form_10q.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, 2007
|
|
|
OR
|
|
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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|
For
the transition period
from to
|
Commission
file number: 1-13988
DeVry
Inc.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
36-3150143
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
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 or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Large
Accelerated Filer R Accelerated
Filer £ Non-Accelerated
Filer £
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:
January
31, 2008 — 71,419,315 shares of Common Stock, $0.01 par
value
DEVRY
INC.
FORM 10-Q
FOR
THEQUARTERLY PERIOD
ENDED DECEMBER 31, 2007
TABLE
OF CONTENTS
|
Page No.
|
PART I
– Financial Information
|
|
Item 1 —
Financial Statements (Unaudited)
|
|
Consolidated
Balance
Sheets
|
3
|
Consolidated
Statements of Income
|
4
|
Consolidated
Statements of Cash Flows
|
5
|
Notes
to Consolidated Financial Statements
|
6
|
Item 2 —
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
19
|
Item 3 —
Quantitative and Qualitative Disclosures About Market
Risk
|
28
|
Item 4 —
Controls and Procedures
|
29
|
|
|
PART II
– Other Information
|
|
Item 1 —
Legal Proceedings
|
30
|
Item 1A
— Risk
Factors
|
30
|
Item
2 — Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
Item 4
— Submission of Matters to a Vote of Security Holders
|
32
|
Item 6
—
Exhibits
|
32
|
|
|
|
|
Signatures
|
33
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
I – Financial
Information
DEVRY INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
December
31,
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
98,912 |
|
|
$ |
129,155 |
|
|
$ |
171,346 |
|
Marketable
Securities
|
|
|
142,144 |
|
|
|
— |
|
|
|
— |
|
Restricted
Cash
|
|
|
9,823 |
|
|
|
14,483 |
|
|
|
24,091 |
|
Accounts
Receivable, Net
|
|
|
76,842 |
|
|
|
43,084 |
|
|
|
60,350 |
|
Inventories
|
|
|
142 |
|
|
|
141 |
|
|
|
118 |
|
Deferred
Income Taxes, Net
|
|
|
17,938 |
|
|
|
13,915 |
|
|
|
15,344 |
|
Prepaid
Expenses and Other
|
|
|
22,456 |
|
|
|
18,207 |
|
|
|
21,255 |
|
Total
Current Assets
|
|
|
368,257 |
|
|
|
218,985 |
|
|
|
292,504 |
|
Land,
Buildings and Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
51,431 |
|
|
|
60,570 |
|
|
|
61,789 |
|
Buildings
|
|
|
206,003 |
|
|
|
218,836 |
|
|
|
212,171 |
|
Equipment
|
|
|
271,594 |
|
|
|
260,847 |
|
|
|
252,269 |
|
Construction
In Progress
|
|
|
6,375 |
|
|
|
15,816 |
|
|
|
12,880 |
|
|
|
|
535,403 |
|
|
|
556,069 |
|
|
|
539,109 |
|
Accumulated
Depreciation and Amortization
|
|
|
(301,362 |
)
|
|
|
(296,742 |
) |
|
|
(282,458 |
) |
Land,
Buildings and Equipment, Net
|
|
|
234,041 |
|
|
|
259,327 |
|
|
|
256,651 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
65,372 |
|
|
|
56,920 |
|
|
|
60,150 |
|
Goodwill
|
|
|
308,598 |
|
|
|
291,113 |
|
|
|
291,113 |
|
Perkins
Program Fund, Net
|
|
|
13,450 |
|
|
|
13,450 |
|
|
|
13,450 |
|
Other
Assets
|
|
|
6,614 |
|
|
|
4,318 |
|
|
|
5,933 |
|
Total
Other Assets
|
|
|
394,034 |
|
|
|
365,801 |
|
|
|
370,646 |
|
TOTAL
ASSETS
|
|
$ |
996,332 |
|
|
$ |
844,113 |
|
|
$ |
919,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Portion of Debt
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
50,000 |
|
Accounts
Payable
|
|
|
37,029 |
|
|
|
34,295 |
|
|
|
32,975 |
|
Accrued
Salaries, Wages and Benefits
|
|
|
43,249 |
|
|
|
47,093 |
|
|
|
43,642 |
|
Accrued
Expenses
|
|
|
31,312 |
|
|
|
32,737 |
|
|
|
29,059 |
|
Advance
Tuition Payments
|
|
|
10,804 |
|
|
|
14,402 |
|
|
|
7,367 |
|
Deferred
Tuition Revenue
|
|
|
124,539 |
|
|
|
37,348 |
|
|
|
119,950 |
|
Total
Current Liabilities
|
