form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark
One)
|
|
|
|
|
|
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
For
the quarterly period ended: December 31, 2008
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
DeVry
Inc.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
36-3150143
|
(State
or other jurisdiction of incorporation
or organization)
|
(I.R.S.
Employer Identification
No.)
|
|
|
ONE
TOWER LANE, SUITE 1000,
|
60181
|
OAKBROOK
TERRACE, ILLINOIS
|
(Zip
Code)
|
(Address
of principal executive offices)
|
|
Registrant’s
telephone number; including area code:
(630) 571-7700
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 R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
R
|
Accelerated
filer
|
£
|
Non-accelerated
filer
|
£ (Do not
check if a smaller reporting company)
|
Smaller
reporting company
|
£
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes £ No R
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:
February
2, 2009 — 71,614,700 shares of Common Stock, $0.01 par
value
DEVRY
INC.
FORM 10-Q FOR
THE QUARTERLY PERIOD
ENDED DECEMBER 31, 2008
|
|
Page No.
|
PART I
– Financial Information
|
|
Item 1
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
Item 2
|
|
24
|
Item 3
|
|
35
|
Item 4
|
|
35
|
|
|
|
PART II
– Other Information
|
|
Item 1
|
|
37
|
Item 1A
|
|
38
|
Item
2
|
|
38
|
Item 4
|
|
39
|
Item 6
|
|
39
|
|
|
|
|
40
|
PART
I – Financial Information
DEVRY
INC.
(Unaudited)
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
203,326 |
|
|
$ |
217,199 |
|
|
$ |
98,912 |
|
Marketable
Securities
|
|
|
1,861 |
|
|
|
2,308 |
|
|
|
142,144 |
|
Restricted
Cash
|
|
|
31,948 |
|
|
|
4,113 |
|
|
|
9,823 |
|
Accounts
Receivable, Net
|
|
|
137,602 |
|
|
|
55,214 |
|
|
|
76,842 |
|
Deferred
Income Taxes, Net
|
|
|
16,312 |
|
|
|
14,975 |
|
|
|
17,938 |
|
Prepaid
Expenses and Other
|
|
|
33,903 |
|
|
|
31,779 |
|
|
|
22,598 |
|
Total
Current Assets
|
|
|
424,952 |
|
|
|
325,588 |
|
|
|
368,257 |
|
Land,
Buildings and Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
50,797 |
|
|
|
50,726 |
|
|
|
51,431 |
|
Buildings
|
|
|
235,640 |
|
|
|
216,048 |
|
|
|
206,003 |
|
Equipment
|
|
|
295,636 |
|
|
|
282,273 |
|
|
|
271,594 |
|
Construction
In Progress
|
|
|
8,209 |
|
|
|
4,874 |
|
|
|
6,375 |
|
|
|
|
590,282 |
|
|
|
553,921 |
|
|
|
535,403 |
|
Accumulated
Depreciation and Amortization
|
|
|
(325,452 |
) |
|
|
(314,606 |
) |
|
|
(301,362 |
) |
Land,
Buildings and Equipment, Net
|
|
|
264,830 |
|
|
|
239,315 |
|
|
|
234,041 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
187,612 |
|
|
|
62,847 |
|
|
|
65,372 |
|
Goodwill
|
|
|
494,488 |
|
|
|
308,024 |
|
|
|
308,598 |
|
Perkins
Program Fund, Net
|
|
|
13,450 |
|
|
|
13,450 |
|
|
|
13,450 |
|
Investments
|
|
|
57,757 |
|
|
|
57,171 |
|
|
|
0 |
|
Other
Assets
|
|
|
11,798 |
|
|
|
11,961 |
|
|
|
6,614 |
|
Total
Other Assets
|
|
|
765,105 |
|
|
|
453,453 |
|
|
|
394,034 |
|
TOTAL
ASSETS
|
|
$ |
1,454,887 |
|
|
$ |
1,018,356 |
|
|
$ |
996,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Portion of Debt
|
|
$ |
135,124 |
|
|
$ |
— |
|
|
$ |
— |
|
Accounts
Payable
|
|
|
40,905 |
|
|
|
70,368 |
|
|
|
37,029 |
|
Accrued
Salaries, Wages and Benefits
|
|
|
54,200 |
|
|
|
51,300 |
|
|
|
43,249 |
|
Accrued
Expenses
|
|
|
41,470 |
|
|
|
31,175 |
|
|
|
31,312 |
|
Advance
Tuition Payments
|
|
|
44,443 |
|
|
|
16,972 |
|
|
|
10,804 |
|
Deferred
Tuition Revenue
|
|
|
181,616 |
|
|
|
40,877 |
|
|
|
124,539 |
|
Total
Current Liabilities
|
|
|
497,758 |
|
|
|
210,692 |
|
|
|
246,933 |
|
Other
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Loan
|
|
|
20,000 |
|
|
|
— |
|
|
|
— |
|
Deferred
Income Taxes, Net
|
|
|
66,497 |
|
|
|
22,163 |
|
|
|
16,053 |
|
Deferred
Rent and Other
|
|
|
30,463 |
|
|
|
29,512 |
|
|
|
30,181 |
|
Total
Other Liabilities
|
|
|
116,960 |
|
|
|
51,675 |
|
|
|
46,234 |
|
TOTAL
LIABILITIES
|
|
|
614,718 |
|
|
|
262,367 |
|
|
|
293,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $0.01 Par Value, 200,000,000 Shares Authorized;
71,636,000; 71,377,000 and 71,361,000 Shares Issued and
Outstanding at December 31, 2008, June 30, 2008 and December 31,
2007, Respectively
|
|
|
726 |
|
|
|
724 |
|
|
|
721 |
|
Additional
Paid-in Capital
|
|
|
181,758 |
|
|
|
168,405 |
|
|
|
158,663 |
|
Retained
Earnings
|
|
|
699,027 |
|
|
|
627,064 |
|
|
|
568,463 |
|
Accumulated
Other Comprehensive Loss
|
|
|
469 |
|
|
|
(2,963 |
) |
|
|
(1,788 |
) |
Treasury
Stock, at Cost (1,064,367; 989,579 and 688,706 Shares,
Respectively)
|
|
|
(41,811 |
) |
|
|
(37,241 |
) |
|
|
(22,894 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
840,169 |
|
|
|
755,989 |
|
|
|
703,165 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
1,454,887 |
|
|
$ |
1,018,356 |
|
|
$ |
996,332 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
(Dollars
in Thousands Except Per Share Amounts)
(Unaudited)
|
|
For
the Quarter
|
|
|
For
the Six Months
|
|
|
|
Ended December 31,
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition
|
|
$ |
342,044 |
|
|
$ |
250,695 |
|
|
$ |
621,171 |
|
|
$ |
480,916 |
|
Other
Educational
|
|
|
27,571 |
|
|
|
23,042 |
|
|
|
52,161 |
|
|
|
43,139 |
|
Total
Revenues
|
|
|
369,615 |
|
|
|
273,737 |
|
|
|
673,332 |
|
|
|
524,055 |
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Educational Services
|
|
|
167,107 |
|
|
|
123,887 |
|
|
|
306,720 |
|
|
|
244,915 |
|
Loss
on Sale of Assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,743 |
|
Student
Services and Administrative Expense
|
|
|
139,968 |
|
|
|
102,917 |
|
|
|
257,260 |
|
|
|
194,562 |
|
Total
Operating Costs and Expenses
|
|
|
307,075 |
|
|
|
226,804 |
|
|
|
563,980 |
|
|
|
443,220 |
|
Operating
Income
|
|
|
62,540 |
|
|
|
46,933 |
|
|
|
109,352 |
|
|
|
80,835 |
|
INTEREST
AND OTHER (EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
1,710 |
|
|
|
2,892 |
|
|
|
3,852 |
|
|
|
5,299 |
|
Interest
Expense
|
|
|
(1,176 |
) |
|
|
(98 |
) |
|
|
(1,529 |
) |
|
|
(319 |
) |
Net
Investment Loss
|
|
|
(1,718 |
) |
|
|
- |
|
|
|
(1,718 |
) |
|
|
- |
|
Net
Interest and Other (Expense) Income
|
|
|
(1,184 |
) |
|
|
2,794 |
|
|
|
605 |
|
|
|
4,980 |
|
Income
Before Income Taxes
|
|
|
61,356 |
|
|
|
49,727 |
|
|
|
109,957 |
|
|
|
85,815 |
|
Income
Tax Provision
|
|
|
18,491 |
|
|
|
13,914 |
|
|
|
32,262 |
|
|
|
23,167 |
|
NET
INCOME
|
|
$ |
42,865 |
|
|
$ |
35,813 |
|
|
$ |
77,695 |
|
|
$ |
62,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.60 |
|
|
$ |
0.50 |
|
|
$ |
1.09 |
|
|
$ |
0.88 |
|
Diluted
|
|
$ |
0.59 |
|
|
$ |
0.49 |
|
|
$ |
1.07 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDEND DECLARED PER COMMON SHARE
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
(Unaudited)
|
|
For
the Six Months
|
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income
|
|
$ |
77,695 |
|
|
$ |
62,648 |
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Charge
|
|
|
4,809 |
|
|
|
2,880 |
|
Depreciation
|
|
|
19,200 |
|
|
|
17,263 |
|
Amortization
|
|
|
3,904 |
|
|
|
2,471 |
|
Provision
for Refunds and Uncollectible Accounts
|
|
|
34,056 |
|
|
|
28,080 |
|
Deferred
Income Taxes
|
|
|
(503 |
) |
|
|
(3,632 |
) |
(Gain)
Loss on Disposals of Land, Buildings and Equipment
|
|
|
(7 |
) |
|
|
3,730 |
|
Unrealized
Net Loss on Investments
|
|
|
1,718 |
|
|
|
— |
|
Changes
in Assets and Liabilities, Net of Effects from Acquisition of
Business:
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
(27,712 |
) |
|
|
4,667 |
|
Accounts
Receivable
|
|
|
(87,520 |
) |
|
|
(57,763 |
) |
Prepaid
Expenses and Other
|
|
|
(592 |
) |
|
|
(4,497 |
) |
Accounts
Payable
|
|
|
(31,143 |
) |
|
|
2,652 |
|
Accrued
Salaries, Wages, Benefits and Expenses
|
|
|
5,525 |
|
|
|
(7,403 |
) |
Advance
Tuition Payments
|
|
|
22,716 |
|
|
|
(3,640 |
) |
Deferred
Tuition Revenue
|
|
|
116,627 |
|
|
|
84,674 |
|
NET CASH PROVIDED BY
OPERATING ACTIVITIES
|
|
|
138,773 |
|
|
|
132,130 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(25,208 |
) |
|
|
(27,957 |
) |
Net
Proceeds from Sale of Land and Building
|
|
|
— |
|
|
|
38,528 |
|
Payment
for Purchase of Business, Net of Cash Acquired
|
|
|
(286,500 |
) |
|
|
(27,454 |
) |
Marketable
Securities Purchased
|
|
|
(37 |
) |
|
|
(264,122 |
) |
Marketable
Securities-Maturities and Sales
|
|
|
— |
|
|
|
121,836 |
|
NET CASH (USED IN)
INVESTING ACTIVITIES
|
|
|
(311,745 |
) |
|
|
(159,169 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from Exercise of Stock Options
|
|
|
7,764 |
|
|
|
11,315 |
|
Reissuance
of Treasury Stock
|
|
|
1,570 |
|
|
|
577 |
|
Repurchase
of Common Stock for Treasury
|
|
|
(5,358 |
) |
|
|
(10,187 |
) |
Cash
Dividends Paid
|
|
|
(4,282 |
) |
|
|
(3,557 |
) |
Excess
Tax Benefit from Stock-Based Payments
|
|
|
2,095 |
|
|
|
1,210 |
|
Borrowings
Under Collateralized Line of Credit
|
|
|
46,187 |
|
|
—
|
|
Repayments
Under Collateralized Line of Credit
|
|
|
(1,063 |
) |
|
|
— |
|
Borrowings
Under Revolving Credit Facility
|
|
|
210,000 |
|
|
|
25,000 |
|
Repayments
Under Revolving Credit Facility
|
|
|
(100,000 |
) |
|
|
(26,895 |
) |
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
|
|
156,913 |
|
|
|
(2,537 |
) |
Effects
of Exchange Rate Differences
|
|
|
2,186 |
|
|
|
(667 |
) |
NET DECREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(13,873 |
) |
|
|
(30,243 |
) |
Cash and Cash Equivalents at
Beginning of
Period
|
|
|
217,199 |
|
|
|
129,155 |
|
Cash and Cash Equivalents at
End of Period
|
|
$ |
203,326 |
|
|
$ |
98,912 |
|
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
Paid During the Period For:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,057 |
|
|
$ |
231 |
|
Income
Taxes, Net
|
|
|
18,119 |
|
|
|
32,679 |
|
Non-cash
Financing Activity:
|
|
|
|
|
|
|
|
|
Declaration
of Cash Dividends to be Paid
|
|
|
5,732 |
|
|
|
4,283 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
NOTE 1:
|
INTERIM
FINANCIAL STATEMENTS
|
The
interim consolidated financial statements include the accounts of DeVry Inc.
(“DeVry”) and its wholly-owned subsidiaries. These financial statements are
unaudited but, in the opinion of management, contain all adjustments, consisting
only of normal, recurring adjustments, necessary to fairly present the financial
condition and results of operations of DeVry. The June 30, 2008 data
that is presented is derived from audited financial statements.
The
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in DeVry's Annual
Report on Form 10-K for the fiscal year ended June 30, 2008, and in conjunction
with DeVry’s quarterly report on Form 10-Q for the quarter ended September 30,
2008, each as filed with the Securities and Exchange Commission.
The
results of operations for the three and six months ended December 31, 2008, are
not necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2:
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses during the
reported period. Actual results could differ from those estimates.
Marketable Securities and
Investments
DeVry
owns investments in marketable securities that have been designated as
“available for sale” or “trading securities” in accordance with SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities. Available for sale securities
are carried at fair value with the unrealized gains and losses reported in the
Consolidated Balance Sheets as a component of Accumulated Other Comprehensive
Income (Loss). Trading securities are carried at fair value with unrealized
gains and losses reported in the Consolidated Statements of Income as a
component of interest and other income and expense.
Marketable
securities and investments consist of auction-rate certificates and put rights
on these certificates which are classified as trading securities and investments
in mutual funds which are classified as available-for-sale
securities. The following is a summary of our available-for-sale
marketable securities at December 31, 2008 (dollars in thousands):
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Gain
|
|
|
Fair Value
|
|
Short-term
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond
Mutual Fund
|
|
$ |
766 |
|
|
$ |
- |
|
|
$ |
4 |
|
|
$ |
770 |
|
Stock
Mutual Funds
|
|
|
1,955 |
|
|
|
(864 |
) |
|
|
- |
|
|
|
1,091 |
|
Total
Short-term Investments
|
|
$ |
2,721 |
|
|
$ |
(864 |
) |
|
$ |
4 |
|
|
$ |
1,861 |
|
Investments
are classified as short-term if they are readily convertible to cash or have
other characteristics of short-term investments such as highly liquid markets or
maturities within one year. All mutual fund investments are recorded
at fair market value based upon quoted market prices. At December 31,
2008, all of the Bond and Stock mutual fund investments are held in a rabbi
trust for the purpose of paying benefits under DeVry’s non-qualified deferred
compensation plan.
