Company Quick10K Filing
Quick10K
Adtalem Global Education
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$49.18 58 $2,840
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-04-12 Enter Agreement, Regulation FD, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2019-01-09 Officers, Exhibits
8-K 2018-12-11 Exhibits
8-K 2018-12-11 Enter Agreement, M&A, Other Events, Exhibits
8-K 2018-12-10 Exhibits
8-K 2018-12-04 M&A
8-K 2018-11-06 Shareholder Vote, Other Events, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-10-03 Officers, Exhibits
8-K 2018-09-12 Other Events
8-K 2018-08-16 Earnings, Exhibits
8-K 2018-08-02 Enter Agreement, Other Events, Exhibits
8-K 2018-07-17 Other Events, Exhibits
8-K 2018-06-28 Enter Agreement, Exhibits
8-K 2018-06-19 Other Events, Exhibits
8-K 2018-05-09 Regulation FD, Exhibits
8-K 2018-05-08 Officers, Exhibits
8-K 2018-04-13 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-26 Other Events
8-K 2018-02-02 Other Events, Exhibits
8-K 2018-02-01 Other Events, Exhibits
CLR Continental Resources 18,420
STOR Store Capital 7,100
LHCG LHC Group 3,130
RDUS Radius Health 1,040
DXLG Destination Xl Group 112
HCT Healthcare Trust 0
EGN Energen 0
TEAR Tearlab 0
GRAS Greenfield Farms Food 0
CTY Qwest 0
ATGE 2018-12-31
Note 1: Interim Financial Statements
Note 3: Summary of Significant Accounting Policies
Note 4: Stock-Based Compensation
Note 5: Fair Value Measurements
Note 6: Financing Receivables
Note 7: Share Repurchase Programs
Note 8: Business Combinations
Note 9: Intangible Assets
Note 10: Restructuring Charges
Note 11: Income Taxes
Note 12: Debt
Note 13: Commitments and Contingencies
Note 14: Segment Information
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 6 - Exhibits
EX-31 tv511687_ex31.htm
EX-32 tv511687_ex32.htm

Adtalem Global Education Earnings 2018-12-31

ATGE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv511687_10q.htm FORM 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One) 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: December 31, 2018

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____      

 

Commission file number: 1-13988

 

Adtalem Global Education Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE   36-3150143
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
500 WEST MONROE STREET   60661
CHICAGO, ILLINOIS   (Zip Code)
(Address of principal executive offices)    

 

Registrant’s telephone number; including area code:

(630) 515-7700

 

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.  Yes þ     No ¨

 

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).  Yes þ     No ¨

 

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.

 

Large accelerated filer þ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company ¨
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨     No þ

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

January 31, 2019 — 57,780,000 shares of Common Stock, $0.01 par value

 

 

 

 

 

 

ADTALEM GLOBAL EDUCATION INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2018

 

TABLE OF CONTENTS

 

    Page #
     
  PART I – FINANCIAL INFORMATION  
Item 1 — Financial Statements (Unaudited)  
  Consolidated Balance Sheets 3
  Consolidated Statements of Income (Loss) 4
  Consolidated Statements of Comprehensive Income (Loss) 5
  Consolidated Statements of Cash Flows 6
  Consolidated Statements of Shareholders’ Equity 7
  Notes to Consolidated Financial Statements 9
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
Item 3 — Quantitative and Qualitative Disclosures About Market Risk 61
Item 4 — Controls and Procedures 62
     
  PART II – OTHER INFORMATION  
Item 1 — Legal Proceedings 62
Item 1A — Risk Factors 63
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds 63
Item 6 — Exhibits 63
     
Signatures   65

 

2 

 

 

ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   December 31,   June 30,   December 31, 
   2018   2018   2017 
   (in thousands, except share and par value amounts) 
ASSETS:   
Current Assets:               
Cash and Cash Equivalents  $294,801   $430,690   $212,239 
Marketable Securities and Investments   7,269    4,255    4,268 
Restricted Cash   818    310    33 
Accounts Receivable, Net   138,708    146,726    134,274 
Prepaid Expenses and Other Current Assets   64,953    58,887    75,499 
Current Assets Held for Sale   -    47,132    43,496 
Total Current Assets   506,549    688,000    469,809 
Land, Building and Equipment:               
Land   43,829    48,177    46,908 
Building   364,417    389,129    391,574 
Equipment   271,979    302,516    293,665 
Construction in Progress   23,136    25,360    26,225 
    703,361    765,182    758,372 
Accumulated Depreciation   (345,062)   (376,528)   (360,854)
Land, Building and Equipment Held for Sale, Net   -    -    20,821 
Land, Building and Equipment, Net   358,299    388,654    418,339 
Noncurrent Assets:               
Deferred Income Taxes   19,141    38,780    31,968 
Intangible Assets, Net   358,415    362,931    386,800 
Goodwill   813,176    813,887    832,943 
Other Assets, Net   66,643    39,259    34,671 
Other Assets Held for Sale   -    13,450    37,070 
Total Noncurrent Assets   1,257,375    1,268,307    1,323,452 
TOTAL ASSETS  $2,122,223   $2,344,961   $2,211,600 
LIABILITIES:               
Current Liabilities:               
Accounts Payable  $48,525   $47,477   $32,730 
Accrued Salaries, Wages and Benefits   57,856    71,289    59,794 
Accrued Liabilities   83,756    80,803    77,134 
Deferred Revenue   51,173    106,773    69,953 
Current Portion of Long-Term Debt   3,000    3,000    - 
Current Liabilities Held for Sale   -    56,439    57,208 
Total Current Liabilities   244,310    365,781    296,819 
Noncurrent Liabilities:               
Long-Term Debt   289,084    290,073    165,000 
Deferred Income Taxes   32,398    29,115    31,745 
Other Liabilities   118,133    131,380    101,232 
Income Taxes Payable   -    -    88,562 
Noncurrent Liabilities Held for Sale   -    216    878 
Total Noncurrent Liabilities   439,615    450,784    387,417 
TOTAL LIABILITIES   683,925    816,565    684,236 
COMMITMENTS AND CONTINGENCIES (NOTE 13)               
NONCONTROLLING INTEREST   8,651    9,110    7,405 
SHAREHOLDERS' EQUITY:               
Common Stock, $0.01 Par Value, 200,000,000 Shares Authorized; 58,212,000, 59,893,000 and 60,295,000 Shares Outstanding at December 31, 2018, June 30, 2018 and December 31, 2017, respectively   801    793    787 
Additional Paid-in Capital   479,946    454,653    433,855 
Retained Earnings   1,926,134    1,917,373    1,812,746 
Accumulated Other Comprehensive Loss   (143,518)   (142,168)   (60,745)
Treasury Stock, at Cost, 21,883,000, 19,390,000 and 18,451,000 Shares at December 31, 2018, June 30, 2018 and December 31, 2017, respectively   (833,716)   (711,365)   (666,684)
TOTAL SHAREHOLDERS' EQUITY   1,429,647    1,519,286    1,519,959 
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND SHAREHOLDERS' EQUITY  $2,122,223   $2,344,961   $2,211,600 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3 

 

 

ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
   (in thousands, except per share amounts) 
REVENUE  $316,594   $308,211   $600,784   $601,354 
OPERATING COST AND EXPENSE:                    
Cost of Educational Services   158,232    157,443    306,885    330,619 
Student Services and Administrative Expense   99,989    89,423    198,486    178,367 
Restructuring Expense   3,645    1,426    43,193    2,563 
Insurance Settlement Gain   (15,571)   -    (15,571)   - 
Total Operating Cost and Expense   246,295    248,292    532,993    511,549 
Operating Income from Continuing Operations   70,299    59,919    67,791    89,805 
OTHER INCOME (EXPENSE):                    
Interest and Dividend Income   2,173    1,365    4,118    3,483 
Interest Expense   (5,556)   (2,481)   (11,758)   (4,397)
Investment Loss   (1,122)   -    (1,122)   - 
Net Other Expense   (4,505)   (1,116)   (8,762)   (914)
Income from Continuing Operations Before Income Taxes   65,794    58,803    59,029    88,891 
Income Tax Provision   (13,165)   (110,276)   (11,278)   (114,751)
Equity Method Investment Income (Loss)   -    6    -    (38)
Income (Loss) from Continuing Operations   52,629    (51,467)   47,751    (25,898)
DISCONTINUED OPERATIONS (NOTE 2):                    
Loss from Discontinued Operations Before Income Taxes   (8,313)   (48,409)   (14,448)   (63,858)
Loss on Disposal of Discontinued Operations Before Income Taxes   (32,714)   -    (32,714)   - 
Income Tax Benefit   5,904    19,094    7,332    21,890 
Loss from Discontinued Operations   (35,123)   (29,315)   (39,830)   (41,968)
NET INCOME (LOSS)   17,506    (80,782)   7,921    (67,866)
Net Income Attributable to Noncontrolling Interest   (211)   (374)   (156)   (505)
NET INCOME (LOSS) ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION  $17,295   $(81,156)  $7,765   $(68,371)
                     
AMOUNTS ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION:                    
Income (Loss) from Continuing Operations  $52,418   $(51,841)  $47,595   $(26,403)
Loss from Discontinued Operations   (35,123)   (29,315)   (39,830)   (41,968)
NET INCOME (LOSS) ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION  $17,295   $(81,156)  $7,765   $(68,371)
                     
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION SHAREHOLDERS:                    
Basic:                    
Continuing Operations  $0.89   $(0.85)  $0.80   $(0.43)
Discontinued Operations  $(0.59)  $(0.48)  $(0.67)  $(0.68)
Total  $0.29   $(1.33)  $0.13   $(1.10)
Diluted:                    
Continuing Operations  $0.87   $(0.85)  $0.79   $(0.43)
Discontinued Operations  $(0.59)  $(0.48)  $(0.66)  $(0.68)
Total  $0.29   $(1.33)  $0.13   $(1.10)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4 

 

 

 ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
   (in thousands) 
NET INCOME (LOSS)  $17,506   $(80,782)  $7,921   $(67,866)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                    
Currency Translation Gain (Loss)   19,660    (25,028)   (955)   (1,699)
Change in Fair Value of Available-For-Sale Securities   (10)   3    (14)   73 
COMPREHENSIVE INCOME (LOSS)   37,156    (105,807)   6,952    (69,492)
COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST   (753)   147    (86)   (467)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION  $36,403   $(105,660)  $6,866   $(69,959)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5 

 

 

ADTALEM GLOBAL EDUCATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

  

Six Months Ended

December 31,

 
   2018   2017 
   (in thousands) 
CASH FLOW FROM OPERATING ACTIVITIES:          
Net Income (Loss)   7,921   $(67,866)
Loss from Discontinued Operations   39,830    41,968 
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:          
Stock-Based Compensation Expense   7,360    8,780 
Depreciation   20,597    21,693 
Amortization of Intangible Assets   4,238    4,960 
Amortization of Deferred Debt Issuance Costs   784    351 
Provision for Bad Debts   6,432    8,117 
Deferred Income Taxes   22,924    380 
Loss on Disposals, Accelerated Depreciation and Adjustments to Land, Building and Equipment   41,875    29,987 
Realized Loss on Investments   108    - 
Unrealized Loss on Investments   1,014    - 
Insurance Settlement Gain   (15,571)   - 
Changes in Assets and Liabilities:          
Accounts Receivable   1,423    6,674 
Prepaid Expenses and Other   (41,459)   (32,592)
Accounts Payable   1,691    (4,769)
Accrued Salaries, Wages, Benefits and Liabilities   (12,458)   (27,265)
Deferred Revenue   (55,583)   (33,613)
Income Taxes Payable, Long-Term   -    88,562 
Net Cash Provided by Operating Activities-Continuing Operations   31,126    45,367 
Net Cash (Used in) Provided by Operating Activities-Discontinued Operations   (8,105)   4,412 
NET CASH PROVIDED BY OPERATING ACTIVITIES   23,021    49,779 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Capital Expenditures   (35,355)   (31,473)
Insurance Proceeds Received for Damage to Buildings and Equipment   35,706    - 
Sales of Marketable Securities   1,136    - 
Purchases of Marketable Securities   (5,290)   (136)
Payment for Purchase of Businesses, Net of Cash Acquired   -    (972)
Loan to DeVry University (see "Note 2: Discontinued Operations")   (10,000)   - 
Net Cash Used in Investing Activities-Continuing Operations   (13,803)   (32,581)
Net Cash (Used in) Provided by Investing Activities-Discontinued Operations   (1,833)   7,454 
Cash and Restricted Cash Transferred in Divestitures of Discontinued Operations   (48,876)   - 
NET CASH USED IN INVESTING ACTIVITIES   (64,512)   (25,127)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from Exercise of Stock Options   16,784    9,582 
Employee Taxes Paid on Withholding Shares   (6,401)   (3,806)
Proceeds from Stock Issued Under Colleague Stock Purchase Plan   312    391 
Repurchase of Common Stock for Treasury   (115,933)   (93,178)
Payments of Seller Financed Obligations   (846)   (7,941)
Borrowings Under Credit Facility   -    201,000 
Repayments Under Credit Facility   (1,500)   (161,000)
NET CASH USED IN FINANCING ACTIVITIES   (107,584)   (54,952)
Effects of Exchange Rate Differences   289    (1,043)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (148,786)   (31,343)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period   444,405    251,096 
Cash, Cash Equivalents and Restricted Cash at End of Period   295,619    219,753 
Less: Cash, Cash Equivalents and Restricted Cash of Discontinued Operations at End of Period   -    7,481 
Cash, Cash Equivalents and Restricted Cash at End of Period  $295,619   $212,272 
Non-cash Investing and Financing Activity:          
(Decrease) Increase in Redemption Value of Noncontrolling Interest Put Options  $(615)  $615 

  

The accompanying notes are an integral part of these consolidated financial statements. 

6 

 

 

ADTALEM GLOBAL EDUCATION INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)

  

   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Treasury
Stock
   Total 
  (in thousands) 
Three Months Ended    
Balance at September 30, 2018  $798   $469,545   $1,908,465   $(163,168)  $(775,605)  $1,440,035 
Net income             17,295              17,295 
Foreign currency translation                  19,660         19,660 
Unrealized investment losses, net of tax                  (10)        (10)
Change in noncontrolling interest put option             374              374 
Stock-based compensation        3,819                   3,819 
Net activity from stock-based compensation awards   3    6,548              (1,472)   5,079 
Proceeds from stock issued under Colleague Stock Purchase Plan        34              119    153 
Repurchase of common shares for treasury                       (56,758)   (56,758)
Balance at December 31, 2018  $801   $479,946   $1,926,134   $(143,518)  $(833,716)  $1,429,647 
                               
Three Months Ended                              
Balance at September 30, 2017  $785   $422,358   $1,894,372   $(35,720)  $(623,756)  $1,658,039 
Net loss             (81,156)             (81,156)
Foreign currency translation                  (25,028)        (25,028)
Unrealized investment gains, net of tax                  3         3 
Change in noncontrolling interest put option             (465)             (465)
Stock-based compensation        3,796                   3,796 
Net activity from stock-based compensation awards   2    7,696              (321)   7,377 
Proceeds from stock issued under Colleague Stock Purchase Plan        5    (5)        196    196 
Repurchase of common shares for treasury                       (42,803)   (42,803)
Balance at December 31, 2017  $787   $433,855   $1,812,746   $(60,745)  $(666,684)  $1,519,959 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7 

 

 

ADTALEM GLOBAL EDUCATION INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)

  

   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Treasury
Stock
   Total 
  (in thousands) 
Six Months Ended    
Balance at June 30, 2018  $793   $454,653   $1,917,373   $(142,168)  $(711,365)  $1,519,286 
Cumulative effect adjustment upon the adoption of ASU 2016-01             381    (381)        - 
Net income             7,765              7,765 
Foreign currency translation                  (955)        (955)
Unrealized investment losses, net of tax                  (14)        (14)
Change in noncontrolling interest put option             615              615 
Stock-based compensation        8,188                   8,188 
Net activity from stock-based compensation awards   8    17,035              (6,660)   10,383 
Proceeds from stock issued under Colleague Stock Purchase Plan        70              242    312 
Repurchase of common shares for treasury                       (115,933)   (115,933)
Balance at December 31, 2018  $801   $479,946   $1,926,134   $(143,518)  $(833,716)  $1,429,647 
                         
Six Months Ended                        
Balance at June 30, 2017  $781   $415,912   $1,881,397   $(59,119)  $(569,932)  $1,669,039 
Cumulative effect adjustment upon the adoption of ASU 2016-09        (596)   360              (236)
Net loss             (68,371)             (68,371)
Foreign currency translation                  (1,699)        (1,699)
Unrealized investment gains, net of tax                  73         73 
Change in noncontrolling interest put option             (615)             (615)
Stock-based compensation        8,780                   8,780 
Net activity from stock-based compensation awards   6    9,754              (3,985)   5,775 
Proceeds from stock issued under Colleague Stock Purchase Plan        5    (25)        411    391 
Repurchase of common shares for treasury                       (93,178)   (93,178)
Balance at December 31, 2017  $787   $433,855   $1,812,746   $(60,745)  $(666,684)  $1,519,959 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8 

 

 

ADTALEM GLOBAL EDUCATION INC.

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1: INTERIM FINANCIAL STATEMENTS

 

For purposes of this report, “Adtalem,” “we,” “our,” “us,” or similar references refers to Adtalem Global Education Inc. and its consolidated subsidiaries, unless the context requires otherwise. The interim Consolidated Financial Statements include accounts of Adtalem and its wholly-owned and majority-owned subsidiaries. Adtalem’s wholly-owned subsidiaries include:

 

·Chamberlain University (“Chamberlain”)
·American University of the Caribbean School of Medicine (“AUC”)
·Ross University School of Medicine (“RUSM”)
·Ross University School of Veterinary Medicine (“RUSVM”)
·Association of Certified Anti-Money Laundering Specialists (“ACAMS”)
·Becker Professional Education (“Becker”)

 

In addition, Adtalem maintains a 97.9% ownership interest in Adtalem Education of Brazil (“Adtalem Brazil”) and a 69% ownership interest in EduPristine.

