Shares
of
stock repurchased under the program 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 5: BUSINESS
COMBINATIONS
In
July
2005, DeVry signed a definitive agreement to acquire Gearty CPE for
$2.0 million in cash. Gearty CPE, which operates in the New York/New Jersey
metro area, is a provider of continuing professional education (CPE) programs
and seminars in accounting and finance predominantly serving chief financial
officers and controllers of Fortune 500 companies.
There
is
no pro forma presentation of prior year operating results related to this
acquisition due to the insignificant effect on consolidated
operations.
NOTE 6: INTANGIBLE
ASSETS
Intangible
assets consist of the following (dollars in thousands):
|
|
As
of March 31, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
|
Student
Relationships
|
|
$
|
47,770
|
|
$
|
(42,979
|
)
|
License
and Non-compete Agreements
|
|
|
2,650
|
|
|
(2,617
|
)
|
Class Materials
|
|
|
2,900
|
|
|
(1,250
|
)
|
Trade
Names
|
|
|
110
|
|
|
(97
|
)
|
Other
|
|
|
620
|
|
|
(620
|
)
|
Total
|
|
$
|
54,050
|
|
$
|
(47,563
|
)
|
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
Trade
Names
|
|
$
|
20,972
|
|
|
|
|
Trademark
|
|
|
1,645
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100
|
|
|
|
|
Intellectual
Property
|
|
|
13,940
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200
|
|
|
|
|
Total
|
|
$
|
51,857
|
|
|
|
|
|
|
As
of March 31, 2006
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
Student
Relationships
|
|
$
|
47,770
|
|
$
|
(35,623
|
)
|
License
and Non-compete Agreements
|
|
|
2,650
|
|
|
(2,591
|
)
|
Class Materials
|
|
|
2,900
|
|
|
(1,050
|
)
|
Trade
Names
|
|
|
110
|
|
|
(69
|
)
|
Other
|
|
|
620
|
|
|
(618
|
)
|
Total
|
|
$
|
54,050
|
|
$
|
(39,951
|
)
|
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
Trade
Names
|
|
$
|
20,972
|
|
|
|
|
Trademark
|
|
|
1,645
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100
|
|
|
|
|
Intellectual
Property
|
|
|
13,940
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200
|
|
|
|
|
Total
|
|
$
|
51,857
|
|
|
|
|
Amortization
expense for amortized intangible assets was $1,806,000 and $5,418,000 for
the
quarter and nine months ended March 31, 2007, respectively, and $2,582,000
and $7,743,000 for the quarter and nine months ended March 31, 2006,
respectively. Estimated amortization expense for amortized intangible assets
for
the next five fiscal years ending June 30 is as follows (dollars in
thousands):
Fiscal
Year
|
|
|
|
2007
|
|
$
|
6,843
|
|
2008
|
|
|
3,660
|
|
2009
|
|
|
203
|
|
2010
|
|
|
200
|
|
2011
|
|
|
200
|
|
The
weighted-average amortization period for amortized intangible assets is three
and five years for Chamberlain and Ross University Student Relationships,
respectively; six years for License and Non-compete Agreements; 14 years
for Class Materials; four years for Trade Names and six years for Other.
These intangible assets, except for the Ross University Student Relationships,
are being amortized on a straight-line basis. The amount being amortized
for the
Ross University Student Relationships is based on the estimated progression
of
the students through the respective medical and veterinary programs, giving
consideration to the revenue and cash flow associated with both existing
students and new applicants. This results in the basis being amortized at
an
annual rate for each of the five years of estimated economic life as
follows:
Year
1
|
|
|
27.4
|
%
|
Year
2
|
|
|
29.0
|
%
|
Year
3
|
|
|
21.0
|
%
|
Year
4
|
|
|
14.5
|
%
|
Year
5
|
|
|
8.1
|
%
|
Indefinite-lived
intangible assets related to Trademarks, 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. As of the end of
fiscal
year 2006, there was no impairment loss associated with these indefinite-lived
intangible assets, as fair value exceeds the carrying amount.
DeVry
determined that as of the end of fiscal year 2006, there was no impairment
in
the value of DeVry’s goodwill for any reporting units. This determination was
made after considering a number of factors including a valuation analysis
prepared by an independent professional valuation specialist. The carrying
amount of goodwill related to the DeVry University reportable segment at
March
31, 2007 and June 30, 2006, was unchanged at $22,195,000. The carrying amount
of
goodwill related to the Professional and Training reportable segment was
unchanged at $24,716,000 at March 31, 2007 and June 30, 2006. The carrying
amount of goodwill related to the Medical & Healthcare segment was
unchanged at $244,202,000 at March 31, 2007 and June 30, 2006.
NOTE 7: SALE
OF FACILITIES
In
March 2007, DeVry sold unused land located adjacent to its DeVry University
campus in Tinley Park, Illinois for approximately $1.9 million. In
connection with the sale, DeVry recorded a pre-tax gain of approximately
$1.0
million during the third quarter of fiscal year 2007. In September 2006,
DeVry sold its facility located in West Hills, California for
$36.0 million. In connection with the sale, DeVry recorded a pre-tax gain
of $19.9 million during the first quarter of fiscal year 2007. DeVry
relocated its West Hills operations to a leased facility in nearby Sherman
Oaks,
California. These gains are separately classified in the Consolidated Statements
of Income as a component of Total Costs and Expenses and are related to the
DeVry University reportable segment.
In
November 2005, a DeVry owned building in the Denver, Colorado area was sold
for
$1,798,000. As a result of this sale, DeVry realized a pre-tax gain of $451,000.
This gain is separately classified in the Consolidated Statements of Income
as a
component of Total Costs and Expenses and related to the DeVry University
reportable segment. This building was acquired in 1999 with the acquisition
of
Denver Technical College. This facility was no longer essential to its
operations, having been largely replaced by a new and larger DeVry University
campus serving the Denver market.
NOTE 8: REDUCTION
IN WORKFORCE CHARGES
Fiscal
Year 2007 Charges
During
the third quarter of fiscal 2007, DeVry offered a voluntary separation plan
(VSP) to eligible DeVry University campus-based employees. The decision to
take
this action resulted from a thorough analysis which revealed that a reduction
in
the number of employees at DeVry University campuses was warranted to address
the subsidiary’s cost structure. The VSP was offered at 22 DeVry University
campuses with 285 employees being eligible to participate. Separation of
employment is expected to be effective on June 30, 2007. As of March 31,
2007,
19 employees had accepted this separation plan. DeVry recorded a pre-tax
charge
of approximately $1.1 million in the third quarter of the current fiscal
year in
relation to these employees. This charge consists of severance pay and extended
medical and dental benefits coverage. The charge is separately classified
in the
Consolidated Statements of Income as a component of Total Costs and Expenses
and
is related to the DeVry University reportable segment. No cash payments were
made in the third quarter in relation to this charge.
In
April
2007, an additional 51 employees accepted the VSP. DeVry will record an
additional pre-tax charge of approximately $2.6 million in the fourth quarter
of
the current fiscal year that will cover severance pay and benefits in relation
to these employees.
Also
in
April 2007, DeVry announced plans for an involuntary reduction in force (RIF)
that will reduce its workforce by approximately an additional 145 positions
at
its DeVry University campus-based operations. This will result in an additional
pre-tax charge in the fourth quarter of fiscal 2007 of approximately $2.6
million that will cover severance pay and benefits in relation to these
employees.
Cash
payments for the VSP will begin in the first quarter of fiscal year 2008
and
extend until the period of benefit coverage has expired. Cash payments for
the
RIF will begin in the fourth quarter of the current fiscal year and extend
until
the period of benefit coverage has expired.
Fiscal
Year 2005 Charges
During
fiscal year 2005, DeVry offered voluntary separation plans and implemented
an
involuntary reduction in force which resulted in workforce reductions of
approximately 230 employees. In relation to all of these voluntary and
involuntary reductions in force, DeVry recorded pre-tax charges of approximately
$8.4 million in fiscal year 2005. These charges consisted of severance pay
and in some cases, extended medical and dental benefits coverage. These
workforce reductions related to actions across several of DeVry’s businesses
resulting from process improvements and its continuing efforts to realign
costs
with revenues. The majority of the workforce reductions was in the U.S. and
included managerial, professional, clerical and instructor roles.