As of
December 31, 2008, all unrealized losses in the above table have been in a
continuous unrealized loss position for more than one year. When
evaluating its investments for possible impairment, DeVry reviews factors such
as length of time and extent to which fair value has been less than cost basis,
the financial condition of the issuer, and DeVry’s ability and intent to hold
the investment for a period of time that may be sufficient for anticipated
recovery in fair value. The decline in value of the above investments
is considered temporary in nature and, accordingly, DeVry does not consider
these investments to be other-than-temporarily impaired as of December 31,
2008.
The
following is a summary of our long-term investments at December 31, 2008
(dollars in thousands):
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Gain
|
|
|
Fair Value
|
|
Long-term
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
Rate Securities (ARS)
|
|
$ |
59,475 |
|
|
$ |
(10,317 |
) |
|
$ |
- |
|
|
$ |
49,158 |
|
Put
Rights on ARS
|
|
|
- |
|
|
|
- |
|
|
|
8,599 |
|
|
|
8,599 |
|
Total
Long-term Investments
|
|
$ |
59,475 |
|
|
$ |
(10,317 |
) |
|
$ |
8,599 |
|
|
$ |
57,757 |
|
As shown
in the table above, as of December 31, 2008, DeVry held auction-rate debt
securities in the aggregate principal amount of $59.5 million. The auction-rate
securities are triple-A rated, long-term debt obligations with contractual
maturities ranging from 18 to 33 years. They are secured by student
loans, which are guaranteed by U.S. and state governmental agencies. Liquidity
for these securities has in the past been provided by an auction process that
has allowed DeVry and other investors in these instruments to obtain immediate
liquidity by selling the securities at their face amounts. Disruptions in
credit markets over the past year, however, have adversely affected the auction
market for these types of securities. Auctions for these securities have not
produced sufficient bidders to allow for successful auctions since February
2008. As a result, DeVry has been unable to liquidate its auction-rate
securities and there can be no assurance that DeVry will be able to access the
principal value of these securities prior to their maturity.
For each
unsuccessful auction, the interest rates on these securities are reset to a
maximum rate defined by the terms of each security, which in turn is reset on a
periodic basis at levels which are generally higher than defined short-term
interest rate benchmarks. To date DeVry has collected all interest
payable on all of its auction-rate securities when due and expects to continue
to do so in the future. Auction failures relating to this type of
security are symptomatic of current conditions in the broader debt markets and
are not unique to DeVry. DeVry intends to hold its portfolio of
auction-rate securities until successful auctions resume; a buyer is found
outside of the auction process; the issuers establish a different form of
financing to replace these securities; or its broker, UBS Financial Services
(UBS), purchases the securities (as discussed below).
On August
8, 2008, UBS announced that it had reached a settlement, in principle, with the
New York Attorney General, the Massachusetts Securities Division, the Securities
and Exchange Commission and other state regulatory agencies represented by North
American Securities Administrators Association to restore liquidity to all
remaining clients' holdings of auction rate securities. Under this
agreement in principle, UBS has committed to provide liquidity solutions to
institutional investors, including DeVry. During the second quarter
of fiscal year 2009, DeVry agreed to accept Auction Rate Security Rights (the
Rights) from UBS. The Rights permit DeVry to sell, or put, its auction rate
securities back to UBS at par value at any time during the period from June 30,
2010 through July 2, 2012. We expect to exercise our Rights and put our auction
rate securities back to UBS on June 30, 2010, the earliest date allowable under
the Rights, unless auctions resume; a buyer is found outside of the auction
process; or the issuers establish a different form of financing to replace these
securities.
Prior to
accepting the Rights agreement, DeVry had the intent and ability to hold these
securities until anticipated recovery. As a result, we had recognized the
unrealized loss previously as a temporary impairment in other comprehensive
income in stockholders’ equity. After accepting the Rights, DeVry no
longer has the intent to hold the auction rate securities until anticipated
recovery. As a result, DeVry has elected to classify the Rights and
reclassify our investments in auction rate securities as trading securities, as
defined by FAS No. 115, on the date of our acceptance of the Rights. Therefore,
we recognized an other-than-temporary impairment charge of approximately $10.3
million in the second quarter of fiscal 2009. The charge was measured as the
difference between the par value and market value of the auction rate securities
on December 31, 2008. However, as DeVry will be permitted to put the auction
rate securities back to UBS at par value, we will account for the Rights as a
separate asset that will be measured at its fair value, resulting in a gain of
approximately $8.6 million recorded at December 31, 2008. The Rights do
not meet the definition of a derivative instrument under SFAS
133. Therefore, we have elected to measure the Rights at fair value
under SFAS 159, which permits an entity to elect the fair value option for
recognized financial assets, in order to match the changes in the fair value of
the auction rate securities. DeVry will be required to assess the fair value of
these two individual assets and record changes each period until the Rights are
exercised and the auction rate securities are redeemed. As a result,
unrealized gains and losses will be included in earnings in future
periods. We expect that future changes in the fair value of the
Rights will approximate fair value movements in the related auction rate
securities. Although the Rights represent the right to sell the
securities back to UBS at par, we will be required to periodically assess the
economic ability of UBS to meet that obligation in assessing the fair value of
the Rights. UBS’s obligations under the Rights are not secured by its assets and
do not require UBS to obtain any financing to support its performance
obligations under the Rights. UBS has disclaimed any assurance that
it will have sufficient financial resources to satisfy its obligations under the
Rights. We will continue to classify the auction rate securities as
long-term investments until June 30, 2009, one year prior to the expected
settlement.
As
detailed above, changing market conditions have reduced liquidity for Auction
Rate Securities. These investments, including the put rights, are
valued using internally-developed pricing models with observable and
unobservable inputs. Realized gains and losses are computed on the basis of
specific identification and are included in interest and other income and
expense in the Consolidated Statements of Income. DeVry has not recorded any
realized gains or realized losses for fiscal 2009. See Note 4
for further disclosures on the Fair Value of Financial Instruments.
While the
recent auction failures will limit DeVry’s ability to liquidate these
investments for some period of time, DeVry believes that based on its current
cash, cash equivalents and marketable securities balances of $205 million
(exclusive of auction-rate securities) and its current borrowing capacity of
approximately $50 million under its $175 million revolving credit facility
(DeVry has the option to expand the revolving credit facility to $275 million),
the current lack of liquidity in the auction-rate market will not have a
material impact on its ability to fund its operations, nor will it interfere
with external growth plans. Also, as of December 31, 2008, DeVry has
borrowed through its broker, UBS, $45.1 million using the auction rate
securities portfolio as collateral (See Note 11). Should DeVry need
to liquidate such securities and auctions of these securities continue to fail,
and UBS is unable to meet their obligations under the Rights, future impairment
of the carrying value of these securities could cause DeVry to recognize a
material charge to net income in future periods.
Earnings per Common
Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares assuming dilution. Dilutive shares are computed using the Treasury Stock
Method and reflect the additional shares that would be outstanding if dilutive
stock options were exercised during the period. Excluded from the
computations of diluted earnings per share were options to purchase 487,000 and
405,000 shares of common stock for the three and six months ended December 31,
2008, respectively, and 35,000 and 395,000 shares of common stock, for the three
and six months ended December 31, 2007, respectively. These outstanding options
were excluded because the option exercise prices were greater than the average
market price of the common shares; thus, their effect would be
anti-dilutive.
The
following is a reconciliation of basic shares to diluted shares (in
thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares
|
|
|
71,597 |
|
|
|
71,282 |
|
|
|
71,511 |
|
|
|
71,194 |
|
Effect of Dilutive Stock
Options
|
|
|
1,065 |
|
|
|
1,238 |
|
|
|
1,095 |
|
|
|
1,080 |
|
Diluted Shares
|
|
|
72,662 |
|
|
|
72,520 |
|
|
|
72,606 |
|
|
|
72,274 |
|
Treasury
Stock
DeVry’s
Board of Directors has authorized stock repurchase programs on two occasions
(see “Note 5 – Dividends and Stock Repurchase Program”). The first repurchase
program was completed in April 2008. The second repurchase program
was approved by the DeVry Board of Directors in May 2008. Shares that are
repurchased by DeVry are recorded as Treasury Stock at cost and result in a
reduction of Shareholders’ Equity.
From time
to time, shares of its common stock are delivered back to DeVry under a swap
arrangement resulting from employees’ exercise of incentive stock options
pursuant to the terms of the DeVry Stock Incentive Plans (see “Note 3 –
Stock-Based Compensation”). 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 DeVry Employee
Stock Purchase Plan in exchange for employee payroll deductions. In
the first quarter of fiscal year 2009, 21,575 treasury shares were resold at a
10% discount to market value to three employees of U.S. Education Corporation
(“U.S. Education”) upon the acquisition of that business (see “Note 6 – Business
Combinations”). When treasury shares are reissued, DeVry 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.
Accumulated Other
Comprehensive Income (Loss)
Accumulated
Other Comprehensive Income (Loss) is composed of the change in cumulative
translation adjustment, unrealized gains and losses on available-for-sale
marketable securities, net of the effects of income taxes, and the differences
between changes in the fair values of the cash flow hedging instruments and the
amount of these instruments being amortized to earnings. The following are the
amounts recorded in Accumulated Other Comprehensive Income (Loss) for the three
and six months ended December 31 (dollars in thousands).
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Balance
at Beginning of Period
|
|
$ |
(2,557 |
) |
|
$ |
(1,550 |
) |
|
$ |
(2,963 |
) |
|
$ |
(918 |
) |
Net
Unrealized Investment Losses
|
|
|
(5,112 |
) |
|
|
(149 |
) |
|
|
(5,253 |
) |
|
|
(142 |
) |
Net
Unrealized Investment Losses Recognized
|
|
|
6,378 |
|
|
|
- |
|
|
|
6,378 |
|
|
|
- |
|
Translation
Adjustments
|
|
|
1,760 |
|
|
|
(89 |
) |
|
|
2,307 |
|
|
|
(728 |
) |
Balance
at End of Period
|
|
$ |
469 |
|
|
$ |
(1,788 |
) |
|
$ |
469 |
|
|
$ |
(1,788 |
) |
The
Accumulated Other Comprehensive Income (Loss) balance at December 31, 2008,
consists of $1,000,000 of cumulative translation gains and $531,000 of
unrealized losses on available-for-sale marketable securities, net of tax of
$328,000. At December 31, 2007, this balance consisted of $1,646,000 of
cumulative translation losses and $142,000 of unrealized gains on
available-for-sale marketable securities.
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, was $44.3 million and $84.1 million for the three and six months ended
December 31, 2008, respectively. Advertising expense for the three
and six months ended December 31, 2007, was $30.5 million and $59.1 million,
respectively. Advanced Academics, which was acquired on October 31,
2007, and U.S. Education, which was acquired on September 18, 2008, accounted
for a significant portion of the increase in advertising expense.
Recent Accounting
Pronouncements
SFAS 141(R)
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) retains
the fundamental requirements of Statement of Financial Accounting Standards
No. 141 (“SFAS 141”) that the acquisition method of accounting be used for
all business combinations. SFAS 141(R)
also retains the guidance in SFAS 141 for identifying and recognizing intangible
assets separately from goodwill. However, the new accounting
requirements of SFAS 141(R) will change how business acquisitions are
accounted for and will impact financial statements both on the acquisition date
and in subsequent periods. For DeVry, SFAS 141(R) is effective
beginning in fiscal year 2010.
SFAS 160
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB number 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards to improve the relevance, comparability and
transparency of the financial information provided in a company’s financial
statements as it relates to minority interests in the equity of a
subsidiary. These minority interests will be recharacterized
as noncontrolling interests and classified as a component of equity. For
DeVry, SFAS 160 is effective beginning in fiscal year 2010. DeVry
does not expect that the adoption of SFAS 160 will have a material impact on its
consolidated financial statements as all current subsidiaries are wholly
owned.
SFAS 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an Amendment
of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. For DeVry, SFAS
161 is effective beginning in the third quarter of fiscal year
2009. The adoption of SFAS 161 is not expected to have a material
impact on DeVry’s consolidated financial statements as DeVry does not currently
maintain derivative instruments or engage in hedging
activities.
NOTE 3:
|
STOCK-BASED
COMPENSATION
|
DeVry
maintains four stock-based award plans: the 1994 Stock Incentive Plan, the 1999
Stock Incentive Plan, the 2003 Stock Incentive Plan and the 2005 Incentive Plan.
Under these plans, directors, key executives and managerial employees are
eligible to receive incentive stock or nonqualified options to purchase shares
of DeVry’s common stock. The 2005 Incentive Plan also permits the award of stock
appreciation rights, restricted stock, performance stock and other stock and
cash based compensation. The 1999 and 2003 Stock Incentive Plans are
administered by a Plan Committee of the Board of Directors subject to approval
by the Compensation Committee of the Board of Directors. The 2005
Incentive Plan is administered by the Compensation Committee of the Board of
Directors. Options are granted for terms of up to 10 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.
DeVry
accounts for options granted to retirement eligible employees that fully vest
upon an employees’ retirement under the non-substantive vesting period approach
to these options. Under this approach, the entire compensation cost is
recognized at the grant date for options issued to retirement eligible
employees.
At
December 31, 2008, 5,551,231 authorized but unissued shares of common stock
were reserved for issuance under DeVry’s stock incentive plans.
Effective
July 1, 2005, DeVry adopted the provisions of SFAS 123(R) which
establishes accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at grant date, based on
the fair value of the award, and is recognized as expense over the employee’s
requisite service period.
The
following is a summary of options activity for the six months ended
December 31, 2008:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Outstanding
at July 1, 2008
|
|
|
3,039,796 |
|
|
$ |
26.19 |
|
|
|
|
|
|
|
Options
Granted
|
|
|
433,283 |
|
|
$ |
51.40 |
|
|
|
|
|
|
|
Options
Exercised
|
|
|
(333,783 |
) |
|
$ |
23.41 |
|
|
|
|
|
|
|
Options
Canceled
|
|
|
(30,171 |
) |
|
$ |
23.99 |
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
3,109,125 |
|
|
$ |
30.02 |
|
|
|
6.71 |
|
|
$ |
85,170 |
|
Exercisable
at December 31, 2008
|
|
|
1,718,792 |
|
|
$ |
25.07 |
|
|
|
5.24 |
|
|
$ |
55,597 |
|
The total
intrinsic value of options exercised for the six months ended December 31,
2008 and 2007 was $10,053,000 and $11,269,000, respectively.