 

On December 4, 2018, Adtalem completed the sale of its previously wholly-owned subsidiary Carrington College (“Carrington”). On December 11, 2018, Adtalem completed the sale of its previously wholly-owned subsidiary DeVry University. Carrington and DeVry University are presented as discontinued operations. See “Note 2: Discontinued Operations” for additional details.

 

These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition and results of operations of Adtalem. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”).

 

The interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in Adtalem's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and Adtalem’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, each as filed with the Securities and Exchange Commission (“SEC”).

 

The results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of results to be expected for the entire fiscal year.

 

NOTE 2: DISCONTINUED OPERATIONS

 

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

 

On December 11, 2018, Adtalem completed the sale of DeVry University to Cogswell Education, LLC (“Cogswell”) for de minimis consideration. The purchase agreement includes an earn-out entitling Adtalem to payments of up to $20 million over a ten-year period payable based on DeVry University’s free cash flow. In connection with the closing of the sale, Adtalem loaned to DeVry University $10 million under the terms of the promissory note, dated as of December 11, 2018 (the “Note”). The Note bears interest at a rate of 4% per annum, payable annually in arrears and has a maturity date of January 1, 2022. DeVry University may make prepayments on the loan. This loan is presented as Other Assets, Net on the Consolidated Balance Sheet. Adtalem has retained certain leases associated with DeVry University operations. Adtalem remains the primary lessee on these leases and subleases to DeVry University. In addition, Adtalem owns the buildings for certain DeVry University operating and administrative office locations and leases space to DeVry University under one-year operating leases, renewable annually at DeVry University’s option. Adtalem records the proceeds from these leases and subleases as an offset to operating costs. Adtalem also assigned certain leases to DeVry University but remains contingently liable under these leases. Adtalem recorded a pre-tax loss of $21.7 million on the sale of DeVry University and transferred $39.0 million of cash and restricted cash balances in the second quarter of fiscal year 2019, subject to post-closing adjustments to be completed in the third quarter of fiscal year 2019.

 

9 

 

 

The following is a summary of balance sheet information of assets and liabilities reported as held for sale (in thousands):

 

   December 31,   June 30,   December 31, 
   2018   2018   2017 
ASSETS:               
Current Assets:               
Cash and Cash Equivalents  $-   $1   $902 
Restricted Cash   -    13,404    6,579 
Accounts Receivable, Net   -    25,294    25,404 
Prepaid Expenses and Other Current Assets   -    8,433    10,611 
Total Current Assets Held for Sale   -    47,132    43,496 
Land, Building and Equipment Held for Sale, Net Noncurrent Assets:   -    -    20,821 
Intangible Assets   -    -    20,200 
Perkins Program Fund, Net   -    13,450    13,450 
Other Assets, Net   -    -    3,420 
Total Noncurrent Assets Held for Sale   -    13,450    37,070 
Total Assets Held for Sale  $-   $60,582   $101,387 
                
LIABILITIES:               
Current Liabilities:               
Accounts Payable  $-   $24,312   $19,801 
Accrued Salaries, Wages and Benefits   -    13,979    13,846 
Accrued Liabilities   -    1,514    8,044 
Deferred Revenue   -    16,634    15,517 
Total Current Liabilities Held for Sale   -    56,439    57,208 
Noncurrent Liabilities:               
Deferred Income Taxes   -    216    878 
Total Noncurrent Liabilities Held for Sale   -    216    878 
Total Liabilities Held for Sale  $-   $56,655   $58,086 

 

The following is a summary of income statement information of operations reported as discontinued operations (in thousands). The results include Carrington's and DeVry University's operations through the date of each respective sale.

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2018   2017   2018   2017 
REVENUE  $83,414   $119,674   $195,716   $247,557 
OPERATING COST AND EXPENSE:                    
Cost of Educational Services   48,075    69,747    109,416    144,688 
Student Services and Administrative Expense   43,920    47,537    99,292    109,073 
Restructuring Expense (Gain)   21    3,337    (497)   10,192 
Asset Impairment Charge - Intangible and Goodwill   -    23,841    -    23,841 
Asset Impairment Charge - Building and Equipment   (289)   23,391    1,953    23,391 
Loss on Sale of Assets   -    230    -    230 
Total Operating Cost and Expense   91,727    168,083    210,164    311,415 
Loss from Discontinued Operations Before Income Taxes   (8,313)   (48,409)   (14,448)   (63,858)
Loss on Disposal of Discontinued Operations Before Income Taxes   (32,714)   -    (32,714)   - 
Income Tax Benefit   5,904    19,094    7,332    21,890 
Loss from Discontinued Operations  $(35,123)  $(29,315)  $(39,830)  $(41,968)

 

10 

 

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of Adtalem and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Where our ownership interest is less than 100%, but greater than 50%, the noncontrolling ownership interest is reported on our Consolidated Balance Sheets. The noncontrolling ownership interest earnings portion is classified as “Net Income Attributable to Noncontrolling Interest” in our Consolidated Statements of Income (Loss). Unless indicated, or the context requires otherwise, references to years refer to Adtalem’s fiscal years.

 

Equity/Cost Method Investment

 

The equity method of accounting is used for an investment where we have the ability to influence the operating and financial decisions of the investee but do not possess more than a 50% ownership interest. Generally, this occurs when the ownership interest is greater than 20%. The investment is initially recorded at cost and classified as Other Assets, Net on the Consolidated Balance Sheets. The carrying amount of the investment is adjusted in subsequent periods for Adtalem’s share of the earnings or losses of the investee, which is recorded in the Consolidated Statements of Income (Loss) as Equity Method Investment Income (Loss).

 

The cost method of accounting is used for an investment where we do not have the ability to influence the operating and financial decisions of the investee. Generally, this occurs when the ownership interest is less than 20%. The investment is recorded at cost and classified as Other Assets, Net on the Consolidated Balance Sheets.

 

Cash and Cash Equivalents

 

Cash and cash equivalents can include time deposits, high-grade commercial paper, money market funds and bankers acceptances with original maturities of three months or less. Short-term investment objectives are to minimize risk and maintain liquidity. These investments are stated at cost (which approximates fair value) because of their short duration or liquid nature. Adtalem places its cash and temporary cash investments with high credit quality institutions. Cash and cash equivalent balances in U.S. bank accounts are generally in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. Cash and cash equivalent balances in Brazilian bank accounts are generally in excess of the deposit insurance limits for Brazilian banks. Adtalem has not experienced any losses on its cash and cash equivalents.

 

Management periodically evaluates the creditworthiness of the security issuers and financial institutions with which it invests and maintains deposit accounts.

 

Financial Aid and Restricted Cash

 

A significant portion of cash is received from students who participate in government financial aid and assistance programs which are subject to political and governmental budgetary considerations. There is no assurance that such funding will be maintained at current levels. Extensive and complex regulations in the U.S. and Brazil govern all of the government financial assistance programs in which students participate. Administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for disciplinary action, which could include the suspension, limitation or termination from such financial aid programs.

 

Restricted cash represents amounts received from federal and state governments under various student aid grant and loan programs and such restricted funds are held in separate bank accounts. Once the financial aid authorization and disbursement process for the student has been completed, the funds are transferred to unrestricted accounts, and these funds then become available for use in Adtalem’s operations. This authorization and disbursement process that precedes the transfer of funds generally occurs within the period of the academic term for which such funds were authorized.

 

Revenue Recognition

 

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 in exchange for those goods or services.

 

11 

 

 

The following tables disaggregate revenue by source (in thousands):

 

   Three Months Ended December 31, 2018 
   Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Higher Education  $211,487   $-   $59,394   $-   $270,881 
Test Preparation   -    23,950    3,239    (808)   26,381 
Certifications   -    7,284    -    -    7,284 
Conferences/Seminars   -    9,378    -    -    9,378 
Memberships/Subscriptions   -    1,263    -    -    1,263 
Other   1,140    267    -    -    1,407 
   $212,627   $42,142   $62,633   $(808)  $316,594 

 

   Six Months Ended December 31, 2018 
   Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Higher Education  $412,660   $-   $103,235   $-   $515,895 
Test Preparation   -    44,452    6,649    (1,615)   49,486 
Certifications   -    15,498    -    -    15,498 
Conferences/Seminars   -    12,246    -    -    12,246 
Memberships/Subscriptions   -    5,199    -    -    5,199 
Other   2,067    393    -    -    2,460 
   $414,727   $77,788   $109,884   $(1,615)  $600,784 

 

   Three Months Ended December 31, 2017 
   Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Higher Education  $203,297   $-   $70,045   $-   $273,342 
Test Preparation   -    16,451    5,088    (578)   20,961 
Certifications   -    6,968    -    -    6,968 
Conferences/Seminars   -    3,595    -    -    3,595 
Memberships/Subscriptions   -    3,257    -    -    3,257 
Other   -    88    -    -    88 
   $203,297   $30,359   $75,133   $(578)  $308,211 

 

   Six Months Ended December 31, 2017 
   Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Higher Education  $394,582   $-   $127,275   $-   $521,857 
Test Preparation   -    36,988    10,297    (1,201)   46,084 
Certifications   -    15,828    -    -    15,828 
Conferences/Seminars   -    10,963    -    -    10,963 
Memberships/Subscriptions   -    6,272    -    -    6,272 
Other   -    350    -    -    350 
   $394,582   $70,401   $137,572   $(1,201)  $601,354 

 

In addition, see “Note 14: Segment Information” for a disaggregation of revenue by geographical region.

 

12 

 

 

Performance Obligations and Revenue Recognition

 

Higher Education: Higher education revenue consists of tuition, fees, books and other educational products. The majority of revenue is derived from tuition and fees, which is recognized on a straight-line basis over the term as instruction is delivered. Books and other educational product revenue is recognized when products are shipped or students receive access to electronic materials. Under certain circumstances we report revenue from these transactions on a net basis because our performance obligation is to facilitate a transaction between the student and a vendor.

 

Test Preparation: Test preparation revenue consists of test preparation course instruction and self-study materials sales. Becker test preparation revenue is recognized when access to the course materials is delivered to the customer. Adtalem Brazil and EduPristine test preparation course instruction revenue is recognized on a straight-line basis over the applicable instruction delivery periods.

 

Certifications: Certification revenue consists of exam preparation guides, seminars, exam sitting fees and recertification fees. We recognize revenue for each of these items at a point in time when the applicable performance obligation is satisfied.

 

Conferences/Seminars: Conference revenue consists of revenue from attendees, sponsors and exhibitors. We recognize revenue for all items related to conferences at the time of the conference. Seminar revenue consists of seminars delivered in live, live-online, or on-demand online formats. We recognize revenue for live and live-online seminars on the day of the seminar. On-demand online seminars, in which customers have access to a webcast of a seminar, are recognized on the day the customer places the order.

 

Memberships/Subscriptions: Membership revenue is recognized on a straight-line basis over the membership period. Subscription revenue is recognized on a straight-line basis over the subscription period.

 

Other: Other revenue consists of housing and other miscellaneous services. Other revenue is recognized over the period in which the applicable performance obligation is satisfied.

 

Customer contracts generally have separately stated prices for each performance obligation contained in the contract. Therefore, each performance obligation generally has its own standalone selling price. For higher education students, arrangements for payment are agreed to prior to registration of the student’s first academic term. The majority of U.S. students obtain Title IV or other financial aid resulting in institutions receiving a significant amount of the transaction price at the beginning of the academic term. Students utilizing private funding or funding through Adtalem’s institutional loan program (see “Note 6: Financing Receivables” for further discussion) generally pay during or after the academic term is complete. For non-higher education customers, payment is typically due and collected at the time a customer places an order.

 

Transaction Price

 

Revenue, or transaction price, is measured as the amount of consideration expected to be received in exchange for transferring goods or services.

 

For higher education, students may receive discounts, scholarships or refunds, which gives rise to variable consideration. The amounts of discounts or scholarships are applied to individual student accounts when such amounts are awarded. Therefore, the transaction price is reduced directly by these discounts or scholarships from the amount of the standard tuition rate charged. Upon withdrawal, a student may be eligible to receive a refund, or partial refund, the amount of which is dependent on the timing of the withdrawal during the academic term. If a student withdraws prior to completing an academic term, federal and state regulations and accreditation criteria permit Adtalem to retain only a set percentage of the total tuition received from such student, which varies with, but generally equals or exceeds, the percentage of the academic term completed by such student. Payment amounts received by Adtalem in excess of such set percentages of tuition are refunded to the student or the appropriate funding source. For contracts with similar characteristics and historical data on refunds, the expected value method is applied in determining the variable consideration related to refunds. Estimates of Adtalem’s expected refunds are determined at the outset of each academic term, based upon actual refunds in previous academic terms. Reserves related to refunds are presented as refund liabilities within Accrued Liabilities on the Consolidated Balance Sheets. All refunds are netted against revenue during the applicable academic term.

 

Management reassesses collectability throughout the period revenue is recognized by the Adtalem institutions, on a student-by-student basis. This reassessment is based upon new information and changes in facts and circumstances relevant to a student’s ability to pay. Management also reassesses collectability when a student withdraws from the institution and has unpaid tuition charges. Such unpaid charges do not meet the threshold of reasonably collectible and are recognized as revenue on a cash basis.

 

13 

 

 

For test preparation and other Professional Education products, the transaction price is equal to the amount charged to the customer, which is the standard rate, less any discounts and an estimate for returns or refunds.

 

We believe it is not probable that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is subsequently resolved. Therefore, the estimate of variable consideration is not constrained.

 

Contract Balances

 

For higher education institutions, students are billed at the beginning of each academic term and payment is due at that time. Adtalem’s performance obligation is to provide educational services in the form of instruction during the academic term. As instruction is provided, deferred revenue is reduced. A significant portion of student payments are from Title IV financial aid and other programs and are generally received during the first month of the respective academic term. For students utilizing Adtalem’s institutional loan program (see “Note 6: Financing Receivables”), payments are generally received after the academic term, and the corresponding performance obligation, is complete. When payments are received, accounts receivable is reduced.

 

For our Professional Education businesses, customers are billed and payment is due at the time of order placement. In most cases, performance obligations are delivered subsequent to payments received. Delivering our performance obligations reduces deferred revenue, and accounts receivable is reduced upon payments received. Becker offers an 18-month term loan program as a financing option for the Becker CPA Exam Review Course (see “Note 6: Financing Receivables”). In this case, payment is received after satisfying the performance obligation.

 

Revenue of $95.1 million was recognized during the first six months of fiscal year 2019 that was included in the deferred revenue balance at the beginning of fiscal year 2019. Revenue recognized from performance obligations that were satisfied, or partially satisfied, in prior periods was not material.

 

The difference between the opening and closing balances of deferred revenue includes decreases from revenue recognized during the period and increases from charges and payments received related to the start of academic terms beginning during the period.

 

Allowance for bad debts as of December 31, 2018, June 30, 2018 and December 31, 2017 was $19.5 million, $27.6 million and $26.8 million, respectively.

 

Practical Expedients

 

As our performance obligations have an original expected duration of one year or less, we have applied the practical expedient (as provided in ASC 606-10-50-14) to not disclose the information in ASC 606-10-50-13, which requires disclosure of the amount of the transaction price allocated to our performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period and when the entity expects to recognize this amount as revenue. All consideration from contracts with customers is included in the transaction price.

 

Internal-Use Software Development Costs

 

Adtalem capitalizes certain internal-use software development costs that are amortized using the straight-line method over the estimated lives of the software, not to exceed seven years. Capitalized costs include external direct costs of equipment, materials and services consumed in developing or obtaining internal-use software and payroll-related costs for employees directly associated with the internal-use software development project. Capitalization of such costs ceases at the point at which the project is substantially complete and ready for its intended purpose. Capitalized internal-use software development costs for projects not yet complete are included as Construction in Progress in the Land, Building and Equipment section of the Consolidated Balance Sheets. As of December 31, 2018, June 30, 2018 and December 31, 2017, the net balance of capitalized internal-use software development costs was $11.9 million, $13.5 million and $8.6 million, respectively.

 

14 

 

 

Impairment of Long-Lived Assets

 

Adtalem evaluates the carrying amount of its significant long-lived assets whenever changes in circumstances or events indicate that the value of such assets may not be fully recoverable. Events that may trigger an impairment analysis could include a decision by management to exit a market or a line of business or to consolidate operating locations. During the six months ended December 31, 2018, we recorded impairment charges of $2.0 million to write-down building, building improvements, furniture and equipment to zero based on the fair market value of the DeVry University and Carrington operations, which are classified within discontinued operations. During the first quarter of fiscal year 2018, the campuses of AUC and RUSM were damaged from Hurricanes Irma and Maria, respectively. Hurricane-related impairment charges of $19.0 million and $29.9 million were recorded in the three and six months ended December 31, 2017, respectively, for building, building improvements, furniture and equipment, along with receivables for insurance reimbursements of these amounts, less deductibles, of $20.8 million as of December 31, 2017. The impairment charges are included in Cost of Educational Services in the Consolidated Statements of Income (Loss). In the first quarter of fiscal year 2019, Adtalem announced its decision to relocate RUSM’s campus operations to Barbados and not return to RUSM’s Dominica campus. Adtalem recorded impairment charges of $2.3 million and $40.1 million in the three and six months ended December 31, 2018, respectively, to fully impair the land, buildings and equipment in Dominica as management has determined the market value less the costs to sell the facilities or move the equipment is zero (see “Note 10: Restructuring Charges”). The impairment charges are included in Restructuring Expense in the Consolidated Statements of Income (Loss). For a discussion of the impairment review of goodwill and intangible assets see “Note 9: Intangible Assets.”

 

Foreign Currency Translation

 

The financial position and results of operations of the AUC, RUSM and RUSVM Caribbean operations are measured using the U.S. dollar as the functional currency. As such, there is no translation gain or loss associated with these operations. Adtalem Brazil’s and EduPristine’s operations and Becker’s and ACAMS’s international operations are measured using the local currency as the functional currency. Assets and liabilities of these entities are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Income and expense items are translated at monthly average exchange rates. The resulting translation adjustments are included in the component of Shareholders’ Equity designated as Accumulated Other Comprehensive Loss. Transaction gains or losses during each of the three-month and six-month periods ended December 31, 2018 and 2017 were not material.