Cash
payments for the fiscal year 2005 voluntary separation plans and the involuntary
reductions in force were approximately $76,000 and $388,000 for the quarter
and
nine months ended March 31, 2007, respectively and $250,000 and $2.6 million
for
the quarter and nine months ended March 31, 2006, respectively. Of the total
amount accrued for these events, approximately $280,000 remained to be paid
as
of March 31, 2007. Payments will continue throughout fiscal year
2007.
NOTE
9: INCOME TAXES
DeVry’s
effective income tax rate reflects benefits derived from significant operations
outside the United States. Earnings of Ross University’s international
operations are not subject to U.S. federal or state income taxes. The principal
operating subsidiaries of Ross University are Ross University School of Medicine
(the Medical School) incorporated under the laws of the Commonwealth of Dominica
and Ross University School of Veterinary Medicine (the Veterinary School),
incorporated under the laws of the Federation of St. Christopher Nevis, St.
Kitts in the West Indies. Both Schools have agreements with the respective
governments that exempt them from local income taxation through the years
2043
and 2023, respectively.
DeVry
has
not recorded a tax provision for the undistributed international earnings
of the
Medical and Veterinary Schools. It is DeVry’s intention to indefinitely reinvest
accumulated cash balances, future cash flows and post-acquisition undistributed
earnings and profits to improve the facilities and operations of the Schools
and
pursue future opportunities outside of the United States. In accordance with
this plan, cash held by Ross University will not be available for general
company purposes and under current laws will not be subject to U.S. taxation.
Included in DeVry’s consolidated cash balances were approximately $62 million
and $66 million attributable to Ross University’s international operations as of
March 31, 2007 and March 31, 2006, respectively. As of March 31, 2007 and
2006,
cumulative undistributed earnings were approximately $88.0 million and $50.1
million, respectively.
The
effective tax rate was 25.5% for the third quarter and 29.1% for the first
nine
months of fiscal year 2007, compared to 26.1% for the third quarter and 25.8%
for the first nine months in the prior year. The lower effective income tax
rate
for the third quarter of fiscal year 2007 was primarily due to an increase
in
the relative proportion of earnings from Ross University’s international
operations to U.S. sourced income, partially offset by taxes on the gain
from
the sale of excess land, which carried a tax rate of 40.3%. The increase
in the
effective income tax rate for the first nine months of fiscal year 2007 is
attributable to the gain on the sale of the West Hills facility, which carried
a
tax rate of 40.4%, changes to prior and current year income tax estimates
for
Ross University’s domestic operations, and the factors as discussed above for
the third quarter. The effective income tax rate for the fiscal year ended
June
30, 2006 was 25.1%.
During
the third quarter of fiscal year 2006, the Internal Revenue Service began
an
audit of DeVry’s consolidated federal income tax returns for the fiscal years of
2003 and 2004 and certain refund claims for prior years. During the first
quarter of fiscal year 2007, the Internal Revenue Service completed this
audit
and no adjustments were required to be made for those income tax returns
and
refund claims.
NOTE 10: LONG-TERM
DEBT
All
of
DeVry’s borrowings and letters of credit under its long-term debt agreements are
through DeVry Inc. and Global Education International, Inc. (“GEI”), an
international subsidiary formed in connection with the acquisition of Ross
University. This long-term debt consists of the following at March 31, 2007
and 2006 (dollars in thousands):
|
|
Outstanding
Debt
at
March 31,
|
|
|
|
2007
|
|
2006
|
|
Revolving
Credit Agreement:
|
|
|
|
|
|
|
|
DeVry
Inc. as borrower
|
|
$
|
—
|
|
$
|
20,000
|
|
GEI
as borrower
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
$
|
20,000
|
|
Senior
Notes:
|
|
|
|
|
|
|
|
DeVry
Inc. as borrower
|
|
$
|
—
|
|
$
|
75,000
|
|
GEI
as borrower
|
|
|
—
|
|
|
50,000
|
|
Total
|
|
$
|
—
|
|
$
|
125,000
|
|
Total
Outstanding Debt
|
|
$
|
—
|
|
$
|
145,000
|
|
Current
Maturities of Debt
|
|
|
—
|
|
|
50,000
|
|
Total
Long-term Debt
|
|
$
|
—
|
|
$
|
95,000
|
|
In
July
and October 2006, DeVry prepaid the remaining $115.0 million of Senior
Notes without penalty. In connection with the prepayments, DeVry charged
to
expense approximately $0.8 million of unamortized deferred financing costs.
This
prepayment was funded through a combination of available cash and $40.0 million
of increased borrowings under DeVry’s revolving credit agreement, which bears a
lower interest rate than the Senior Notes.
On
January 11, 2007, DeVry entered into a third amendment to the revolving credit
agreement. This agreement amends or modifies certain aspects of the revolving
credit agreement so as to, among other things: (i) extend the maturity date
to
January 11, 2012, (ii) decrease the spread on applicable interest and fee
rates,
(iii) revise certain financial covenants, and (iv) increase permitted
acquisition and restricted payment flexibility. DeVry deferred approximately
$246,000 in financing costs incurred in relation to this refinancing and
charged
to expense approximately $130,000 of previously deferred financing
costs.
The
spreads on the interest rate, letter of credit fees and commitment fees are
adjusted quarterly, based
upon DeVry’s achievement of certain financial ratios.
NOTE 11: COMMITMENTS
AND CONTINGENCIES
DeVry
is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
associated with financial assistance programs and other claims arising in
the
normal conduct of its business. The following is a description of pending
litigation that may be considered other than ordinary and routine litigation
that is incidental to the business.
Brigette
Dean Hines, a former student of Ross University Veterinary School of Medicine
was dismissed from the school and denied re-enrollment. This former student
filed a claim in June 2005 in the Superior Court of New Jersey for Middlesex
County. In this suit, she claims that the dismissal was based upon her
disability and she is seeking compensatory damages for economic and non-economic
harm, punitive damages, cost of the suit, attorney’s fees and other relief
deemed appropriate by the Court. Discovery is ongoing.
On
August
25, 2005, DeVry filed a complaint in the Superior Court of California, County
of
Alameda, against Sierra Bay Contractors, Inc., the general contractor
responsible for the construction of the student dormitory on the DeVry
University, Fremont, California campus. DeVry's complaint sought monetary
damages arising out of Sierra Bay's failure to keep the project free from
liens
filed by Sierra Bay's subcontractors, and sought indemnity from the same.
Sierra
Bay also placed a lien on the real property on which the building is situated,
and further filed a counterclaim to DeVry’s claim in December 2005, alleging
that DeVry failed to pay the outstanding contract balance or amounts for
extra
work done. The total amount claimed for the outstanding contract balance,
the extra work, and other damages resulting from construction delays, is
approximately $3.0 million. All of the claims, including those of the
subcontractors, have been consolidated under the principal case between DeVry
and Sierra Bay. There are no governmental entities involved. In April 2007,
DeVry also filed complaints against the architect, the project manager and
an
engineering firm to ensure that all parties of interest were engaged in the
suit. Sierra Bay and DeVry have agreed to attempt a mediation of the claims.
No
date has been set for the mediation.
Saro
Daghlian, a former student at a California DeVry University campus, brought
a
putative class action suit in December 2005 in the California State District
Court for the County of Los Angeles alleging that DeVry’s materials distributed
to students did not comply with California state statutes including a California
Education Code requirement to provide a specified statement to prospective
students concerning the transferability of credits. The case was removed
to the
United States District Court for the Central District of California, and
a
motion to dismiss was filed. The motion to dismiss was denied. The plaintiff
filed a motion for class certification, which the court denied without
prejudice, and the plaintiff has filed a new motion for class
certification.
As
of
March 31, 2007, there is an accrual of less than $1.0 million for the resolution
of all legal claims.
While
the
ultimate outcome of pending contingencies is difficult to estimate at this
time,
DeVry intends to vigorously defend itself with respect to the pending claims.
At
this time, DeVry does not believe that the outcome of current claims,
administrative proceedings, regulatory reviews and lawsuits will have a material
effect on its cash flows, results of operations or financial
position.
NOTE 12: SEGMENT
INFORMATION
DeVry’s
principal business is providing post-secondary education. The services of
our
operations are described in more detail in “Note 1- Nature of Operations”
to the consolidated financial statements contained in DeVry’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2006. DeVry presents three
reportable segments: the DeVry University undergraduate and graduate operations
(DeVry University); the professional exam review and training operations
including Becker Professional Review and the Center for Corporate Education
(Professional and Training); and the Ross University medical and veterinary
school and Chamberlain College of Nursing operations (Medical &
Healthcare).