The fair
value of DeVry’s stock-based awards was estimated using a binomial model. This
model uses historical cancellation and exercise experience of DeVry 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 values, as defined by
SFAS 123(R), for options granted at market price under DeVry’s stock option
plans during first six months of fiscal years 2009 and 2008 were $23.54 and
$16.09, per share, respectively. The fair values of DeVry’s stock
option awards were estimated assuming the following weighted average
assumptions:
|
|
Fiscal Year
|
|
|
|
2009
|
|
|
2008
|
|
Expected
Life (in Years)
|
|
|
6.79 |
|
|
|
6.60 |
|
Expected
Volatility
|
|
|
41.57 |
% |
|
|
39.33 |
% |
Risk-free
Interest Rate
|
|
|
3.39 |
% |
|
|
4.34 |
% |
Dividend
Yield
|
|
|
0.23 |
% |
|
|
0.32 |
% |
Pre-vesting
Forfeiture Rate
|
|
|
5.00 |
% |
|
|
5.00 |
% |
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.
DeVry’s expected volatility is computed by combining and weighting the implied
market volatility, it’s most recent volatility over the expected life of the
option grant, and DeVry’s long-term historical volatility. The pre-vesting
forfeiture rate is based on DeVry’s historical stock option forfeiture
experience.
If
factors change and different assumptions are employed in the application of
SFAS 123(R) in future periods, the stock-based compensation expense that
DeVry records may differ significantly from what was recorded in the previous
period.
During
August and November 2008, DeVry granted 81,435 shares of restricted stock to
selected employees. These shares are subject to restrictions which
lapse ratably over a four-year period from the grant date based on the
recipient’s continued employment with DeVry, or upon
retirement. During the restriction period, the recipient shall have a
beneficial interest in the restricted stock and all associated rights and
privileges of a stockholder, including the right to vote and receive dividends.
The following is a summary of restricted stock activity for the six months ended
December 31, 2008:
|
|
Restricted
Stock
Outstanding
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Nonvested
at July 1, 2008
|
|
|
- |
|
|
$ |
- |
|
Shares
Granted
|
|
|
81,435 |
|
|
$ |
51.32 |
|
Shares
Vested
|
|
|
- |
|
|
$ |
- |
|
Shares
Canceled
|
|
|
- |
|
|
$ |
- |
|
Nonvested
at December 31, 2008
|
|
|
81,435 |
|
|
$ |
51.32 |
|
The
following table shows total stock-based compensation expense included in the
Consolidated Statement of Earnings:
|
|
For
the Three Months
Ended December 31,
|
|
|
For
the Six Months
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of Educational Services
|
|
$ |
543 |
|
|
$ |
438 |
|
|
$ |
1,539 |
|
|
$ |
922 |
|
Student
Services and Administrative Expense
|
|
|
1,155 |
|
|
|
929 |
|
|
|
3,270 |
|
|
|
1,959 |
|
Income
Tax Benefit
|
|
|
(279 |
) |
|
|
(184 |
) |
|
|
(741 |
) |
|
|
(388 |
) |
Net
Stock-Based Compensation Expense
|
|
$ |
1,419 |
|
|
$ |
1,183 |
|
|
$ |
4,068 |
|
|
$ |
2,493 |
|
As of
December 31, 2008, $19.9 million of total pre-tax unrecognized
compensation costs related to non-vested awards is expected to be recognized
over a weighted average period of 3.4 years. The total fair value of
options and shares vested during the six months ended December 31, 2008 and
2007 was approximately $4.9 million and $4.7 million, respectively.
There
were no capitalized stock-based compensation costs at December 31, 2008 and
2007.
DeVry has
an established practice of issuing new shares of common stock to satisfy share
option exercises. However, DeVry also may issue treasury shares to
satisfy option exercises under certain of its plans.
NOTE
4:
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Effective
July 1, 2008, DeVry adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157). In accordance with Financial Accounting Standards Board Staff
Position No. FAS 157-2, Effective Date of FASB Statement
No. 157 (FSP 157-2), we will defer the adoption of SFAS No. 157
for our nonfinancial assets and nonfinancial liabilities, including long-lived
assets, goodwill and intangible assets, until July 1, 2009. The adoption of
SFAS No. 157 did not have a material impact on our fair value
measurements.
In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active ("FSP FAS
157-3"). FSP FAS 157-3 clarifies the application of SFAS 157 in a
market that is not active. Management has fully considered this
guidance when determining the fair value of our financial assets as of December
31, 2008.
SFAS 157
defines fair value 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. SFAS 157 also 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. In accordance with
SFAS 157, fair value measurements are classified 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, DeVry 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, DeVry makes use of observable market based
inputs to calculate fair value, in which case the measurements are classified
within Level 2. If quoted or observable market prices are not
available, fair value is based upon internally developed models that use, where
possible, current market-based parameters such as interest rates and yield
curves. These measurements are classified within Level
3.
Fair
value measurements are classified according to the lowest level input or
value-driver that is significant to the valuation. A measurement may
therefore be classified within Level 3 even though there may be significant
inputs that are readily observable.
The
following tables present DeVry’s assets at December 31, 2008, that are measured
at fair value on a recurring basis and are categorized using the fair value
hierarchy.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash
Equivalents
|
|
$ |
165,237 |
|
|
$ |
- |
|
|
$ |
- |
|
Available
for Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
Securities, short-term
|
|
|
1,861 |
|
|
|
- |
|
|
|
- |
|
Trading
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments,
long-term
|
|
|
- |
|
|
|
- |
|
|
|
57,757 |
|
Total
Assets at Fair Value
|
|
$ |
167,098 |
|
|
$ |
- |
|
|
$ |
57,757 |
|
Cash
Equivalents and investments in short-term Marketable Securities are valued using
a market approach based on the quoted market prices of identical instruments.
Long-term Investments consist of auction rate securities and put rights on the
auction rate securities. Both are valued using a
discounted cash flow model using assumptions that, in management’s judgment,
reflect the assumptions a marketplace participant would
use. Significant unobservable inputs include collateralization of the
respective underlying security; credit worthiness of the issuer; duration for
holding the security and quotes received from DeVry’s broker. See
“Note 2-Summary Of Significant Accounting Policies-Marketable Securities and
Investments” for further information on these investments.
Below is
a roll-forward of assets measured at fair value using Level 3 inputs for the six
months ended December 31, 2008.
|
|
Investments - Long Term
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2008
|
|
Balance
at Beginning of Period
|
|
$ |
57,128 |
|
|
$ |
57,171 |
|
Total
Unrealized Gains (Losses) Included in Income:
|
|
|
|
|
|
|
|
|
Recognition
of UBS Put Right
|
|
|
8,599 |
|
|
|
8,599 |
|
Transfer
of ARS to Trading Security
|
|
|
(10,317 |
) |
|
|
(10,317 |
) |
Net
Charged to Other Comprehensive Income (Loss) (1)
|
|
|
2,347 |
|
|
|
2,304 |
|
Purchases,
Sales and Maturities
|
|
|
- |
|
|
|
- |
|
Balance
at December 31, 2008
|
|
$ |
57,757 |
|
|
$ |
57,757 |
|
(1)
|
–
Upon the transfer of the auction rate securities from available for sale
to trading securities, the cumulative unrealized loss was reversed from
Other Comprehensive Income (Loss) and charged to
earnings.
|
NOTE
5:
|
DIVIDENDS
AND STOCK REPURCHASE PROGRAM
|
On
November 13, 2008, the DeVry Board of Directors declared a cash dividend of
$0.08 per share. This dividend was paid on January 9, 2009, to common
stockholders of record as of December 12, 2008. The total dividend
declared of $5.7 million was recorded as a reduction to retained earnings as of
December 31, 2008. Future dividends will be at the discretion of the Board of
Directors.
On May
13, 2008, the DeVry Board of Directors declared a cash dividend of $0.06 per
share. This dividend was paid on July 10, 2008, to common stockholders of record
as of June 19, 2008. The total dividend declared of $4.3 million was
recorded as a reduction to retained earnings as of June 30, 2008. Future
dividends will be at the discretion of the Board of Directors.
On May
13, 2008, the DeVry Board of Directors authorized a share repurchase program,
which allows the company to repurchase up to $50 million of its common stock
through December 31, 2010. As of December 31, 2008, DeVry has repurchased, on
the open market, 98,100 shares of its common stock at a total cost of
approximately $5.4 million. The timing and amount of any repurchase
will be determined by 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, and may be suspended or discontinued at any time.
On
November 15, 2006, the DeVry Board of Directors authorized a share repurchase
program. The stock repurchase program allowed DeVry to repurchase up to $35
million of its common stock through December 31, 2008. As of April, 2008, DeVry
completed this repurchase program having repurchased, on the open market,
908,399 shares of its common stock at a total cost of $35 million. These
buybacks were funded through available cash balances.
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 6:
|
BUSINESS
COMBINATIONS
|
Advanced Academics,
Inc.
On
October 31, 2007, DeVry Inc. acquired the operations of Advanced Academics, Inc.
(“AAI”) for $27.6 million in cash, including costs of acquisition. Funding was
provided from DeVry’s existing operating cash balances. The results of AAI’s
operations have been included in the consolidated financial statements of DeVry
since the date of acquisition.
AAI is a
leading provider of online secondary education. Founded in 2000 and
headquartered in Oklahoma City, Oklahoma, AAI partners with school districts to
help more students graduate high school. AAI supplements traditional
classroom programs through Web-based course instruction using highly qualified
teachers and a proprietary technology platform specifically designed for
secondary education. AAI also operates virtual high schools in six
states. Since its inception, AAI has delivered online learning
programs to more than 40,000 students in more than 200 school
districts. The addition of AAI has further diversified DeVry’s
curricula.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (dollars in
thousands).
|
|
At October 31, 2007
|
|
|
|
|
|
Current
Assets
|
|
$ |
4,556 |
|
Property
and Equipment
|
|
|
210 |
|
Other
Long-term Assets
|
|
|
3,599 |
|
Intangible
Assets
|
|
|
10,853 |
|
Goodwill
|
|
|
17,108 |
|
Total
Assets Acquired
|
|
|
36,326 |
|
Liabilities
Assumed
|
|
|
8,691 |
|
Net
Assets Acquired
|
|
$ |
27,635 |
|
Of the
$10.9 million of acquired intangible assets, $1.3 million was assigned to the
value of the AAI trade name which has been determined to not be subject to
amortization. The remaining acquired intangible assets have all been
determined to be subject to amortization and their values and estimated useful
lives are as follows (dollars in thousands):
|
|
As of October 31,
2007
|
|
|
Value
Assigned
|
|
Estimated
Useful Life
|
|
|
|
|
|
Customer
Contracts-Direct to Student
|
|
$ |
4,100 |
|
6
yrs 8 mths
|
Customer
Contracts-Direct to District
|
|
|
2,900 |
|
4
yrs 8 mths
|
Curriculum/Software
|
|
|
2,500 |
|
5
yrs
|
Other
|
|
|
53 |
|
1
yr
|
The $17.1
million of goodwill was all assigned to the AAI reporting unit which is
classified within the DeVry University segment.
There is
no pro forma presentation of prior year operating results related to this
acquisition due to the insignificant effect on consolidated
operations.
U.S. Education
Corporation
On
September 18, 2008, DeVry Inc. acquired the operations of U.S. Education, the
parent organization of Apollo College and Western Career College, for $290
million. Including working capital adjustments and direct costs of
acquisition, total consideration paid was approximately $302 million in
cash. The results of U.S. Education’s operations have been included
in the consolidated financial statements of DeVry since that
date. The total consideration was comprised of approximately $136
million of internal cash resources, approximately $120 million of borrowings
under the Company’s existing credit facility and approximately $46 million of
borrowings against its outstanding auction rate securities. The final
purchase price is subject to adjustment based upon adjustments to actual working
capital at the closing date.
Apollo
College and Western Career College prepare students for careers in healthcare
through certificate and associate degree programs in such rapidly growing fields
as nursing, ultrasound and radiography technology, surgical technology,
veterinary technology, pharmacy technology, dental hygiene, and medical and
dental assisting. The two colleges operate 17 campus locations in the western
United States and currently serve more than 9,000 students and have more than
65,000 alumni. The addition of U.S. Education has further diversified DeVry’s
curricula.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (dollars in
thousands).
|
|
At September 18, 2008
|
|
|
|
|
|
Current
Assets
|
|
$ |
46,042 |
|
Property
and Equipment
|
|
|
19,558 |
|
Other
Long-term Assets
|
|
|
2,308 |
|
Intangible
Assets
|
|
|
128,600 |
|
Goodwill
|
|
|
186,267 |
|
Total
Assets Acquired
|
|
|
382,775 |
|
Liabilities
Assumed
|
|
|
80,980 |
|
Net
Assets Acquired
|
|
$ |
301,795 |
|
Goodwill
is all assigned to the U.S. Education reporting unit which is classified within
the Medical and Healthcare segment. Approximately $25 million of the
goodwill acquired is expected to be deductible for income tax
purposes. Of the $128.6 million of acquired intangible assets, $112.3
million was assigned to the value of the U.S. Education Title IV Eligibility and
Accreditations which has been determined to not be subject to
amortization. The remaining acquired intangible assets have all been
determined to be subject to amortization and their values and estimated useful
lives are as follows (dollars in thousands):
|
|
As of December 31,
2008
|
|
|
Value
Assigned
|
|
Estimated
Useful Life
|
|
|
|
|
|
Trade
name-WCC
|
|
$ |
1,500 |
|
1
yr 3 months
|
Trade
name-Apollo
|
|
|
1,600 |
|
1
yr 3 months
|
Student
Relationships
|
|
|
8,500 |
|
1
yr 3 months
|
Curriculum
|
|
|
800 |
|
5
yrs
|
Outplacement
Relationships
|
|
|
3,900 |
|
15
yrs
|
The
amount of goodwill recorded at December 31, 2008 and the final purchase price
relating to the acquisition are subject to adjustment based on final
determination of actual working capital as of the closing
date. Deferred income taxes may also be affected by the goodwill and
final purchase price determination. DeVry expects to finalize the
working capital and purchase price no later than the fourth quarter of fiscal
2009.