 

Noncontrolling Interest

 

Adtalem currently maintains a 97.9% ownership interest in Adtalem Brazil with the remaining 2.1% owned by members of the current Adtalem Brazil senior management group. In addition, Adtalem currently maintains a 69% ownership interest in EduPristine with the remaining 31% owned by Kaizen Management Advisors (“Kaizen”), an India-based private equity firm. The adjustment to increase or decrease the Adtalem Brazil and EduPristine noncontrolling interests each reporting period for their respective proportionate shares of Adtalem Brazil’s and EduPristine’s profit (loss) flows through the Consolidated Statements of Income (Loss) based on Adtalem’s noncontrolling interest accounting policy.

 

Since July 1, 2015, Adtalem has had the right to exercise a call option and purchase any remaining Adtalem Brazil stock from Adtalem Brazil management. Likewise, Adtalem Brazil management has had the right to exercise a put option and sell its remaining ownership interest in Adtalem Brazil to Adtalem.

 

Beginning on March 26, 2020, Adtalem will have the right to exercise a call option and purchase any remaining EduPristine stock from Kaizen. Likewise, Kaizen will have the right to exercise a put option and sell up to 33% of its remaining ownership interest in EduPristine to Adtalem. Beginning on March 26, 2022, Kaizen will have the right to exercise a put option and sell its remaining ownership interest in EduPristine to Adtalem.

 

Since the put options are out of the control of Adtalem, authoritative guidance requires the noncontrolling interests, which includes the value of the put options, to be displayed outside of the equity section of the Consolidated Balance Sheets.

 

The Adtalem Brazil management and Kaizen put options are being accreted to their respective redemption values in accordance with the terms of the related stock purchase agreements. The adjustments to increase or decrease the put options to their expected redemption values each reporting period are recorded in retained earnings in accordance with GAAP.

 

15 

 

 

The following is a reconciliation of the noncontrolling interest balance (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
Balance at Beginning of Period  $8,814   $6,566   $9,110   $6,285 
Net Income Attributable to Noncontrolling Interest   211    374    156    505 
Increase in Redemption Value of Noncontrolling Interest Put Options   (374)   465    (615)   615 
Balance at End of Period  $8,651   $7,405   $8,651   $7,405 

 

Earnings per Common Share

 

Basic earnings per share is computed by dividing net income or loss attributable to Adtalem by the weighted average number of common shares outstanding during the period plus unvested participating restricted stock units (“RSUs”). Diluted earnings per share is computed by dividing net income or loss attributable to Adtalem by the weighted average number of shares assuming dilution. As required by GAAP, because the three and six months ended December 31, 2017 resulted in a loss from continuing operations, diluted earnings per share was computed by dividing the net loss attributable to Adtalem by the weighted average number of basic shares. Diluted shares are computed using the Treasury Stock Method and reflect the additional shares that would be outstanding if dilutive stock-based grants were exercised during the period. Excluded from the computations of diluted earnings per share were outstanding stock-based grants representing 227,000 and 282,000 shares of common stock for the three and six months ended December 31, 2018, respectively, and 1,377,000 and 1,866,000 shares of common stock for the three and six months ended December 31, 2017, respectively. These outstanding stock-based grants were excluded because the exercise prices were greater than the average market price of the common shares or the assumed proceeds upon exercise under the Treasury Stock Method resulted in the repurchase of more shares than would be issued; thus, their effect would be anti-dilutive.

 

The following is a reconciliation of basic shares to diluted shares (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
Weighted Average Shares Outstanding   58,640    60,529    59,181    61,271 
Unvested Participating RSUs   545    705    575    738 
Basic Shares   59,185    61,234    59,756    62,009 
Effect of Dilutive Stock Options   815    789    842    696 
Diluted Shares   60,000    62,023    60,598    62,705 

 

Treasury Stock

 

Adtalem’s Board of Directors (the “Board”) has authorized share repurchase programs on eleven occasions (see “Note 7: Share Repurchase Programs”). The tenth share repurchase program was approved on February 16, 2017 and commenced in February 2017. The eleventh share repurchase program was approved on November 7, 2018 and will commence when the repurchases from the tenth share repurchase program are complete. Shares that are repurchased by Adtalem are recorded as Treasury Stock at cost and result in a reduction of Shareholders’ Equity.

 

From time to time, shares of our common stock are delivered back to Adtalem under a swap arrangement resulting from employees’ exercise of incentive stock options pursuant to the terms of the Adtalem Stock Incentive Plans (see “Note 4: Stock-Based Compensation”). In addition, shares of our common stock are delivered back to Adtalem for payment of withholding taxes from employees for vesting RSUs. These shares are recorded as Treasury Stock at cost and result in a reduction of Shareholders’ Equity.

 

Treasury shares are reissued on a monthly basis, at market value, to the Adtalem Colleague Stock Purchase Plan in exchange for employee payroll deductions. When treasury shares are reissued, Adtalem uses an average cost method to reduce the Treasury Stock balance. Gains on the difference between the average cost and the reissuance price are credited to Additional Paid-in Capital. Losses on the difference are charged to Additional Paid-in Capital to the extent that previous net gains from reissuance are included therein, otherwise such losses are charged to Retained Earnings.

 

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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 disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenue and expense reported during the period. Actual results could differ from those estimates.

 

Accumulated Other Comprehensive Loss

 

Accumulated Other Comprehensive Loss is composed of the change in cumulative translation adjustment, primarily at Adtalem Brazil, and unrealized gains on available-for-sale marketable securities, net of the effects of income taxes.

 

The Accumulated Other Comprehensive Loss balance as of December 31, 2018, consists of $143.5 million of cumulative translation losses ($140.3 million attributable to Adtalem and $3.2 million attributable to noncontrolling interest) and unrealized gains on available-for-sale debt securities were immaterial. As of June 30, 2018, this balance consisted of $142.6 million of cumulative translation losses ($139.6 million attributable to Adtalem and $3.0 million attributable to noncontrolling interest) and $0.4 million of unrealized gains on available-for-sale marketable securities, net of tax of $0.1 million and all attributable to Adtalem. As of December 31, 2017, this balance consisted of $61.1 million of cumulative translation losses ($59.8 million attributable to Adtalem and $1.3 million attributable to noncontrolling interest) and $0.4 million of unrealized gains on available-for-sale marketable securities, net of tax of $0.2 million and all attributable to Adtalem.

 

Advertising Expense

 

Advertising costs are recognized as expense in the period in which materials are purchased or services are performed. Advertising expense, which is included in Student Services and Administrative Expense in the Consolidated Statements of Income (Loss), was $21.3 million and $40.2 million for the three and six months ended December 31, 2018, respectively, and $17.2 million and $37.4 million for the three and six months ended December 31, 2017, respectively.

 

Hurricane Expense

 

In September 2017, Hurricanes Irma and Maria caused damage and disrupted operations at AUC and RUSM. Adtalem recorded expenses of $5.6 million and $12.5 million in the three and six months ended December 31, 2018, respectively, associated with incremental costs of teaching at alternative sites, and $30.3 million and $44.0 million in the three and six months ended December 31, 2017, respectively, associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental additional costs of teaching in alternate locations. Insurance proceeds of $5.6 million and $12.5 million were recorded in the three and six months ended December 31, 2018, respectively, and insurance receivables of $30.5 million and $39.8 million were recorded in the three and six months ended December 31, 2017, respectively, to offset these expenses. Based upon damage assessments of the AUC and RUSM facilities, impairment write-downs of buildings, building improvements, furniture and equipment of $19.0 million and $29.9 million were recorded in the three and six months ended December 31, 2017, respectively. Insurance receivables of $19.0 million and $20.8 million were recorded to offset these expenses in the three and six months ended December 31, 2017, respectively. No further asset impairments were recorded in fiscal year 2019. In total, no net expense related to the hurricanes was recorded in the three and six months ended December 31, 2018. In total, no net expense was recorded in the three months ended December 31, 2017 and $13.4 million of net expense was recorded in Cost of Educational Services in the Consolidated Statement of Income (Loss) for the six months ended December 31, 2017. The expense primarily represented the deductibles under insurance policies. During the second quarter of fiscal year 2019, Adtalem received the final insurance proceeds related to Hurricanes Irma and Maria and recorded a pre-tax gain of $15.6 million in the three and six months ended December 31, 2018.

 

Restructuring Charges

 

Adtalem’s financial statements include charges related to severance and related benefits for workforce reductions in staff. These charges also include early lease termination or cease-of-use costs, accelerated depreciation and losses on disposals of property and equipment related to campus and administrative office consolidations (see “Note 10: Restructuring Charges”). When estimating the costs of exiting lease space, estimates are made which could differ materially from actual results and result in additional restructuring charges or reversals in future periods.

 

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Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13: “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This guidance was issued to provide financial statement users with more decision-useful information about the expected losses on financial instruments by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses by requiring a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Management is evaluating the impact the guidance will have on Adtalem’s Consolidated Financial Statements.

 

In February 2016, FASB issued ASU No. 2016-02: “Leases (Topic 842).” This guidance was issued to increase transparency and comparability among organizations by recognizing right-to-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Adtalem will implement this guidance effective July 1, 2019. Management is evaluating the impact the guidance will have on Adtalem’s Consolidated Financial Statements and believes the adoption will impact the Consolidated Balance Sheet with significant increases in assets and liabilities.

 

In January 2016, FASB issued ASU No. 2016-01: “Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This guidance was issued to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The guidance eliminates the classification of equity securities into different categories (that is, trading or available-for-sale) and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. In the first quarter of fiscal year 2019, we retrospectively adopted this guidance. The adoption resulted in a cumulative adjustment to decrease retained earnings and increase additional paid-in capital, each by $0.4 million. This guidance requires Adtalem to record the changes in the fair value of its available-for-sale equity investments through net income, which is included within the Consolidated Statements of Income (Loss) beginning with the first quarter of fiscal year 2019.

 

In May 2014, FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606).” This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The guidance is effective for the fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We adopted this guidance effective July 1, 2018 using the full retrospective approach. The adoption of this standard did not have any impact on Adtalem’s Consolidated Financial Statements, and therefore, no adjustments were made to the prior year comparative financial statements. See subsection “Revenue Recognition” in “Note 3: Summary of Significant Accounting Policies” for the disclosures related to this new accounting standard.

 

Reclassifications

 

Beginning in the second quarter of fiscal year 2018, DeVry University operations were classified as discontinued operations. In addition, beginning in the fourth quarter of fiscal year 2018, Carrington operations were classified as discontinued operations. See “Note 2: Discontinued Operations” for further information. Prior period amounts have been revised to conform to the current classification. Certain expenses in prior periods previously allocated to DeVry University and Carrington within the U.S. Traditional Postsecondary segment have been reclassified to the Home Office and Other segment based on discontinued operation reporting guidance regarding allocation of corporate overhead. See “Note 14: Segment Information” for additional information.

 

In addition, we have reclassified certain amounts in the operating section of the Consolidated Statement of Cash Flows to conform to current period classification.

 

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NOTE 4: STOCK-BASED COMPENSATION

 

Adtalem maintains two stock-based incentive plans: the Amended and Restated Incentive Plan of 2005 and the Fourth Amended and Restated Incentive Plan of 2013. Under these plans, directors, key executives and managerial employees are eligible to receive incentive stock or nonqualified options to purchase shares of Adtalem’s common stock. The Fourth Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 also permit the granting of stock appreciation rights, RSUs, performance-based RSUs and other stock and cash-based compensation. Although options remain outstanding under the 2005 incentive plan, no further stock-based grants will be issued under this plan. The Fourth Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 are administered by the Compensation Committee of the Board. Options are granted for terms of up to ten years and can vest immediately or over periods of up to five years. The requisite service period is equal to the vesting period. The option price under the plans is the fair market value of the shares on the date of the grant.

 

Stock-based compensation expense is measured at the grant date based on the fair value of the award. Adtalem accounts for stock-based compensation granted to retirement eligible employees that fully vests upon an employee’s retirement under the non-substantive vesting period approach. Under this approach, the entire stock-based compensation expense is recognized at the grant date for stock-based grants issued to retirement eligible employees. For non-retirement eligible employees, stock-based compensation expense is recognized as expense over the employee requisite service period. We account for forfeitures of outstanding but unvested grants in the period they occur.

 

As of December 31, 2018, 7,389,850 authorized but unissued shares of common stock were reserved for issuance under Adtalem’s stock-based incentive plans.

 

The following is a summary of options activity for the six months ended December 31, 2018:

 

           Weighted     
       Weighted   Average   Aggregate 
       Average   Remaining   Intrinsic 
   Number of   Exercise   Contractual   Value 
   Options   Price   Life (in Years)   (in thousands) 
Outstanding at July 1, 2018   1,806,133   $32.88           
Granted   129,025    49.01           
Exercised   (404,510)   42.77           
Forfeited   -    -           
Expired   (18,367)   51.61           
Outstanding at December 31, 2018   1,512,281    31.39    7.13   $24,632 
Exercisable at December 31, 2018   594,769   $31.64    5.32   $9,646 

 

The total intrinsic value of options exercised for the six months ended December 31, 2018 and 2017 was $4.2 million and $2.3 million, respectively.

 

The fair value of Adtalem’s stock option awards was estimated using a binomial model. This model uses historical cancellation and exercise experience of Adtalem to determine the option value. It also takes into account the illiquid nature of employee options during the vesting period.

 

The weighted average estimated grant date fair value of options granted at market price under Adtalem’s stock-based incentive plans during the first six months of fiscal years 2019 and 2018 was $20.96 and $14.63, per share, respectively. The fair value of Adtalem’s stock option grants was estimated assuming the following weighted average assumptions:

 

   Fiscal Year 
   2019   2018 
Expected Life (in Years)   6.50    6.68 
Expected Volatility   39.60%   41.45%
Risk-free Interest Rate   2.73%   1.95%
Dividend Yield   0.00%   0.00%

 

The expected life of the options granted is based on the weighted average exercise life with age and salary adjustment factors from historical exercise behavior. Adtalem’s expected volatility is computed by combining and weighting the implied market volatility, the most recent volatility over the expected life of the option grant and Adtalem’s long-term historical volatility.

 

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If factors change and different assumptions are employed in the valuation of stock-based grants in future periods, the stock-based compensation expense that Adtalem records may differ significantly from what was recorded in previous periods.

 

During the first six months of fiscal year 2019, Adtalem granted 216,430 RSUs to selected employees and directors. Of these, 65,160 are performance-based RSUs and 151,270 are non-performance-based RSUs. Performance-based RSUs are earned by the recipients over a three-year period based on achievement of certain mission-based goals, academic goals, achievement of a minimum level of Adtalem’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), achievement of a minimum level of Adtalem’s return on invested capital (“ROIC”) or achievement of a minimum level of Adtalem’s free cash flow per share. Non-performance-based RSUs are subject to restrictions which lapse ratably over one, three or four-year periods on the grant anniversary date based on the recipient’s continued service on the Board, employment with Adtalem or upon retirement. During the restriction period, the recipient of the non-performance based RSUs has the right to receive dividend equivalents, if any. This right does not pertain to the performance-based RSUs. The following is a summary of RSU activity for the six months ended December 31, 2018:

 

       Weighted 
       Average 
   Number of   Grant Date 
   RSUs   Fair Value 
Outstanding at July 1, 2018   1,226,958   $28.31 
Granted   216,430    49.57 
Vested   (443,859)   27.81 
Forfeited   (70,385)   32.00 
Outstanding at December 31, 2018   929,144   $33.45 

 

The weighted average estimated grant date fair value of RSUs granted at market price under Adtalem’s stock-based incentive plans during the first six months of fiscal years 2019 and 2018 was $49.57 and $34.15, per share, respectively.

 

The following table shows total stock-based compensation expense included in the Consolidated Statements of Income (Loss) (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
Cost of Educational Services  $302   $1,214   $696   $2,634 
Student Services and Administrative Expense   2,922    2,581    6,664    5,598 
Restructuring Expense   -    -    -    548 
    3,224    3,795    7,360    8,780 
Income Tax Benefit   (1,231)   (1,667)   (3,238)   (4,101)
Net Stock-Based Compensation Expense  $1,993   $2,128   $4,122   $4,679 

 

As of December 31, 2018, $24.9 million of total pre-tax unrecognized stock-based compensation expense related to unvested grants is expected to be recognized over a weighted average period of 2.4 years. The total fair value of options and RSUs vested during the six months ended December 31, 2018 and 2017 was approximately $13.5 million and $14.2 million, respectively.

 

There was no capitalized stock-based compensation cost at each of December 31, 2018, June 30, 2018 and December 31, 2017.

 

Adtalem has an established practice of issuing new shares of common stock to satisfy stock-based grant exercises. However, Adtalem also may issue treasury shares to satisfy stock-based grant exercises under certain of its stock-based incentive plans.

 

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NOTE 5: 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 – 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 some cases where market prices are not available, Adtalem makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates and yield curves. These measurements are classified within Level 3.

 

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

 

Assets measured at fair value on a nonrecurring basis include goodwill and indefinite-lived intangibles arising from a business combination. These assets are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed annually for impairment or more frequently if circumstances arise indicating potential impairment. This impairment review was most recently completed as of May 31, 2018. See “Note 9: Intangible Assets” for further discussion on the impairment review including valuation techniques and assumptions.

 

The following table presents Adtalem's assets and liabilities at December 31, 2018, that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):

 

   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $294,801   $-   $- 
Marketable Securities and Investments   7,269    -    - 
Institutional Loans Receivable, Net   -    42,146    - 

Loan Receivable from DeVry University

   -    10,000    - 
Deferred Acquisition Obligations   -    18,485    - 
Total Financial Assets at Fair Value  $302,070   $70,631   $- 

  

The following table presents Adtalem's assets and liabilities at June 30, 2018, that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):

 

   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $430,690   $-   $- 
Marketable Securities and Investments   4,255    -    - 
Institutional Loans Receivable, Net   -    44,320    - 
Deferred Acquisition Obligations   -    18,585    - 
Total Financial Assets at Fair Value  $434,945   $62,905   $- 

 

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The following table presents Adtalem's assets and liabilities at December 31, 2017, that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):

 

   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $212,239   $-   $- 
Marketable Securities and Investments   4,268    -    - 
Institutional Loans Receivable, Net   -    38,311    - 
Deferred Acquisition Obligations   -    23,903    - 
FIES Receivable   -    16,087    - 
Total Financial Assets at Fair Value  $216,507   $78,301   $- 

 

Cash and Cash Equivalents and Investments in Marketable Securities are valued using a market approach based on quoted market prices of identical instruments.