|
|
246,933 |
|
|
|
165,875 |
|
|
|
282,993 |
|
Other
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes, Net
|
|
|
16,053 |
|
|
|
18,343 |
|
|
|
12,407 |
|
Accrued
Postemployment Agreements
|
|
|
4,342 |
|
|
|
4,901 |
|
|
|
5,341 |
|
Deferred
Rent and Other
|
|
|
25,839 |
|
|
|
13,028 |
|
|
|
14,698 |
|
Total
Other Liabilities
|
|
|
46,234 |
|
|
|
36,272 |
|
|
|
32,446 |
|
TOTAL
LIABILITIES
|
|
|
293,167 |
|
|
|
202,147 |
|
|
|
315,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $0.01 Par Value, 200,000,000 Shares Authorized;
71,361,000; 71,131,000 and 70,907,000 Shares Issued and
Outstanding at December 31, 2007, June 30, 2007 and December 31,
2006, Respectively
|
|
|
721 |
|
|
|
716 |
|
|
|
710 |
|
Additional
Paid-in Capital
|
|
|
158,663 |
|
|
|
143,580 |
|
|
|
129,928 |
|
Retained
Earnings
|
|
|
568,463 |
|
|
|
510,979 |
|
|
|
475,665 |
|
Accumulated
Other Comprehensive Loss
|
|
|
(1,788 |
) |
|
|
(918 |
) |
|
|
(50 |
) |
Treasury
Stock, at Cost (688,706; 436,786 and 86,490 Shares,
Respectively)
|
|
|
(22,894 |
)
|
|
|
(12,391 |
)
|
|
|
(1,891 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
703,165 |
|
|
|
641,966 |
|
|
|
604,362 |
|
TOTAL
LIABILITIES AND
SHAREHOLDERS’EQUITY
|
|
$ |
996,332 |
|
|
$ |
844,113 |
|
|
$ |
919,801 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in Thousands Except Per Share Amounts)
(Unaudited)
|
|
For
the Quarter
|
|
|
For
the Six Months
|
|
|
|
Ended
December 31,
|
|
|
Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition
|
|
$ |
250,695 |
|
|
$ |
217,076 |
|
|
$ |
480,916 |
|
|
$ |
419,709 |
|
Other
Educational
|
|
|
23,042 |
|
|
|
18,528 |
|
|
|
43,139 |
|
|
|
35,110 |
|
Total
Revenues
|
|
|
273,737 |
|
|
|
235,604 |
|
|
|
524,055 |
|
|
|
454,819 |
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Educational Services
|
|
|
123,887 |
|
|
|
120,580 |
|
|
|
244,915 |
|
|
|
240,884 |
|
Loss
(Gain) on Sale of Assets
|
|
|
- |
|
|
|
- |
|
|
|
3,743 |
|
|
|
(19,855 |
) |
Student
Services and Administrative Expense
|
|
|
102,917 |
|
|
|
93,238 |
|
|
|
194,562 |
|
|
|
179,036 |
|
Total
Costs and Expenses
|
|
|
226,804 |
|
|
|
213,818 |
|
|
|
443,220 |
|
|
|
400,065 |
|
Operating
Income
|
|
|
46,933 |
|
|
|
21,786 |
|
|
|
80,835 |
|
|
|
54,754 |
|
INTEREST:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
2,892 |
|
|
|
1,932 |
|
|
|
5,299 |
|
|
|
3,370 |
|
Interest
Expense
|
|
|
(98 |
)
|
|
|
(1,720 |
)
|
|
|
(319 |
)
|
|
|
(3,889 |
)
|
Net
Interest Income (Expense)
|
|
|
2,794 |
|
|
|
212 |
|
|
|
4,980 |
|
|
|
(519 |
)
|
Income
Before Income Taxes
|
|
|
49,727 |
|
|
|
21,998 |
|
|
|
85,815 |
|
|
|
54,235 |
|
Income
Tax Provision
|
|
|
13,914 |
|
|
|
5,601 |
|
|
|
23,167 |
|
|
|
16,918 |
|
NET
INCOME
|
|
$ |
35,813 |
|
|
$ |
16,397 |
|
|
$ |
62,648 |
|
|
$ |
37,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.50 |
|
|
$ |
0.23 |
|
|
$ |
0.88 |
|
|
$ |
0.53 |
|
Diluted
|
|
$ |
0.49 |
|
|
$ |
0.23 |
|
|
$ |
0.87 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDEND DECLARED PER COMMON SHARE
|
|
$ |
0.06 |
|
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
$ |
0.05 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Six Months
|
|
|
|
|
Ended
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in Thousands)
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
Income
|
|
$ |
62,648 |
|
|
$ |
37,317 |
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Charge
|
|
|
2,880 |
|
|
|
3,113 |
|
Depreciation
|
|
|
17,263 |
|
|
|
17,365 |
|
Amortization
|
|
|
2,471 |
|
|
|
4,585 |
|
Provision
for Refunds and Uncollectible Accounts
|
|
|
28,080 |
|
|
|
26,440 |
|
Deferred
Income Taxes
|
|
|
(3,632 |
) |
|
|
(1,848 |
) |
Loss
(Gain) on Disposals of Land, Buildings and Equipment