The
following unaudited pro forma financial information presents the results of
operations of DeVry and U.S. Education as if the acquisition had occurred at the
beginning of each period. The pro forma information is based on
historical results of operations and does not necessarily reflect the actual
results that would have occurred, nor is it necessarily indicative of future
results of operations of the combined enterprises (dollars in thousands except
for per share amounts):
|
|
|
|
|
Pro
Forma
|
|
|
|
For the Three
Months ended
December 31,
|
|
|
For the Three
Months ended
December 31,
|
|
|
For the Six Months ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
|
$ |
369,615 |
|
|
$ |
308,341 |
|
|
$ |
709,239 |
|
|
$ |
592,548 |
|
Operating
Income
|
|
|
62,540 |
|
|
|
48,689 |
|
|
|
113,086 |
|
|
|
84,433 |
|
Net
Income
|
|
|
42,865 |
|
|
|
34,920 |
|
|
|
78,730 |
|
|
|
60,606 |
|
Earning
per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.60 |
|
|
$ |
0.49 |
|
|
$ |
1.10 |
|
|
$ |
0.85 |
|
Diluted
|
|
$ |
0.59 |
|
|
$ |
0.48 |
|
|
$ |
1.08 |
|
|
$ |
0.84 |
|
NOTE 7:
|
INTANGIBLE
ASSETS
|
Intangible
assets consist of the following (dollars in thousands):
|
|
As of December 31,
2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
56,270 |
|
|
$ |
(49,697 |
) |
Customer
Contracts
|
|
|
7,000 |
|
|
|
(1,615 |
) |
License
and Non-compete Agreements
|
|
|
2,684 |
|
|
|
(2,684 |
) |
Class Materials
|
|
|
2,900 |
|
|
|
(1,600 |
) |
Curriculum/Software
|
|
|
3,300 |
|
|
|
(628 |
) |
Trade
Names
|
|
|
3,210 |
|
|
|
(813 |
) |
Outplacement
Relationships
|
|
|
3,900 |
|
|
|
(74 |
) |
Other
|
|
|
639 |
|
|
|
(639 |
) |
Total
|
|
$ |
79,903 |
|
|
$ |
(57,750 |
) |
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
Trade
Names
|
|
$ |
22,272 |
|
|
|
|
|
Trademark
|
|
|
1,645 |
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100 |
|
|
|
|
|
Intellectual
Property
|
|
|
13,940 |
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200 |
|
|
|
|
|
USEC
Title IV Eligibility
|
|
|
112,300 |
|
|
|
|
|
Total
|
|
$ |
165,457 |
|
|
|
|
|
|
|
As of December 31,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
47,770 |
|
|
$ |
(46,307 |
) |
Customer
Contracts
|
|
|
7,000 |
|
|
|
(224 |
) |
License
and Non-compete Agreements
|
|
|
2,684 |
|
|
|
(2,641 |
) |
Class Materials
|
|
|
2,900 |
|
|
|
(1,400 |
) |
Curriculum/Software
|
|
|
2,500 |
|
|
|
(83 |
) |
Trade
Names
|
|
|
110 |
|
|
|
(110 |
) |
Other
|
|
|
639 |
|
|
|
(623 |
) |
Total
|
|
$ |
63,603 |
|
|
$ |
(51,388 |
) |
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
Trade
Names
|
|
$ |
22,272 |
|
|
|
|
|
Trademark
|
|
|
1,645 |
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100 |
|
|
|
|
|
Intellectual
Property
|
|
|
13,940 |
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200 |
|
|
|
|
|
Total
|
|
$ |
53,157 |
|
|
|
|
|
Amortization
expense for amortized intangible assets was $2.9 million and $3.8 million for
the three and six months ended December 31, 2008, respectively, and $1.4
million and $2.4 million for the three and six months ended December 31, 2007.
Estimated amortization expense for amortized intangible assets for the next five
fiscal years ending June 30 is as follows (dollars in
thousands):
Fiscal Year
|
|
|
|
2009
|
|
$ |
9,752 |
|
2010
|
|
|
6,955 |
|
2011
|
|
|
2,426 |
|
2012
|
|
|
2,118 |
|
2013
|
|
|
1,198 |
|
The
weighted-average amortization period for amortized intangible assets is 18
months for U.S. Education Student Relationships; approximately six years for AAI
customer contracts; six years for License and Non-compete Agreements;
14 years for Class Materials; five years for Curriculum/Software; one
year for U.S. Education Trade Names and four years for other Trade Names; 15
years for Outplacement Relationships and six years for Other. These intangible
assets, except for the AAI Customer Contracts, are being amortized on a
straight-line basis.
The
amount being amortized for the AAI Customer Contracts is based on the estimated
renewal probability of the contracts, giving consideration to the revenue and
discounted cash flow associated with both types of customer relationships. This
results in the basis being amortized at an annual rate for each of the years of
estimated economic life as follows:
Fiscal Year
|
|
Direct
to
Student
|
|
|
Direct
to
District
|
|
2008
|
|
|
12 |
% |
|
|
14 |
% |
2009
|
|
|
18 |
% |
|
|
24 |
% |
2010
|
|
|
19 |
% |
|
|
25 |
% |
2011
|
|
|
17 |
% |
|
|
21 |
% |
2012
|
|
|
14 |
% |
|
|
16 |
% |
2013
|
|
|
11 |
% |
|
|
- |
|
2014
|
|
|
9 |
% |
|
|
- |
|
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
years 2008 and 2007, there was no impairment loss associated with these
indefinite-lived intangible assets, as estimated fair value exceeds the carrying
amount. No impairment indicators were noted through the period ended
December 31, 2008.
DeVry
determined that as of the end of fiscal years 2008 and 2007, 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 management. No impairment indicators were noted
through the period ended December 31, 2008. The carrying amount of goodwill
related to the DeVry University reportable segment was $39.3 million at December
31, 2008 which was an increase of $0.2 million from June 30, 2008. This increase
resulted from the final allocation of the AAI purchase price. The
carrying amount of goodwill related to the Professional and Training reportable
segment was $24.7 million at December 31, 2008, unchanged from June 30, 2008.
The carrying amount of goodwill related to the Medical and Healthcare
reportable segment at December 31, 2008 was $430.5 million which was an increase
of $186.3 million from June 30, 2008. This increase resulted from the allocation
of the U.S. Education purchase price as described in “Note 6-Business
Combinations”.
NOTE 8:
|
SALE
OF FACILITIES
|
In
February 2008, DeVry sold its facility located in Houston, Texas, for
approximately $14.5 million in gross proceeds which resulted in a pre-tax gain
of approximately $2.2 million. In connection with the transaction,
DeVry entered into an agreement to lease back approximately 60% of the original
space in the facility. The leaseback required the deferral of the
gain on the sale. The gain is being recognized ratably as a reduction
to rent expense over the twelve year term of the lease agreement.
In
September 2007, DeVry sold its facility located in Seattle, Washington, for
approximately $12.4 million. In connection with the sale, DeVry
recorded a pre-tax loss of $5.4 million during the first quarter of fiscal
year 2008. In the same transaction, DeVry sold its facility located
in Phoenix, Arizona, for approximately $16.0 million which resulted in a pre-tax
gain of approximately $7.7 million. In connection with the transaction, DeVry
entered into agreements to lease back approximately 60% of the total space of
both facilities. The leaseback required the deferral of a portion of
the gain on the sale of the Phoenix facility of approximately $6.6 million. This
gain will be recognized as a reduction to rent expense over the ten year life of
the lease agreement. The remaining pre-tax gain of $1.1 million was recorded
during the first quarter of fiscal year 2008. In September 2007,
DeVry exercised the option to purchase its leased facility in Alpharetta,
Georgia, for $11.2 million. Immediately following the acquisition,
DeVry sold the facility to a different party for $11.2 million and executed a
leaseback on the entire facility. In connection with this
transaction, DeVry accelerated to the first quarter of fiscal year 2008, the
recognition of approximately $0.6 million of remaining deferred lease credits
associated with the original lease. The recorded net loss on the sale
of the facilities and the recognition of the deferred lease credits are
separately classified in the Consolidated Statements of Income as a component of
Total Operating Costs and Expenses and are related to the DeVry University
reportable segment.
In the
second quarter of fiscal 2009, DeVry moved its Decatur, Georgia campus to a new
leased facility. The campus was previously located in an owned facility
that is currently held as available for sale. DeVry estimates the fair
value of this property less costs to sell to be in excess of its carrying value;
therefore, no impairment loss was recognized.
In
January 2009, DeVry entered into an agreement to buy out a portion of its lease
at its Long Island City, New York campus. DeVry will buy out the lease on
approximately 40 percent of the space it occupies. In the third
quarter of fiscal year 2009, DeVry will record a pre-tax charge of approximately
$3.9 million. The charge is composed of a $2.7 million cash outlay
and a non-cash charge of $1.2 million related to the write-off of leasehold
improvements, net of a deferred rent credit.
NOTE 9:
|
REDUCTION
IN WORKFORCE 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 eligible to
participate. Seventy employees accepted this separation
plan. Separation of employment was effective no later than June
30, 2007. DeVry recorded a pre-tax charge of approximately $3.7
million in the third and fourth quarters of fiscal 2007 in relation to these
employees. This charge consists of severance pay and extended medical
and dental benefits coverage.
In April
2007, DeVry announced plans for an involuntary reduction in force (RIF) that
further reduced its workforce by approximately 150 positions at its DeVry
University campus-based operations. This resulted in an additional
pre-tax charge in the fourth quarter of fiscal 2007 of approximately $2.6
million that represented severance pay and benefits in relation to these
employees.
Cash
payments for the VSP and RIF were approximately $68,000 and $135,000, in the
three and six months ended December 31, 2008, respectively. These payments will
extend until the period of benefit coverage has expired. Of the total amount
accrued for the fiscal year 2007 VSP and RIF, approximately $0.4 million
remained to be paid as of December 31, 2008.
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 $141.5 million and $90.5 million
attributable to Ross University’s international operations as of December 31,
2008 and 2007, respectively. As of December 31, 2008 and 2007,
cumulative undistributed earnings were approximately $176.3 million and $120.5
million, respectively.
The
effective tax rate was 30.1% for the second quarter and 29.3% for the first six
months of fiscal year 2009, compared to 28.0% for the second quarter and 27.0%
for the first six months of the prior fiscal year. The higher effective income
tax rate for the quarter and first six months of fiscal year 2009 is
attributable to an increase in the proportion of income generated by U.S.
operations to the offshore operations of Ross University as compared to the
prior year period. Also the net loss on the fiscal year 2008 first quarter
facility sales which carried a tax rate of 39.1% provided a benefit which
decreased the effective tax rate in the first six months of fiscal 2008. The
effective income tax rate for the fiscal year ended June 30, 2008 was
27.1%.
Effective
July 1, 2007, DeVry adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on derecognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures. The cumulative effects of applying this
interpretation have been recorded as a decrease of $0.9 million to retained
earnings, an increase of $0.5 million to net deferred income tax assets, a
decrease of $4.2 million to net deferred income tax liabilities, an increase of
$0.7 million to other accrued current taxes and an increase of $4.8 million to
other accrued non-current taxes as of July 1, 2007. In
conjunction with adoption of FIN 48, we classify uncertain tax positions as
non-current tax liabilities unless expected to be paid in one
year.
As of
June 30, 2008, the total amount of gross unrecognized tax benefits for uncertain
tax positions, including positions impacting only the timing of tax benefits,
was $2.6 million. The amount of unrecognized tax benefits that, if
recognized, would impact the effective tax rate was $1.9 million. We
expect that our unrecognized tax benefits will decrease by an insignificant
amount during the next twelve months. DeVry classifies interest and penalties on
tax uncertainties as a component of the provision for income
taxes. The total amount of interest and penalties accrued as of at
June 20, 2008 was $0.8 million. The corresponding amounts at December
31, 2008, were not materially different from the amounts at June 30,
2008.
The
Internal Revenue Service is currently examining DeVry’s 2006 and 2007 U.S.
Federal Income Tax Returns. DeVry generally remains subject to
examination for all tax years beginning on or after July 1, 2004.
DeVry had
no outstanding debt at June 30, 2008 and December 31, 2007. Debt
consists of the following at December 31, 2008 (dollars in
thousands):
|
|
December 31, 2008
|
|
Revolving
Credit Facility:
|
|
Outstanding Debt
|
|
|
Average Interest Rate
|
|
DeVry
Inc. as borrower
|
|
$ |
110,000 |
|
|
|
1.93 |
% |
GEI
as borrower
|
|
|
-- |
|
|
|
-- |
|
Total
|
|
$ |
110,000 |
|
|
|
1.93 |
% |
Auction
Rate Securities Collateralized Line of Credit:
|
|
|
|
|
|
|
|
|
DeVry
Inc. as borrower
|
|
|
45,124 |
|
|
|
0.93 |
% |
Total
Outstanding Debt
|
|
$ |
155,124 |
|
|
|
1.64 |
% |
Current
Maturities of Debt
|
|
|
135,124 |
|
|
|
1.60 |
% |
Total
Long-term Debt
|
|
$ |
20,000 |
|
|
|
1.93 |
% |
Revolving Credit
Facility
All of
DeVry’s borrowings and letters of credit under its $175 million revolving credit
facility are through DeVry Inc. and Global Education International, Inc.
(“GEI”), an international subsidiary. The revolving credit facility became
effective on May 16, 2003, and was amended as of September 30, 2005
and again on January 11, 2007. DeVry Inc. aggregate commitments including
borrowings and letters of credit under this agreement in total not to exceed
$175.0 million, and GEI aggregate commitments cannot exceed $50.0 million. At
the request of DeVry, the maximum borrowings and letters of credit can be
increased to $275.0 million in total with GEI aggregate commitments not to
exceed $50.0 million. There are no required payments under this revolving credit
agreement and all borrowings and letters of credit mature on January 11, 2012.
As a result of the agreement extending beyond one year, all borrowings are
classified as long-term with the exception of amounts expected to be repaid in
the 12 months subsequent to the balance sheet date. DeVry Inc. letters of
credit outstanding under this agreement were $15.2 million and $3.9 million as
of December 31, 2008 and 2007, respectively. As of December 31, 2008,
outstanding borrowings under this agreement bear interest, payable quarterly or
upon expiration of the interest rate period, at the prime rate or at a LIBOR
rate plus 0.50%, at the option of DeVry. Outstanding letters of credit under the
revolving credit agreement are charged an annual fee equal to 0.50% of the
undrawn face amount of the letter of credit, payable quarterly. The agreement
also requires payment of a commitment fee equal to 0.1% of the undrawn portion
of the credit facility. The interest rate, letter of credit fees and commitment
fees are adjustable quarterly, based upon DeVry’s achievement of certain
financial ratios.
The
revolving credit agreement contains certain covenants that, among other things,
require maintenance of certain financial ratios, as defined in the agreements.
These financial ratios include a consolidated fixed charge coverage ratio, a
consolidated leverage ratio and a composite Equity, Primary Reserve and Net
Income, Department of Education, financial responsibility ratio (“DOE Ratio”).
Failure to maintain any of these ratios or to comply with other covenants
contained in the agreement will constitute an event of default and could result
in termination of the agreements and require payment of all outstanding
borrowings. DeVry was in compliance with all debt covenants as of
December 31, 2008.
The stock
of certain subsidiaries of DeVry is pledged as collateral for the borrowings
under the revolving credit facility.
Auction Rate Securities
Collateralized Line of Credit
In
connection with the completion of the acquisition of U.S. Education, on
September 18, 2008, (See NOTE 6: BUSINESS COMBINATIONS) DeVry borrowed
approximately $46 million against its portfolio of auction rate securities under
a temporary, uncommitted, demand revolving line of credit facility between DeVry
Inc. and UBS Bank USA (the “Lender”). This borrowing totaled
approximately 80% of the fair market value on September 18, 2008, of DeVry’s
auction rate securities portfolio held through its broker, UBS, which is the
maximum borrowing permitted under this credit facility.