 

The fair value of the institutional loans receivable included in Accounts Receivable, Net and Other Assets, Net on the Consolidated Balance Sheets as of December 31, 2018, June 30, 2018 and December 31, 2017 is estimated by discounting the future cash flows using current rates for similar arrangements. See “Note 6: Financing Receivables” for further discussion on these institutional loans receivable.

 

In connection with the completion of the sale of DeVry University, Adtalem loaned $10.0 million to DeVry University under the terms of the promissory note, dated December 11, 2018 (the “Note”). The Note bears interest at a rate of 4% per annum, payable annually in arrears, and has a maturity date of January 1, 2022. The fair value of the DeVry University loan receivable included in Other Assets, Net on the Consolidated Balance Sheet as of December 31, 2018 is estimated by discounting the future cash flows using current rates for similar arrangements.

 

The fair value of the deferred acquisition obligations is estimated by discounting the future cash flows using current rates for similar arrangements. $4.3 million, $4.3 million and $4.0 million were classified as Accrued Liabilities on the Consolidated Balance Sheets at December 31, 2018, June 30, 2018 and December 31, 2017, respectively, and $14.2 million, $14.3 million and $19.9 million were classified as Other Liabilities on the Consolidated Balance Sheets at December 31, 2018, June 30, 2018 and December 31, 2017, respectively.

 

The fair value of Adtalem Brazil’s receivable under Brazil’s “Fundo de Financiamento Estudantil” or “Students Financing Fund” (“FIES”) public loan program included in Accounts Receivable, Net on the Consolidated Balance Sheet as of December 31, 2017 is estimated by discounting the future cash flows using published market data on Brazilian interest and inflation rates.

 

As of December 31, 2018, June 30, 2018 and December 31, 2017, there were no assets or liabilities measured at fair value using Level 3 inputs.

 

NOTE 6: FINANCING RECEIVABLES

 

Adtalem’s institutional loan programs are available to students at Chamberlain, AUC, RUSM and RUSVM. These loan programs are designed to assist students who are unable to completely cover educational costs consisting of tuition, books and fees and are available only after all other student financial assistance has been applied toward those purposes. In addition, AUC, RUSM and RUSVM loans may be used for students’ living expenses. Repayment plans for institutional loan program balances are developed to address the financial circumstances of the particular student. Interest charges at rates from 3.76% to 12.0% per annum accrue each month on the unpaid balance. Students are required to begin repaying their loans while they are still in school with a minimum payment level designed to demonstrate their capability to repay, reduce the possibility of over borrowing and to minimize interest being accrued on the loan balance. Payments may increase upon completing or departing the program. After a student leaves school, the student typically will have a monthly installment repayment plan. In addition, the Becker CPA Exam Review Course can be financed through Becker with an 18-month term loan program.

 

Reserves for uncollectible loans are determined by analyzing the current aging of institutional loans and historical loss rates of loans at each institution. Management performs this analysis periodically throughout the year. Loans are considered nonperforming and are fully reserved if they are more than 90 days past due. Since all of Adtalem’s financing receivables are generated through the extension of credit to fund educational costs, all such receivables are considered part of the same loan portfolio.

 

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The following table details the institutional loan balances along with the related allowances for credit losses (in thousands).

 

   December 31, 2018   June 30, 2018   December 31, 2017 
Gross Institutional Loans       $46,633        $54,323        $49,523 
Allowance for Credit Losses:                              
Balance at July 1  $(10,003)       $(9,736)       $(9,736)     
Charge-offs and Adjustments   8,570         330         146      
Recoveries   (53)        (61)        (40)     
Additional Provision   (3,001)        (536)        (1,582)     
Balance at End of Period        (4,487)        (10,003)        (11,212)
Net Institutional Loans       $42,146        $44,320        $38,311 

 

Of the net balances above, $12.8 million, $21.2 million and $18.2 million was classified as Accounts Receivable, Net on the Consolidated Balance Sheets at December 31, 2018, June 30, 2018 and December 31, 2017, respectively, and $29.3 million, $23.1 million and $20.1 million, representing amounts due beyond one year, was classified as Other Assets, Net on the Consolidated Balance Sheets at December 31, 2018, June 30, 2018 and December 31, 2017, respectively.

 

The following tables detail the credit risk profiles of the institutional loan balances based on payment activity and an aging of past due institutional loans (in thousands):

 

   December 31,   June 30,   December 31, 
   2018   2018   2017 
Institutional Loans:               
Performing  $42,297   $44,492   $38,496 
Nonperforming   4,336    9,831    11,027 
Total Institutional Loans  $46,633   $54,323   $49,523 

 

   1-29 Days
Past Due
   30-59
Days Past
Due
   60-89
Days Past
Due
   Greater
Than 90
Days Past
Due
   Total
Past Due
   Current   Total
Institutional
Loans
 
Institutional Loans:                                   
December 31, 2018  $5,535   $963   $308   $4,336   $11,142   $35,491   $46,633 
June 30, 2018  $8,473   $900   $3,099   $9,831   $22,303   $32,020   $54,323 
December 31, 2017  $7,254   $463   $715   $11,027   $19,459   $30,064   $49,523 

 

NOTE 7: SHARE REPURCHASE PROGRAMS

 

Adtalem has repurchased shares under the following programs as of December 31, 2018:

 

Date  Shares   Total Cost 
Authorized  Repurchased   (in millions) 
November 15, 2006   908,399   $35.0 
May 13, 2008   1,027,417    50.0 
November 11, 2009   972,205    50.0 
August 11, 2010   1,103,628    50.0 
November 10, 2010   968,105    50.0 
May 20, 2011   2,396,143    100.0 
November 2, 2011   3,478,299    100.0 
August 29, 2012   2,005,317    62.7 
December 15, 2015   1,672,250    36.6 
February 16, 2017   6,695,592    281.0 
Totals   21,227,355   $815.3 

 

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On February 16, 2017, the Board authorized Adtalem’s tenth share repurchase program, which allows Adtalem to repurchase up to $300 million of its common stock through December 31, 2020. A total of 2,365,451 shares were repurchased during the six months ended December 31, 2018 under the tenth share repurchase program for an aggregate of $115.9 million. On November 7, 2018, the Board authorized Adtalem’s eleventh share repurchase program, which allows Adtalem to repurchase up to $300 million of its common stock through December 31, 2021. The new program will commence when the repurchases from the current program are complete. The timing and amount of any repurchase will be determined based on evaluation of market conditions and other factors. These repurchases may be made through the open market, including block purchases, in privately negotiated transactions, or otherwise. The buyback will be funded through available cash balances and/or borrowings and may be suspended or discontinued at any time.

 

Shares of stock repurchased under the programs are held as treasury shares. These repurchased shares have reduced the weighted average number of shares of common stock outstanding for basic and diluted earnings per share calculations.

 

NOTE 8: BUSINESS COMBINATIONS

 

EduPristine

 

On February 5, 2018, Adtalem completed the acquisition of a majority interest in EduPristine. Under the terms of the agreement, Adtalem agreed to pay approximately $3.2 million in cash, in exchange for stock of EduPristine, increasing Adtalem’s ownership share from 36% to 64%. This ownership percentage was increased to 69% with an additional equity investment of $1.3 million in March 2018. The payments for these additional investments were made in the third quarter of fiscal year 2018. EduPristine is a professional education provider in India in the areas of finance, accounting, analytics, marketing and healthcare. The acquisition furthers Adtalem’s global growth strategy into professional education.

 

The operations of EduPristine are included in Adtalem’s Professional Education segment. Prior to the February 5, 2018 investment, Adtalem accounted for its ownership interest in EduPristine under the equity method of accounting for investments. The results of EduPristine’s operations have been fully consolidated in the Consolidated Financial Statements of Adtalem since the February 5, 2018 acquisition date. The fair value of Adtalem’s equity investment immediately prior to the majority interest investment was $4.1 million, which was based on a discounted cash flow analysis. The $4.1 million noncontrolling interest recorded on the acquisition date was also derived using the same discounted cash flow analysis. In the third quarter of fiscal year 2018, Adtalem recorded a $1.2 million gain on its previous equity investment.

 

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition of Adtalem’s majority interest in EduPristine (in thousands):

 

   February 5,
2018
 
Current Assets  $866 
Property and Equipment   239 
Other Long-term Assets   69 
Intangible Assets   1,380 
Goodwill   11,527 
Total Assets Acquired   14,081 
Liabilities Assumed   2,715 
Net Assets Acquired  $11,366 

 

Goodwill, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, was assigned to the Professional Education reporting unit and reporting segment. Factors that contributed to a purchase price resulting in the recognition of goodwill include EduPristine’s strategic fit into Adtalem’s expanding presence in professional education and the acquired assembled workforce. None of the goodwill acquired is expected to be deductible for income tax purposes. The $1.4 million of acquired intangible assets was assigned to Trade Names. None of the acquired intangible assets were determined to be subject to amortization.

 

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There is no pro forma presentation of operating results for this acquisition due to the insignificant effect on consolidated operations.

 

São Judas Tadeu

 

On November 1, 2017, Adtalem Brazil completed the acquisition of São Judas Tadeu (“SJT”). Under the terms of the agreement, Adtalem Brazil agreed to pay approximately $6.0 million in cash, in exchange for 100% of the stock of SJT. Approximately $1.0 million of payments were made in the second quarter of fiscal year 2018, with additional aggregate payments of approximately $5.0 million required over the succeeding four years. Located in São Paulo, SJT offers medical doctor specialty test preparation and currently serves approximately 2,700 students. The acquisition of SJT adds a new product offering to Adtalem Brazil’s test preparation business.

 

The operations of SJT are included in Adtalem’s Technology and Business segment. The results of SJT’s operations have been included in the Consolidated Financial Statements of Adtalem since the date of acquisition.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

   November 1, 2017 
Current Assets  $558 
Property and Equipment   64 
Other Long-term Assets   9 
Intangible Assets   381 
Goodwill   5,636 
Total Assets Acquired   6,648 
Liabilities Assumed   684 
Net Assets Acquired  $5,964 

 

Goodwill, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, was assigned to the Adtalem Brazil reporting unit, which is classified within the Technology and Business segment. Factors that contributed to a purchase price resulting in the recognition of goodwill include SJT’s strategic fit into Adtalem’s expanding presence in test preparation and the acquired assembled workforce. Of the $0.4 million of acquired intangible assets, $0.2 million was assigned to Trade Names, which has been determined not to be subject to amortization. The remaining acquired intangible asset was determined to be subject to amortization with a useful life of approximately six months. The value and estimated useful life by asset type is as follows (in thousands):

 

   November 1, 2017 
   Value
Assigned
   Estimated
Useful Life
 
Student Relationships  $162    6 months 

 

There is no pro forma presentation of operating results for this acquisition due to the insignificant effect on consolidated operations.

 

NOTE 9: INTANGIBLE ASSETS

 

Intangible assets relate mainly to acquired business operations. These assets consist of the acquisition fair value of certain identifiable intangible assets acquired and goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.

 

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Intangible assets consist of the following (in thousands):

 

   December 31, 2018    
   Gross
Carrying
Amount
   Accumulated
Amortization
  

Weighted Average
Amortization

Period

Amortizable Intangible Assets:             
Student Relationships  $8,039   $(7,352)  5 Years
Customer Relationships   42,900    (11,913)  10 Years
Curriculum/Software   6,829    (5,279)  4 Years
Franchise Contracts   9,044    (1,968)  18 Years
Clinical Agreements   335    (123)  15 Years
Trade Names   975    (951)  10 Years
Proprietary Technology   500    (312)  4 Years
Total  $68,622   $(27,898)   
Indefinite-Lived Intangible Assets:             
Trade Names  $106,049         
Ross Title IV Eligibility and Accreditations   14,100         
Intellectual Property   13,940         
Chamberlain Title IV Eligibility and Accreditations   1,200         
AUC Title IV Eligibility and Accreditations   100,000         
Adtalem Brazil Accreditation   82,402         
Total  $317,691         

 

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   June 30, 2018 
   Gross
Carrying
Amount
   Accumulated
Amortization
 
Amortizable Intangible Assets:          
Student Relationships  $8,193   $(6,972)
Customer Relationships   42,900    (9,598)
Non-compete Agreements   700    (700)
Curriculum/Software   6,833    (4,265)
Franchise Contracts   9,064    (1,720)
Clinical Agreements   336    (112)
Trade Names   976    (904)
Proprietary Technology   500    (250)
Total  $69,502   $(24,521)
Indefinite-Lived Intangible Assets:          
Trade Names  $106,132      
Ross Title IV Eligibility and Accreditations   14,100      
Intellectual Property   13,940      
Chamberlain Title IV Eligibility and Accreditations   1,200      
AUC Title IV Eligibility and Accreditations   100,000      
Adtalem Brazil Accreditation   82,578      
Total  $317,950      

  

   December 31, 2017 
   Gross
Carrying
Amount
   Accumulated
Amortization
 
Amortizable Intangible Assets:          
Student Relationships  $11,049   $(8,999)
Customer Relationships   42,900    (7,261)
Non-compete Agreements   700    (682)
Curriculum/Software   7,143    (3,375)
Franchise Contracts   10,597    (1,717)
Clinical Agreements   392    (118)
Trade Names   1,143    (1,000)
Proprietary Technology   500    (187)
Total  $74,424   $(23,339)
Indefinite-Lived Intangible Assets:          
Trade Names  $109,462      
Ross Title IV Eligibility and Accreditations   14,100      
Intellectual Property   13,940      
Chamberlain Title IV Eligibility and Accreditations   1,200      
AUC Title IV Eligibility and Accreditations   100,000      
Adtalem Brazil Accreditation   97,013      
Total  $335,715      

 

Amortization expense for amortized intangible assets was $2.1 million and $4.2 million for the three and six months ended December 31, 2018, respectively, and $2.5 million and $5.0 million for the three and six months ended December 31, 2017, respectively. Estimated amortization expense for amortizable intangible assets for the next five fiscal years ending June 30 and in the aggregate, by reporting unit, is as follows (in thousands):

 

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   Professional   Adtalem     
Fiscal Year  Education   Brazil   Total 
2019 (excluding the six months ended December 31, 2018)  $3,211   $712   $3,923 
2020   4,671    1,246    5,917 
2021   4,440    774    5,214 
2022   4,300    525    4,825 
2023   4,119    525    4,644 
Thereafter   11,268    4,933    16,201 

 

All amortizable intangible assets except student relationships and customer relationships are being amortized on a straight-line basis. The amount being amortized for student relationships is based on the estimated progression of the students through the respective Damásio Educacional (“Damasio”) and Grupo Ibmec Educacional S.A. (“Grupo Ibmec”) programs, giving consideration to the revenue and cash flow associated with both existing students and new applicants. The amount being amortized for customer relationships related to ACAMS is based on the estimated retention of the customers, giving consideration to the revenue and cash flow associated with these existing customers.

 

Indefinite-lived intangible assets related to trade names, Title IV eligibility, accreditations and intellectual property are not amortized, as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity.

 

In accordance with GAAP, goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, these assets must be reviewed annually for impairment or more frequently if circumstances arise indicating potential impairment. Adtalem’s annual impairment review was most recently completed as of May 31, 2018, at which time, there was no impairment loss associated with recorded goodwill or indefinite-lived intangible assets for any reporting unit.

 

Adtalem has five reporting units that contained goodwill as of the second quarter of fiscal year 2019. These reporting units constitute components for which discrete financial information is available and regularly reviewed by segment management. If the carrying amount of a reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss to goodwill is recognized. In analyzing the results of operations and business conditions of all the reporting units, as of December 31, 2018, it was determined that no triggering event had occurred that would indicate the carrying value of a reporting unit had exceeded its fair value.

 

Adtalem has five reporting units that contained indefinite-lived intangible assets as of the second quarter of fiscal year 2019. For indefinite-lived intangible assets, management first analyzes qualitative factors including results of operations and business conditions of the five reporting units that contained indefinite-lived intangible assets, significant changes in cash flows at the individual indefinite-lived intangible asset level, if applicable, as well as how much previously calculated fair values exceed carrying values to determine if it is more likely than not that the intangible assets associated with these reporting units have been impaired.

 

Management does not believe the effects of Hurricanes Irma and Maria created a triggering event that would require an impairment analysis of AUC’s or RUSM’s indefinite-lived intangible assets and goodwill. Damage to physical property was repaired with the majority of costs reimbursed by insurance proceeds. The September 2017 semesters at both institutions were completed with minimal lost students and revenue and commencement of future semesters was not impacted. Management believes it is probable that the response to the crises and the institutions’ ability to continue providing educational services demonstrates AUC’s and RUSM’s capacity to generate future revenue and operating results sufficient to maintain fair values of these assets in excess of their carrying values.

 

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 no impairment indicators as of the end of fiscal year 2018, and that no interim events or deviations from planned operating results occurred as of December 31, 2018, that would cause management to reassess these conclusions.

 

On August 3, 2018, Adtalem announced plans to relocate RUSM to Barbados from its temporary locations in Knoxville, Tennessee at facilities owned by Lincoln Memorial University (“LMU”) and at a facility on St Kitts. Management believes the values of RUSM’s goodwill and indefinite-lived intangible assets are not affected by this move. The Trade Name will continue to be used and the U.S. Department of Education (“ED”) has provided approval for RUSM to operate in Barbados. No new accreditation is necessary, as RUSM’s secondary accreditor, the Caribbean Accreditation Authority for Education in Medicine and other Health Professions (“CAAM-HP”), is now its primary accreditor as of the start of the January 2019 semester. CAAM-HP is authorized by the government of Barbados to accredit medical programs.

 

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Determining the fair value of a reporting unit or an intangible asset involves the use of significant estimates and assumptions. Management bases its fair value estimates on assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates, which could lead to additional impairments of intangible assets or goodwill.