|
|
|
3,730 |
|
|
|
(19,677 |
) |
Changes
in Assets and Liabilities, Net of Effects from Acquisition of
Business:
|
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
4,667 |
|
|
|
(3,462 |
) |
Accounts
Receivable
|
|
|
(57,763 |
) |
|
|
(40,241 |
) |
Inventories
|
|
|
10 |
|
|
|
9 |
|
Prepaid
Expenses and Other
|
|
|
(4,507 |
) |
|
|
(7,531 |
) |
Accounts
Payable
|
|
|
2,652 |
|
|
|
(6,699 |
) |
Accrued
Salaries, Wages, Benefits and Expenses
|
|
|
(7,403 |
) |
|
|
5,950 |
|
Advance
Tuition Payments
|
|
|
(3,640 |
) |
|
|
(9,186 |
) |
Deferred
Tuition Revenue
|
|
|
84,674 |
|
|
|
88,181 |
|
NET
CASH PROVIDED BY
OPERATINGACTIVITIES
|
|
|
132,130 |
|
|
|
94,316 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(27,957 |
) |
|
|
(16,202 |
) |
Net
Proceeds from Sale of Land and Building
|
|
|
38,528 |
|
|
|
34,778 |
|
Payment
for Purchase of Business, Net of Cash Acquired
|
|
|
(27,454 |
) |
|
|
— |
|
Marketable
Securities Purchased
|
|
|
(264,122 |
) |
|
|
— |
|
Marketable
Securities-Maturities and Sales
|
|
|
121,836 |
|
|
|
— |
|
NET
CASH (USED IN) PROVIDED BY
INVESTINGACTIVITIES
|
|
|
(159,169 |
)
|
|
|
18,576 |
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from Exercise of Stock Options
|
|
|
11,315 |
|
|
|
2,098 |
|
Reissuance
of Treasury Stock
|
|
|
577 |
|
|
|
398 |
|
Repurchase
of Common Stock for Treasury
|
|
|
(10,187 |
) |
|
|
— |
|
Cash
Dividends Paid
|
|
|
(3,557 |
) |
|
|
— |
|
Excess
Tax Benefit from Stock-Based Payments
|
|
|
1,210 |
|
|
|
47 |
|
Borrowings
from Revolving Credit Facility
|
|
|
25,000 |
|
|
|
40,000 |
|
Repayments
Under Revolving Credit Facilities
|
|
|
(26,895 |
) |
|
|
— |
|
Repayments
Under Senior Notes
|
|
|
— |
|
|
|
(115,000 |
)
|
NET
CASH USED IN
FINANCINGACTIVITIES
|
|
|
(2,537 |
) |
|
|
(72,457 |
) |
Effects
of Exchange Rate Differences
|
|
|
(667 |
)
|
|
|
328 |
|
NET
(DECREASE) INCREASE IN CASH
AND CASHEQUIVALENTS
|
|
|
(30,243 |
) |
|
|
40,763 |
|
Cash
and Cash Equivalents at
Beginningof
Period
|
|
|
129,155 |
|
|
|
130,583 |
|
Cash
and Cash Equivalents at
End ofPeriod
|
|
$ |
98,912 |
|
|
$ |
171,346 |
|
SUPPLEMENTAL
DISCLOSURE OF CASH
FLOWINFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash
Paid During the Period For:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
231 |
|
|
$ |
4,014 |
|
Income
Taxes,
Net
|
|
|
32,679 |
|
|
|
17,219 |
|
Non-cash
Financing Activity:
|
|
|
|
|
|
|
|
|
|
Declaration
of Cash Dividends to be
Paid
|
|
|
4,283 |
|
|
|
3,545 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
Notes
to Consolidated Financial Statements (Unaudited)
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, 2007 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, 2007, and in conjunction
with DeVry’s quarterly report on Form 10-Q for the quarter ended September 30,
2007, each as filed with the Securities and Exchange Commission.
The
results of operations for the three and six months ended December 31, 2007,
are
not necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Marketable
Securities
Marketable
securities consist of municipal auction rate securities and investments in
mutual funds all of which are classified as available-for-sale securities.
All
marketable securities are classified as short term investments because DeVry
has
the ability to divest the holdings within one year. The investments
in the municipal auction rate securities generally have stated terms to maturity
of greater than one year; however, the market is highly liquid and interest
rates reset within 35 days. The investments in mutual funds are held
in a rabbi trust for the purpose of paying benefits under DeVry’s non-qualified
deferred compensation plan.