Under
this lending agreement, the Lender may demand payment at any time and for any
reason. In addition, the credit facility may be terminated at the
Lender’s discretion, on such date as the auction rate securities portfolio may
be liquidated in such amounts and at such a price as the Lender may determine to
be acceptable. Under this lending agreement, interest will be charged
monthly at a rate equal to 30-day LIBOR, adjusted daily, plus a spread which is
initially set at 0.50%. No interest payments are required as long as
the minimum equity ratio is maintained in the collateral accounts and
outstanding loan balances do not exceed the approved credit limit of $46
million. Any proceeds from the liquidation, redemption, sale or other
disposition of all or part of the auction rate securities and all interest,
dividends and other income payments received from the auction rate securities
will be transferred automatically to the Lender as payments under the lending
agreement.
NOTE 12:
|
COMMITMENTS
AND CONTINGENCIES
|
DeVry is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
and investigations 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.
On
December 23, 2005, Saro Daghlian, a former DeVry University student in
California, commenced a putative class action against DeVry University and DeVry
Inc. (collectively “DeVry”) in Los Angeles Superior Court, asserting
various claims predicated upon DeVry’s alleged failure to comply with disclosure
requirements under the California Education Code relating to the transferability
of academic units. In addition to the alleged omission,
Daghlian also claimed that DeVry made untrue or misleading statements to
prospective students, in violation of the California Unfair Competition
Law ("UCL") and the California False Advertising Law,
("FAL"). DeVry removed the action to the U.S. District Court
for the Central District of California. In two Orders dated October 9,
2007, and December 31, 2007, the District Court entered judgment
dismissing all of plaintiffs’ class and individual claims and awarded
DeVry its cost of suit. The final judgment was entered on January 3,
2008. Plaintiffs filed a notice of appeal to the U.S. Court of
Appeals for the Ninth Circuit on January 8, 2008. DeVry continues to
defend itself vigorously with respect to this claim. DeVry filed a
motion to dismiss the appeal on January 2, 2009, which awaits
ruling.
In May
2008, the U.S. Department of Justice, Civil Division, working with the U.S.
Attorney for the Northern District of Illinois, requested that DeVry voluntarily
furnish documents and other information regarding its policies and practices
with respect to recruiter compensation and performance
evaluation. The stated purpose of the request was made to examine
whether DeVry may have submitted or caused the submission of false claims or
false statements to the U.S. Department of Education in violation of the False
Claims Act ("FCA"). After providing the government its full
cooperation, DeVry was advised by the U.S. Attorney for the Northern District of
Illinois, on October 16, 2008, that the government had concluded its inquiry and
had declined to intervene in an underlying qui tam action that had
precipitated the government's inquiry. The case, which was unsealed
as a result of the government’s action, was originally filed in September 2007
by a former DeVry employee, Jennifer S. Shultz. The action, which is
pending in the United States District Court for the Northern District of
Illinois, Eastern Division, relates to whether DeVry’s compensation plans for
admission representatives violated the Higher Education Act ("HEA") and the
Department Of Education ("DOE") regulations prohibiting an institution
participating in Title IV Programs from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments to any person or entity engaged in any student recruitment or
admissions activity. A number of similar lawsuits have been filed in
recent years against educational institutions that receive Title IV
funds. A first amended complaint in the Shultz matter was
unsealed by a court order dated December 31, 2008. The amended
complaint outlines a theory of damages based upon Title IV funding disbursements
to DeVry over a number of years and asserts the plaintiff is entitled to
recover treble the amount of actual damages allegedly sustained by the
federal government as a result of the alleged activity, plus civil monetary
penalties. DeVry is defending this claim vigorously. On January 26,
2009, DeVry filed a motion to dismiss the case entirely.
In April
2004, U.S. Education, successor to Silicon Valley College, was sued in a qui tam action brought in the
Northern District of California pursuant to the FCA. This action also
relates to whether U.S. Education’s compensation plans for admission
representatives violated the HEA and the DOE regulations prohibiting an
institution participating in Title IV Programs from providing any commission,
bonus or other incentive payment based directly or indirectly on success in
securing enrollments to any person or entity engaged in any student recruitment
or admissions activity. The DOJ declined to intervene in this action as
well. In October 2005, the Court granted U.S. Education’s motion to
dismiss the complaint with prejudice. Plaintiffs appealed the District
Court's order dismissing the complaint to the Ninth Circuit Court of
Appeals. In January 2008, the Ninth Circuit affirmed the district court's
dismissal of the complaint. The Ninth Circuit observed that the conduct
alleged in the complaint – that recruiters were terminated for failing to meet
enrollment quotas – was not prohibited by the HEA or DOE regulations. The
Ninth Circuit also rejected a subsequent motion for rehearing and rehearing
en banc and, on April
25, 2008, issued a mandate. In September 2008, Plaintiffs filed a Petition
for Writ of Certiorari with the Supreme Court of the United States. The
Court rejected the Petition as well as a subsequent Petition for Reconsideration
thereby exhausting all of Plaintiffs' options for relief by the Court and
bringing this matter to a close.
In August
2007, Western Career College (“WCC”), a subsidiary of U.S. Education, was sued
in a qui tam
action. This qui
tam Action, brought in the Eastern District of California pursuant to
both the Federal and California FCA, again relates to whether WCC’s compensation
plans for admission representatives violates the HEA and DOE regulations
prohibiting an institution participating in Title IV Programs from providing any
commission, bonus or other incentive payment based directly or indirectly on
success in securing enrollments to any person or entity engaged in any student
recruitment or admissions activity. In April 2008, the DOJ and the
California Attorney General declined to intervene in the action and, on July
30, 2008, Plaintiff filed a Request for Dismissal of Action, Without
Prejudice. The lawsuit was never served upon WCC and the Court docket
reflects the matter as closed.
The
ultimate outcome of pending litigation and other proceedings, reviews,
investigations and contingencies is difficult to estimate. At this time, DeVry
does not expect that the outcome of any such matter, including the litigation
described above, will have a material effect on its cash flows, results of
operations or financial position.
NOTE 13:
|
SEGMENT
INFORMATION
|
DeVry’s
principal business is providing post-secondary education. DeVry’s operations are
described in more detail in “Note 1- Nature of Operations” to the
consolidated financial statements contained in its Annual Report on Form 10-K
for the fiscal year ended June 30, 2008. DeVry presents three
reportable segments: the DeVry University undergraduate and graduate and the
Advanced Academics operations (DeVry University); the Ross University medical
and veterinary schools, Chamberlain College of Nursing operations and the U.S.
Education operations (Medical and Healthcare); and the professional exam
review and training operations which includes Becker CPA Review and Stalla
Review for the CFA Exams (Professional and Training).
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 income,
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, 2008.
The
consistent measure of segment profit excludes interest income, 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 three and six months ended December 31, 2008 and 2007.
Corporate information is included where it is needed to reconcile segment data
to the consolidated financial statements.
|
|
For
the Three Months
|
|
|
For
the Six Months
|
|
|
|
Ended December 31,
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
(Dollars
in Thousands)
|
|
DeVry
University
|
|
$ |
253,667 |
|
|
$ |
213,394 |
|
|
$ |
484,347 |
|
|
$ |
408,159 |
|
Medical and
Healthcare
|
|
|
97,979 |
|
|
|
42,586 |
|
|
|
151,257 |
|
|
|
79,826 |
|
Professional
and Training
|
|
|
17,969 |
|
|
|
17,757 |
|
|
|
37,728 |
|
|
|
36,070 |
|
Total
Consolidated Revenues
|
|
$ |
369,615 |
|
|
$ |
273,737 |
|
|
$ |
673,332 |
|
|
$ |
524,055 |
|
Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
34,835 |
|
|
$ |
28,220 |
|
|
$ |
60,123 |
|
|
$ |
43,781 |
|
Medical and
Healthcare
|
|
|
26,666 |
|
|
|
15,262 |
|
|
|
42,017 |
|
|
|
26,863 |
|
Professional
and Training
|
|
|
4,526 |
|
|
|
5,374 |
|
|
|
12,249 |
|
|
|
13,732 |
|
Reconciling
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
(2,919 |
) |
|
|
(1,355 |
) |
|
|
(3,835 |
) |
|
|
(2,401 |
) |
Depreciation
and Other
|
|
|
(568 |
) |
|
|
(568 |
) |
|
|
(1,202 |
) |
|
|
(1,140 |
) |
Total
Consolidated Operating Income
|
|
$ |
62,540 |
|
|
$ |
46,933 |
|
|
$ |
109,352 |
|
|
$ |
80,835 |
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
1,710 |
|
|
$ |
2,892 |
|
|
$ |
3,852 |
|
|
$ |
5,299 |
|
Interest
Expense
|
|
|
(1,176 |
) |
|
|
(98 |
) |
|
|
(1,529 |
) |
|
|
(319 |
) |
Net
Investment Loss
|
|
|
(1,718 |
) |
|
|
- |
|
|
|
(1,718 |
) |
|
|
- |
|
Net
Interest Income
|
|
|
(1,184 |
) |
|
|
2,794 |
|
|
|
605 |
|
|
|
4,980 |
|
Total
Consolidated Income before Income Taxes
|
|
$ |
61,356 |
|
|
$ |
49,727 |
|
|
$ |
109,957 |
|
|
$ |
85,815 |
|
Segment
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
484,270 |
|
|
$ |
476,413 |
|
|
$ |
484,270 |
|
|
$ |
476,413 |
|
Medical and
Healthcare
|
|
|
887,058 |
|
|
|
427,077 |
|
|
|
887,058 |
|
|
|
427,077 |
|
Professional
and Training
|
|
|
64,105 |
|
|
|
72,555 |
|
|
|
64,105 |
|
|
|
72,555 |
|
Corporate
|
|
|
19,454 |
|
|
|
20,287 |
|
|
|
19,454 |
|
|
|
20,287 |
|
Total
Consolidated Assets
|
|
$ |
1,454,887 |
|
|
$ |
996,332 |
|
|
$ |
1,454,887 |
|
|
$ |
996,332 |
|
Additions
to Long-lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
6,906 |
|
|
$ |
35,261 |
|
|
$ |
13,298 |
|
|
$ |
49,413 |
|
Medical and
Healthcare
|
|
|
26,248 |
|
|
|
2,383 |
|
|
|
343,144 |
|
|
|
6,357 |
|
Professional
and Training
|
|
|
27 |
|
|
|
147 |
|
|
|
76 |
|
|
|
161 |
|
Total
Consolidated Additions to Long-lived Assets
|
|
$ |
33,181 |
|
|
$ |
37,791 |
|
|
$ |
356,518 |
|
|
$ |
55,931 |
|
Reconciliation
to Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
$ |
14,570 |
|
|
$ |
9,817 |
|
|
$ |
25,208 |
|
|
$ |
27,957 |
|
Increase
in Capital Assets from Acquisitions
|
|
|
- |
|
|
|
210 |
|
|
|
9,558 |
|
|
|
210 |
|
Increase
in Intangible Assets and Goodwill
|
|
|
18,611 |
|
|
|
27,764 |
|
|
|
311,752 |
|
|
|
27,764 |
|
Total
Increase in Consolidated Long-lived Assets
|
|
$ |
33,181 |
|
|
$ |
37,791 |
|
|
$ |
356,518 |
|
|
$ |
55,931 |
|
Depreciation
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
7,240 |
|
|
$ |
7,095 |
|
|
$ |
14,244 |
|
|
$ |
13,858 |
|
Medical and
Healthcare
|
|
|
2,857 |
|
|
|
1,480 |
|
|
|
4,411 |
|
|
|
2,802 |
|
Professional
and Training
|
|
|
90 |
|
|
|
103 |
|
|
|
177 |
|
|
|
198 |
|
Corporate
|
|
|
188 |
|
|
|
180 |
|
|
|
368 |
|
|
|
405 |
|
Total
Consolidated Depreciation
|
|
$ |
10,375 |
|
|
$ |
8,858 |
|
|
$ |
19,200 |
|
|
$ |
17,263 |
|
Intangible
Asset Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
488 |
|
|
$ |
317 |
|
|
$ |
985 |
|
|
$ |
317 |
|
Medical and
Healthcare
|
|
|
2,382 |
|
|
|
982 |
|
|
|
2,748 |
|
|
|
1,965 |
|
Professional
and Training
|
|
|
49 |
|
|
|
56 |
|
|
|
102 |
|
|
|
119 |
|
Total
Consolidated Amortization
|
|
$ |
2,919 |
|
|
$ |
1,355 |
|
|
$ |
3,835 |
|
|
$ |
2,401 |
|
In
September 2007, DeVry executed a sale leaseback transaction for its facilities
in Seattle, Washington, and Phoenix, Arizona. In connection with these
transactions, DeVry recorded a pre-tax loss of $4.3 million during the
first quarter of fiscal year 2008. This loss is included in operating income of
the DeVry University reportable segment.
In
September 2007, DeVry exercised the option to purchase its leased facility in
Alpharetta, Georgia. Immediately following the acquisition, DeVry
sold the facility to a different party and executed a leaseback on the entire
facility. In connection with this transaction, DeVry accelerated to
the first quarter of fiscal year 2008, the recognition of approximately $0.6
million of remaining deferred lease credits associated with the original lease.
This income is included in operating income of the DeVry University reportable
segment.
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 three and six months ended
December 31, 2008 and 2007. Revenues and long-lived assets by geographic
area are as follows:
|
|
For
the Three Months
|
|
|
For
the Six Months
|
|
|
|
Ended December 31,
|
|
|
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
from Unaffiliated Customers:
|
|
(Dollars
in Thousands)
|
|
Domestic
Operations
|
|
$ |
326,354 |
|
|
$ |
234,375 |
|
|
$ |
591,478 |
|
|
$ |
450,296 |
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
40,905 |
|
|
|
36,763 |
|
|
|
77,017 |
|
|
|
68,471 |
|
Other
|
|
|
2,356 |
|
|
|
2,599 |
|
|
|
4,837 |
|
|
|
5,288 |
|
Total
International
|
|
|
43,261 |
|
|
|
39,362 |
|
|
|
81,854 |
|
|
|
73,759 |
|
Consolidated
|
|
$ |
369,615 |
|
|
$ |
273,737 |
|
|
$ |
673,332 |
|
|
$ |
524,055 |
|
Long-lived
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$ |
650,984 |
|
|
$ |
315,129 |
|
|
$ |
650,984 |
|
|
$ |
315,129 |
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
320,831 |
|
|
|
312,612 |
|
|
|
320,831 |
|
|
|
312,612 |
|
Other
|
|
|
363 |
|
|
|
334 |
|
|
|
363 |
|
|
|
334 |
|
Total
International
|
|
|
321,194 |
|
|
|
312,946 |
|
|
|
321,194 |
|
|
|
312,946 |
|
Consolidated
|
|
$ |
972,178 |
|
|
$ |
628,075 |
|
|
$ |
972,178 |
|
|
$ |
628,075 |
|
No one
customer accounted for more than 10% of DeVry’s consolidated
revenues.