 

As of December 31, 2018, intangible assets from business combinations totaled $358.4 million and goodwill totaled $813.2 million. Together, these assets equaled 55% of total assets as of such date, and any impairment could significantly affect future results of operations.

 

The table below summarizes goodwill balances by reporting unit (in thousands):

 

   December 31,   June 30,   December 31, 
Reporting Unit  2018   2018   2017 
Chamberlain  $4,716   $4,716   $4,716 
AUC   68,321    68,321    68,321 
RUSM and RUSVM   237,173    237,173    237,173 
Professional Education   317,384    317,699    306,808 
Adtalem Brazil   185,582    185,978    215,925 
Total  $813,176   $813,887   $832,943 

  

The table below summarizes goodwill balances by reporting segment (in thousands):

 

   December 31,   June 30,   December 31, 
Reporting Segment  2018   2018   2017 
Medical and Healthcare  $310,210   $310,210   $310,210 
Professional Education   317,384    317,699    306,808 
Technology and Business   185,582    185,978    215,925 
Total  $813,176   $813,887   $832,943 

 

The table below summarizes the changes in goodwill balances by reporting segment (in thousands):

 

   Medical and
Healthcare
   Professional
Education
  

Technology

and Business

   Total 
Balance at June 30, 2017   310,210    306,653    212,223    829,086 
Acquisitions   -    -    4,121    4,121 
Foreign exchange rate changes   -    155    (419)   (264)
Balance at December 31, 2017   310,210    306,808    215,925    832,943 
Acquisitions   -    11,527    -    11,527 
Purchase accounting adjustments   -    -    1,515    1,515 
Foreign exchange rate changes   -    (636)   (31,462)   (32,098)
Balance at June 30, 2018   310,210    317,699    185,978    813,887 
Foreign exchange rate changes   -    (315)   (396)   (711)
Balance at December 31, 2018  $310,210   $317,384   $185,582   $813,176 

 

The decrease in the goodwill balance from June 30, 2018 in the Professional Education segment is the result of a change in the value of the British Sterling Pound and Indian Rupee compared to the U.S. dollar. Since Becker’s European subsidiary’s and EduPristine’s goodwill is recorded in local currency, fluctuations in the values of the British Sterling Pound and Indian Rupee in relation to the U.S. dollar will cause changes in the balance of this asset. The decrease in the goodwill balance from June 30, 2018 in the Technology and Business segment is the result of a change in the value of the Brazilian Real compared to the U.S. dollar. Since Adtalem Brazil goodwill is recorded in local currency, fluctuations in the value of the Brazilian Real in relation to the U.S. dollar will cause changes in the balance of this asset.

 

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The table below summarizes the indefinite-lived intangible asset balances by reporting segment (in thousands):

 

   December 31,   June 30,   December 31, 
Reporting Segment  2018   2018   2017 
Medical and Healthcare  $137,500   $137,500   $137,500 
Professional Education   69,105    69,126    67,812 
Technology and Business   111,086    111,324    130,403 
Total  $317,691   $317,950   $335,715 

 

Total indefinite-lived intangible assets decreased by $0.3 million from June 30, 2018. The decrease is the result of a change in the value of the Brazilian Real as compared to the U.S. dollar. Since Adtalem Brazil intangible assets are recorded in local currency, fluctuations in the value of the Brazilian Real in relation to the U.S. dollar will cause changes in the balance of these assets.

 

NOTE 10: RESTRUCTURING CHARGES

 

During the second quarter and first six months of fiscal year 2019, Adtalem recorded restructuring charges primarily related to the impairment of the land, buildings and equipment at the Dominica campus of RUSM and severance related to workforce reductions in Dominica. On August 3, 2018, management announced its decision to relocate RUSM’s campus operations to Barbados and not return to Dominica. The land, buildings and equipment in Dominica have been fully impaired as management has determined the market value less the costs to sell the facilities or move the equipment is zero (see “Note 3: Summary of Significant Accounting Policies”). In addition, during the second quarter and first six months of fiscal year 2019, Adtalem recorded restructuring charges primarily related to real estate consolidations at Adtalem’s home office. During the second quarter and first six months of fiscal year 2018, Adtalem recorded restructuring charges primarily related to workforce reductions and real estate consolidations at Adtalem’s home office. When estimating costs of exiting lease space, estimates are made which could differ materially from actual results and result in additional restructuring charges or reversals in future periods. Termination benefit charges, as a result of reducing Adtalem’s workforce by 201 and 40 positions in the first six months of fiscal year 2019 and 2018, respectively, represented severance pay and benefits for these employees. Adtalem’s home office is classified as “Home Office and Other” in “Note 14: Segment Information.” Pre-tax restructuring charges by segment were as follows (in thousands):

 

   Three Months Ended December 31, 2018   Six Months Ended December 31, 2018 
  

Real Estate

and Other

  

Termination

Benefits

   Total  

Real Estate

and Other

  

Termination

Benefits

   Total 
Medical and Healthcare  $2,389   $56   $2,445   $40,143   $1,317   $41,460 
Technology and Business   110    -    110    185    -    185 
Home Office and Other   968    122    1,090    1,477    71    1,548 
Total  $3,467   $178   $3,645   $41,805   $1,388   $43,193 

 

   Three Months Ended December 31, 2017   Six Months Ended December 31, 2017 
  

Real Estate

and Other

  

Termination

Benefits

   Total  

Real Estate

and Other

  

Termination

Benefits

   Total 
Medical and Healthcare  $-   $-   $-   $26   $86   $112 
Home Office and Other   160    1,266    1,426    (465)   2,916    2,451 
Total  $160   $1,266   $1,426   $(439)  $3,002   $2,563 

 

The following table summarizes the separation and restructuring plan activity for the fiscal years 2019 and 2018, for which cash payments are required (in thousands):

 

Liability balance at June 30, 2017  $46,115 
Increase in liability (separation and other charges)   19,893 
Reduction in liability (payments and adjustments)   (27,081)
Liability balance at June 30, 2018   38,927 
Increase in liability (separation and other charges)   2,797 
Reduction in liability (payments and adjustments)   (13,557)
Liability balance at December 31, 2018  $28,167 

 

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Of this liability balance, $9.0 million is recorded as Accrued Liabilities and $19.2 million is recorded as Other Liabilities on the Consolidated Balance Sheet as of December 31, 2018. These liability balances primarily represent rent accruals and costs for employees who have either not yet separated from Adtalem or for whom full severance has not yet been paid. All of these remaining costs are expected to be paid out for periods of up to 7 years.

 

NOTE 11: INCOME TAXES

 

The effective tax rate on income from continuing operations was 20.0% in the second quarter and 19.1% in the first six months of fiscal year 2019, compared to 202.0% on income from continuing operations in the second quarter and 141.2% in the first six months of fiscal year 2018. Tax expense in the second quarter of fiscal year 2019 included a special item related to one-time impacts from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) and various impacts due to the sale of DeVry University. The effective tax rates on income from continuing operations excluding tax expense related to special items were 17.7% in the second quarter and 16.5% in the first six months of fiscal year 2019. Also, tax expense in the second quarter of fiscal year 2018 included a special item of $101.2 million related to the Tax Act. The effective tax rates on income from continuing operations excluding special items were 15.6% in the second quarter and 15.0% in the first six months of fiscal year 2018. This increase in fiscal year 2019 primarily reflects a lower U.S. tax rate resulting from the Tax Act offset by higher additional expense from provisions of the Tax Act that were effective beginning in fiscal year 2019 and a decrease in the percentage of earnings from foreign operations, which are taxed at lower rates than domestic earnings. The provisions from the Tax Act impacting fiscal year 2019 include a tax on global intangible low-taxed income (“GILTI”), a deduction for foreign derived intangible income (“FDII”), a limitation of certain executive compensation, and the repeal of the domestic production activity deduction. We have elected to account for GILTI as a period cost. The effective tax rate includes estimates of these new provisions. Our estimates may be revised in future periods as we obtain additional data and any new regulations or guidance is released.

 

Four of Adtalem’s operating units, AUC, which operates in St. Maarten, RUSM, which operated in Dominica, RUSVM, which operates in St. Kitts, and Adtalem Brazil, which operates in Brazil, all benefit from local tax incentives. AUC’s effective tax rate reflects benefits derived from investment incentives. RUSM and RUSVM each have agreements with their respective domestic governments that exempt them from local income taxation. Both of these agreements have been extended to provide, in the case of RUSM, an indefinite period of exemption and, in the case of RUSVM, exemption until 2037. On August 3, 2018, Adtalem announced plans to permanently relocate RUSM from Dominica to Barbados. RUSM has negotiated an agreement with the Barbados government that exempts it from local income taxation until 2039. Adtalem Brazil’s effective tax rate reflects benefits derived from its participation in “Programa Universidade para Todos” or “University for All Program” (“PROUNI”), a Brazilian program for providing scholarships to a portion of its undergraduate students.

 

Adtalem has completed its accounting for the tax effects of the enactment of the Tax Act. The SEC has issued rules that allowed for a measurement period of up to one year after the enactment date of the legislation to finalize the recording of the related tax impacts. As that period has now ended, we have finalized the calculations of the Tax Act’s impacts previously recorded in the second and fourth quarters of fiscal year 2018 with an immaterial adjustment in the second quarter of fiscal year 2019.

 

NOTE 12: DEBT

 

Long-term debt consists of the following (in thousands):

 

   December 31,   June 30,   December 31, 
   2018   2018   2017 
Total Debt:               
Term B Loan  $298,500   $300,000   $- 
Revolver   -    -    165,000 
Total Principal Payments Due   298,500    300,000    165,000 
Deferred Debt Issuance Costs   (6,416)   (6,927)   - 
Total Amount Outstanding   292,084    293,073    165,000 
Less Current Portion:               
Term B Loan   (3,000)   (3,000)   - 
Noncurrent Portion  $289,084   $290,073   $165,000 

 

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Scheduled future maturities of long-term debt for the next five fiscal years ending June 30 and in the aggregate are as follows (in thousands):

 

Fiscal Year  Maturity
Payments
 
2019 (excluding the six months ended December 31, 2018)  $1,500 
2020   3,000 
2021   3,000 
2022   3,000 
2023   3,000 
Thereafter   285,000 
   $298,500 

 

Prior Credit Facility

 

Adtalem entered into a revolving credit facility on March 31, 2015, which was set to expire on March 31, 2020 (“Prior Credit Facility”). The Prior Credit Facility provided for a multi-currency revolving credit facility in the amount of $400 million and $100 million available for letters of credit. As of December 31, 2017, Adtalem’s borrowings under the Prior Credit Facility were $165 million with a weighted average interest rate of 3.42%.

 

Senior Secured Credit Facilities

 

On April 13, 2018, Adtalem replaced the Prior Credit Facility with new credit facilities under a new Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (1) a $300 million revolving facility (“Revolver”) with a maturity date of April 13, 2023, and (2) a $300 million senior secured Term B loan (“Term B Loan”) with a maturity date of April 13, 2025. We refer to the Revolver and Term B Loan collectively as the “Credit Facility.” The Revolver has availability for currencies other than U.S. dollars of up to $200 million and $100 million available for letters of credit. Subject to certain conditions set forth in the Credit Agreement, the Credit Facility may be increased by $250 million.

 

Term B Loan

 

For Eurocurrency Rate Loans, Term B Loan interest is equal to LIBOR or a LIBOR-equivalent rate plus 3%. For Base Rate Loans, Term B Loan interest is equal to the base rate plus 2%. The Term B Loan amortizes in equal quarterly installments of $750,000, with the balance due at maturity on April 13, 2025. As of December 31, 2018, the interest rate for borrowings under the Term B Loan facility was 5.52%, which approximated the effective interest rate.

 

Revolver

 

Revolver interest is equal to LIBOR or a LIBOR-equivalent rate for Eurocurrency Rate Loans or a base rate, plus an applicable rate based on Adtalem’s consolidated leverage ratio, as defined in the Credit Agreement. The applicable rate ranges from 1.75% to 2.75% for Eurocurrency Rate Loans and from 0.75% to 1.75% for Base Rate Loans.

 

Adtalem letters of credit outstanding were $68.4 million as of each of December 31, 2018 and June 30, 2018 and $68.5 million as of December 31, 2017. Of this amount, $68.4 million was posted in the second quarter of fiscal year 2017 in relation to the Federal Trade Commission Settlement. As of December 31, 2018, Adtalem is charged an annual fee equal to 2.25% of the undrawn face amount of the outstanding letters of credit under the Revolver, payable quarterly. Adtalem continues to post the letter of credit in relation to the Federal Trade Commission Settlement on behalf of DeVry University and is reimbursed by DeVry University for 2.00% of the outstanding amount of this letter of credit. The Credit Agreement also requires payment of a commitment fee equal to 0.40% of the undrawn portion of the Revolver as of December 31, 2018. The amount undrawn under the Revolver, which includes the impact of the outstanding letters of credit, was $231.6 million as of December 31, 2018. The letter of credit fees and commitment fees are adjustable quarterly, based upon Adtalem’s achievement of certain financial ratios.

 

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Debt Issuance Costs

 

Adtalem incurred $9.9 million in fees that were capitalized in relation to the Credit Agreement, $7.1 million of which was related to the Term B Loan facility and $2.7 million of which was related to the Revolver facility. The deferred debt issuance costs related to the Term B Loan are presented as a direct deduction from the face amount of the debt, while the deferred debt issuance costs related to the Revolver are classified as Other Assets, Net on the Consolidated Balance Sheets. The following table summarizes the total deferred debt issuance costs for the Term B Loan and Revolver, which will be amortized over seven years and five years, respectively (in thousands):

 

   Term B Loan   Revolver   Total 
Deferred Debt Issuance Costs at June 30, 2018  $6,927   $2,606   $9,533 
Amortization of Deferred Debt Issuance Costs   (511)   (273)   (784)
Deferred Debt Issuance Costs at December 31, 2018  $6,416   $2,333   $8,749 

 

Covenants and Guarantees

 

The Credit Agreement contains customary covenants, including restrictions on our restricted subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interest on assets, make acquisitions, loans, advances or investments, or sell or otherwise transfer assets.

 

The Credit Agreement contains covenants that, among other things, require maintenance of certain financial ratios, as defined in the agreement. Maintenance of these financial ratios could place restrictions on Adtalem’s ability to pay dividends. These financial ratios include a consolidated fixed charge coverage ratio, a consolidated leverage ratio and a U.S. Department of Education financial responsibility ratio based upon a composite score of an equity ratio, a primary reserve ratio and a net income ratio. Failure to maintain any of these ratios or to comply with other covenants contained in the Credit Agreement would constitute an event of default and could result in termination of the Credit Agreement and require payment of all outstanding borrowings and replacement of outstanding letters of credit. Adtalem was in compliance with the debt covenants as of December 31, 2018.

 

The stock of all U.S. and certain foreign subsidiaries of Adtalem is pledged as collateral for borrowings under the Credit Agreement.

 

The Term B Loan requires mandatory prepayments equal to a percentage of Excess Cash Flow, which is defined within the Credit Agreement, subject to incremental step-downs, depending on the Consolidated Leverage Ratio. Beginning in fiscal year 2019, the Excess Cash Flow payment is due in the first quarter of each year and is based on the Excess Cash Flow and Leverage Ratio for the prior year. No payment was due as of December 31, 2018.

 

Our borrowings under the Credit Facility are guaranteed by us and all of our domestic subsidiaries (subject to certain exceptions) and secured by a first lien on our assets and the assets of our guarantor subsidiaries (excluding real estate), including capital stock of the subsidiaries.

 

Deferred Acquisition Obligations

 

Adtalem also has liabilities recorded for deferred purchase price agreements with sellers related to the purchases of Faculdade Diferencial Integral (“Facid”), Faculdade Ideal (“Faci”), Damasio, Grupo Ibmec, Faculdade de Imperatriz (“Facimp”) and SJT. This financing is in the form of holdbacks of a portion of the purchase price of these acquisitions or installment payments. Payments are made under these agreements based on payment schedules or the resolution of any pre-acquisition contingencies.

 

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NOTE 13: COMMITMENTS AND CONTINGENCIES

 

Adtalem is subject to lawsuits, administrative proceedings, regulatory reviews and investigations associated with financial assistance programs and other matters arising in the normal conduct of its business. As of December 31, 2018, 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. The timing or outcome of the following matters, or their possible impact on Adtalem’s business, financial condition or results of operations, cannot be predicted at this time. The continued defense, resolution or settlement of any of the following matters could require us to expend significant resources and could have a material adverse effect on our business, financial condition, results of operations and cash flows and result in the imposition of significant restrictions on us and our ability to operate.

 

On May 13, 2016, a putative class action lawsuit was filed by the Pension Trust Fund for Operating Engineers, individually and on behalf of others similarly situated, against Adtalem, Daniel Hamburger, Richard M. Gunst, and Timothy J. Wiggins in the United States District Court for the Northern District of Illinois. The complaint was filed on behalf of a putative class of persons who purchased Adtalem common stock between February 4, 2011 and January 27, 2016. The complaint cites the ED January 2016 Notice and a civil complaint (the “FTC lawsuit”) filed by the FTC on January 27, 2016 against Adtalem, DeVry University, Inc., and DeVry/New York Inc. (collectively, the “Adtalem Parties”), which was resolved with the FTC in 2017, that alleged that certain of DeVry University’s advertising claims were false or misleading or unsubstantiated at the time they were made in violation of Section 5(a) of the FTC Act, as the basis for claims that defendants made false or misleading statements regarding DeVry University’s graduate employment rate and the earnings of DeVry University graduates relative to the graduates of other universities and colleges. As a result of these alleged false or misleading statements, the plaintiff alleged that defendants overstated Adtalem’s growth, revenue and earnings potential and made false or misleading statements about Adtalem’s business, operations and prospects. The plaintiff alleged direct liability against all defendants for violations of §10(b) and Rule 10b-5 of the Exchange Act and asserted liability against the individual defendants pursuant to § 20(a) of the Exchange Act. The plaintiff sought monetary damages, interest, attorneys’ fees, costs and other unspecified relief. On July 13, 2016, the Utah Retirement System (“URS”) moved for appointment as lead plaintiff and approval of its selection of counsel, which was not opposed by the Pension Trust Fund for Operating Engineers and URS was appointed as lead plaintiff on August 24, 2016. URS filed a second amended complaint (“SAC”) on December 23, 2016. The SAC sought to represent a putative class of persons who purchased Adtalem common stock between August 26, 2011 and January 27, 2016 and named an additional individual defendant, Patrick J. Unzicker. Like the original complaint, the SAC asserted claims against all defendants for alleged violations of §10(b) and Rule 10b-5 of the Exchange Act and asserted liability against the individual defendants pursuant to § 20(a) of the Exchange Act for alleged material misstatements or omissions regarding DeVry University graduate outcomes. On January 27, 2017, defendants moved to dismiss the SAC, which motion was granted on December 6, 2017 without prejudice. The plaintiffs filed a Third Amended Complaint (“TAC”) on January 29, 2018. The defendants moved to dismiss the TAC on March 30, 2018. The Court denied the motion to dismiss the TAC on December 20, 2018. On January 8, 2019, the Court entered an order which, among other dates, set February 8, 2019, as the date for the defendants to file their answer to the TAC. Defendants intend to deny all material allegations in the TAC.