All
available-for-sale securities are recorded at fair market value based upon
quoted market prices. Fair market value of the municipal auction rate
securities approximates cost due to the short interest rate reset
period. Unrealized gains or temporary unrealized losses, net of
income tax effects, are reported as a component of accumulated other
comprehensive loss on the consolidated balance sheets. Realized gains
and losses are computed on the basis of specific identification and are included
in interest income in the consolidated income statements. Realized gains of
$80,000 were recorded in the second quarter of fiscal 2008. No
realized losses have been recorded to date. The following table
summarizes DeVry’s available-for-sale securities as of December 31, 2007 (in
thousands):
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Gain
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
Rate Municipal Bonds
|
|
$ |
139,632 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
139,632 |
|
Bond
Mutual Fund
|
|
|
723 |
|
|
|
- |
|
|
|
21 |
|
|
|
744 |
|
Stock
Mutual Funds
|
|
|
1,931 |
|
|
|
(163 |
) |
|
|
- |
|
|
|
1,768 |
|
Total
Marketable Securities
|
|
$ |
142,286 |
|
|
$ |
(163 |
) |
|
|
21 |
|
|
$ |
142,144 |
|
As
of
December 31, 2007, all unrealized losses in the above table have been in a
continuous unrealized loss position for less than one year. When
evaluating our investments for possible impairment, we review factors such
as
length of time and extent to which fair value has been less than cost basis,
the
financial condition of the investee, and our 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, we do not believe these
investments are impaired as of December 31, 2007.
Postemployment
Benefits
DeVry’s
employment agreements with its Chair of the Board of Directors and former Chief
Executive Officer provide certain benefits upon a change in their respective
responsibilities that required accrual over the service period which ended
June
30, 2005. DeVry reduced expense by approximately $64,000 and $35,000,
related to these agreements for the three and six months ended December 31,
2007, respectively. DeVry recognized expense of approximately $66,000
and $243,000, related to these agreements for the three and six months ended
December 31, 2006, respectively. The amounts provided represent the
present value of the obligation related to these agreements, discounted using
a
6.22% rate as of December 31, 2007, and using the sinking fund accrual
method.
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 35,000 and 395,000 shares
of common stock for the three and six months ended December 31, 2007,
respectively, and 932,000 and 1,487,000 shares of common stock, for the three
and six months ended December 31, 2006, respectively, because 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,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Basic
shares
|
|
71,282
|
|
70,859
|
|
71,194
|
|
70,827
|
Effect
of Dilutive Stock Options
|
1,238
|
|
423
|
|
1,080
|
|
335
|
Diluted
Shares
|
|
72,520
|
|
71,282
|
|
72,274
|
|
71,162
|
Treasury
Stock
During
the third quarter of fiscal 2007, the Company initiated a stock repurchase
program (see “Note 4 – Dividends and Stock Repurchase Program”). Shares that are
repurchased by the Company 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 second quarter of fiscal year 2008, 3,455 treasury shares were resold at
a
10% discount to market value to two employees of Advanced Academics Inc. upon
the acquisition of that business (see “Note 5 – Business
Combination). 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.
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.
Accumulated
Other
Comprehensive Loss
Accumulated
Other Comprehensive Loss is composed of the change in cumulative translation
adjustment and unrealized gains and losses on available-for-sale marketable
securities. The amounts recorded in Accumulated Other Comprehensive Loss for
the
changes in translation rates were losses of $89,000 and $728,000 for the three
and six months ended December 31, 2007, respectively. For the three and six
months ended December 31, 2006, these amounts were gains of $373,000 and
$374,000, respectively. Unrealized losses on available-for-sale
marketable securities for the three and six months ended December 31, 2007,
of
$149,000 and $142,000, respectively, are recorded in Accumulated Other
Comprehensive Loss.
The
Accumulated Other Comprehensive Loss balance at December 30, 2007, consists
of $1,646,000 of cumulative translation losses and $142,000 of unrealized losses
on available-for-sale marketable securities. At December 31, 2006, this balance
was composed entirely of cumulative translation losses of $50,000.
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 $30.5 million and $59.1 million for the three and six months ended
December 31, 2007, respectively. Advertising expense for the three and six
months ended December 31, 2006, was $29.0 million and $54.1 million,
respectively.
Recent
Accounting
Pronouncements
SFAS 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines and
establishes a framework for measuring fair value. In addition, SFAS
157 expands disclosures about fair value measurements. For DeVry,
SFAS 157 is effective beginning in fiscal year 2009. DeVry does not
expect that the adoption of SFAS 157 will have a material impact on its
consolidated financial statements.
SFAS 159
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Liabilities, Including an
Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
assets and liabilities at fair value, with changes in fair value recorded in
earnings. Under SFAS 159, the decision to measure items at fair value
is made at specified election dates on an instrument-by-instrument basis and
is
irrevocable. For DeVry, SFAS 159 is effective beginning in fiscal
year 2009. DeVry is currently evaluating the impact of SFAS
159.
SFAS 141R
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141R, “Business Combinations” (“SFAS 141R”). SFAS 141R 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 141R
also retains the guidance in SFAS 141 for identifying and recognizing intangible
assets separately from goodwill. The new accounting requirements of
SFAS 141R 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 141R is effective beginning in fiscal year
2010 and will impact the accounting for any acquisitions DeVry may complete
beginning in that fiscal year.
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.