These
segments are consistent with the method by which management evaluates
performance and allocates resources. Such decisions are based, in part, on
each
segment’s operating income, which is defined as income before interest expense,
amortization and income taxes. Intersegment sales are accounted for at amounts
comparable to sales to nonaffiliated customers and are eliminated in
consolidation. The accounting policies of the segments are the same as those
described in “Note 2 — Summary of Significant Accounting Policies” to
the consolidated financial statements contained in the Company’s Annual Report
on Form 10-K for the fiscal year ended June 30, 2006.
The
consistent measure of segment profit excludes interest expense, amortization
and
certain corporate-related depreciation. As such, these items are reconciling
items in arriving at income before income taxes. The consistent measure of
segment assets excludes deferred income tax assets and certain depreciable
corporate assets. Additions to long-lived assets have been measured in this
same
manner. Reconciling items are included as corporate assets.
Following
is a tabulation of business segment information based on the current
segmentation for the quarter and nine months ended March 31, 2007 and 2006.
Corporate information is included where it is needed to reconcile segment
data
to the consolidated financial statements.
|
|
For
the Quarter
Ended
March 31,
|
|
For
the Nine Months
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
(Dollars
in Thousands)
|
DeVry
University
|
|
$
|
192,116
|
|
$
|
174,504
|
|
$
|
552,123
|
|
$
|
506,899
|
|
Professional
and Training
|
|
|
17,569
|
|
|
15,063
|
|
|
48,732
|
|
|
37,296
|
|
Medical &
Healthcare
|
|
|
38,096
|
|
|
30,639
|
|
|
105,115
|
|
|
82,660
|
|
Total
Consolidated Revenues
|
|
$
|
247,781
|
|
$
|
220,206
|
|
$
|
705,970
|
|
$
|
626,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
13,058
|
|
$
|
8,492
|
|
$
|
39,926
|
|
$
|
15,155
|
|
Professional
and Training
|
|
|
7,157
|
|
|
5,707
|
|
|
17,570
|
|
|
12,612
|
|
Medical &
Healthcare
|
|
|
13,519
|
|
|
12,360
|
|
|
39,280
|
|
|
30,612
|
|
Reconciling
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
(1,806
|
)
|
|
(2,582
|
)
|
|
(5,418
|
)
|
|
(7,743
|
)
|
Interest
Expense
|
|
|
(774
|
)
|
|
(2,490
|
)
|
|
(4,663
|
)
|
|
(7,751
|
)
|
Depreciation
and Other
|
|
|
(385
|
)
|
|
(253
|
)
|
|
(1,691
|
)
|
|
(766
|
)
|
Total
Consolidated Income before Income Taxes
|
|
$
|
30,769
|
|
$
|
21,234
|
|
$
|
85,004
|
|
$
|
42,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
455,291
|
|
$
|
485,131
|
|
$
|
455,291
|
|
$
|
485,131
|
|
Professional
and Training
|
|
|
76,045
|
|
|
82,025
|
|
|
76,045
|
|
|
82,025
|
|
Medical &
Healthcare
|
|
|
392,398
|
|
|
390,318
|
|
|
392,398
|
|
|
390,318
|
|
Corporate
|
|
|
23,427
|
|
|
28,725
|
|
|
23,427
|
|
|
28,725
|
|
Total
Consolidated Assets
|
|
$
|
947,161
|
|
$
|
986,199
|
|
$
|
947,161
|
|
$
|
986,199
|
|
Additions
to Long-lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
8,188
|
|
$
|
3,311
|
|
$
|
17,786
|
|
$
|
10,703
|
|
Professional
and Training
|
|
|
184
|
|
|
31
|
|
|
229
|
|
|
2,179
|
|
Medical &
Healthcare
|
|
|
2,965
|
|
|
2,095
|
|
|
9,524
|
|
|
5,401
|
|
Total
Consolidated Additions to Long-lived Assets
|
|
$
|
11,337
|
|
$
|
5,437
|
|
$
|
27,539
|
|
$
|
18,283
|
|
Depreciation
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
7,914
|
|
$
|
8,067
|
|
$
|
22,271
|
|
$
|
24,045
|
|
Professional
and Training
|
|
|
107
|
|
|
120
|
|
|
367
|
|
|
348
|
|
Medical &
Healthcare
|
|
|
1,193
|
|
|
981
|
|
|
3,447
|
|
|
2,909
|
|
Corporate
|
|
|
247
|
|
|
247
|
|
|
741
|
|
|
741
|
|
Total
Consolidated Depreciation
|
|
$
|
9,461
|
|
$
|
9,415
|
|
$
|
26,826
|
|
$
|
28,043
|
|
Intangible
Asset Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Professional
and Training
|
|
|
63
|
|
|
67
|
|
|
190
|
|
|
200
|
|
Medical &
Healthcare
|
|
|
1,743
|
|
|
2,515
|
|
|
5,228
|
|
|
7,543
|
|
Total
Consolidated Amortization
|
|
$
|
1,806
|
|
$
|
2,582
|
|
$
|
5,418
|
|
$
|
7,743
|
|
In
September 2006, DeVry sold its facility located in West Hills, California.
In connection with the sale, DeVry recorded a pre-tax gain of $19.9 million
during the first quarter of fiscal year 2007. This gain is included in operating
income of the DeVry University reportable segment for the nine months ended
March 31, 2007. In March 2007, DeVry sold unused land adjacent to its campus
in
Tinley Park, Illinois. In connection with the sale, DeVry recorded a pre-tax
gain of approximately $1.0 million during the third quarter of fiscal year
2007.
This gain is included in operating income of the DeVry University reportable
segment for the quarter and the nine months ended March 31, 2007. Also in
March
2007, DeVry recorded a pre-tax charge of $1.1 million for separation plan
severance expense. This expense reduced operating income of the DeVry University
reportable segment for the quarter and the nine months ended March 31,
2007.
DeVry
conducts its educational operations in the United States, Canada, the Caribbean
countries of Dominica and St. Kitts/Nevis, Europe, the Middle East and the
Pacific Rim. Other international revenues, which are derived principally
from
Canada, were less than 5% of total revenues for the quarters and nine months
ended March 31, 2007 and 2006. Revenues and long-lived assets by geographic
area are as follows:
|
|
For
the Quarter
Ended
March 31,
|
|
For
the Nine Months
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars
in Thousands)
|
|
Revenues
from Unaffiliated Customers:
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$
|
209,946
|
|
$
|
184,450
|
|
$
|
601,287
|
|
$
|
537,368
|
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
34,473
|
|
|
32,748
|
|
|
94,985
|
|
|
81,176
|
|
Other
|
|
|
3,362
|
|
|
3,008
|
|
|
9,698
|
|
|
8,311
|
|
Total
International
|
|
|
37,835
|
|
|
35,756
|
|
|
104,683
|
|
|
89,487
|
|
Consolidated
|
|
$
|
247,781
|
|
$
|
220,206
|
|
$
|
705,970
|
|
$
|
626,855
|
|
Long-lived
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$
|
317,158
|
|
$
|
341,495
|
|
$
|
317,158
|
|
$
|
341,495
|
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
309,538
|
|
|
306,371
|
|
|
309,538
|
|
|
306,371
|
|
Other
|
|
|
290
|
|
|
297
|
|
|
290
|
|
|
297
|
|
Total
International
|
|
|
309,828
|
|
|
306,668
|
|
|
309,828
|
|
|
306,668
|
|
Consolidated
|
|
$
|
626,986
|
|
$
|
648,163
|
|
$
|
626,986
|
|
$
|
648,163
|
|
No
one
customer accounted for more than 10% of DeVry’s consolidated revenues.
ITEM 2 —
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Through
its Web site, DeVry offers (free of charge) its annual report on Form 10-K,
quarterly reports on Form 10-Q and other reports filed with the United States
Securities and Exchange Commission. DeVry’s Web site address is
http://www.devryinc.com.