 

On October 14, 2016, a putative class action lawsuit was filed by Debbie Petrizzo and five other former DeVry University students, individually and on behalf of others similarly situated, against the Adtalem Parties in the United States District Court for the Northern District of Illinois (the “Petrizzo Case”). The complaint was filed on behalf of a putative class of persons consisting of those who enrolled in and/or attended classes at DeVry University from at least 2002 through the present and who were unable to find employment within their chosen field of study within six months of graduation. Citing the FTC lawsuit, the plaintiffs claimed that defendants made false or misleading statements regarding DeVry University’s graduate employment rate and asserted claims for unjust enrichment and violations of six different states’ consumer fraud, unlawful trade practices, and consumer protection laws. The plaintiffs seek monetary, declaratory, injunctive, and other unspecified relief.

 

On October 28, 2016, a putative class action lawsuit was filed by Jairo Jara and eleven others, individually and on behalf of others similarly situated, against the Adtalem Parties in the United States District Court for the Northern District of Illinois (the “Jara Case”). The individual plaintiffs claim to have graduated from DeVry University in 2001 or later and sought to proceed on behalf of a putative class of persons consisting of those who obtained a degree from DeVry University and who were unable to find employment within their chosen field of study within six months of graduation. Citing the FTC lawsuit, the plaintiffs claimed that defendants made false or misleading statements regarding DeVry University’s graduate employment rate and asserted claims for unjust enrichment and violations of ten different states’ consumer fraud, unlawful trade practices, and consumer protection laws. The plaintiffs seek monetary, declaratory, injunctive, and other unspecified relief.

 

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By order dated November 28, 2016, the district court ordered the Petrizzo and Jara Cases be consolidated under the Petrizzo caption for all further purposes. On December 5, 2016, plaintiffs filed an amended consolidated complaint on behalf of 38 individual plaintiffs and others similarly situated. The amended consolidated complaint seeks to bring claims on behalf of the named individuals and a putative nationwide class of individuals for unjust enrichment and alleged violations of the Illinois Consumer Fraud and Deceptive Practices Act and the Illinois Private Businesses and Vocational Schools Act of 2012. In addition, it purports to assert causes of action on behalf of certain of the named individuals and 15 individual state-specific putative classes for alleged violations of 15 different states’ consumer fraud, unlawful trade practices, and consumer protection laws. Finally, it seeks to bring individual claims under Georgia state law on behalf of certain named plaintiffs. The plaintiffs seek monetary, declaratory, injunctive, and other unspecified relief. A motion to dismiss the amended complaint was filed by the Adtalem Parties and granted by the court, without prejudice, on February 12, 2018. Because the case was dismissed without prejudice, the plaintiffs can re-file the action.

 

On April 12, 2018, the Petrizzo plaintiffs refiled their complaint with a new lead plaintiff, Renee Heather Polly. The plaintiffs’ refiled complaint is nearly identical to the complaint previously dismissed by the court on February 12, 2018. The Adtalem Parties moved to dismiss this refiled complaint on May 14, 2018.

 

On January 17, 2017, Harriet Myers filed a complaint derivatively on behalf of Adtalem in the United States District Court for the Northern District of Illinois against individual defendants Daniel M. Hamburger, Timothy J. Wiggins, Richard M. Gunst, Patrick J. Unzicker, Christopher B. Begley, David S. Brown, Lisa W. Wardell, Ann Weaver Hart, Lyle Logan, Alan G. Merten, Fernando Ruiz, Ronald L. Taylor and James D. White. Adtalem was named as a nominal defendant only. The plaintiffs have agreed to a stipulated order moving the case to the United States District Court for the District of Delaware. Citing the FTC lawsuit and settlement, the ED January 2016 Notice, the negotiated agreement reached by DeVry University and ED on October 13, 2016 (the “ED Settlement”), and the allegations in the lawsuit filed by the Pension Trust Fund for Operating Engineers, each referenced above, the plaintiff alleges that the individual defendants have breached their fiduciary duties and violated federal securities law since at least 2011. The plaintiff asserts that the individual defendants permitted Adtalem to engage in unlawful conduct, failed to correct misconduct or prevent its recurrence, and failed to ensure the accurate dissemination of information to shareholders. The complaint attempts to state three claims: (i) breach of fiduciary duty by all named defendants for allegedly allowing the illegal conduct to occur, (ii) unjust enrichment by all individual defendants in the receipt of compensation, and (iii) violation of Section 14(a) of the Exchange Act by failing to disclose the alleged illegal scheme in proxy statements and falsely stating that compensation was based on “pay for performance” where those performance results were allegedly false. The plaintiff seeks on behalf of Adtalem monetary, injunctive and other unspecified relief.

 

On June 20, 2017, the City of Hialeah Employees Retirement System filed a complaint derivatively on behalf of Adtalem in the Court of Chancery of the State of Delaware States District Court for the Northern District of Illinois against individual defendants Daniel M. Hamburger, Christopher B. Begley, Lisa W. Wardell, Lyle Logan, Fernando Ruiz, Ronald L. Taylor and James D. White. Adtalem was named as a nominal defendant only. Citing the FTC lawsuit and settlement, the ED January 2016 Notice and ED Settlement, and documents produced in response to plaintiff’s request under Section 220 of the Delaware Code, the plaintiff alleges that the individual defendants have breached their fiduciary duties. The plaintiff asserts that the individual defendants permitted Adtalem and DeVry University to make, and failed to stop, false and misleading advertisements in breach of their fiduciary duties and in bad faith. The plaintiff seeks on behalf of Adtalem monetary and other unspecified relief. A motion to dismiss the complaint was filed by the Adtalem Parties on September 1, 2017, which was partially granted as to one count and partially denied as to another count on April 20, 2018.

 

On April 13, 2018, a putative class action lawsuit was filed by Nicole Versetto, individually and on behalf of other similarly situated, against the Adtalem Parties in the Circuit Court of Cook County, Illinois, Chancery Division. The complaint was filed on behalf of herself and three separate classes of similarly situated individuals who were citizens of the State of Illinois who purchased or paid for a DeVry University program between January 1, 2008 and April 8, 2016. The plaintiffs claim that defendants made false or misleading statements regarding DeVry University’s graduate employment rate and asserts causes of action under the Illinois Uniform Deceptive Trade Practices Act, Illinois Consumer Fraud and Deceptive Trade Practices Act, and Illinois Private Business and Vocational Schools Act, and claims of breach of contract, fraudulent misrepresentation, concealment, negligence, breach of fiduciary duty, conversion, unjust enrichment, and declaratory relief as to violations of state law. The plaintiffs seek compensatory, exemplary, punitive, treble, and statutory penalties and damages, including pre-judgment and post-judgment interest, in addition to restitution, declaratory and injunctive relief, and attorneys’ fees. The Adtalem Parties moved to dismiss this complaint on June 20, 2018.

 

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On May 8, 2018, the Carlson Law Firm filed a lawsuit against Adtalem and DeVry University, Inc., on behalf of 71 individual former DeVry University students. Calson filed this lawsuit in the United States District Court for the Western District of Texas. Plaintiffs contend that DeVry University “made deceptive representations about the benefits of obtaining a degree from DeVry University” in violation of Texas state laws and seek full restitution of all monies paid to DeVry University and any student loan lenders, punitive damages, and attorneys’ fees. The defendants moved to dismiss this complaint on June 5, 2018. On June 27, 2018, Carlson filed a second lawsuit on behalf of 32 former DeVry University students against Adtalem and DeVry University, Inc. Carlson filed this lawsuit in the United States District Court for the Western District of Texas. The allegations are identical to the allegations in the lawsuit Carlson filed on May 8, 2018. Specifically, plaintiffs contend that DeVry University “made deceptive representations about the benefits of obtaining a degree from DeVry University” in violation of Texas state law and seek full restitution of all monies paid to DeVry University and any student loan lenders, punitive damages, and attorneys’ fees. The defendants moved to dismiss this complaint on August 28, 2018. The Court consolidated these two lawsuits on December 10, 2018. The defendants moved to dismiss the consolidated action on December 18, 2018. On January 2, 2019, Carlson filed a motion to intervene on behalf of 13 additional former DeVry University students seeking to join the consolidated lawsuit.

 

On June 21, 2018, the Stoltmann Law Firm filed a lawsuit against Adtalem in Cook County Circuit Court, alleging that Adtalem breached a contract with the Stoltmann Law Firm to pay filing fees associated with arbitration claims the Stoltmann Law Firm has filed with JAMS. The Stoltmann Law Firm is seeking Specific Performance from the Court. Adtalem moved to dismiss this complaint on August 3, 2018. Prior to the Court ruling on Adtalem’s motion to dismiss, the Stoltmann Law Firm and 399 individuals filed an amended complaint on August 9, 2018, asserting claims for specific performance, declaratory judgment and a petition to compel arbitration. Adtalem moved to dismiss the amended complaint on August 31, 2018. The Court granted Adtalem’s motion to dismiss on November 30, 2018, but granted plaintiffs leave to file a second amended complaint. A single individual plaintiff filed a second amended complaint on January 3, 2019.

 

NOTE 14: SEGMENT INFORMATION

 

Beginning in the second quarter of fiscal year 2018, DeVry University operations were classified as discontinued operations. In addition, beginning in the fourth quarter of fiscal year 2018, Carrington operations were classified as discontinued operations. See “Note 2: Discontinued Operations” for further information. Segment information presented excludes the results of DeVry University and Carrington, which were previously classified within our former U.S. Traditional Postsecondary segment and are presented as discontinued operations in the Consolidated Financial Statements. Discontinued operations assets are included in the table below to reconcile to Total Consolidated Assets presented on the Consolidated Balance Sheets. In addition, certain expenses previously allocated to DeVry University and Carrington within our former U.S. Traditional Postsecondary segment have been reclassified to the Home Office and Other segment based on discontinued operating reporting guidance regarding allocation of corporate overhead.

 

Adtalem’s principal business is the provision of educational services. Adtalem presents three reporting segments: “Medical and Healthcare,” which includes the operations of Chamberlain and the medical and veterinary schools (which include AUC, RUSM and RUSVM); “Professional Education,” which includes the operations of ACAMS, Becker and EduPristine; and “Technology and Business,” which includes the operations of Adtalem Brazil.

 

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, in part, on each segment’s operating income. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers and are eliminated in consolidation. “Home Office and Other” includes activity not allocated to a reporting segment and is included to reconcile segment results to the Consolidated Financial Statements. Segments may have allocated depreciation expense related to depreciable assets reported as an asset in a different segment. The accounting policies of the segments are the same as those described in “Note 3: Summary of Significant Accounting Policies.”

 

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Summary financial information by reporting segment is as follows (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
Revenue:                    
Medical and Healthcare  $212,627   $203,297   $414,727   $394,582 
Professional Education   42,142    30,359    77,788    70,401 
Technology and Business   62,633    75,133    109,884    137,572 
Home Office and Other   (808)   (578)   (1,615)   (1,201)
Total Consolidated Revenue  $316,594   $308,211   $600,784   $601,354 
Operating Income (Loss) from Continuing Operations:                    
Medical and Healthcare  $60,647   $55,047   $62,303   $81,279 
Professional Education   9,633    2,193    14,383    12,700 
Technology and Business   8,471    13,991    5,726    15,852 
Home Office and Other   (8,452)   (11,312)   (14,621)   (20,026)
Total Consolidated Operating Income from Continuing Operations  $70,299   $59,919   $67,791   $89,805 
Segment Assets:                    
Medical and Healthcare  $793,673   $885,663   $793,673   $885,663 
Professional Education   447,717    444,029    447,717    444,029 
Technology and Business   551,501    610,803    551,501    610,803 
Home Office and Other   329,332    169,718    329,332    169,718 
Discontinued Operations   -    101,387    -    101,387 
Total Consolidated Assets  $2,122,223   $2,211,600   $2,122,223   $2,211,600 
Additions to Long-Lived Assets:                    
Medical and Healthcare  $14,942   $8,669   $26,718   $14,336 
Professional Education   441    298    1,403    1,221 
Technology and Business   1,468    12,407    3,297    15,748 
Home Office and Other   3,354    2,463    3,937    4,305 
Total Consolidated Additions to Long-Lived Assets  $20,205   $23,837   $35,355   $35,610 
Reconciliation to Consolidated Financial Statements:                    
Capital Expenditures  $20,205   $19,700   $35,355   $31,473 
Increase in Capital Assets from Acquisitions   -    16    -    16 
Increase in Intangible Assets and Goodwill   -    4,121    -    4,121 
Total Increase in Consolidated Long-Lived Assets  $20,205   $23,837   $35,355   $35,610 
Depreciation Expense (1):                    
Medical and Healthcare  $6,509   $7,225   $12,769   $14,811 
Professional Education   365    522    732    982 
Technology and Business   2,369    2,458    4,684    5,223 
Home Office and Other   1,312    310    2,412    677 
Total Consolidated Depreciation Expense  $10,555   $10,515   $20,597   $21,693 
Intangible Asset Amortization Expense:                    
Professional Education  $1,605   $1,626   $3,211   $3,251 
Technology and Business   522    837    1,027    1,709 
Total Consolidated Amortization Expense  $2,127   $2,463   $4,238   $4,960 

 

(1) Depreciation expense for each reporting segment has been modified to current presentation to include the Home Office and Other depreciation which is allocated to each reporting segment.

 

 

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Adtalem conducts its educational operations in the U.S., Barbados, St. Kitts, St. Maarten, Brazil, Canada, Europe, the Middle East, India, China and the Pacific Rim. Other international revenue, which is derived principally from Europe and the Pacific Rim, was less than 5% of total revenue for each of the three and six months ended December 31, 2018 and 2017. Revenue and long-lived assets by geographic area are as follows (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2018   2017   2018   2017 
Revenue from Unaffiliated Customers:                    
Domestic Operations  $161,176   $144,095   $307,839   $296,120 
International Operations:                    
Dominica, St. Kitts and St. Maarten   90,394    88,236    178,841    165,614 
Brazil   62,633    75,133    109,884    137,572 
Other   2,391    747    4,220    2,048 
Total International   155,418    164,116    292,945    305,234 
Total Consolidated Revenue  $316,594   $308,211   $600,784   $601,354 
Long-Lived Assets:                    
Domestic Operations  $159,069   $153,321   $159,069   $153,321 
International Operations:                    
Barbados, Dominica, St. Kitts and St. Maarten   172,065    167,841    172,065    167,841 
Brazil   91,653    106,884    91,653    106,884 
Other   2,155    4,143    2,155    4,143 
Total International   265,873    278,868    265,873    278,868 
Total Consolidated Long-Lived Assets  $424,942   $432,189   $424,942   $432,189 

 

No one customer accounted for more than 10% of Adtalem's consolidated revenue.

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Through its website, Adtalem Global Education Inc. (“Adtalem,” “we,” “our,” or “us”) offers its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed with the Securities and Exchange Commission (“SEC”). Adtalem’s website is http://www.adtalem.com. Except as otherwise stated in these reports, the information contained on our website or available by hyperlink from our website is not incorporated into our Annual Report on Form 10-K, this Quarterly Report on Form 10-Q, or other documents we file with, or furnish to, the SEC.

 

The following discussion of Adtalem’s results of operations and financial condition should be read in conjunction with Adtalem’s Consolidated Financial Statements and the related Notes thereto in “Item 1 – Financial Statements” in this Quarterly Report on Form 10-Q and Adtalem’s Consolidated Financial Statements and related Notes thereto in “Item 8 – Financial Statements and Supplementary Data” in Adtalem’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018. Adtalem’s Annual Report on Form 10-K includes a description of critical accounting policies and estimates and assumptions used in the preparation of Adtalem’s financial statements. These include, but are not limited to, the use of estimates and assumptions that affect the reported amounts of assets and liabilities; revenue and expense recognition; allowance for uncollectible accounts; internal-use developed software; land, building and equipment; stock-based compensation; valuation of goodwill and other intangible assets; valuation of long-lived assets; and income taxes.

 

The seasonal pattern of Adtalem’s enrollments and its educational programs’ starting dates affect the results of operations and the timing of cash flows. Therefore, management believes that comparisons of its results of operations should primarily be made to the corresponding period in the preceding year. Comparisons of financial position should be made to both the end of the previous fiscal year and to the end of the corresponding quarterly period in the preceding year.

 

As of June 30, 2018, Adtalem eliminated its U.S. Traditional Postsecondary reporting segment when Carrington College (“Carrington”) was placed into discontinued operations (see further details below under the heading “Divestiture of Carrington College”). As a result, Adtalem now has three reporting segments.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Quarterly Report on Form 10-Q, including those statements concerning Adtalem’s expectations or plans, may constitute forward-looking statements subject to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. These forward-looking statements generally can be identified by phrases such as Adtalem Global Education or its management “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “could,” or other words or phrases of similar import which predict or indicate future events or trends or that are not statements of historical matters. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances.