Through
its website, 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 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 fiscal year ended June 30,
2008. 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; valuation of marketable securities and investments; 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,” “intends,” “plans”
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 throughout this Report,
including those in Note 12 to the Consolidated Financial Statements and in Part
II, Item 1, “Legal Proceedings”, and in DeVry’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2008 and filed with the Securities and Exchange
Commission on August 27, 2008 including, without limitation, 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.”
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
second quarter of fiscal year 2009, DeVry continued to execute its strategic
plan and posted strong financial results in a challenging economic
environment. Operational and financial highlights for the second
quarter of fiscal year 2009 include:
|
·
|
Total
revenues rose 35.0%, reaching a quarterly record high of $369.6 million,
and net income of $42.9 million increased 19.7% over the prior year
period.
|
|
·
|
The
Fall 2008 term marked DeVry University’s twelfth consecutive period of
positive undergraduate new student growth and the ninth consecutive period
of positive total student enrollment
growth.
|
|
·
|
During
November 2008, DeVry began repurchasing shares of its common stock under a
$50 million repurchase program, which was approved by its Board of
Directors in May 2008. During the second quarter of fiscal year
2009, DeVry repurchased 98,100 shares at a total cost of approximately
$5.4 million.
|
|
·
|
In
November 2008, DeVry’s Board of Directors approved a 33.3 percent dividend
increase, raising its annual dividend rate from $0.12 to $0.16 per
share. Payable on a semi-annual basis, the most recent dividend
of $0.08 per share was paid on January 9,
2009.
|
|
·
|
DeVry’s
financial position remained strong as it generated $138.8 million of
operating cash flow during the first six months of fiscal year 2009,
driven primarily by strong operating results. As of December 31, 2008,
cash and short- and long-term investment balances totaled $262.9
million.
|
As
described in Note 8 to the financial statements, DeVry executed sale/leaseback
transactions in the first half of fiscal year 2008 which resulted in a loss on
the sale of such facilities. The following table illustrates the
effects of the loss on the sale of facilities on DeVry’s
earnings. The non-GAAP disclosure of net income and earnings per
share, excluding these items, is not preferable to GAAP net income but is shown
as a supplement to such disclosure for comparability to the year-ago
period. The following table reconciles these items to the relevant
GAAP information (in thousands, except per share data):
|
|
For
the Six Months
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
Income
|
|
$ |
77,695 |
|
|
$ |
62,648 |
|
Earnings
per Share (diluted)
|
|
$ |
1.07 |
|
|
$ |
0.87 |
|
Loss
on Sale of Assets (net of tax)
|
|
|
-- |
|
|
$ |
2,279 |
|
Effect
on Earnings per Share (diluted)
|
|
|
-- |
|
|
$ |
0.03 |
|
Net
Income Excluding the Loss on Sale of Assets (net of tax)
|
|
$ |
77,695 |
|
|
$ |
64,927 |
|
Earnings
per Share Excluding the Loss on Sale of Assets (diluted)
|
|
$ |
1.07 |
|
|
$ |
0.90 |
|
RESULTS OF
OPERATIONS
The
following table presents information with respect to the size relative to
revenue of each item in the Consolidated Statements of Income for the second
quarter and first six months of both the current and prior fiscal
year. Percentages may not add because of rounding.
|
|
For
the Three Months
Ended
December 31,
|
|
|
For
the Six Months
Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of Educational Services
|
|
|
45.2 |
% |
|
|
45.3 |
% |
|
|
45.6 |
% |
|
|
46.7 |
% |
Loss
on Sale of Assets
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.7 |
% |
Student
Services & Admin. Exp
|
|
|
37.9 |
% |
|
|
37.6 |
% |
|
|
38.2 |
% |
|
|
37.1 |
% |
Total
Operating Costs and Expenses
|
|
|
83.1 |
% |
|
|
82.9 |
% |
|
|
83.8 |
% |
|
|
84.6 |
% |
Operating
Income
|
|
|
16.9 |
% |
|
|
17.1 |
% |
|
|
16.2 |
% |
|
|
15.4 |
% |
Interest
Income
|
|
|
0.5 |
% |
|
|
1.1 |
% |
|
|
0.6 |
% |
|
|
1.0 |
% |
Interest
Expense
|
|
|
(0.3 |
%) |
|
|
(0.0 |
%) |
|
|
(0.2 |
%) |
|
|
(0.1 |
%) |
Net
Investment Loss
|
|
|
(0.5 |
%) |
|
|
-- |
|
|
|
(0.3 |
%) |
|
|
-- |
|
Net
Interest and Other (Expense) Income
|
|
|
(0.3 |
%) |
|
|
1.1 |
% |
|
|
0.1 |
% |
|
|
0.9 |
% |
Income
Before Income Taxes
|
|
|
16.6 |
% |
|
|
18.2 |
% |
|
|
16.3 |
% |
|
|
16.4 |
% |
Income
Tax Provision
|
|
|
5.0 |
% |
|
|
5.1 |
% |
|
|
4.8 |
% |
|
|
4.4 |
% |
Net
Income
|
|
|
11.6 |
% |
|
|
13.1 |
% |
|
|
11.5 |
% |
|
|
12.0 |
% |
REVENUES
Total
consolidated revenues for the second quarter of fiscal year 2009 increased 35.0%
to $369.6 million versus the prior year quarter. For the first six
months of fiscal year 2009, total consolidated revenues increased 28.5% to
$673.3 million compared to the same period a year ago. For both the
second quarter and first six months of fiscal year 2009, revenues increased at
all three of DeVry’s business segments as a result of continued growth in
student enrollments and tuition price increases as compared to the year ago
period. In addition, U.S. Education, which was acquired on September
18, 2008, contributed to the revenue growth in the second quarter and first six
months of fiscal year 2009. Revenues also increased because of higher
sales of DeVry University electronic course materials and Becker CPA review
materials. However, the revenue growth rate for Becker CPA review
courses and materials slowed significantly during the first six months of the
year due to the economic downturn.
DeVry
University
DeVry
University segment revenues increased 18.9% to $253.7 million in the second
quarter, and rose 18.7% to $484.3 million for the first six months of fiscal
2009 as compared to the year ago periods driven by strong enrollment
growth. While DeVry University accounted for the majority of the
revenue increase in this segment, revenues at Advanced Academics Inc., which was
acquired on October 31, 2007, also contributed to segment revenue
growth. DeVry University tuition revenues are the largest component
of total revenues in the DeVry University segment. The two principal factors
that influence tuition revenues are enrollment and tuition rates. Key trends in
these two components are set forth below.
Total undergraduate enrollment by
term:
|
·
|
Increased
by 10.3% from spring 2007 (40,637 students) to spring 2008 (44,814
students);
|
|
·
|
Increased
by 12.6% from summer 2007 (40,774 students) to summer 2008 (45,907
students); and
|
|
·
|
Increased
by 16.9% from fall 2007 (44,594 students) to fall 2008 (52,146
students). This was DeVry University’s ninth consecutive period
of positive total undergraduate student enrollment
growth.
|
New undergraduate enrollment by
term:
|
·
|
Increased
by 12.1% from spring 2007 (11,075 students) to spring 2008 (12,410
students);
|
|
·
|
Increased
by 19.3% from summer 2007 (13,906 students) to summer 2008 (16,595
students); and
|
|
·
|
Increased
by 19.7% from fall 2007 (13,204 students) to fall 2008 (15,811 students).
The fall 2008 term was the twelfth consecutive term in which new
undergraduate student enrollments increased from the year-ago
level.
|
Total graduate coursetakers by
session:
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 14.2% from the July 2007 session (14,023 coursetakers) to the July 2008
session (16,017 coursetakers);
|
|
·
|
Increased
by 12.2% from the September 2007 session (15,857 coursetakers) to the
September 2008 session (17,799 coursetakers);
and
|
|
·
|
Increased
by 13.7% from the November 2007 session (15,657 coursetakers) to the
November 2008 session (17,803
coursetakers).
|
Tuition rates:
|
·
|
Effective
July 2008, DeVry University’s undergraduate tuition ranges from $515 to
$560 per credit hour for students enrolling in 1 to 11 credit
hours. Tuition ranges from $310 to $330 per credit hour for
each credit hour in excess of 11 credit hours. These tuition
rates vary by location and/or program and represent an expected weighted
average increase of approximately 4.3% as compared to the summer 2007
term.
|
|
·
|
Effective
July 2008, DeVry University’s graduate program tuition per classroom
course (four quarter credit hours) ranges from $1,845 to $2,100, depending
on location. This represents an expected weighted average increase of
3.1%. The price for a graduate course taken online is $2,100, compared to
$2,050 previously.
|
Management
believes the increased undergraduate student enrollments were most significantly
impacted by improved marketing and recruiting efforts, continued strong demand
for DeVry University’s online programs and a heightened focus on the retention
of existing students. Management believes efforts to enhance the
Keller Graduate School of Management brand awareness through improved messaging
have produced positive graduate enrollment results. Also contributing
to higher total revenues in the DeVry University segment was an increase in
Other Educational Revenues from sales of educational materials.
Partly
offsetting the increases in revenue from enrollment growth and higher tuition
rates was a decline in average course load per student driven by the continued
mix shift toward online enrollments and economic conditions.
Medical and
Healthcare
Medical
and Healthcare segment revenues increased 130.1% to $98.0 million in the second
quarter and grew 89.5% to $151.3 million for the first six months of fiscal year
2009 as compared to the year-ago periods. U.S. Education, which was
acquired on September 18, 2008, contributed $42.5 million and $48.0 million of
revenue growth in the second quarter and first six months of fiscal year 2009,
respectively. In addition, increases in student enrollments and
tuition rates at both Ross University and the Chamberlain College of Nursing
(“Chamberlain”) also contributed to segment revenue growth. Key
trends for Ross University and Chamberlain in these two components are set forth
below.
Ross University total enrollment by
term:
|
·
|
Increased
by 7.0% from January 2007 (3,747 students) to January 2008 (4,011
students);
|
|
·
|
Increased
by 7.9% from May 2007 (3,767 students) to May 2008 (4,064 students);
and
|
|
·
|
Increased
by 8.8% from September 2007 (3,876 students) to September 2008 (4,219
students).
|
Ross University new student
enrollment by term:
|
·
|
Increased
by 11.1% from January 2007 (496 students) to January 2008 (551
students);
|
|
·
|
Increased
by 15.6% from May 2007 (416 students) to May 2008 (481 students);
and
|
|
·
|
Increased
by 6.3% from September 2007 (572 students) to September 2008 (608
students).
|
Chamberlain
College of Nursing total enrollment by term:
|
·
|
Increased
by 99.0% from July 2007 (1,089 students) to July 2008 (2,167
students).
|
Tuition rates:
|
·
|
Effective
September 2008, tuition and fees for the beginning basic sciences portion
of the programs at Ross University’s medical and veterinary schools are
$13,650 per semester. This tuition rate represents an increase from
September 2007 tuition rates of approximately
5.4%.
|
|
·
|
Effective
September 2008, tuition and fees for the final clinical portion of the
Ross University programs are $15,000 per semester for the medical
school, and $17,150 per semester for the veterinary
school. These tuition rates represent an increase from
September 2007 tuition rates of approximately 5.3% for the medical school
and approximately 5.5% for the veterinary
school.
|
|
·
|
Effective
July 2008, Chamberlain tuition is $546 per credit hour. Students enrolled
on a full-time basis (between 12 and 17 credit hours) are charged a flat
tuition amount of $6,552 per semester. This represents an increase of
approximately 5% from July 2007.
|
Continued
demand for medical doctors and veterinarians positively influenced career
decisions of new students towards these respective fields of
study. Management believes the increasing enrollments at Ross
University for the past several terms resulted from enhancements made to its
marketing and recruiting functions, as well as steps taken to meet increasing
student demand such as adding faculty, classrooms, and a new student center and
gymnasium.
The
increase in student enrollments at Chamberlain was attributable to its growing
RN-to-BSN online completion program and the opening of its Addison, Illinois,
and Phoenix campuses in March 2008. These locations are co-located
with existing respective DeVry University campuses.
Professional and
Training
Professional
and Training segment revenues rose 1.2% to $18.0 million in the second quarter
and increased 4.6% to $37.7 million for the first six months of fiscal year 2009
as compared to the year-ago periods. The primary reasons for the increase were a
tuition price increase of approximately 5% partially offset by a decline in
enrollments in review courses and sales of CPA review courses on
CD-ROM. The revenue growth rate for the Professional and Training
segment slowed during the first and second quarters of fiscal 2009 as compared
to the past two years due to the economic downturn, particularly among the
financial firms that the segment serves. Management expects that the
softness in revenue will persist at least through calendar 2009.
Revenue from Other
Sources
Other
Educational Revenue increased 19.7% to $27.6 million in the second quarter and
grew 20.9% to $52.2 million for the first six months of fiscal year 2009 as
compared to the prior year periods. As discussed above, the primary
drivers for the increase in Other Educational Revenue were increased sales of
DeVry University electronic course materials and the contribution to revenue
growth as a result of the acquisition of U.S. Education.
COSTS AND
EXPENSES
Cost of Educational
Services
The
largest component of Cost of Educational Services is the cost of employees 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
uncollectible student accounts.
DeVry’s
Cost of Educational Services increased 34.9% to $167.1 million during the second
quarter and grew 25.2% to $306.7 million during the first six months of fiscal
year 2009 as compared to the year-ago periods. U.S. Education, which
was acquired by DeVry on September 18, 2008, accounted for more than half of the
increase in Cost of Educational Services during the second quarter of fiscal
2009. For both the second quarter and first six months of fiscal
2009, cost increases were incurred in support of expanding DeVry University
online and onsite enrollments and operating a higher number of DeVry University
Centers as compared to the prior year periods. Also, higher costs
were incurred to support increasing student enrollments and capacity expansion
to drive future growth at Ross University. During the second quarter
of fiscal 2009, Ross University opened its clinical training center in Freeport,
Grand Bahama, with courses beginning in January 2009. Also, cost
increases were incurred for the operation of two additional campuses at
Chamberlain which began offering programs in March 2008. Expense
attributed to stock-based awards included in Cost of Educational Services
increased during the first six months of fiscal year 2009 as a result of an
increase in the fair value of the awards granted during the current year and an
increase in the number of retirement eligible awards, which are fully expensed
upon grant.
As a
percent of revenue, Cost of Educational Services decreased to 45.2% in the
second quarter of fiscal year 2009 from 45.3% during the prior year
period. For the first six months of fiscal year 2009, Cost of
Educational Services as a percent of revenue decreased to 45.6% from 46.7% in
the year-ago period. These decreases were the result of increased
operating leverage with existing facilities and staff and revenue gains, which
more than offset incremental investments.