The
following discussion of DeVry’s results of operations and financial condition
should be read in conjunction with DeVry’s Consolidated Financial Statements and
the related Notes thereto in Item 1, “FINANCIAL STATEMENTS” in this Quarterly
Report on Form 10-Q and DeVry’s Consolidated Financial Statements and related
Notes thereto in Item 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” in DeVry’s
Annual Report on Form 10-K for the year ended June 30, 2006. DeVry’s annual
report on Form 10-K includes a description of critical accounting policies
and
estimates and assumptions used in the preparation of DeVry’s financial
statements. These include, but are not limited to, revenue and expense
recognition; allowance for uncollectible accounts; internally developed
software; land, buildings and equipment; stock-based compensation; impairment
of
goodwill and other intangible assets; impairment of long-lived assets and
income
tax liabilities.
The
somewhat seasonal pattern of DeVry’s enrollments and its educational program
starting dates affect the results of operations and the timing of cash flows.
Therefore, management believes that comparisons of its results of operations
should 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.
FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this quarterly report on Form 10-Q, including those
that affect DeVry’s expectations or plans, may constitute “forward-looking
statements” subject to the Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally
can be
identified by phrases such as DeVry Inc. or its management “anticipates,”
“believes,” “estimates,” “expects,” “forecasts,” “foresees” or other words or
phrases of similar import. Such statements are inherently uncertain and may
involve risks and uncertainties that could cause future results to differ
materially from those projected or implied by these forward-looking statements.
Potential risks and uncertainties that could affect DeVry’s results are
described in Item 1A, “Risk Factors” and in the subsections of
“Item 1 — Business” entitled “Competition,” “Student Recruiting and
Admission,” “Accreditation,” “Approval and Licensing,” “Tuition and Fees,”
“Financial Aid and Financing Student Education,” “Student Loan Defaults,”
“Career Services,” “Seasonality,” and “Employees” in DeVry’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2006 and filed with the Securities
and Exchange Commission on September 13, 2006.
All
forward-looking statements included in this report are based upon information
presently available, and DeVry assumes no obligation to update any
forward-looking statements.
OVERVIEW
For
the
third quarter of fiscal year 2007, DeVry’s net income increased 46% to $22.9
million on record total revenues of $247.8 million and on improved operating
performance. Operational and financial highlights for the third quarter of
fiscal year 2007 include:
|
·
|
Total
revenues and operating profits increased at all three of DeVry’s business
segments primarily due to continued enrollment growth, sales of
review
course materials and improved operational execution, while at the
same
time making investments to support future
growth.
|
|
·
|
The
Spring 2007 term marked DeVry University’s seventh consecutive period of
positive undergraduate new student growth and the fourth consecutive
period of positive total student enrollment growth.
|
|
·
|
In
connection with DeVry’s real estate optimization strategy, excess land
adjacent to the DeVry University campus in Tinley Park, Illinois
was sold
for $1.9 million resulting in a pre-tax gain of $1.0 million. This
pre-tax
gain was offset by a severance charge of $1.1 million pre-tax for
the
previously announced Voluntary Separation Plan for eligible DeVry
University campus-based
employees.
|
|
·
|
DeVry’s
financial position continued to strengthen as it eliminated all
debt by
repaying $50 million of outstanding revolver borrowings and ended
the
quarter with $136 million of cash.
|
|
·
|
DeVry
repurchased approximately 194,000 shares of its common stock at
a total
cost of approximately $5.3 million. The stock repurchase program,
which
was approved by its Board of Directors in November 2006, allows
DeVry to
buy back up to $35.0 million of its common stock within the next
two
years.
|
The
following table illustrates the effects of the gain on the sales of the West
Hills facility and excess land adjacent to the Tinley Park campus and the
charge
for separation plan severance on DeVry’s earnings. The non-GAAP disclosure of
earnings is not preferable to GAAP net income but is shown as a supplement
to
such disclosure for comparability to the year-ago three and nine month’s
earnings (in thousands, except per share data):
|
|
For
the Three Months
Ended
March 31,
|
|
For
the Nine Months
Ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
Income
|
|
$
|
22,924
|
|
$
|
15,682
|
|
$
|
60,241
|
|
$
|
31,242
|
|
Earnings
per Share (diluted)
|
|
$
|
0.32
|
|
$
|
0.22
|
|
$
|
0.85
|
|
$
|
0.44
|
|
Gain
on Sale of Assets (net of tax)
|
|
$
|
571
|
|
|
--
|
|
$
|
12,411
|
|
$
|
273
|
|
Earnings
per Share (diluted)
|
|
$
|
0.01
|
|
|
--
|
|
$
|
0.17
|
|
|
--
|
|
Separation
Plan Severance (net of tax)
|
|
$
|
(654
|
)
|
|
--
|
|
$
|
(654
|
)
|
|
--
|
|
Earnings
per Share (diluted)
|
|
$
|
(0.01
|
)
|
|
--
|
|
$
|
(0.01
|
)
|
|
--
|
|
Income
Excluding the Gain on Sale of Assets and Separation Plan Severance
(net of
tax)
|
|
$
|
23,007
|
|
$
|
15,682
|
|
$
|
48,484
|
|
$
|
30,969
|
|
Earnings
per Share (diluted)
|
|
$
|
0.32
|
|
$
|
0.22
|
|
$
|
0.68
|
|
$
|
0.44
|
|
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 for the third
quarter and first nine months for both the current and prior fiscal years.
Percents may not add due to rounding.
|
|
For
the Three Months Ended March 31,
|
|
For
the Nine Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of Educational Services
|
|
|
50.8
|
%
|
|
52.4
|
%
|
|
51.9
|
%
|
|
54.0
|
%
|
Separation
Plan Severance
|
|
|
0.4
|
%
|
|
—
|
|
|
0.2
|
%
|
|
—
|
|
Gain
on Sale of Assets
|
|
|
(0.4
|
%)
|
|
—
|
|
|
(2.9
|
%)
|
|
(0.1
|
%)
|
Student
Services & Admin. Exp
|
|
|
36.4
|
%
|
|
36.8
|
%
|
|
38.1
|
%
|
|
38.1
|
%
|
Interest
Expense
|
|
|
0.3
|
%
|
|
1.1
|
%
|
|
0.7
|
%
|
|
1.2
|
%
|
Total
Costs and Expenses
|
|
|
87.6
|
%
|
|
90.4
|
%
|
|
88.0
|
%
|
|
93.3
|
%
|
Income
Before Income Taxes
|
|
|
12.4
|
%
|
|
9.6
|
%
|
|
12.0
|
%
|
|
6.7
|
%
|
Income
Tax Provision
|
|
|
3.2
|
%
|
|
2.5
|
%
|
|
3.5
|
%
|
|
1.7
|
%
|
Net
Income
|
|
|
9.3
|
%
|
|
7.1
|
%
|
|
8.5
|
%
|
|
5.0
|
%
|
REVENUES
Total
revenues for the third quarter of fiscal year 2007 increased 12.5% to
$247.8 million from the prior year quarter. For the first nine months of
fiscal year 2007, total revenues increased 12.6% to $706.0 million from the
same
period a year ago. For both the third quarter and first nine months of fiscal
year 2007, revenues increased at all three of DeVry’s business segments
primarily due to continued growth in new student enrollments and tuition
price
increases as compared to the year ago periods. In addition, revenues increased
due to higher sales of Becker Professional Review materials, the expanding
sale
of electronic text books (“eBooks”) and higher interest income earned on
investments.
DeVry
University
DeVry
University revenues increased by 10.1% in the third quarter to $192.1 million,
and rose by 8.9% to $552.1 million for the first nine months of fiscal year
2007. Tuition revenues are the largest component of total revenues in the
DeVry
University segment. The two principal factors that influence revenues are
enrollment and tuition rates. Key trends in these two components are set
forth
below.