NOTE 3: STOCK-BASED
COMPENSATION
DeVry
maintains five stock-based award plans: the 1991 Stock Incentive Plan, 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 its 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. Plan Committee
members are granted automatic, nondiscretionary annual options. 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 vest upon
an
employee’s retirement under the non-substantive vesting period approach to these
options. Under this approach, compensation cost is recognized at the grant
date
for options issued to retirement eligible employees where the options vest
upon
retirement.
At
December 31, 2007, 6,217,318 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
requisite service period.
The
following is a summary of options activity for the six months ended
December 31, 2007:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Outstanding
at July 1, 2007
|
|
|
3,316,210 |
|
|
$ |
23.61 |
|
|
|
|
|
|
|
Options
Granted
|
|
|
607,750 |
|
|
$ |
35.96 |
|
|
|
|
|
|
|
Options
Exercised
|
|
|
(481,796 |
) |
|
$ |
25.00 |
|
|
|
|
|
|
|
Options
Cancelled
|
|
|
(71,584 |
) |
|
$ |
28.01 |
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
3,370,580 |
|
|
$ |
25.56 |
|
|
|
6.78 |
|
|
$ |
89,188 |
|
Exercisable
at December 31, 2007
|
|
|
1,935,740 |
|
|
$ |
23.73 |
|
|
|
5.37 |
|
|
$ |
54,638 |
|
The
total
intrinsic value of options exercised for the six months ended December 31,
2007 and 2006 was $11,269,000 and $1,081,000,
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 2008 and 2007 were $16.09 and
$10.05, per share, respectively. The fair values of DeVry’s stock option awards
were estimated assuming the following weighted average assumptions:
Fiscal
Year
|
|
|
2008
|
|
|
2007
|
|
Expected
Life (in Years)
|
|
|
6.60 |
|
|
|
6.67 |
|
Expected
Volatility
|
|
|
39.33 |
% |
|
|
41.51 |
% |
Risk-free
Interest Rate
|
|
|
4.34 |
% |
|
|
4.57 |
% |
Dividend
Yield
|
|
|
0.32 |
% |
|
|
0.46 |
% |
Pre-vesting
Forfeiture Rate
|
|
|
5.00 |
% |
|
|
4.00 |
% |
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, its most recent volatility over the expected life of the option
grant, and DeVry’s long-term historical volatility.
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.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of Educational Services
|
|
$ |
438 |
|
|
$ |
683 |
|
|
$ |
922 |
|
|
$ |
996 |
|
Student
Services and Administrative Expense
|
|
|
929 |
|
|
|
1,452 |
|
|
|
1,959 |
|
|
|
2,117 |
|
Income
Tax Benefit
|
|
|
(184 |
) |
|
|
(538 |
) |
|
|
(388 |
) |
|
|
(707 |
) |
Net
Stock-Based Compensation Expense
|
|
$ |
1,183 |
|
|
$ |
1,597 |
|
|
$ |
2,493 |
|
|
$ |
2,406 |
|
As
of
December 31, 2007, $14.6 million of total pre-tax unrecognized
compensation costs related to non-vested awards is expected to be recognized
over a weighted average period of 3.7 years. The total fair value of
options vested during the six months ended December 31, 2007 and 2006 was
approximately $4,700,000 and $4,800,000, respectively.
There
were no capitalized stock-based compensation costs at December 31, 2007 and
2006.
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: DIVIDENDS AND STOCK REPURCHASE PROGRAM
On
May 8, 2007, DeVry’s Board of
Directors declared a cash dividend of $0.05 per share. This dividend was paid
on
July 12, 2007, to common stockholders of record as of June 18,
2007. The total dividend declared of $3.6 million was recorded as a
reduction to retained earnings as of June 30, 2007. On November 7, 2007, DeVry
announced that its Board of Directors approved a 20% dividend increase, raising
its annual dividend rate from $0.10 to $0.12 per share. Payable on a
semi-annual basis, the most recent dividend of $0.06 per share was paid on
January 4, 2008, to common stockholders of record as of December 14,
2007. This dividend of $4.3 million was recorded as a reduction to
retained earnings as of December 31, 2007. Future dividends will be
at the discretion of the Board of Directors.
On
November 15, 2006, DeVry announced that the Board of Directors had established
a
stock repurchase plan. The stock repurchase plan allows DeVry to buy back up
to
$35 million of its common stock through December 31, 2008. As of December 31,
2007, DeVry has repurchased, on the open market, 606,573 shares of its common
stock at a total cost of approximately $20.7 million. These buybacks were funded
through available cash balances. The timing and amount of any future
repurchases 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 under its revolving credit agreement and may be suspended or
discontinued at any time.
Shares
of
stock repurchased under the program are held as treasury shares. These
repurchased shares have reduced the weighted average number of shares of common
stock outstanding for basic and diluted earnings per share
calculations
NOTE 5: BUSINESS
COMBINATION
Advanced
Academics,
Inc.