 

These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference are described throughout this report, including those in “Note 13: Commitments and Contingencies” to the Consolidated Financial Statements, “Item 1 – Legal Proceedings” and “Item 1A – Risk Factors,” and in the subsections of “Item 1 – Business” entitled “Market Trends and Competition,” “Student Admissions,” “Accreditation,” “Financial Aid and Financing Student Education,” “Legislative and Regulatory Requirements,” “Seasonality” and “Employees” in our most recent Annual Report on Form 10-K for the year ending June 30, 2018 filed with the SEC on August 24, 2018 and our other filings with the SEC. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. All forward-looking statements set forth in this Quarterly Report on Form 10-Q are qualified by these cautionary statements, and should be considered in the context of the risk factors referred to above and discussed elsewhere in this Quarterly Report on Form 10-Q. There can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business or operations. Forward-looking statements set forth in this Quarterly Report on Form 10-Q speak only as of the date hereof, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, changes in expectations or the occurrence of unanticipated events, except to the extent required by law.

 

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OVERVIEW

 

Adtalem’s financial results for the second quarter of fiscal year 2019 reflect a revenue increase of $8.4 million, or 2.7%, compared to the year-ago quarter, driven by increases in the Medical and Healthcare and Professional Education segments. These increases were partially offset by a decrease in revenue in the Technology and Business segment, which included a negative foreign currency exchange impact in Brazil. On a constant currency basis, revenue in the second quarter of fiscal year 2019 increased 6.2% compared to the year-ago quarter. Net income increased to $17.2 million in the second quarter of fiscal year 2019 compared to a net loss of $81.2 million in the year-ago quarter. Net income from continuing operations excluding special items decreased 11.4% in the second quarter of fiscal year 2019 compared to the year-ago quarter, driven by an increase in interest expense and operating income decreases in the Medical and Healthcare and Technology and Business segments. These decreases were partially offset by an increase in operating income in the Professional Education segment and cost reductions at home office. (See “Use of Non-GAAP Financial Information and Supplemental Reconciliation Schedule” below). Operational and financial highlights for the second quarter of fiscal year 2019 include:

 

·On December 4, 2018, Adtalem completed the sale of its ownership of all the outstanding equity interests in U.S. Education Holdings LLC, the holding company of Carrington, to San Joaquin Valley College, Inc. (“SJVC”), pursuant to the terms and conditions of the Membership Interest Purchase Agreement (“MIPA”), dated June 28, 2018. The equity interests were sold for deminimis consideration, subject to customary adjustments for working capital, resulting in a loss of $11.1 million recorded in discontinued operations in the second quarter of fiscal year 2019.

 

·On December 11, 2018, Adtalem completed the sale of all of its right, title, and interest in and to the issued and outstanding shares of capital stock (the “Equity Interests”) of DeVry University, Inc. and DeVry/New York Inc. (collectively “DeVry University”) to Cogswell Education, LLC (“Cogswell”) under the terms of the Stock Purchase Agreement (“Purchase Agreement”) dated December 4, 2017. The Equity Interests were sold for deminimis consideration, subject to customary adjustments for working capital, resulting in a loss of $21.7 million recorded in discontinued operations in the second quarter of fiscal year 2019.

 

·In December 2018, American University of the Caribbean School of Medicine (“AUC”) and Ross University School of Medicine (“RUSM”) received the final insurance settlement proceeds related to the property damage and disruption of operations caused by Hurricanes Irma and Maria in fiscal year 2018 (see further details below under the heading “Hurricanes”). These proceeds produced a gain of $15.6 million, which was recorded in the second quarter of fiscal year 2019. AUC and RUSM have completed substantially all planned repairs and replacement of damaged facilities and equipment.

 

·For the November 2018 session, total student enrollment at Chamberlain University (“Chamberlain”) increased 3.7%, compared to the same term last year. Chamberlain continues to invest in its programs, student services and campus locations.

 

·During the second quarter of fiscal year 2019, Adtalem recorded restructuring charges of $3.6 million primarily related to the impairment of the land, buildings and equipment at the Dominica campus of RUSM and severance related to workforce reductions in Dominica. On August 3, 2018, management announced its decision to relocate RUSM’s campus operations to Barbados and not return to Dominica. The land, buildings and equipment in Dominica have been fully impaired as management has determined the market value less the costs to sell the facilities or move the equipment is zero. In addition, Adtalem recorded restructuring charges related to real estate consolidations at Adtalem’s home office.

 

·Adtalem continued its tenth share repurchase program by repurchasing a total of 1,131,124 shares of Adtalem’s common stock at an average cost of $50.18 per share during the second quarter of fiscal year 2019. On November 7, 2018, the Board of Directors of Adtalem approved the eleventh share repurchase program, which allows Adtalem to repurchase up to $300 million of its common stock, from time to time, through December 31, 2021. The new program will commence when the repurchases from the current program are complete, which is expected to occur in early calendar year 2019.

 

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·Adtalem’s financial position remained strong, generating $23.0 million of operating cash flow during the first six months of fiscal year 2019. As of December 31, 2018, cash and cash equivalents totaled $294.8 million and outstanding borrowings totaled $298.5 million.

 

HURRICANES

 

In September 2017, Hurricanes Irma and Maria caused damage and disrupted operations at AUC and RUSM. For the second quarter and first six months of fiscal year 2019, Adtalem recorded expense of $5.6 million and $12.5 million, respectively, associated with incremental costs of teaching at alternative sites. All of these costs were offset with insurance proceeds. For the second quarter and first six months of fiscal year 2018, Adtalem recorded expense of $30.3 million and $44.0 million, respectively, associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental costs of teaching at alternative sites. Insurance receivables of $30.5 million and $39.8 million were recorded for the second quarter and first six months of fiscal year 2018, respectively, to offset these expenses. The insurance receivables recorded in the first six months of fiscal year 2018 were net of insurance deductibles of $4.2 million, which were satisfied in full during the first quarter of fiscal year 2018.

 

Based upon damage assessments of the AUC and RUSM facilities, impairment write-downs of building, building improvements, furniture and equipment of $19.0 million and $29.9 million were recorded for the second quarter and first six months of fiscal year 2018, respectively. Insurance receivables of $19.0 million and $20.8 million were recorded for the second quarter and first six months of fiscal year 2018, respectively to offset these expenses. The insurance receivables recorded in the first six months of fiscal year 2018 were net of insurance deductibles of $9.1 million, which were satisfied in full during the first quarter of fiscal year 2018. No further asset impairments were recorded in fiscal year 2019.

 

As of December 31, 2018, AUC and RUSM have recorded cumulative expense of $75.7 million associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental costs of teaching at alternative sites, in addition to cumulative asset damage write-downs of building, building improvements, furniture and equipment of $31.0 million. Total costs to repair and replace damaged facilities and equipment were approximately $21.1 million to date, all of which were capitalized as of December 31, 2018. As of December 31, 2018, AUC and RUSM have received insurance proceeds of $110.0 million to fully cover the cumulative expense incurred for the evacuation process, temporary housing and transportation of students, faculty and staff, incremental costs of teaching at alternative sites, and asset damage write-downs of $106.7 million, less $12.3 million in deductibles, which were adjusted down in the second quarter of fiscal year 2019 from $13.4 million. This resulted in a pre-tax gain of $15.6 million recorded in the second quarter of fiscal year 2019. Of the proceeds received, $35.7 million were related to asset damages.

 

DIVESTITURE OF DEVRY UNIVERSITY

 

On December 11, 2018, Adtalem completed the sale of DeVry University to Cogswell pursuant to the Purchase Agreement dated December 4, 2017. To support DeVry University’s future success, Adtalem transferred DeVry University with a working capital balance of $8.75 million at the closing date. In addition, Adtalem has agreed to indemnify Cogswell for certain losses including those related to certain pre-closing defense to repayment claims. The Purchase Agreement also includes an earn-out entitling Adtalem to payments of up to $20 million over a ten-year period payable based on DeVry University’s free cash flow.

 

DeVry University was an operating segment and was previously included in our former U.S. Traditional Postsecondary reporting segment. Subject to the terms and conditions of the Purchase Agreement, DeVry University was sold in its entirety. Divesting DeVry University is a strategic shift in the operations of Adtalem. This segment offers principally bachelor’s and master’s degrees in technology and business in the U.S., and Adtalem exited this market with this disposition. Adtalem’s only other operating segment that grants primarily bachelor’s and master’s degrees is Chamberlain, and this institution’s degrees are in nursing and related medical fields. Selling the DeVry University operating segment reduces the organization’s dependence on government Title IV funds for its revenue, which is one of Adtalem’s important strategic goals. DeVry University was the legacy business of Adtalem and at one time accounted for the majority of its consolidated revenue and operating income. Disposal of this operating segment will have a significant effect on the operations and financial results of Adtalem (See “Note 2: Discontinued Operations”). DeVry University employs approximately 1,400 full-time faculty and staff and required significant home office administrative support, absorbing approximately 30% of all home office administrative costs.

 

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In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we are classifying the DeVry University entity as “Held for Sale” and “Discontinued Operations.” As a result, all financial results, disclosures and discussions of continuing operations in this Quarterly Report on Form 10-Q exclude DeVry University operations, unless otherwise noted.

 

DIVESTITURE OF CARRINGTON COLLEGE

 

On December 4, 2018, Adtalem completed the sale of Carrington to SJVC pursuant to the MIPA dated June 28, 2018. To support Carrington’s future success, Adtalem made a capital contribution of $7.5 million to Carrington, based on an agreed working capital balance of $11.5 million at the closing date.

 

Carrington was an operating segment and was previously included in our former U.S. Traditional Postsecondary reporting segment. Subject to the terms and conditions of the MIPA, Carrington was sold in its entirety. Divesting Carrington is a strategic shift in the operations of Adtalem. This segment offers principally career specific certificate or associate degree programs in the U.S., and Adtalem exited this market with this disposition. Selling the Carrington operating segment reduces the organization’s dependence on government Title IV funds for its revenue, which is one of Adtalem’s important strategic goals. Disposal of this operating segment will have a significant effect on the operations and financial results of Adtalem (See “Note 2: Discontinued Operations”). Carrington employs approximately 550 full-time faculty and staff and required home office administrative support, absorbing approximately 5% of all home office administrative costs.

 

In accordance with GAAP, we are classifying the Carrington entity as “Held for Sale” and “Discontinued Operations.” As a result, all financial results, disclosures and discussions of continuing operations in this Quarterly Report on Form 10-Q exclude Carrington operations, unless otherwise noted.

 

USE OF NON-GAAP FINANCIAL INFORMATION AND SUPPLEMENTAL RECONCILIATION SCHEDULE

 

During the second quarter and first six months of fiscal year 2019, Adtalem recorded special items related to the following:

 

·Restructuring charges related to the closing of the RUSM campus in Dominica, loss on sale charges at Adtalem Brazil related to the disposition of the Joao Pessoa institution, and real estate consolidations at Adtalem’s home office.
·Insurance settlement gain related to the final insurance settlement related to Hurricanes Irma and Maria at AUC and RUSM.
·Adjustments to the preliminary income tax charges related to the implementation of the Tax Cuts and Jobs Act of 2017 and tax charges related to the divestiture of DeVry University.

 

During the second quarter and first six months of fiscal year 2018, Adtalem recorded special items related to the following:

 

·Restructuring charges primarily related to workforce reductions at Adtalem’s home office.
·Income tax charges related to implementation of the Tax Cuts and Jobs Act of 2017.

 

The following table illustrates the effects of discontinued operations and special items on Adtalem’s net income (loss). Management believes that the non-GAAP disclosure of net income from continuing operations excluding special items and adjusted earnings per share excluding discontinued operations and special items provides investors with useful supplemental information regarding the underlying business trends and performance of Adtalem’s ongoing operations and is useful for period-over-period comparisons of such operations given the nature of discontinued operations, restructuring charges, insurance settlement gain and certain income tax charges. Adtalem uses these supplemental financial measures internally in its management and budgeting process. However, these non-GAAP financial measures should be viewed in addition to, and not as a substitute for, Adtalem’s reported results prepared in accordance with GAAP. The following table reconciles these non-GAAP measures to the most directly comparable GAAP information (in thousands, except per share amounts):

 

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   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2018   2017   2018   2017 
Net Income (Loss)  $17,295   $(81,156)  $7,765   $(68,371)
Earnings (Loss) per Share (diluted-2018, basic-2017)  $0.29   $(1.33)  $0.13   $(1.10)
Continuing Operations:                    
Restructuring Expense  $3,645   $1,426   $43,193   $2,563 
Effect on Earnings per Share (diluted)  $0.06   $0.02   $0.71   $0.04 
Insurance Settlement Gain  $(15,571)  $-   $(15,571)  $- 
Effect on Earnings per Share (diluted)  $(0.26)  $-   $(0.26)  $- 
Tax Cuts and Jobs Act of 2017 and Tax Charges Related to the Divestiture of DeVry University  $1,526   $101,196   $1,526   $101,196 
Effect on Earnings per Share (diluted)  $0.03   $1.63   $0.03   $1.61 
Income Tax Impact on Non-GAAP Adjustments (1)  $2,483   $(528)  $(4,969)  $(855)
Effect on Earnings per Share (diluted)  $0.04   $(0.01)  $(0.08)  $(0.01)
Discontinued Operations, net of tax  $35,123   $29,315   $39,830   $41,968 
Effect on Earnings per Share (diluted-2018, basic-2017)  $0.59   $0.48   $0.66   $0.68 
Net Income from Continuing Operations Excluding Special Items, net of tax  $44,501   $50,253   $71,774   $76,501 
Earnings per Share from Continuing Operations                    
Excluding Special Items (diluted)  $0.74   $0.81   $1.18   $1.22 
Shares used in Basic EPS calculation   NA    61,234    NA    62,009 
Shares used in Diluted EPS calculation   60,000    62,023    60,598    62,705 

 

(1) Represents the income tax impact of non-GAAP continuing operations adjustments that is recognized in our GAAP financial statements.

 

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RESULTS OF OPERATIONS

 

The following table presents information with respect to the relative size to revenue of each item in the Consolidated Statements of Income (Loss) for the three and six months ended December 31, 2018 and 2017. Percentages may not add because of rounding.

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2018   2017   2018   2017 
Revenue   100.0%   100.0%   100.0%   100.0%
Cost of Educational Services   50.0%   51.1%   51.1%   55.0%
Student Services and Administrative Expense   31.6%   29.0%   33.0%   29.7%
Restructuring Expense   1.2%   0.5%   7.2%   0.4%
Insurance Settlement Gain   (4.9)%   0.0%   (2.6)%   0.0%
Total Operating Cost and Expense   77.8%   80.6%   88.7%   85.1%
Operating Income from Continuing Operations   22.2%   19.4%   11.3%   14.9%
Net Other Expense   (1.4)%   (0.4)%   (1.5)%   (0.2)%
Income from Continuing Operations Before Income Taxes   20.8%   19.1%   9.8%   14.8%
Income Tax Provision   (4.2)%   (35.8)%   (1.9)%   (19.1)%
Equity Method Investment Income (Loss)   0.0%   0.0%   0.0%   (0.0)%
Income (Loss) from Continuing Operations   16.6%   (16.7)%   7.9%   (4.3)%
Loss from Discontinued Operations, Net of Tax   (11.1)%   (9.5)%   (6.6)%   (7.0)%
Net Income (Loss)   5.5%   (26.2)%   1.3%   (11.3)%
Net Income Attributable to Noncontrolling Interest   (0.1)%   (0.1)%   (0.0)%   (0.1)%
Net Income (Loss) Attributable to Adtalem Global Education   5.5%   (26.3)%   1.3%   (11.4)%

 

REVENUE

 

All discussions of the results of operations exclude the results of DeVry University and Carrington, which are included in the discontinued operations section of the Consolidated Statements of Income (Loss) for all periods presented.

 

The following tables present revenue by segment detailing the changes from the year-ago comparative periods including disclosures of the effect of acquisitions, Hurricanes Irma and Maria, and changes in the value of the Brazilian Real compared to the U.S. dollar. Total consolidated revenue for the second quarter of fiscal year 2019 of $316.6 million increased 2.7%, or $8.4 million, compared to the year-ago quarter. For the first six months of fiscal year 2019, total consolidated revenue of $600.8 million decreased 0.1%, or $0.6 million, compared to the year-ago period. Revenue results by segment are discussed in more detail in the sections below.

 

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   Three Months Ended December 31, 2018 
   (in thousands) 
Revenue:  Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Fiscal Year 2018 as Reported  $203,297   $30,359   $75,133   $(578)  $308,211 
Organic Growth (Decline)   8,438    10,834    (2,242)   (230)   16,800 
Effect of Acquisitions   -    949    474    -    1,423 
Hurricane Impact   892    -    -    -    892 
Effect of Currency Change   -    -    (10,732)   -    (10,732)
Fiscal Year 2019 as Reported  $212,627   $42,142   $62,633   $(808)  $316,594 
                          
Fiscal Year 2019 % Change:                         
Organic Growth (Decline)   4.2%   35.7%   (3.0)%   NM    5.5%
Effect of Acquisitions   -    3.1%   0.6%   NM    0.5%
Hurricane Impact   0.4%   -    -    NM    0.3%
Constant Currency   4.6%   38.8%   (2.4)%   NM    6.2%
Effect of Currency Change   -    -    (14.3)%   NM    (3.5)%
Fiscal Year 2019 % Change as Reported   4.6%   38.8%   (16.6)%   NM    2.7%

 

   Six Months Ended December 31, 2018 
   (in thousands) 
Revenue:  Medical and
 Healthcare
   Professional
 Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Fiscal Year 2018 as Reported  $394,582   $70,401   $137,572   $(1,201)  $601,354 
Organic Growth (Decline)   11,909    5,496    (5,464)   (414)   11,527 
Effect of Acquisitions   -    1,891    1,100    -    2,991 
Hurricane Impact   8,236    -    -    -    8,236 
Effect of Currency Change   -    -    (23,324)   -    (23,324)
Fiscal Year 2019 as Reported  $414,727   $77,788   $109,884   $(1,615)  $600,784 
                          
Fiscal Year 2019 % Change:                         
Organic Growth (Decline)   3.0%   7.8%   (4.0)%   NM    1.9%
Effect of Acquisitions   -    2.7%   0.8%   NM    0.5%
Hurricane Impact   2.1%   -    -    NM    1.4%
Constant Currency   5.1%   10.5%   (3.2)%   NM    3.8%
Effect of Currency Change   -    -    (17.0)%   NM    (3.9)%
Fiscal Year 2019 % Change as Reported   5.1%   10.5%   (20.1)%   NM    (0.1)%

 

Medical and Healthcare

 

Revenue in the Medical and Healthcare segment increased 4.6%, or $9.3 million, to $212.6 million in the second quarter and increased 5.1%, or $20.1 million, to $414.7 million in the first six months of fiscal year 2019 compared to the year-ago periods. In September 2017, Hurricanes Irma and Maria forced shut-downs of basic science academic instruction at AUC and RUSM, respectively, resulting in a revenue loss in the second quarter and the first six months of fiscal year 2018 of $0.9 million and $8.2 million, respectively. Key trends for Chamberlain and the medical and veterinary schools are set forth below.