Total
undergraduate enrollment by term:
|
·
|
Increased
by 2.5% from summer 2005 (36,220 students) to summer 2006 (37,132
students);
|
|
·
|
Increased
by 4.9% from fall 2005 (38,546 students) to fall 2006 (40,434 students);
and
|
|
·
|
Increased
by 5.5% from spring 2006 (38,523 students) to spring 2007 (40,637
students). This was DeVry University’s fourth consecutive period of
positive total undergraduate student enrollment
growth.
|
New
undergraduate enrollment by term:
|
·
|
Increased
by 12.2% from summer 2005 (11,293 students) to summer 2006 (12,671
students);
|
|
·
|
Increased
by 11.9% from fall 2005 (10,663 students) to fall 2006 (11,930
students);
and
|
|
·
|
Increased
by 6.9% from spring 2006 (10,359 students) to spring 2007 (11,075
students). The spring 2007 term was the seventh consecutive term
in which
new undergraduate student enrollments increased from the year-ago
level.
|
Graduate
coursetaker enrollment:
The
term
“coursetaker” refers to the number of courses taken by a student. Thus, one
student taking two courses is counted as two coursetakers.
|
·
|
Increased
by 10.3% from the July 2005 session (11,434 coursetakers) to the
July 2006
(12,617 coursetakers) session;
|
|
·
|
Increased
by 10.5% from the September 2005 session (12,732 coursetakers)
to the
September 2006 session (14,069
coursetakers);
|
|
·
|
Increased
by 8.9% from the November 2005 session (12,777 coursetakers) to
the
November 2006 session (13,920 coursetakers);
|
|
·
|
Increased
by 10.9% from the January 2006 session (13,776 coursetakers) to
the
January 2007 session (15,278 coursetakers);
and
|
|
·
|
Increased
by 5.2% from the March 2006 session (14,029 coursetakers) to the
March
2007 session (14,756 coursetakers).
|
Tuition
rates:
|
·
|
Undergraduate
program tuition increased by approximately 4.5% in July
2006; and
|
|
·
|
Graduate
school program tuition increased by approximately 4.5% for the
July 2006
session following a 5.0% increase for the September 2005
session.
|
The
increasing undergraduate new student enrollments were due to greater investments
in marketing and recruiting, continued demand for DeVry’s high quality
educational programs and its position within the working adult market.
Management believes that efforts at Keller to create new brand awareness
through
improved messaging have produced positive enrollment results, and it will
continue to focus on further improvements in the future.
Also
contributing to higher total revenues in the DeVry University segment was
an
increase in Other Educational Revenues partly from sales of eBooks.
Partly
offsetting the increases in revenue from improved enrollments and higher
tuition
rates is a growing proportion of working adult undergraduate students who
typically enroll for less than a full-time academic load. These students
are
primarily enrolled in online programs and at programs offered at DeVry
University Centers. These part-time students pay a lesser total average tuition
amount each term than do full-time students at the undergraduate campus
locations. Therefore, the higher revenue per student resulting from tuition
increases has been partially offset by a greater proportion of part-time
students. In addition, interest charges (included in Other Educational Revenue)
on undergraduate student accounts receivable decreased in the first nine
months
of fiscal year 2007, as compared to the prior year periods. These receivables
are generally subject to a monthly interest charge of one percent under DeVry
University’s EDUCARD revolving charge plan for financing students’ education.
Lower interest charges are primarily a result of a decrease in the average
accounts receivable balance on enrolled, undergraduate student accounts.
The
timeliness of receivable collections improved as compared to the prior
year.
Professional
and Training
Professional
and Training segment revenues rose 16.6% to $17.6 million in the third quarter
and increased by 30.7% to $48.7 million for the first nine months of fiscal
year
2007 as compared to the year-ago periods. Revenues were higher in the third
quarter primarily due to strong demand for CPA and CFA review courses on
CD-ROM.
The primary reason for the increased revenue during the first nine months
of the
current year was increased enrollment in Becker Professional Review’s CPA review
courses and from increased sales of CPA and CFA review courses on CD-ROM.
Management believes that these increases are being driven by the continued
demand for accounting and finance professionals.
Medical
and Healthcare
Medical
and Healthcare segment revenues increased by 24.3% to $38.1 million in the
third
quarter and grew 27.2% to $105.1 million for the first nine months of fiscal
year 2007 as compared to the prior year periods. While Ross University accounted
for the significant majority of the revenue increase in this segment, increasing
enrollments at Chamberlain College of Nursing also contributed to segment
revenue growth. The two principal factors that influence revenues are enrollment
and tuition rates. Key trends in these two components are set forth
below.
Ross
University total enrollment by term:
|
·
|
Increased
by 13.2% from May 2005 (3,029 students) to May 2006 (3,428
students);
|
|
·
|
Increased
by 15.4% from September 2005 (3,227 students) to September 2006
(3,724
students); and
|
|
·
|
Increased
by 14.8% from January 2006 (3,264 students) to January 2007 (3,747
students).
|
Ross
University new student enrollment by term:
|
·
|
Increased
by 63.8% from May 2005 (268 students) to May 2006 (439
students);
|
|
·
|
Increased
by 9.2% from September 2005 (575 students) to September 2006 (628
students); and
|
|
·
|
Increased
by 28.2% from January 2006 (387 students) to January 2007 (496
students).
|
Tuition
rates:
|
·
|
Tuition
and fees for the Ross University beginning basic sciences programs
increased by approximately 5% for the September 2006 term;
and
|
|
·
|
Tuition
and fees for the Ross University final clinical portion of the
programs
increased by approximately 5% as compared to the year-ago
quarter.
|
Management
believes that the increasing new student enrollments at Ross University for
the
past several terms resulted from enhancements made to its marketing and
recruiting functions. In addition, continued demand for medical doctors and
veterinarians positively influenced career decisions of new students towards
these respective fields of study. To prepare for increasing student demand,
Ross
University is adding faculty, classrooms, laboratories and student
housing.
During
March 2007, Chamberlain College of Nursing began offering associate and
bachelor’s degrees in nursing programs at its new campus in Columbus, Ohio. This
new location is co-located with DeVry University’s campus in
Columbus.
Revenues
from Other Sources
Other
Educational Revenues increased by 24.8% to $19.7 million during the third
quarter and improved by 29.0% to $54.8 million during the first nine months
of fiscal year 2007 as compared to the prior year. As discussed above, the
primary drivers for the increase in Other Educational Revenues were strong
sales
of Becker Professional Review course materials on CD-ROM and eBooks at DeVry
University.
Interest
income on DeVry’s short-term investments of cash balances increased
significantly in both the third quarter and first nine months of fiscal year
2007. The increase is due to higher levels of short-term investments with
higher
short-term interest rates as compared to the prior year.
COSTS
AND EXPENSES
Cost
of Educational Services
Cost
of
Educational Services increased 8.9% to $125.8 million during the third quarter
and grew 8.3% to $366.7 million during the first nine months of fiscal year
2007
as compared to the year-ago periods. Cost increases were incurred in support
of
four additional DeVry University Centers and expanding online program
enrollments. The number of online coursetakers enrolled in the March 2007
term
increased by 22.5% from the year-ago term to 35,417. In addition, cost increases
were incurred at Ross University to support increasing student enrollments.
Also
contributing to the higher cost of educational services was an increase in
salary expense due to annual merit increases.
Partially
offsetting these increases was a decrease in the provision for doubtful accounts
in both the third quarter and first nine months of the current year primarily
due to an improvement in collections of active student receivable balances
due
to internal process improvements. Also partially offsetting these increases
was
a decrease in depreciation expense in the first nine months of the current
year
due to lower capital spending during each of the past several
years.
As
a
percent of revenue, Cost of Educational Services decreased to 50.8% in the
third
quarter of fiscal 2007 from 52.4% during the prior year period. For the first
nine months of fiscal 2007, Cost of Educational Services decreased to 51.9%
from
54.0% in the year-ago period. These decreases were due to increased operating
leverage with existing facilities and staff and revenue gains, which more
than
offset incremental investments at all three business segments.
Separation
Plan Severance
During
the third quarter of fiscal 2007, DeVry offered a voluntary separation plan
(VSP) to eligible DeVry University campus-based employees. The decision to
take
this action resulted from a thorough analysis which revealed that a reduction
in
the number of employees at DeVry University campuses was warranted to address
the subsidiary’s cost structure. The VSP was offered at 22 DeVry University
campuses with 285 employees being eligible to participate. Separation of
employment is expected to be effective on June 30, 2007. As of March 31,
2007,
19 employees had accepted this separation plan. DeVry recorded a pre-tax
charge
of approximately $1.1 million in the third quarter of the current fiscal
year in
relation to these employees. This charge consists of severance pay and extended
medical and dental benefits coverage. The charge is separately classified
in the
Consolidated Statements of Income as a component of Total Costs and Expenses
and
is related to the DeVry University reportable segment. No cash payments were
made in the third quarter in relation to this charge.
In
April
2007, an additional 51 employees accepted the VSP. DeVry will record a pre-tax
charge of approximately $2.6 million in the fourth quarter of the current
fiscal
year that will cover severance pay and benefits in relation to these
employees.