On
October 31, 2007, DeVry Inc, acquired the operations of Advanced Academics,
Inc.
(“AAI”) for $27.5 million in cash. 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 6
states. Since its inception, AAI has delivered online learning
programs to more than 20,000 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.
|
|
At October 31, 2007
|
|
|
|
(Dollars in Thousands)
|
|
Current
Assets
|
|
$ |
4,507 |
|
Property
and Equipment
|
|
|
210 |
|
Other
Long-term Assets
|
|
|
3,796 |
|
Intangible
Assets
|
|
|
10,853 |
|
Goodwill
|
|
|
17,485 |
|
Total
Assets Acquired
|
|
|
36,851 |
|
Liabilities
Assumed
|
|
|
9,351 |
|
Net
Assets Acquired
|
|
$ |
27,500 |
|
Of
the
$10,853,000 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:
|
|
As of October 31, 2007
|
|
|
Value
Assigned
|
|
Estimated
Useful Life
|
|
|
(in thousands)
|
|
|
Customer
Contracts-Direct to Consumer
|
|
$ |
4,100 |
|
6
yrs 8 mths
|
Customer
Contracts-Direct to Schools
|
|
|
2,900 |
|
4
yrs 8 mths
|
Curriculum/Software
|
|
|
2,500 |
|
5
yrs
|
Covenant
not-to-compete
|
|
|
34 |
|
1
yr
|
Accreditations
|
|
|
19 |
|
1
yr
|
DeVry
determined this allocation based upon a number of factors, including a valuation
analysis prepared by an independent professional valuation specialist. The
$17,485,000 of goodwill was all assigned to the DeVry University operating
segment.
There
is
no pro forma presentation of prior year operating results related to this
acquisition due to the insignificant effect on consolidated
operations.
NOTE 6: INTANGIBLE
ASSETS
Intangible
assets consist of the following (dollars in thousands):
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
As
of December 31, 2006
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
47,770 |
|
|
$ |
(41,237 |
) |
License
and Non-compete Agreements
|
|
|
2,650 |
|
|
|
(2,611 |
) |
Class Materials
|
|
|
2,900 |
|
|
|
(1,200 |
) |
Trade
Names
|
|
|
110 |
|
|
|
(89 |
) |
Other
|
|
|
620 |
|
|
|
(620 |
) |
Total
|
|
$ |
54,050 |
|
|
$ |
(45,757 |
) |
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
Trade
Names
|
|
$ |
20,972 |
|
|
|
|
|
Trademark
|
|
|
1,645 |
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100 |
|
|
|
|
|
Intellectual
Property
|
|
|
13,940 |
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200 |
|
|
|
|
|
Total
|
|
$ |
51,857 |
|
|
|
|
|
Amortization
expense for amortized intangible assets was $1,355,000 and $2,401,000 for the
three and six months ended December 31, 2007, respectively, and $1,805,000
and $3,612,000 for the three and six months ended December 31, 2006,
respectively. Estimated amortization expense for amortized intangible assets
for
the next five fiscal years ending June 30 is as follows (dollars in
thousands):
Fiscal
Year
|
|
|
|
2008
|
|
$ |
4,926 |
|
2009
|
|
|
2,154 |
|
2010
|
|
|
2,204 |
|
2011
|
|
|
2,006 |
|
2012
|
|
|
1,698 |
|
The
weighted-average amortization period for amortized intangible assets is three
and five years for Chamberlain and Ross University Student Relationships,
respectively; 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; four years for Trade Names and six years for
Other. These intangible assets, except for the Ross University Student
Relationships and the AAI Customer Contracts , are being amortized on a
straight-line basis. The amount being amortized for the Ross University Student
Relationships is based on the estimated progression of the students through
the
respective medical and veterinary programs, giving consideration to the revenue
and cash flow associated with both existing students and new applicants. This
results in the basis being amortized at an annual rate for each of the five
years of estimated economic life as follows:
Year
1
|
|
|
27.4 |
% |
Year
2
|
|
|
29.0 |
% |
Year
3
|
|
|
21.0 |
% |
Year
4
|
|
|
14.5 |
% |
Year
5
|
|
|
8.1 |
% |
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
Consumer
|
Direct
to
School
|
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 2007 and 2006, there was no impairment loss associated with these
indefinite-lived intangible assets, as fair value exceeds the carrying
amount.
DeVry
determined that as of the end of fiscal years 2007 and 2006, there was no
impairment in the value of DeVry’s goodwill for any reporting units. This
determination was made after considering a number of factors including a
valuation analysis prepared by management. The carrying amount of goodwill
related to the DeVry University reportable segment at December 31, 2007 was
$39,680,000 which was an increase of $17,485,000 from June 30, 2007. This
increase results from the allocation of the AAI purchase price as described
in
Note 5-Business Combination. The carrying amount of goodwill related
to the Professional and Training reportable segment was unchanged at $24,716,000
at December 31, 2007 and June 30, 2007. The carrying amount of goodwill
related to the Medical & Healthcare segment was unchanged at
$244,202,000 at December 31, 2007 and June 30, 2007.