Loss on Sale of
Assets
In
September 2007, DeVry executed sale leaseback transactions for its facilities in
Seattle, Washington; Phoenix, Arizona; and Alpharetta, Georgia. In connection
with these transactions, DeVry recorded a pre-tax loss of $3.7 million
during the first quarter of fiscal year 2008. The recorded net loss
on the sale of the facilities was separately classified in the Consolidated
Statements of Income as a component of Total Operating Costs and Expenses and
was related to the DeVry University reportable segment. There were no
real estate sales during the first six months of fiscal year 2009.
On
January 15, 2009, DeVry announced that it had entered into an agreement to
buyout the lease for approximately 40 percent of the space DeVry University
occupies at its Long Island City, New York, campus. In the third
quarter of fiscal year 2009, DeVry will record a pre-tax charge of approximately
$3.9 million. The charge is composed of a $2.7 million cash outlay and a
non-cash charge of $1.2 million related to the write-off of leasehold
improvements, net of a deferred rent credit. After-tax, the charge is expected
to be $2.4 million or $0.03 per share. This action favorably impacts pre-tax
operating income by approximately $1.9 million per year going forward through
the end of the lease, which expires in April 2014, and has a cash payback of
less than two years.
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 ensure that optimal mix of large campuses, small campuses and DeVry
University centers meet the demand of each market it serves. This
process also improves capacity utilization and enhances economic
value. This strategy may include actions such as reconfiguring large
campuses; renegotiating lease terms; sub-leasing excess space and relocating to
smaller locations within the same geographic area to increase market
penetration. DeVry will also consider co-locating other educational
offerings through U.S. Education and 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,
including whether the facility is owned or leased and other market
factors.
Student Services and
Administrative Expense
This
expense category includes student recruiting and advertising costs, general and
administrative costs, expenses associated with curriculum development, and the
amortization expense of finite-lived intangible assets related to acquisitions
of businesses.
Student
Services and Administrative Expense grew 36.0% to $140.0 million during the
second quarter and increased 32.2% to $257.3 million during the first six months
of fiscal year 2009 as compared to the year-ago periods. U.S.
Education, which was acquired by DeVry on September 18, 2008, accounted for
approximately one-third of the increase in Student Services and Administrative
Expense during the second quarter of fiscal 2009. For both the second
quarter and first six months of fiscal 2009, the balance of the increase in
expenses primarily represents additional investments in advertising and
recruiting to drive and support future growth in new student
enrollments. In addition, cost increases were incurred in information
technology and student services. Expense attributed to stock-based
awards included in Student Services and Administrative Expense increased during
the first six months of fiscal 2009 as a result of an increase in the fair value
of the awards granted during the current year and an increase in the number of
retirement eligible awards, which are fully expensed upon grant.
Amortization
of finite-lived intangible assets in connection with acquisitions of businesses
increased in both the second quarter and first six months of fiscal year 2009 as
compared to the year ago periods. Increased amortization of
finite-lived intangible assets resulting from the acquisitions of U.S. Education
and Advanced Academics was partially offset by a decrease in amortization of
finite-lived intangible assets related to Ross University and Chamberlain, as
such assets are fully amortized. Amortization expense is included
entirely in the Student Services and Administrative Expense
category.
OPERATING
INCOME
DeVry
University
DeVry
University segment operating income increased 23.4% to $34.8 million during the
second quarter and rose 37.3% to $60.1 million during the first six months of
fiscal year 2009 as compared to the prior year periods. The increase
in operating income was the result of higher revenue and gross margins, which
were partially offset by increased spending on advertising and recruiting as
compared to the year-ago periods. First quarter of fiscal year 2008
results included a $3.7 million pre-tax loss from sale leaseback
transactions. The loss in the prior year period is included in
operating income of the DeVry University reportable
segment. Excluding the impact of the asset sales in the year-ago
period, DeVry University operating income increased 26.5% during the first six
months of fiscal 2009 as compared to the year-ago period.
Medical and
Healthcare
Medical
and Healthcare segment operating income increased 74.7% to $26.7 million during
the second quarter and grew 56.4% to $42.0 million during the first six months
of fiscal year 2009 as compared to the prior year periods. Increases
in student enrollments and tuition produced higher revenues and operating income
for the current year period as compared to the prior year period even as
faculty, staff and facilities were being added in connection with the operation
of two additional campuses which began offering programs in March
2008. U.S. Education, which was acquired on September 18, 2008, also
accounted for a significant portion of the operating profit growth for this
segment.
Professional and
Training
Professional
and Training segment operating income declined 15.8% to $4.5 million during the
second quarter and decreased 10.8% to $12.2 million during the first six months
of fiscal year 2009 as compared to the year-ago periods. The decrease
in operating income was the result of increased investments in advertising and
marketing related to expanding its business-to-business sales channel and costs
associated with operating a new office in Hong Kong.
NET INTEREST AND OTHER
INCOME (EXPENSE)
Interest
income decreased 40.9%, to $1.7 million during the second quarter and declined
27.3% to $3.9 million during the first six months of fiscal year 2009 as
compared to the prior year periods. The decrease was attributable to
lower interest rates earned during the current year periods despite an increase
in invested balances as compared to the prior year periods. The
increase in invested cash balances, marketable securities and investments was
attributable to improved operating cash flow over the past twelve months
partially offset by cash used in connection with the acquisition of U.S.
Education.
Interest
expense increased $1.1 million to $1.2 million during the second quarter and
increased $1.2 million to $1.5 million during the first six months of fiscal
year 2009 as compared to the year-ago periods. The increase in
interest expense was attributable to higher average borrowings during the
current year periods. DeVry borrowed approximately $166 million in
September 2008 to finance the acquisition of U.S. Education. As of
December 31, 2008, total outstanding borrowings were $155.1
million.
During
the second quarter of fiscal year 2009, DeVry recorded a net investment loss of
$1.7 million. This net loss is the result of recognizing an
other-than-temporary impairment charge of $10.3 million in connection with
reclassifying its investment in auction rate securities as trading
securities. This impairment charge was partially offset by a $8.6
million gain attributed to recording the fair value of DeVry’s right to put the
auction rate securities back to its broker at par beginning June 2010, as
discussed in Note 2 to the financial statements. DeVry will be
required to assess the fair value of these two individual assets (auction rate
securities and the right to put such securities back to the broker) and record
changes each period until the rights are exercised and the auction rate
securities are redeemed. As a result, unrealized gains and losses
will be included in earnings in future periods. DeVry expects
that future changes in the fair value of the rights will approximate fair value
movements in the related auction rate securities.
INCOME
TAXES
Taxes on
income were 30.1% of pretax income for the second quarter and 29.3% for the
first six months of fiscal year 2009, compared to 28.0% for second quarter and
27.0% for the first six months of the prior year. The higher
effective income tax rate in the current year periods was attributable to an
increase in the proportion of income generated by U.S. operations to the
offshore operations of Ross University as compared to the year-ago
periods. 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 income taxation through the years 2043 and 2023,
respectively. DeVry intends to indefinitely reinvest Ross University
earnings and cash flow to improve and expand facilities and 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 financial aid from various federal, state and provincial loan and
grant programs; student and family educational loans (“private loans”); employer
educational reimbursements; and student and family financial
resources. Private loans as a percent of DeVry’s total revenue are
relatively small.
In
connection with the turmoil in the credit markets and economic downturn over the
past several months, some lenders announced that they were exiting certain
private loan programs for some schools. Also, certain lenders have
tightened underwriting criteria for private loans. To date, these
actions have not had a material impact on DeVry’s students’ ability to access
funds for their educational needs and thus its enrollments. DeVry
monitors the student lending situation very closely and continues to pursue all
available financing options for its students, including its DeVry University
EDUCARD® program.
The
following table summarizes DeVry’s cash receipts from tuition and related fee
payments by fund source as a percentage of total revenue for the fiscal years
2008 and 2007, respectively.
|
|
Fiscal
Year
|
|
Funding
Source:
|
|
2008
|
|
|
2007
|
|
Federal
Assistance (Title IV) Program Funding:
|
|
|
|
|
|
|
Grants
and Loans
|
|
|
70 |
% |
|
|
64 |
% |
Federal
Work Study
|
|
|
1 |
% |
|
|
1 |
% |
Total
Title IV Program Funding
|
|
|
71 |
% |
|
|
65 |
% |
State
Grants
|
|
|
3 |
% |
|
|
3 |
% |
Private
Loans
|
|
|
5 |
% |
|
|
6 |
% |
Student
accounts, cash payments, private scholarships, employer and military
provided tuition assistance and other
|
|
|
21 |
% |
|
|
26 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
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
December 31, 2008, total accounts receivable, net of related reserves, were
$137.6 million, compared to $76.8 million at December 31, 2007. The
increase is due to accounts receivable associated with the acquisition of U.S.
Education and the impact on receivables from revenue growth across all three
business segments as compared to the year-ago period. In addition,
accounts receivable increased due to financial aid system implementation
problems at DeVry University. Such issues have been resolved, and
management expects a corresponding improvement in receivable management over the
next several months.
Financial
Aid
DeVry is
highly dependent upon the timely receipt of federal financial aid funds. All
financial aid and assistance programs are subject to political and governmental
budgetary considerations. In the United States, the Higher Education Act (“HEA”)
guides the federal government’s support of postsecondary
education. The HEA was reauthorized by the United States Congress in
July 2008, and was signed into law by the President on August 14,
2008.
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 and is subject to audit or
investigation by other governmental authorities. Any violation could
be the basis for penalties or other disciplinary action, including initiation of
a suspension, limitation or termination proceeding. Previous Department of
Education and state regulatory agency program reviews have not resulted in
material findings or adjustments against DeVry.
A
U.S. Department of Education regulation known as the “90/10 Rule” affects
only proprietary postsecondary institutions, such as DeVry University, Ross
University, Chamberlain and U.S. Education. Under this regulation, an
institution that derives more than 90% of its revenues from federal financial
assistance programs in any year may not participate in these programs for the
following year. The following table details the percent of revenue
from federal financial assistance programs for each of DeVry’s Title IV eligible
institutions for fiscal years 2008 and 2007, respectively.
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
DeVry
University:
|
|
|
|
|
|
|
Undergraduate
|
|
|
75 |
% |
|
|
70 |
% |
Graduate
|
|
|
75 |
% |
|
|
65 |
% |
Ross
University
|
|
|
81 |
% |
|
|
80 |
% |
Chamberlain
College of Nursing
|
|
|
62 |
% |
|
|
70 |
% |
U.S.
Education:
|
|
|
|
|
|
|
|
|
Apollo
College
|
|
|
79 |
% |
|
|
76 |
% |
Western
Career College
|
|
|
77 |
% |
|
|
61 |
% |
DeVry
University’s percent of revenue from federal financial assistance programs
increased in fiscal year 2008 as compared to fiscal year 2007 primarily due to
increased loan and grant limits. Chamberlain College of Nursing’s percent of
revenue from federal financial assistance programs decreased in fiscal year 2008
as compared to fiscal year 2007 primarily due to an increase of students in the
RN-to-BSN completion program who receive employer reimbursement or are self-pay
students.
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 have been authorized. At December 31,
2008, cash in the amount of $31.9 million was held in restricted bank
accounts, compared to $9.8 million at December 31,
2007. The increase in the restricted cash balance is due to timing in
the disbursement of such funds.
Cash from
Operations
Cash
generated from operations in the first six months of fiscal year 2009 was
$138.8 million, compared to $132.1 million in the prior year
period. Cash flow from operations increased due to higher net
income. Greater cash flow was also a result of an increase in
deferred tuition revenue and advanced tuition payments of $58.3 million driven
by increased student enrollments. These increases were partially
offset by $17.0 million lower source of cash compared to the prior year for
changes in levels of prepaid expenses, accounts payable and accrued expenses,
and a greater use of cash driven by an increase in accounts receivable of $29.8
million as a result of revenue growth across all three business segments as
compared to the year-ago period. In addition, accounts receivable
increased due to financial aid system implementation problems at DeVry
University. Variations in the levels of accrued expenses and accounts
payable from period to period are caused, in part, by the timing of the
period-end relative to DeVry’s payroll and bill payment cycles.
During
the first six months of fiscal year 2009, DeVry’s investments in municipal
auction rate securities continued to remain illiquid. See “Note
2-Summary of Significant Accounting Policies-Marketable Securities and
Investments” for additional information, including the current liquidity
problems associated with such investments.
During
the second quarter of fiscal year 2009, DeVry agreed to accept Auction Rate
Security Rights (the Rights) from UBS (its broker for the Auction Rate
Securities). The Rights permit DeVry to sell, or put, our auction
rate securities back to UBS at par value at any time during the period from June
30, 2010 through July 2, 2012. We expect to exercise our Rights and put our
auction rate securities back to UBS on June 30, 2010, the earliest date
allowable under the Rights, unless auctions resume; a buyer is found outside of
the auction process; or the issuers establish a different form of financing to
replace the securities.
Prior to
accepting the Rights agreement, DeVry had the intent and ability to hold these
securities until anticipated recovery. As a result, we had recognized the
unrealized loss previously as a temporary impairment in other comprehensive
income in stockholders’ equity. After accepting the Rights, DeVry no
longer has the intent to hold the auction rate securities until anticipated
recovery. As a result, DeVry has elected to classify the Rights and
reclassify our investments in auction rate securities as trading securities, as
defined by FAS No. 115, on the date of our acceptance of the Rights. Therefore,
we recognized an other-than-temporary impairment charge of approximately $10.3
million in the second quarter of fiscal 2009. The charge was measured as the
difference between the par value and market value of the auction rate securities
on December 31, 2008. However, as DeVry will be permitted to put the auction
rate securities back to UBS at par value, we will account for the Rights as a
separate asset that will be measured at its fair value, resulting in a gain of
approximately $8.6 million recorded at December 31, 2008. DeVry will be
required to assess the fair value of these two individual assets and record
changes each period until the Rights are exercised and the auction rate
securities are redeemed. As a result, unrealized gains and losses will be
included in earnings in future periods. We expect that future
changes in the fair value of the Rights will approximate fair value movements in
the related auction rate securities. Although the Rights represent
the right to sell the securities back to UBS at par, we will be required to
periodically assess the economic ability of UBS to meet that obligation in
assessing the fair value of the Rights. UBS’s obligations under the Rights are
not secured by its assets and do not require UBS to obtain any financing to
support its performance obligations under the Rights. UBS has disclaimed any
assurance that it will have sufficient financial resources to satisfy its
obligations under the Rights. We will continue to classify the
auction rate securities as long-term investments until June 30, 2009, one year
prior to the expected settlement.