Also
in
April 2007, DeVry announced plans for an involuntary reduction in force (RIF)
that will reduce its workforce by approximately an additional 145 positions
at
its DeVry University campus-based operations. This will result in an additional
pre-tax charge in the fourth quarter of fiscal 2007 of approximately $2.6
million that will cover similar severance pay and benefits in relation to
these
employees.
Cash
payments for the VSP will begin in the first quarter of fiscal year 2008
and
extend until the period of benefit coverage has expired. Cash payments for
the
RIF will begin in the fourth quarter of the current fiscal year and extend
until
the period of benefit coverage has expired.
Gain
on Sale of Assets
During
September 2006, DeVry sold its facility located in West Hills, California
for
$36.0 million. In connection with this sale, DeVry recorded a pre tax gain
of
$19.9 million during the first quarter of fiscal year 2007. Net of tax, the
gain
on the sale was $11.8 million or $0.16 per share. DeVry relocated its West
Hills
operation to a leased facility in nearby Sherman Oaks, California. In March
2007, DeVry sold unused land adjacent to its campus in Tinley Park, Illinois
for
$1.9 million. In connection with the sale, DeVry recorded a pre-tax gain
of
approximately $1.0 million during the third quarter of fiscal year 2007.
These
gains are separately classified in the Consolidated Statements of Income
as a
component of Total Costs and Expenses and are related to the DeVry University
reportable segment.
These
transactions were executed as a part of DeVry’s ongoing real estate optimization
strategy, which involves evaluating DeVry’s current facilities and locations in
order to improve capacity utilization and enhance economic value. DeVry may
pursue plans to reconfigure large campuses and/or relocate to smaller locations
within the same geographic area to increase market penetration. DeVry will
also
consider co-locating other educational offerings such as Chamberlain College
of
Nursing at DeVry University campuses. Future actions under this program could
result in accounting gains and/or losses depending upon real estate market
conditions, whether the facility is owned or leased and other market factors.
Student
Services and Administrative Expense
Student
Services and Administrative Expense increased 11.5% to $90.3 million during
the
third quarter and grew by 12.8% to $269.3 million during the first nine months
of fiscal year 2007 as compared to the prior year periods. The increase in
expenses primarily represents additional investments in recruiting, advertising
and systems to generate growth in new student enrollments at DeVry University.
High school presenters and advisors have been added in connection with DeVry’s
strategy to recapture its share of the high school market. Also, admissions
advisors have been added to support the growing online program enrollments
and
at new DeVry University Centers that have opened since the year-ago periods.
Increased new student enrollments, as described above, at DeVry University,
Becker Professional Review and Ross University are believed to be, in part,
attributable to the higher level and effectiveness of this spending. In
addition, expense attributed to stock-based awards included in Student Services
and Administrative Expense increased during the first nine months of fiscal
year
2007 as more new options were granted during this period.
Partially
offsetting these increases in student recruiting expense was lower amortization
of finite-lived intangible assets in connection with acquisitions of businesses,
primarily related to Ross University. Amortization expense is included entirely
in the Student Services and Administrative Expense category.
OPERATING
INCOME
DeVry
University
DeVry
University operating income improved 53.8% to $13.1 million during the third
quarter and increased $24.8 million to $39.9 million during the first nine
months of fiscal year 2007, as compared to the prior year periods. Revenue
increased and gross margin improved during the third quarter and first nine
months of fiscal year 2007, which was partially offset by increased spending
on
recruiting, advertising and systems infrastructure to drive future enrollment
gains and enhance student services.
Also
contributing to the increase in operating income for the third quarter and
first
nine months of fiscal year 2007 were the gains on the sale of assets, partially
offset by the severance plan accrual, as discussed above.
Professional
and Training
Professional
and Training operating income rose 25.4% to $7.2 million during the third
quarter and increased 39.3% to $17.6 million during the nine months of fiscal
year 2007 as compared to the prior year periods. The increase in operating
income is the result of higher revenues and improved operating leverage as
discussed above. The increase was partially offset by a higher allocation
of
corporate expenses to this business segment, including information technology,
human resources and legal, based upon the current usage of such services.
Medical
and Healthcare
Medical
and Healthcare operating income increased 9.4% to $13.5 million during the
third
quarter and grew 28.3% to $39.3 million during the first nine months of fiscal
year 2007 as compared to the year-ago periods. At Ross University, increases
in
student enrollments and tuition produced higher revenues and operating income
for the current year as compared to the prior year periods even as faculty,
staff and facilities were being added to accommodate future enrollment growth.
Operating income at Chamberlain College of Nursing increased due to higher
revenues from growing enrollments partially offset by an increase in costs
associated with opening its new campus in Columbus, Ohio.
INTEREST
EXPENSE
Interest
expense decreased 68.9% to $0.8 million in the third quarter and dropped
39.8%
to $4.7 million for the first nine months of fiscal year 2007, as compared
to
the prior year periods. The decrease in interest expense is due to lower
average
borrowings partially offset by the write-off of unamortized deferred financing
costs related to the pre-payment of the Senior Notes and the change in the
members of the bank group related to the Third Amendment to DeVry’s revolving
credit agreement. During July and October 2006, DeVry repaid the remaining
Senior Notes totaling $115 million. In connection with the debt prepayments,
DeVry charged to expense approximately $0.8 million of unamortized deferred
financing costs in the first six months of fiscal year 2007. During January
2007, DeVry amended its revolving credit agreement to, among other things,
reduce the spread on applicable interest and fee rates; extend the remaining
term from two to five years; revise and loosen certain financial covenants;
and
provide increased flexibility for acquisitions, dividends and/or share
repurchase programs. DeVry deferred approximately $246,000 in financing costs
incurred in relation to this refinancing and charged to expense approximately
$130,000 of previously deferred financing costs.
INCOME
TAXES
The
effective tax rate was 25.5% for the third quarter and 29.1% for the first
nine
months of fiscal year 2007, compared to 26.1% for the third quarter and 25.8%
for the first nine months in the prior year. The lower effective income tax
rate
for the third quarter of fiscal year 2007 was primarily due to an increase
in
the relative proportion of earnings from Ross University’s international
operations to U.S. sourced income, partially offset by taxes on the gain
from
the sale of excess land, which carried a tax rate of 40.3%. The increase
in the
effective income tax rate for the first nine months of fiscal year 2007 is
attributable to the gain on the sale of the West Hills facility, which carried
a
tax rate of 40.4%, changes to prior and current year income tax estimates
for
Ross University’s domestic operations, and the factors as discussed above for
the third quarter.
Earnings
of Ross University’s international operations are not subject to
U.S. federal or state taxes and also are exempt from income taxes in the
jurisdictions in which the schools operate. The medical and veterinary schools
have agreements with the governments that exempt them from local taxation
through the years 2043 and 2023, respectively. DeVry intends to indefinitely
reinvest Ross University’s international earnings and cash flow to improve and
expand operations at the medical and veterinary schools, and pursue other
business opportunities outside the United States. Accordingly, DeVry has
not
recorded a current provision for the payment of U.S. income taxes on these
earnings.
LIQUIDITY
AND CAPITAL RESOURCES
Student
Payments
DeVry’s
primary source of liquidity is the cash received from payments for student
tuition, books, educational supplies and fees. These payments include funds
originating as student and family educational loans; other financial aid
from
various federal, state and provincial loan and grant programs; and student
and
family financial resources.
The
pattern of cash receipts during the year is somewhat seasonal. DeVry’s accounts
receivable peak immediately after bills are issued each semester. At DeVry
University, the principal undergraduate semesters begin in July, November
and
March, but it also offers shorter eight-week session courses that begin six
times per year. These shorter sessions have the effect of somewhat smoothing
the
cash flow peaks throughout the year as they represent a new revenue billing
and
collection cycle within the longer semester cycle.
At
March 31, 2007, total accounts receivable, net of related reserves, were
$95.5 million, compared to $90.1 million at March 31, 2006. The
increase is due to the impact on receivables from revenue growth across all
three of DeVry’s business segments as compared to the year-ago period partially
offset by continued improvements in the timeliness of collections of DeVry
University enrolled student undergraduate receivables.
Financial
Aid
DeVry
is
highly dependent upon the timely receipt of financial aid funds. Management
estimates that approximately 75% of its DeVry University undergraduate students’
tuition, book and fee revenues have been financed by government-provided
financial aid to students. Keller Graduate School collections from student
participation in federal loan programs are approximately 60% of revenues.
Ross
University collections from student participation in federal loan programs
are
approximately 60% of revenues at both the medical and veterinary schools.