 

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Chamberlain

 

Chamberlain Undergraduate and Graduate Student Enrollment:

 

   Fiscal Year 2019                   
Term  July 2018   Sept. 2018   Nov. 2018   Jan. 2019                   
New Students   2,523    5,435    2,617    4,759                   
% Change from Prior Year   1.0%   9.5%   (6.7)%   6.4%                  
Total Students   28,037    31,295    30,833    32,354                   
% Change from Prior Year   4.6%   4.1%   3.7%   3.3%                  

 

   Fiscal Year 2018   
Term  July 2017   Sept. 2017   Nov. 2017   Jan. 2018   Mar. 2018   May 2018   
New Students   2,497    4,962    2,806    4,472    2,830    3,896   
% Change from Prior Year   16.5%   (0.8)%   5.5%   6.9%   4.3%   3.1%  
Total Students   26,811    30,062    29,719    31,333    31,053    30,309   
% Change from Prior Year   6.3%   4.5%   5.1%   5.2%   4.5%   4.7%  

 

Chamberlain revenue increased 6.2%, or $7.2 million, to $122.2 million in the second quarter and increased 3.0%, or $6.9 million, to $235.9 million in the first six months of fiscal year 2019 compared to the year-ago periods, driven primarily by total enrollment increases. In the current fiscal year combined terms, the improved new and total student enrollment was primarily the result of higher enrollment in all tracks of the Master of Science in Nursing (“MSN”) degree, the campus-based Bachelor of Science of Nursing (“BSN”) program and the Doctorate of Nursing Practice (“DNP”) program. These were partially offset by a decline in new and total student enrollment for the Registered Nurse to Bachelor of Science in Nursing (“RN-to-BSN”) completion option.

 

Chamberlain currently operates 21 campuses in 15 states. Chamberlain’s newest campus, in New Orleans, Louisiana, began instruction in May 2018.

 

Tuition Rates:

 

Tuition is $675 per credit hour for students enrolling in the BSN onsite program. Tuition for the RN-to-BSN online degree program is $590 per credit hour. Tuition for students enrolled in the online MSN program is $650 per credit hour. For students enrolled in the Family Nurse Practitioner (“FNP”) track, tuition is $665 per credit hour for the ten FNP specialty courses. Tuition for the online DNP program is $750 per credit hour. Tuition for the Master of Public Health (“MPH”) program is $550 per credit hour. All of these tuition rates are unchanged from the prior year. These tuition rates do not include the cost of books, supplies, transportation or living expenses.

 

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Medical and Veterinary Schools

 

Medical and Veterinary Schools Student Enrollment:

 

   Fiscal Year 2019         
Term  Sept. 2018   Jan. 2019         
New Students   889    471         
% Change from Prior Year   9.5%   (8.5)%        
Total Students   5,887    5,548         
% Change from Prior Year   2.5%   (6.6)%        

 

   Fiscal Year 2018 
Term  Sept. 2017   Jan. 2018   May 2018 
New Students   812    515    499 
% Change from Prior Year   0.7%   11.5%   9.0%
Total Students   5,744    5,938    5,556 
% Change from Prior Year   (6.9)%   1.3%   1.2%

 

The medical and veterinary schools’ revenue increased 2.4%, or $2.2 million, to $90.4 million in the second quarter and increased 8.0%, or $13.2 million, to $178.8 million in the first six months of fiscal year 2019 compared to the year-ago periods. A significant driver of these increases was $0.9 million and $8.2 million in lost revenue at AUC and RUSM (together the medical schools) for the second quarter and first six months of fiscal year 2018, respectively, as a result of Hurricanes Irma and Maria and the resulting postponement of the September 2017 semester’s basic science academic instruction at the medical schools, along with students withdrawing due to these disruptions. Additional drivers of the second quarter of fiscal year 2019 revenue increase were tuition price increases at the medical and veterinary schools along with total enrollment increases. Management is executing its plan to differentiate the medical and veterinary schools from the competition, with a core goal of increasing international students, and improving the effectiveness of marketing strategies by restructuring the marketing organization, and shifting from traditional media and event-driven marketing to greater use of digital and social media channels to drive awareness throughout the year.

 

New and total student enrollment increases in the September 2018 term were positively influenced by lower comparable enrollment in the September 2017 term due to the effects of the hurricanes at the medical schools. The January 2019 new student enrollment decline at the medical schools was negatively influenced by a high number of new students in the January 2018 term that had previously enrolled in September 2017, but did not start due to hurricanes. The new student enrollment increase in the September 2018 term also benefitted from improved effectiveness of marketing and recruiting strategies at RUSM and RUSVM. Management believes the demand for medical and veterinary education remains strong and can support management’s longer-term expectations to grow new enrollments in the low-single digit range; however, heightened competition may adversely affect the medical and veterinary schools’ ability to continue to attract qualified students to its programs.

 

In January 2019, RUSM moved its basic science instruction to a new location in Barbados. The academic facility is located in Bridgetown, and student housing is located close to the academic facility in the parish of Christ Church at an existing housing community that includes amenities, student services and convenient transportation to campus.

 

Tuition Rates:

 

·Effective for semesters beginning in September 2018, tuition rates for the beginning basic sciences and final clinical rotation portions of AUC’s medical program are $22,454 and $25,120, respectively, per semester. These tuition rates represent a 3.5% increase over the prior academic year.

 

·Effective for semesters beginning in September 2018, tuition rates for the beginning basic sciences and Internal Medicine Foundations/final clinical portion of the programs at RUSM are $23,240 and $25,650, respectively, per semester. These tuition rates represent a 4.0% increase over the prior academic year.

 

·For students beginning the RUSVM program in September 2018 or later, the tuition rate for the pre-clinical (Semesters 1-7) and clinical curriculum (Semesters 8-10) is $20,304 per semester. For students who entered RUSVM before September 2018, tuition rates for the pre-clinical and clinical curriculum are $18,859 and $23,676, respectively, per semester. These tuition rates represent a 3% increase over the prior academic year.

 

The respective tuition rates for AUC, RUSM and RUSVM do not include the cost of transportation, living expenses or health insurance.

 

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Professional Education

 

Revenue in the Professional Education segment increased 38.8%, or $11.8 million, to $42.1 million in the second quarter and increased 10.5%, or $7.4 million, to $77.8 million in the first six months of fiscal year 2019 compared to the year-ago periods. The increase in the second quarter of fiscal year 2019 is driven by revenue growth at the Association of Certified Anti-Money Laundering Specialists (“ACAMS”) partially due to the timing of its largest conference of the year taking place in the second quarter of fiscal year 2019 compared to the conference taking place in the first quarter in fiscal year 2018. ACAMS’s membership has increased to over 70,000 as of December 31, 2018, which is an increase of more than 88% since Adtalem acquired ACAMS in July 2016, and has been driven by strong growth in the Asia Pacific region as well as expansion in business-to-business partnerships in Europe. Revenue also increased at Becker in the second quarter and the first six months of fiscal year 2019, as improved effectiveness of marketing strategies led to an increase in the number of CPA exam candidates purchasing the Becker Exam Review Course compared to the year-ago periods.

 

Technology and Business

 

Revenue in the Technology and Business segment, which is composed solely of Adtalem Brazil, decreased 16.6%, or $12.5 million, to $62.6 million in the second quarter and decreased 20.1%, or $27.7 million, to $109.9 million in the first six months of fiscal year 2019 compared to the year-ago periods. The decrease in value of the Brazilian Real compared to the U.S. dollar decreased reported revenue in the second quarter and first six months of fiscal year 2019 by $10.7 million and $23.3 million, respectively, compared to the year-ago periods. Constant currency calculations assume conversions of local currency amounts at exchange rates in effect in the year-ago period compared to those conversions at exchange rates in effect during the current fiscal year period. On a constant currency basis, revenue decreased by 2.4% and 3.2% in the second quarter and first six months of fiscal year 2019, respectively, compared to the year-ago periods. The decreases were partially driven by the higher discounting necessary to offset the effect of reductions in the “Programa Universidade para Todos” or “University for All Program” (“PROUNI”) and the “Fundo de Financiamento Estudantil” or “Students Financing Fund” (“FIES”) programs, along with increased competition. See below for further discussion of the changes in the FIES program. Additionally, declines in the number of students enrolled in law exam test preparation courses partially drove the revenue decreases. These declines are related to changes in the exam resulting in lower pass rates for the first level of the exam, which lowered demand for preparation courses for the subsequent level.

 

Brazil’s economy presented challenges for enrollment growth and created pricing pressures in the education sector. Adtalem Brazil’s revenue results have been negatively impacted by these conditions as well as reductions in the FIES program and increased competition. Adtalem Brazil students are eligible for loans under Brazil’s FIES public loan program, which is financed by the Brazilian government. As of December 31, 2018, approximately 18% of Adtalem Brazil’s degree-seeking students have obtained financing under the FIES program. This represents approximately 18% of Adtalem Brazil’s revenue. The Brazilian government has stated that it is supportive of the FIES program, which is an important factor in helping to increase the number of college graduates. However, the changes enacted during fiscal year 2018 reducing the number of FIES contracts available for grant by approximately 31% to all higher education institutions in Brazil, have impacted Adtalem Brazil’s growth. Adtalem Brazil institutions have increased efforts to attract more non-FIES students in order to diversify their payer mix. Also, Adtalem Brazil is working with private lenders to increase funding sources for prospective students. Management believes Adtalem Brazil institutions offer programs of study and operate in areas of the country that the Brazilian government favors in issuing FIES loans. Should economic conditions continue to weaken and additional austerity measures be instituted by the Brazilian government, Adtalem Brazil’s ability to grow its student enrollment may be further impacted.

 

Key trends for Adtalem Brazil are set forth below.

 

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Adtalem Brazil Student Enrollment:

 

   Fiscal Year
2019
   Fiscal Year 2018 
Term  Sept. 2018   Sept. 2017   Mar. 2018 
New Students   17,956    14,507    23,367 
% Change over Prior Year   23.8%   (8.7)%   3.7%
Total Students   81,088    78,340    75,700 
% Change over Prior Year   3.5%   1.9%   (4.9)%

 

These enrollment figures include students enrolled in degree-granting programs and exclude students enrolled in test preparation programs at Damásio Educacional (“Damasio”). The November 2017 acquisition of São Judas Tadeu (“SJT”) did not affect the fiscal year 2019 or 2018 enrollment figures because these medical test preparation students are also excluded from reported enrollment. The increase in new and total student enrollment in the September 2018 term is driven primarily by increases in online enrollment and tuition discounting. This enrollment increase is not driving higher revenue due to lower tuition pricing of the online programs.

 

The Brazilian government recently changed regulations on opening and operating distance learning in the country. The approval process for launching online facilities was streamlined, making this segment more economically attractive to larger institutions. Adtalem Brazil began offering several bachelor’s and associate degree programs via distance learning in February 2018. These programs are offered under the Wyden Online brand. They are delivered through the Damasio network of over 200 learning centers, which currently has the infrastructure and staff necessary to support distance learning degrees. These online programs are not currently a significant contributor to Adtalem Brazil’s revenue.

 

COSTS AND EXPENSES

 

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, bookstore and other educational materials, student education-related support activities and the provision for bad debts.

 

   Three Months Ended December 31, 2018 
   (in thousands) 
Cost of Educational Services:  Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Fiscal Year 2018 as Reported  $101,597   $5,844   $48,045   $1,957   $157,443 
Cost Increase (Reduction)   7,300    2,822    (1,225)   (2,106)   6,791 
Effect of Acquisitions   -    418    226    -    644 
Hurricane Impact   245    -    -    -    245 
Effect of Currency Change   -    -    (6,891)   -    (6,891)
Fiscal Year 2019 as Reported  $109,142   $9,084   $40,155   $(149)  $158,232 
                          
Fiscal Year 2019 % Change:                         
Cost Increase (Reduction)   7.2%   48.3%   (2.5)%   NM    4.3%
Effect of Acquisitions   -    7.2%   0.5%   NM    0.4%
Hurricane Impact   0.2%   -    -    NM    0.2%
Constant Currency   7.4%   55.4%   (2.1)%   NM    4.9%
Effect of Currency Change   -    -    (14.3)%   NM    (4.4)%
Fiscal Year 2019 % Change as Reported   7.4%   55.4%   (16.4)%   NM    0.5%

 

49 

 

 

   Six Months Ended December 31, 2018 
   (in thousands) 
Cost of Educational Services:  Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Fiscal Year 2018 as Reported  $218,066   $13,264   $95,392   $3,897   $330,619 
Cost Increase (Reduction)   10,088    933    (2,768)   (4,096)   4,157 
Effect of Acquisitions   -    831    627    -    1,458 
Hurricane Impact   (13,372)   -    -    -    (13,372)
Effect of Currency Change   -    -    (15,977)   -    (15,977)
Fiscal Year 2019 as Reported  $214,782   $15,028   $77,274   $(199)  $306,885 
                          
Fiscal Year 2019 % Change:                         
Cost Increase (Reduction)   4.6%   7.0%   (2.9)%   NM    1.3%
Effect of Acquisitions   -    6.3%   0.7%   NM    0.4%
Hurricane Impact   (6.1)%   -    -    NM    (4.0)%
Constant Currency   (1.5)%   13.3%   (2.2)%   NM    (2.3)%
Effect of Currency Change   -    -    (16.7)%   NM    (4.8)%
Fiscal Year 2019 % Change as Reported   (1.5)%   13.3%   (19.0)%   NM    (7.2)%

 

Cost of Educational Services increased 0.5%, or $0.8 million, to $158.2 million in the second quarter and decreased 7.2%, or $23.7 million, to $306.9 million in the first six months of fiscal year 2019 compared to the year-ago periods. Excluding the effect of the change in value of the Brazilian Real compared to the U.S. dollar, total consolidated Cost of Educational Services increased 4.9%, or $7.7 million, in the second quarter and decreased 2.3%, or $7.8 million, in the first six months of fiscal year 2019 compared to the year-ago periods. Prior year expense in the first six months of fiscal year 2018 also included a $13.4 million charge representing the deductibles under insurance policies, incurred for facility and equipment impairment write-offs and the evacuations of AUC and RUSM students, faculty and staff in the wakes of Hurricanes Irma and Maria. Cost increases at the medical schools in fiscal year 2019, excluding the insurance deductibles in fiscal year 2018, were partially driven by AUC’s return to normal level of expenses of operating in St. Maarten. Costs in fiscal year 2018 were reduced as teaching operations were moved to an alternate site. In addition, expenses increased in fiscal year 2019 due to increased investment in growth in the Medical and Healthcare and Professional Education segments partially offset with cost reduction measures in the Technology and Business segment.

 

As a percentage of revenue, Cost of Educational Services was 50.0% and 51.1% in the second quarter and first six months of fiscal year 2019, respectively, compared to 51.1% and 55.0%, respectively, during the year-ago periods. The decrease in the percentage in the second quarter and the first six months of fiscal year 2019 was primarily the result of the cost reduction efforts across all institutions and the result of the negative effects on revenue and expense from Hurricanes Irma and Maria during the second quarter and first six months of fiscal year 2018.

 

Student Services and Administrative Expense

 

The Student Services and Administrative Expense category includes expenses related to student admissions, marketing and advertising, general and administrative, curriculum development and amortization expense of finite-lived intangible assets related to acquisitions of businesses.

 

50 

 

 

   Three Months Ended December 31, 2018 
   (in thousands) 
Student Services and Administrative Expense:  Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Fiscal Year 2018 as Reported  $46,652   $22,322   $13,097   $7,352   $89,423 
Cost Increase (Reduction)   9,312    288    2,487    (649)   11,438 
Effect of Acquisitions   -    815    7    -    822 
Effect of Currency Change   -    -    (1,694)   -    (1,694)
Fiscal Year 2019 as Reported  $55,964   $23,425   $13,897   $6,703   $99,989 
                          
Fiscal Year 2019 % Change:                         
Cost Increase (Reduction)   20.0%   1.3%   19.0%   NM    12.8%
Effect of Acquisitions   -    3.7%   0.1%   NM    0.9%
Constant Currency   20.0%   4.9%   19.0%   NM    13.7%
Effect of Currency Change   -    -    (12.9)%   NM    (1.9)%
Fiscal Year 2019 % Change as Reported   20.0%   4.9%   6.1%   NM    11.8%

 

   Six Months Ended December 31, 2018 
   (in thousands) 
Student Services and Administrative Expense:  Medical and
Healthcare
   Professional
Education
   Technology
and Business
   Home Office
and Other
   Consolidated 
Fiscal Year 2018 as Reported  $95,124   $44,437   $26,329   $12,477   $178,367 
Cost Increase (Reduction)   16,628    2,391    4,173    (818)   22,374 
Effect of Acquisitions   -    1,548    23    -    1,571 
Effect of Currency Change   -    -    (3,826)   -    (3,826)
Fiscal Year 2019 as Reported  $111,752   $48,376   $26,699   $11,659   $198,486 
                          
Fiscal Year 2019 % Change:                         
Cost Increase (Reduction)   17.5%   5.4%   15.8%   NM    12.5%
Effect of Acquisitions   -    3.5%   0.1%   NM    0.9%
Constant Currency   17.5%   8.9%   15.9%   NM    13.4%
Effect of Currency Change   -   &nbs