While the
recent auction failures will limit DeVry’s ability to liquidate these
investments for some period of time, DeVry believes that based on its current
cash, cash equivalents and marketable securities balances of $205 million
(exclusive of auction-rate securities) and its current borrowing capacity of
approximately $50 million under its $175 million revolving credit facility
(DeVry has the option to expand the revolving credit facility to $275 million),
the current lack of liquidity in the auction-rate market will not have a
material impact on its ability to fund its operations, nor will it interfere
with external growth plans. Also, as of December 31, 2008, DeVry has
borrowed through its broker, UBS, $45.1 million using the auction rate
securities portfolio as collateral. Should DeVry need to liquidate
such securities and auctions of these securities continue to fail, and UBS is
unable to meet their obligations under the Rights, future impairment of the
carrying value of these securities could cause DeVry to recognize a material
charge to net income in future periods.
Cash from Investing
Activities
Capital
expenditures in the first six months of fiscal year 2009 were $25.2 million
compared to $28.0 million in the prior year period. Prior year
capital expenditures include the purchase and an immediate sale lease back of a
facility in Alpharetta, Georgia, for $11.2 million. Excluding the
Alpharetta sale leaseback from the year-ago period capital spending, current
year capital expenditures increased $8.4 million. Current year period
capital expenditure activity included facility expansion at the Ross University
medical and veterinary schools, spending to support the continued growth of
DeVry’s online operations and spending on information systems.
During
the second quarter of fiscal year 2009, Ross University opened a new clinical
center in Freeport, Grand Bahama, with courses beginning in January
2009. The students will be housed and taught in temporary space in
Grand Bahama with Ross’ new 60,000 – 80,000 square foot campus targeted to open
in 2011. Depending on the pace of development, capital expenditures
related to opening the branch campus, including land, buildings and equipment,
is expected to be in the range of $35 - $60 million over the next five
years.
For the
remainder of fiscal 2009, management expects the pace of capital expenditures to
increase in order to support future growth including Ross’ expansion into Grand
Bahama and facility improvements and new locations for DeVry University,
Chamberlain College of Nursing, and U.S. Education. Management
anticipates full year fiscal 2009 capital spending in the range of $60 to $70
million.
During
the first six months of fiscal 2009, cash outflows relating to the purchase of
businesses, net of cash acquired, was $286.5 million. On September
18, 2008, DeVry completed its acquisition of U.S. Education, the parent
organization of Apollo College and Western Career College. Apollo
College and Western Career College operate 17 campus locations in the western
United States and prepare students for careers in the high-growth healthcare
sector through certificate and associate degree programs. DeVry
financed the acquisition utilizing approximately $136 million of internal cash
resources, $120 million of debt from its existing credit facilities and
approximately $46 million of debt secured by its auction rate
securities.
Cash Used in Financing
Activities
During
the first six months of fiscal year 2009, DeVry borrowed $46.2 million from UBS
under a short-term uncommitted line of credit which is collateralized by DeVry’s
auction rate securities portfolio, as discussed above. DeVry has
repaid $1.1 million of such borrowings. In addition, DeVry had
cumulative borrowings of $210 million and cumulative repayments of $100 million
under its existing revolving line of credit during the first six months of
fiscal 2009. DeVry incurred these borrowings to finance the
acquisition of U.S. Education.
Recently,
the United States Internal Revenue Service issued a notice which provides
companies with offshore cash an expanded ability to borrow such funds without
incurring income tax, provided certain requirements are
met. Depending on changes in interest rates, management may utilize a
significant portion of its offshore cash to pay down a portion of its borrowings
under its revolving line of credit for a period of time not to exceed fifty-nine
days.
On May
13, 2008, the Board of Directors authorized a share repurchase program to
buyback up to $50 million of DeVry common stock through December 31,
2010. During the first six months of fiscal year 2009, DeVry
repurchased 98,100 shares of its stock under this program for approximately $5.4
million. The total remaining authorization under the repurchase
program was $44.6 million. 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.
Cash
dividends paid during the first six months of the current fiscal year were $4.3
million. DeVry’s Board of Directors declared a dividend on November
13, 2008 of $0.08 per share to common stockholders of record as of December 12,
2008. The total dividend of $5.7 million was paid on January 9,
2009.
DeVry
believes that it has sufficient liquidity despite the current disruption of the
credit markets. Management believes that current balances of
unrestricted cash, cash generated from operations and 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 U.S. Education, should
arise.
Other Contractual
Arrangements
DeVry’s
long-term contractual obligations consist of its $175 million revolving credit
facility, operating leases on facilities and equipment, and agreements for
various services. DeVry has the option to expand the revolving credit facility
to $275 million. At December 31, 2008, DeVry had $110 million of outstanding
borrowings under its revolving credit agreement, and there were no required
payments under this borrowing agreement prior to its
maturity. DeVry’s letters of credit outstanding under the revolving
credit facility were approximately $15.2 million as of December 31, 2008, which
includes a letter of credit in the amount of $10.9 million issued for U.S.
Education.
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. DeVry has not entered into any
derivative, swap, futures contract, call, hedge or non-exchange traded
contracts.
Included
in DeVry’s consolidated cash balances at December 31, 2008 was approximately
$142 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 facilities and
operations of the 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 on a long-term
basis.
RECENT ACCOUNTING
PRONOUNCEMENTS
SFAS 141(R)
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) retains
the fundamental requirements of Statement of Financial Accounting Standards
No. 141 (“SFAS 141”) that the acquisition method of accounting be used for
all business combinations. SFAS 141(R)
also retains the guidance in SFAS 141 for identifying and recognizing intangible
assets separately from goodwill. However, the new accounting
requirements of SFAS 141(R) will change how business acquisitions are
accounted for and will impact financial statements both on the acquisition date
and in subsequent periods. For DeVry, SFAS 141(R) is effective
beginning in fiscal year 2010.
SFAS 160
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of ARB number 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards to improve the relevance, comparability and
transparency of the financial information provided in a company’s financial
statements as it relates to minority interests in the equity of a
subsidiary. These minority interests will be recharacterized
as noncontrolling interests and classified as a component of equity. For
DeVry, SFAS 160 is effective beginning in fiscal year 2010. DeVry
does not expect that the adoption of SFAS 160 will have a material impact on its
consolidated financial statements as all current subsidiaries are wholly
owned.
SFAS 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an Amendment
of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. For DeVry, SFAS
161 is effective beginning in the third quarter of fiscal year
2009. The adoption of SFAS 161 is not expected to have a material
impact on DeVry’s consolidated financial statements as DeVry does not currently
maintain derivative instruments or engage in hedging
activities.
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 1.0% of
DeVry’s overall assets, and its Canadian liabilities constitute approximately 2%
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 LIBOR interest rates for periods
typically ranging from one to three months. Based upon DeVry’s total borrowings
of $155.1 million at December 31, 2008, a 100 basis point increase in short-term
interest rates would result in approximately $1.6 million of additional
annual interest expense. 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.
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. Management’s assessment has excluded
U.S. Education, which was acquired by DeVry on September 18,
2008. U.S. Education’s total assets and total net revenues
represented approximately 41% and 7%, respectively, of consolidated total assets
and consolidated total net revenues of DeVry as of and for the six-month period
ended December 31, 2008. This exclusion is in accordance with the
SEC’s general guidance that an assessment of a recently acquired business may be
omitted from management’s scope in the year of acquisition. 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
Management
is in the process of integrating U.S. Education operations and considers U.S.
Education material to the Consolidated Financial Statements and believes that
the internal controls and procedures have a material effect on DeVry’s internal
control over financial reporting. DeVry intends to extend its Section 404
compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules
and regulations under such Act to include U.S. Education by June 30,
2009.
There
were no other changes in internal control over financial reporting that occurred
during the second quarter of fiscal year 2009 that materially affected, or are
reasonably likely to materially affect, DeVry’s internal control over financial
reporting.
PART II – Other
Information
DeVry is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
and investigations 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.
On
December 23, 2005, Saro Daghlian, a former DeVry University student in
California, commenced a putative class action against DeVry University and DeVry
Inc. (collectively “DeVry”) in Los Angeles Superior Court, asserting
various claims predicated upon DeVry’s alleged failure to comply with disclosure
requirements under the California Education Code relating to the transferability
of academic units. In addition to the alleged omission,
Daghlian also claimed that DeVry made untrue or misleading statements to
prospective students, in violation of the California Unfair Competition
Law ("UCL") and the California False Advertising Law,
("FAL"). DeVry removed the action to the U.S. District Court
for the Central District of California. In two Orders dated October 9,
2007, and December 31, 2007, the District Court entered judgment
dismissing all of plaintiffs ’ class and individual claims and
awarded DeVry its cost of suit. The final judgment was entered on
January 3, 2008. Plaintiffs filed a notice of appeal to the U.S.
Court of Appeals for the Ninth Circuit on January 8,
2008. DeVry continues to defend itself vigorously with respect
to this claim. DeVry filed a motion to dismiss the appeal on January 2, 2009,
which awaits ruling.
In May
2008, the U.S. Department of Justice, Civil Division, working with the U.S.
Attorney for the Northern District of Illinois, requested that DeVry voluntarily
furnish documents and other information regarding its policies and practices
with respect to recruiter compensation and performance
evaluation. The stated purpose of the request was made to examine
whether DeVry may have submitted or caused the submission of false claims or
false statements to the U.S. Department of Education in violation of the False
Claims Act ("FCA"). After providing the government its full
cooperation, DeVry was advised by the U.S. Attorney for the Northern District of
Illinois, on October 16, 2008, that the government had concluded its inquiry and
had declined to intervene in an underlying qui tam action that had
precipitated the government's inquiry. The case, which was unsealed
as a result of the government’s action, was originally filed in September 2007
by a former DeVry employee, Jennifer S. Shultz. The action, which is
pending in the United States District Court for the Northern District of
Illinois, Eastern Division, relates to whether DeVry’s compensation plans for
admission representatives violated the Higher Education Act ("HEA") and the
Department Of Education ("DOE") regulations prohibiting an institution
participating in Title IV Programs from providing any commission, bonus or other
incentive payment based directly or indirectly on success in securing
enrollments to any person or entity engaged in any student recruitment or
admissions activity. A number of similar lawsuits have been filed in
recent years against educational institutions that receive Title IV
funds. A first amended complaint in the Shultz matter was
unsealed by a court order dated December 31, 2008. The amended
complaint outlines a theory of damages based on Title IV funding
disbursements to DeVry over a number of years and asserts the plaintiff is
entitled to recover treble the amount of actual damages allegedly sustained
by the federal government as a result of the alleged activity, plus civil
monetary penalties. DeVry is defending this claim vigorously. On
January 26, 2009, DeVry filed a motion to dismiss the case
entirely.
In April
2004, U.S. Education, successor to Silicon Valley College, was sued in a qui tam action brought in the
Northern District of California pursuant to the FCA. This action also
relates to whether U.S. Education’s compensation plans for admission
representatives violated the HEA and the DOE regulations prohibiting an
institution participating in Title IV Programs from providing any commission,
bonus or other incentive payment based directly or indirectly on success in
securing enrollments to any person or entity engaged in any student recruitment
or admissions activity. The DOJ declined to intervene in this action as
well. In October 2005, the Court granted U.S. Education’s motion to
dismiss the complaint with prejudice. Plaintiffs appealed the District
Court's order dismissing the complaint to the Ninth Circuit Court of
Appeals. In January 2008, the Ninth Circuit affirmed the district court's
dismissal of the complaint. The Ninth Circuit observed that the conduct
alleged in the complaint – that recruiters were terminated for failing to meet
enrollment quotas – was not prohibited by the HEA or DOE regulations. The
Ninth Circuit also rejected a subsequent motion for rehearing and rehearing
en banc and, on April
25, 2008, issued a mandate. In September 2008, Plaintiffs filed a Petition
for Writ of Certiorari with the Supreme Court of the United States. The
Court rejected the Petition as well as a subsequent Petition for Reconsideration
thereby exhausting all of Plaintiffs' options for relief by the Court and
bringing this matter to a close.
In August
2007, Western Career College (“WCC”), a subsidiary of U.S. Education, was sued
in a qui tam
action. This qui
tam Action, brought in the Eastern District of California pursuant to
both the Federal and California FCA, again relates to whether WCC’s compensation
plans for admission representatives violates the HEA and DOE regulations
prohibiting an institution participating in Title IV Programs from providing any
commission, bonus or other incentive payment based directly or indirectly on
success in securing enrollments to any person or entity engaged in any student
recruitment or admissions activity. In April 2008, the DOJ and the
California Attorney General declined to intervene in the action and, on July
30, 2008, Plaintiff filed a Request for Dismissal of Action, Without
Prejudice. The lawsuit was never served upon WCC and the Court docket
reflects the matter as closed.
The
ultimate outcome of pending litigation and other proceedings, reviews,
investigations and contingencies is difficult to estimate. At this time, DeVry
does not expect that the outcome of any such matter, including the litigation
described above, 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, 2008, 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.
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
|
|
October
2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
-- |
|
|
$ |
50,000,000 |
|
November
2008
|
|
|
49,700 |
|
|
$ |
53.53 |
|
|
|
49,700 |
|
|
|
47,339,388 |
|
December
2008
|
|
|
48,400 |
|
|
$ |
55.73 |
|
|
|
48,400 |
|
|
|
44,642,082 |
|
Total
|
|
|
98,100 |
|
|
$ |
54.62 |
|
|
|
98,100 |
|
|
$ |
44,642,082 |
|
1On May
13, 2008, the Board of Directors authorized a share repurchase program to
buyback up to $50 million of DeVry common stock through December 31,
2010. The total remaining authorization under the repurchase program
was $44,642,082 as of December 31, 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
|
|
October
2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
N/A |
|
|
|
N/A |
|
November
2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
N/A |
|
|
|
N/A |
|
December
2008
|
|
|
1,340 |
|
|
$ |
56.85 |
|
|
|
N/A |
|
|
|
N/A |
|
Total
|
|
|
1,340 |
|
|
$ |
56.85 |
|
|
|
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.
|
(a)
|
DeVry
held its Annual Meeting of Stockholders on November 13,
2008.
|
|
(b)
|
All
Board of Director nominees were
elected.
|
|
(c)
|
Certain
matters voted upon at the meeting and the votes cast with respect to such
matters are as follows:
|
Three
nominees were elected as Class II Directors to serve until the 2011 Annual
Meeting of Stockholders or until their successors are elected and
qualified.
Director
|
Affirmative Votes
|
Votes Withheld
|
David
S. Brown
|
55,699,308
|
1,025,877
|
Lisa
W. Pickrum
|
55,852,940
|
872,245
|
Fernando
Ruiz
|
56,052,946
|
672,239
|
The
selection of PricewaterhouseCoopers LLP as the independent registered public
accounting firm for DeVry for fiscal year 2009 was ratified.
Affirmative Votes
|
Votes Against
|
Abstain
|
56,561,275
|
150,211
|
13,699
|
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the 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:
February 6, 2009
|
By
|
/s/ Daniel M.
Hamburger
|
|
|
Daniel
M. Hamburger
|
|
|
Chief
Executive Officer
|
|
|
|
Date:
February 6, 2009
|
By
|
/s/ Richard M.
Gunst
|
|
|
Richard
M. Gunst
|
|
|
Senior
Vice President and Chief Financial
Officer
|
40