NOTE 7: SALE
OF FACILITIES
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 under its lease agreement to purchase
its 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
September 2006, DeVry sold its facility located in West Hills, California
for $36.0 million. In connection with the sale, DeVry recorded a pre-tax
gain of $19.9 million during the first quarter of fiscal year
2007. DeVry relocated its West Hills campus operations to a leased
facility in nearby Sherman Oaks, California. This gain is separately
classified in the Consolidated Statements of Income as a component of Total
Operating Costs and Expenses and is related to the DeVry University reportable
segment.
NOTE 8: REDUCTION
IN WORKFORCE CHARGES
During
the third quarter of fiscal year 2007, DeVry offered a voluntary separation
plan
(VSP) to eligible DeVry University campus-based employees. The
decision to take this action resulted from a thorough analysis which revealed
that a reduction in the number of employees at DeVry University campuses was
warranted to address the subsidiary’s cost structure. The VSP was
offered at 22 DeVry University campuses with 285 employees being eligible to
participate. 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 year 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 year 2007 of approximately $2.6
million that represents severance pay and benefits in relation to these
employees.
Cash
payments for the VSP and RIF were approximately $0.1 million and $4.5 million,
in the three and six months ended December 31, 2007, 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 $0.7 million
remained to be paid as of December 31, 2007.
NOTE
9: INCOME TAXES
DeVry’s
effective income tax rate reflects benefits derived from significant operations
outside the United States. Earnings of Ross University’s
international operations are not subject to U.S. federal or state income taxes.
The principal operating subsidiaries of Ross University are Ross University
School of Medicine (the Medical School) incorporated under the laws of the
Commonwealth of Dominica and Ross University School of Veterinary Medicine
(the
Veterinary School), incorporated under the laws of the Federation of St.
Christopher Nevis, St. Kitts in the West Indies. Both Schools have
agreements with the respective governments that exempt them from local income
taxation through the years 2043 and 2023, respectively.
DeVry
has
not recorded a tax provision for the undistributed international earnings
of the
Medical and Veterinary Schools. It is DeVry’s intention to
indefinitely reinvest accumulated cash balances, future cash flows and
post-acquisition undistributed earnings and profits to improve the facilities
and operations of the Schools and pursue future opportunities outside of
the
United States. In accordance with this plan, cash held by Ross
University will not be available for general company purposes and under current
laws will not be subject to U.S. taxation. Included in DeVry’s
consolidated cash balances were approximately $90.5 million and $61.7 million
attributable to Ross University’s international operations as of December 31,
2007 and 2006, respectively. As of December 31, 2007 and 2006,
cumulative undistributed earnings were approximately $120.5 million and $76.5
million, respectively.
The
effective tax rate was 28.0% for the second quarter and 27.0% for the first
six
months of fiscal year 2008, compared to 25.5% for the second quarter and
31.2%
for the first six months in the prior year. The higher effective income tax
rate
for the first six months of fiscal year 2007 is attributable to the gain
on the
sale of the West Hills facility which carried a tax rate of 40.4%. In
fiscal year 2008, there is no corresponding gain and the net loss on the
fiscal
year 2008 first quarter facility sales which carries a tax rate of 39.1%
provided a benefit which decreased the year to date effective tax
rate. This decrease was partially offset by 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. This also
influenced the higher effective rate for the second quarter of fiscal year
2008. The effective income tax rate for the fiscal year ended June
30, 2007 was 27.4%.
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 the
adoption of FIN 48, the total amount of gross unrecognized tax benefits for
uncertain tax positions, including positions impacting only the timing of
tax
benefits, was $6.0 million. The amount of unrecognized tax benefits
that, if recognized, would impact the effective tax rate was $1.4
million. 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 adoption was $0.5 million. The
corresponding amounts at December 31, 2007, were not materially different
from
the amounts at the date of adoption. DeVry expects the total amount of
unrecognized tax benefits to decrease by $4.3 million within 12 months of
the
reporting date, in one case due to the anticipated approval of a change in
accounting method, in another case due to the expiration of the applicable
statute of limitations, and in a final item due to an anticipated settlement
with tax authorities.
The
Internal Revenue Service examined the Company's 1997-2003 U.S. Federal Income
Tax Returns. Although these examinations were effectively closed on
May 11, 2006, the examinations and the findings were subject to Joint Committee
Review. On June 23, 2006, the Joint Committee on taxation completed
its consideration of the Internal Revenue Service's Special Report and did
not
take exception to the examination and the agents' conclusions. DeVry
generally remains subject to examination for all tax years beginning on or
after
July 1, 2003.
