuring expense | 0.02 | 0.33 | ||||
Business integration expense | 0.12 | 0.21 | ||||
Intangible amortization expense | 0.25 | 0.40 | ||||
Write-off of debt discount and issuance costs, gain on extinguishment of debt, and litigation reserve | 0.44 | 0.06 | ||||
Income tax impact on non-GAAP adjustments (1) | (0.18) | (0.21) | ||||
Net loss from discontinued operations | 0.03 | 0.11 | ||||
Adjusted earnings per share, diluted (non-GAAP) | $ | 0.93 | $ | 0.90 | ||
Diluted shares used in non-GAAP EPS calculation | 42,184 | 46,342 | ||||
| (1) | Represents the income tax impact of non-GAAP continuing operations adjustments that is recognized in our GAAP financial statements. |
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Reconciliation to adjusted EBITDA (in thousands):
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
Increase/(Decrease) | ||||||||||||
2023 | 2022 | $ | % | |||||||||
Chamberlain: | ||||||||||||
Operating income (GAAP) | $ | 24,324 | $ | 26,184 | $ | (1,860) | (7.1) | % | ||||
Restructuring expense | — | 818 | (818) | |||||||||
Depreciation | 4,316 | 4,481 | (165) | |||||||||
Stock-based compensation | 2,907 | 2,274 | 633 | |||||||||
Adjusted EBITDA (non-GAAP) | $ | 31,547 | $ | 33,757 | $ | (2,210) | (6.5) | % | ||||
Adjusted EBITDA margin (non-GAAP) | 22.1 | % | 24.9 | % | ||||||||
Walden: | ||||||||||||
Operating income (GAAP) | $ | 1,938 | $ | 2,933 | $ | (995) | (33.9) | % | ||||
Restructuring expense | — | 3,080 | (3,080) | |||||||||
Intangible amortization expense | 10,677 | 18,528 | (7,851) | |||||||||
Litigation reserve | 18,500 | — | 18,500 | |||||||||
Depreciation | 2,162 | 2,595 | (433) | |||||||||
Stock-based compensation | 1,864 | 1,905 | (41) | |||||||||
Adjusted EBITDA (non-GAAP) | $ | 35,141 | $ | 29,041 | $ | 6,100 | 21.0 | % | ||||
Adjusted EBITDA margin (non-GAAP) | 24.8 | % | 22.2 | % | ||||||||
Medical and Veterinary: | ||||||||||||
Operating income (GAAP) | $ | 14,363 | $ | 10,238 | $ | 4,125 | 40.3 | % | ||||
Restructuring expense | 114 | 6,826 | (6,712) | |||||||||
Depreciation | 2,944 | 3,105 | (161) | |||||||||
Stock-based compensation | 1,640 | 1,475 | 165 | |||||||||
Adjusted EBITDA (non-GAAP) | $ | 19,061 | $ | 21,644 | $ | (2,583) | (11.9) | % | ||||
Adjusted EBITDA margin (non-GAAP) | 22.5 | % | 24.6 | % | ||||||||
Home Office and Other: | ||||||||||||
Operating loss (GAAP) | $ | (12,431) | $ | (15,721) | $ | 3,290 | 20.9 | % | ||||
Restructuring expense | 562 | 4,341 | (3,779) | |||||||||
Business integration expense | 5,262 | 9,540 | (4,278) | |||||||||
Depreciation | 356 | 624 | (268) | |||||||||
Stock-based compensation | 1,044 | 491 | 553 | |||||||||
Adjusted EBITDA (non-GAAP) | $ | (5,207) | $ | (725) | $ | (4,482) | (618.2) | % | ||||
Adtalem Global Education: | ||||||||||||
Net income (GAAP) | $ | 10,646 | $ | 592 | $ | 10,054 | 1,698.3 | % | ||||
Net loss from discontinued operations | 1,313 | 4,921 | (3,608) | |||||||||
Interest expense | 15,657 | 17,760 | (2,103) | |||||||||
Other income, net | (2,214) | (761) | (1,453) | |||||||||
Provision for income taxes | 2,792 | 1,122 | 1,670 | |||||||||
Operating income (GAAP) | 28,194 | 23,634 | 4,560 | |||||||||
Depreciation and amortization | 20,455 | 29,333 | (8,878) | |||||||||
Stock-based compensation | 7,455 | 6,145 | 1,310 | |||||||||
Restructuring expense | 676 | 15,065 | (14,389) | |||||||||
Business integration expense | 5,262 | 9,540 | (4,278) | |||||||||
Litigation reserve | 18,500 | — | 18,500 | |||||||||
Adjusted EBITDA (non-GAAP) | $ | 80,542 | $ | 83,717 | $ | (3,175) | (3.8) | % | ||||
Adjusted EBITDA margin (non-GAAP) | 21.8 | % | 23.6 | % | ||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in Adtalem’s market risk exposure during the first three months of fiscal year 2024 from those set forth in 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, 2023.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of our disclosure controls and procedures (as such term in set forth in Exchange Act Rule 13a-15(e)) that was conducted under the supervision and with the participation of Adtalem’s management, including our Chief Executive Officer and Chief Financial Officer, our Chief Executive Officer and Chief Financial Officer concluded that Adtalem’s disclosure controls were effective as of September 30, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes during the first quarter of fiscal year 2024 in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 17 “Commitments and Contingencies” to the Consolidated Financial Statements included in Item 1. “Financial Statements.”
Item 1A. Risk Factors
There have been no material changes to Adtalem’s risk factors from those set forth since Item 1A. “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023.
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, 2023 - July 31, 2023 | 667,987 | $ | 39.41 | 667,987 | $ | 146,421,843 | ||||
August 1, 2023 - August 31, 2023 | 673,792 | $ | 43.89 | 673,792 | $ | 116,852,143 | ||||
September 1, 2023 - September 30, 2023 | 816,619 | $ | 44.07 | 816,619 | $ | 80,862,017 | ||||
Total | 2,158,398 | $ | 42.57 | 2,158,398 | ||||||
(1) | See Note 14 “Share Repurchases” to the Consolidated Financial Statements for additional information on our share repurchase programs. |
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, 2023 - July 31, 2023 | 129 | $ | 41.23 | NA | NA | ||||
August 1, 2023 - August 31, 2023 | 117,359 | $ | 43.37 | NA | NA | ||||
September 1, 2023 - September 30, 2023 | 12,920 | $ | 44.22 | NA | NA | ||||
Total | 130,408 | $ | 43.45 | 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 the terms of Adtalem’s stock incentive plans. |
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
31.1 | ||
31.2 | ||
32 | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed or furnished herewith.
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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: October 26, 2023 | By: | /s/ Robert J. Phelan |
Robert J. Phelan | ||
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
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