Chamberlain collections from student participation in federal financial aid
programs are approximately 35% of revenues.
All
financial aid and assistance programs are subject to political and governmental
budgetary considerations. In the United States, the Higher Education Act
(“HEA”)
guides the federal government’s support of postsecondary education. The HEA was
most recently reauthorized in the fall of 1998 to redefine and extend the
numerous financial aid programs then in existence. Typically, the HEA is
reviewed and amended every five years, but this process has been delayed.
During
September 2006, the United States Congress again extended the HEA, through
June
2007. As reauthorization moves forward, there may be proposals for change
that
could adversely affect the amount of financial aid available to students.
There
is no assurance that such federal funding will be continued at its present
level
or in its present form.
In
addition, government-funded financial assistance programs are governed by
extensive and complex regulations in both the United States and Canada. Like
any
other educational institution, DeVry’s administration of these programs is
periodically reviewed by various regulatory agencies. Any regulatory violation
could be the basis for disciplinary action, including initiation of a
suspension, limitation or termination proceeding. Previous Department of
Education and state regulatory agency program reviews have not resulted in
material findings or adjustments against DeVry.
Under
the
terms of DeVry’s participation in financial aid programs, certain cash received
from state governments and the U.S. Department of Education is maintained
in restricted bank accounts. DeVry receives these funds either after the
financial aid authorization and disbursement process for the benefit of the
student is completed, or just prior to that authorization. Once the
authorization and disbursement process for a particular student is completed,
the funds may be transferred to unrestricted accounts and become available
for
DeVry to use in current operations. This process generally occurs during
the
academic term for which such funds were authorized. At March 31, 2007, cash
in
the amount of $58.0 million was held in restricted bank accounts, compared
to $52.5 million at March 31, 2006.
Cash
from Operations
Cash
generated from operations in the first nine months of fiscal year 2007 was
$124.2 million, compared to $95.4 million in the prior year period.
Cash flow from operations increased due to higher net income (excluding the
gain
on sale of assets). Also, driving greater cash flow was a $2.7 million
greater source of cash compared to the prior year for changes in accounts
receivable and $12.8 million for changes in levels of accrued expenses. Net
accounts receivable decreased due in part to continued improvements in the
timeliness of collections of DeVry University enrolled student undergraduate
receivables. Variations in the levels of accrued expenses from period to
period
are caused, in part, by the timing of the year-end relative to DeVry’s payroll
and bill payment cycles. These increases in cash flow were partially offset
by a
decrease in accounts payable and lower non-cash charges (including depreciation
and amortization).
Cash
from Investing Activities
Capital
expenditures in the first nine months of fiscal year 2007 were
$27.5 million compared to $16.3 million in the year ago period. The
higher level of capital expenditures is due to facility expansion at both
the
Ross University medical and veterinary schools; renovations at DeVry University
campuses, including investments for the co-location of the Chamberlain College
of Nursing at selected locations; and costs of opening additional DeVry
University Centers. For fiscal year 2007, management expects total capital
expenditures to be in the range of $35 to $40 million to support future growth
and enhance student services. Other new or expanded operating locations are
expected to be in leased facilities, thus requiring less capital
spending.
During
September 2006, DeVry sold its West Hills facility for $36 million. In
March 2007, DeVry sold unused land adjacent to its campus in Tinley Park,
Illinois for $1.9 million. Proceeds from these sales were used to pay income
taxes attributed to the gain on the sales, reduce debt and for general corporate
purposes.
Cash
used in Financing Activities
In
July
and October 2006, DeVry prepaid the remaining $115.0 million of Senior
Notes without penalty. In connection with the prepayments, DeVry charged
to
expense approximately $0.8 million of unamortized deferred financing costs.
This
prepayment was funded through a combination of available cash and $40.0 million
of increased borrowings under DeVry’s revolving credit agreement, which bears a
lower interest rate than the Senior Notes. During the third quarter of the
current fiscal year, DeVry repaid all outstanding borrowings under the revolving
credit agreement and was debt free as of March 31, 2007.
On
November 15, 2006, the Board of Directors adopted a share repurchase program
to
buyback up to $35 million of DeVry common stock within the next two years.
As of
March 31, 2007, the company has repurchased, on the open market, 193,573
shares
of its common stock at a total cost of approximately $5.3 million. These
buybacks were funded through available cash balances. The timing and amount
of
any future repurchases will be determined by company management based on
its
evaluation of market conditions and other factors. These repurchases may
be made
through the open market, including block purchases, or in privately negotiated
transactions, or otherwise. The buyback will be funded through available
cash
balances and/or borrowings under its revolving credit agreement and may be
suspended or discontinued at any time.
The
Board
of Directors declared DeVry’s first-ever dividend on November 15, 2006, of $0.05
per share to common stockholders of record as of December 20, 2006. The dividend
was paid on January 12, 2007. DeVry’s Board of Directors stated its intent to
declare future dividends on a semi-annual basis.
Other
Contractual Arrangements
DeVry’s
only long-term contractual obligations consist of its revolving line of credit,
operating leases on facilities and equipment, and agreements for various
services. At March 31, 2007, there were no outstanding borrowings nor any
required payments under DeVry’s revolving credit agreement prior to its
maturity.
In
January 2007, DeVry amended its revolving credit agreement to, among other
things, reduce the spread on applicable interest and fee rates; extend the
remaining term from two to five years; revise and loosen certain financial
covenants; and provide increased flexibility for acquisitions, dividends
and/or
share repurchase programs.
DeVry
is
not a party to any off-balance sheet financing or contingent payment
arrangements, nor are there any unconsolidated subsidiaries. DeVry has not
extended any loans to any officer, director or other affiliated person. DeVry
has not entered into any synthetic leases, and there are no residual purchase
or
value commitments related to any facility lease.
Included
in DeVry’s consolidated cash balances at March 31, 2007 was approximately $62
million attributable to Ross University international operations. It is DeVry’s
intention to indefinitely reinvest this cash and subsequent earnings and
cash
flow to improve and expand operations of Ross University and pursue future
business opportunities outside the United States. Therefore, cash held by
Ross
University will not be available for domestic general corporate
purposes.
Management
believes that current balances of unrestricted cash, cash generated from
operations and, if necessary, the revolving loan facility, will be sufficient
to
fund both DeVry’s current operations and current growth plans for the
foreseeable future unless future significant investment opportunities, similar
to the acquisition of Ross University, should arise.
RECENT
ACCOUNTING PRONOUNCEMENTS
SFAS 154 —
Accounting Changes and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections,” (“SFAS 154”). This statement
replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements.”
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. For DeVry, SFAS 154 was effective at the
beginning of fiscal year 2007. The adoption of SFAS 154 did not have a material
impact on DeVry’s consolidated financial statements.
SFAS 157 —
Fair Value Measurements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines and establishes a
framework for measuring fair value. In addition, SFAS 157 expands disclosures
about fair value measurements. For DeVry, SFAS 157 is effective beginning
in
fiscal year 2009. DeVry does not expect that the adoption of SFAS 157 will
have
a material impact on its consolidated financial statements.
FIN 48 —
Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement 109
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement 109”
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for DeVry beginning in fiscal year 2008.
DeVry is currently evaluating the impact of FIN 48.
ITEM 3 —
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
DeVry
is
not dependent upon the price levels, nor affected by fluctuations in pricing,
of
any particular commodity or group of commodities. However, more than 50%
of
DeVry’s costs are in the form of employee wages and benefits. Changes in
employment market conditions or escalations in employee benefit costs could
cause DeVry to experience cost increases at levels beyond what it has
historically experienced.
The
financial position and results of operations of Ross University’s Caribbean
operations are measured using the U.S. dollar as the functional currency.
Substantially all Ross University financial transactions are denominated
in the
U.S. dollar.
The
financial position and results of operations of DeVry’s Canadian educational
programs are measured using the Canadian dollar as the functional currency.
The
Canadian operations have not entered into any material long-term contracts
to
purchase or sell goods and services, other than the lease agreement on a
teaching facility. DeVry does not have any foreign exchange contracts or
derivative financial instruments designed to mitigate changes in the value
of
the Canadian dollar. Because Canada-based assets constitute less than 2.5%
of
DeVry’s overall assets, and its Canadian liabilities constitute a similarly
small percentage of overall liabilities, changes in the value of Canada’s
currency at rates experienced during the past several years are unlikely
to have
a material effect on DeVry’s results of operations or financial position. Based
upon the current value of the net assets in the Canadian operations, a change
of
$0.01 in the value of the Canadian dollar relative to the U.S. dollar would
result in a translation adjustment of less than $100,000.
DeVry’s
customers are principally individual students enrolled in its various
educational programs. Accordingly, concentration of accounts receivable credit
risk is small relative to total revenues or accounts
receivable.
DeVry’s
cash is held in accounts at various large, financially secure depository
institutions. Although the amount on deposit at a given institution typically
will exceed amounts subject to guarantee, DeVry has not experienced any deposit
losses to date, nor does management expect to incur such losses in the
future.
The
interest rate on DeVry’s debt is based upon Eurodollar interest rates for
periods typically ranging from one to three months. Based upon our borrowings
of
$50.0 million at December 31, 2006, a 1.0% increase in short-term interest
rates
would result in approximately $0.5 million of additional annual interest
expense. At March 31, 2007, DeVry had no outstanding borrowings. However,
future
investment opportunities and cash flow generated from operations may affect
the
level of outstanding borrowings and the effect of a change in interest
rates.
ITEM 4 —
CONTROLS
AND PROCEDURES
Principal
Executive and Principal Financial Officer Certificates
The
required compliance certificates signed by the DeVry’s CEO and CFO are included
as Exhibits 31 and 32 of this Quarterly Report on
Form 10-Q.
Disclosure
Controls and Procedures
Disclosure
controls and procedures are designed to help ensure that all the information
required to be disclosed in DeVry’s reports filed with the SEC is recorded,
processed, summarized and reported within the time periods specified by the
applicable rules.
Evaluations
required by Rule 13a — 15 of the Securities Exchange Act of 1934 of
the effectiveness of DeVry’s disclosure controls and procedures as of the end of
the period covered by this Report have been carried out under the supervision
and with the participation of its management, including its Chief Executive
Officer and its Chief Financial Officer. Based upon these evaluations, the
Chief
Executive Officer and Chief Financial Officer have concluded that DeVry’s
disclosure controls and procedures were effective as required, and have attested
to this in Exhibit 31 of this Report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in internal control over financial reporting that occurred
during the third quarter of fiscal year 2007 that materially affected, or
are
reasonably likely to materially affect, DeVry’s internal control over financial
reporting.
PART II
- Other Information
ITEM
1 - LEGAL PROCEEDINGS
DeVry
is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
associated with financial assistance programs and other claims arising in
the
normal conduct of its business. The following is a description of pending
litigation that may be considered other than ordinary and routine litigation
that is incidental to the business.
Brigette
Dean Hines, a former student of Ross University Veterinary School of Medicine
was dismissed from the school and denied re-enrollment. This former student
filed a claim in June 2005 in the Superior Court of New Jersey for Middlesex
County. In this suit, she claims that the dismissal was based upon her
disability and she is seeking compensatory damages for economic and non-economic
harm, punitive damages, cost of the suit, attorney’s fees and other relief
deemed appropriate by the Court. Discovery is ongoing.
On
August
25, 2005, DeVry filed a complaint in the Superior Court of California, County
of
Alameda, against Sierra Bay Contractors, Inc., the general contractor
responsible for the construction of the student dormitory on the DeVry
University, Fremont, California campus. DeVry's complaint sought monetary
damages arising out of Sierra Bay's failure to keep the project free from
liens
filed by Sierra Bay's subcontractors, and sought indemnity from the same.
Sierra
Bay also placed a lien on the real property on which the building is situated,
and further filed a counterclaim to DeVry’s claim in December 2005, alleging
that DeVry failed to pay the outstanding contract balance or amounts for
extra
work done. The total amount claimed for the outstanding contract balance,
the extra work, and other damages resulting from construction delays, is
approximately $3.0 million. All of the claims, including those of the
subcontractors, have been consolidated under the principal case between DeVry
and Sierra Bay. There are no governmental entities involved. In April 2007,
DeVry also filed complaints against the architect, the project manager and
an
engineering firm to ensure that all parties of interest were engaged in the
suit. Sierra Bay and DeVry have agreed to attempt a mediation of the claims.
No
date has been set for the mediation.
Saro
Daghlian, a former student at a California DeVry University campus, brought
a
putative class action suit in December 2005 in the California State District
Court for the County of Los Angeles alleging that DeVry’s materials distributed
to students did not comply with California state statutes including a California
Education Code requirement to provide a specified statement to prospective
students concerning the transferability of credits. The case was removed
to the
United States District Court for the Central District of California, and
a
motion to dismiss was filed. The motion to dismiss was denied. The plaintiff
filed a motion for class certification, which the court denied without
prejudice, and the plaintiff has filed a new motion for class
certification.
As
of
March 31, 2007, there is an accrual of less than $1.0 million for the resolution
of all legal claims.
While
the
ultimate outcome of pending contingencies is difficult to estimate at this
time,
DeVry intends to vigorously defend itself with respect to the pending claims.
At
this time, DeVry does not believe that the outcome of current claims,
administrative proceedings, regulatory reviews and lawsuits will have a material
effect on its cash flows, results of operations or financial
position.
In
addition to the other information set forth in this report, the factors
discussed in Part I “Item 1A. Risk Factors” in DeVry’s Annual Report on Form
10-K for the fiscal year ended June 30, 2006, which could materially affect
DeVry’s business, financial condition or future results, should be carefully
considered. The risks described in DeVry’s Form 10-K are not the only
risks facing the company. Additional risks and uncertainties not currently
known to DeVry or that management currently deems to be immaterial also may
materially adversely affect its business, financial condition and/or operating
results.
ITEM 2 —
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
Issuer
Purchases of Equity Securities
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid
per
Share
|
|
Total
Number of
Shares
Purchased
as
part of Publicly
Announced
Plans
or
Programs1
|
|
Approximate
Dollar
Value
of Shares that
May Yet Be Purchased
Under
the Plans or
Programs1
|
|
January
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
35,000,000
|
|
February
2007
|
|
|
38,300
|
|
$
|
28.85
|
|
|
38,300
|
|
|
33,895,219
|
|
March
2007
|
|
|
155,273
|
|
$
|
27.13
|
|
|
155,273
|
|
|
29,682,868
|
|
Total
|
|
|
193,573
|
|
$
|
27.47
|
|
|
193,573
|
|
$
|
29,682,868
|
|
1On
November 15, 2006, the Board of Directors approved a stock repurchase program,
pursuant to which up to $35 million of DeVry common stock may be repurchased
within the next two years. This program was announced in DeVry’s report on Form
8-K, which was filed on November 15, 2006. The total remaining authorization
under the repurchase program was $29,682,868 as of March 31, 2007. The
expiration date of the repurchase program is November 15, 2008.
Other
Purchases of Equity Securities
Period
|
|
Total
Number of
Shares
Purchased2
|
|
Average
Price Paid
per
Share
|
|
Total
Number of
Shares
Purchased
as
part of Publicly
Announced
Plans
or
Programs
|
|
Approximate
Dollar
Value
of Shares that
May Yet Be Purchased
Under
the Plans or
Programs
|
|
January
2007
|
|
|
93
|
|
$
|
29.78
|
|
|
N/A
|
|
|
N/A
|
|
February
2007
|
|
|
4,897
|
|
$
|
28.50
|
|
|
N/A
|
|
|
N/A
|
|
March
2007
|
|
|
-
|
|
|
-
|
|
|
N/A
|
|
|
N/A
|
|
Total
|
|
|
4,990
|
|
$
|
28.52
|
|
|
N/A
|
|
|
N/A
|
|
2Represents
shares delivered back to the issuer under a swap agreement resulting from
employees’ exercise of incentive stock options pursuant to the terms of DeVry’s
stock incentive plans.
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the United States
Securities Exchange Act of 1934, as Amended.
|
|
|
|
|
|
Certification
Pursuant to Title 18 of the United States Code Section
1350
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
DeVry
Inc.
|
|
|
|
|
|
|
Date:
May 9, 2007
|
By
|
/s/ Daniel
M. Hamburger
|
|
|
Daniel
M. Hamburger
|
|
|
President
and Chief Executive Officer
|
|
|
|
Date:
May 9, 2007
|
By
|
/s/ Richard
M. Gunst
|
|
|
Richard
M. Gunst
|
|
|
Senior
Vice President and Chief Financial
Officer
|
30