NOTE 10: LONG-TERM
DEBT
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. DeVry has the option to expand
the revolving credit facility to $275 million. As of December 31,
2007, DeVry had no outstanding borrowings. Long-term debt consisted
of the following at December 31, 2007, June 30, 2007 and December 31, 2006
(dollars in thousands):
|
|
Outstanding
Debt at
|
|
Revolving
Credit Agreement:
|
|
December
31, 2007
|
|
|
June
30,
2007
|
|
|
December
31, 2006
|
|
DeVry
Inc. as borrower
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
50,000 |
|
GEI
as borrower
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
50,000 |
|
Current
Maturities of Debt
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
50,000 |
|
Total
Long-term Debt
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
NOTE 11: COMMITMENTS
AND CONTINGENCIES
DeVry
is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
associated with financial assistance programs and other claims arising in the
normal conduct of its business. The following is a description of pending
litigation that may be considered other than ordinary and routine litigation
that is incidental to the business.
On
August
25, 2005, DeVry filed a complaint in the Superior Court of California, County
of
Alameda, against Sierra Bay Contractors, Inc., the general contractor
responsible for the construction of a dormitory facility on the DeVry
University, Fremont, California campus. DeVry's complaint sought monetary
damages arising out of Sierra Bay's failure to keep the project free from liens
filed by subcontractors, and indemnification against subcontractor claims.
Sierra Bay filed a counterclaim in December 2005, asserting that DeVry owed
approximately $3 million for work allegedly performed on the project.
DeVry filed additional complaints against the architect, the project manager
and
an engineering firm, and the Court subsequently consolidated all claims relating
to the project, including those of the subcontractors, into the principal case
filed by DeVry against Sierra Bay. All claims relating to this matter
were settled in December 2007.
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 denied all of Daghlian’s allegations and removed
the action to the U.S. District Court for the Central District of
California. On June 11, 2007, the District Court issued an Order
certifying a class under the UCL, comprised of students who enrolled and paid
tuition at a California DeVry school in the four years prior to the date when
the suit was filed. In two Orders dated October 9, 2007, and December 31,
2007, the District Court entered judgment dismissing all
of plaintiffs ’ class and individual claims, dismissed the case,
and awarded DeVry its costs of suit. On January 8, 2008, plaintiffs
filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth
Circuit. DeVry intends to vigorously defend itself with respect to
this claim.
DeVry
is
also subject from time to time to claims, administrative proceedings, regulatory
reviews and lawsuits incidental to its business. Although the ultimate outcome
of pending 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 12: SEGMENT
INFORMATION
DeVry’s
principal business is providing secondary and post-secondary education. The
services of our operations are described in more detail in “Note 1- Nature
of Operations” to the consolidated financial statements contained in DeVry’s
Annual Report on Form 10-K for the fiscal year ended June 30,
2007. DeVry presents three reportable segments: the DeVry University
undergraduate and graduate and the Advanced Academics operations (DeVry
University); the professional exam review and training operations which includes
Becker CPA Review and Stalla Review for the CFA Exams (Professional and
Training); and the Ross University medical and veterinary school and Chamberlain
College of Nursing operations (Medical & Healthcare).
These
segments are consistent with the method by which management evaluates
performance and allocates resources. Such decisions are based, in part, on
each
segment’s operating income, which is defined as income before interest expense,
amortization and income taxes. Intersegment sales are accounted for at amounts
comparable to sales to nonaffiliated customers and are eliminated in
consolidation. The accounting policies of the segments are the same as those
described in “Note 2 — Summary of Significant Accounting Policies” to
the consolidated financial statements contained in the Company’s Annual Report
on Form 10-K for the fiscal year ended June 30, 2007.
The
consistent measure of segment profit excludes interest, 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, 2007 and 2006.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
(Dollars
in Thousands)
|
|
DeVry
University
|
|
$ |
213,394 |
|
|
$ |
185,656 |
|
|
$ |
408,159 |
|
|
$ |
358,228 |
|
Professional
and Training
|
|
|
17,757 |
|
|
|
14,615 |
|
|
|
36,070 |
|
|
|
30,747 |
|
Medical &
Healthcare
|
|
|
42,586 |
|
|
|
35,333 |
|
|
|
79,826 |
|
|
|
65,844 |
|
Total
Consolidated Revenues
|
|
$ |
273,737 |
|
|
$ |
235,604 |
|
|
$ |
524,055 |
|
|
$ |
454,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
DeVry
University
|
|
$ |
28,220 |
|
|
$ |
6,791 |
|
|
$ |
43,781 |
|
|
$ |
25,089 |
|
Professional
and Training
|
|
|
5,374 |
|
|
|
3,183 |
|
|
|
13,732 |
|
|
|
9,997 |
|
Medical &
Healthcare
|
|
|
15,262 |
|
|
|
14,003 |
|
|
|
26,863 |
|
|
|
24,586 |
|
Reconciling
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
(1,355 |
) |
|
|
(1,805 |
) |
|
|
(2,401 |
) |
|
|
(3,612 |
) |
Depreciation
and Other
|
|
|
(568 |
) |
|
|
(386 |
) |
|
|
(1,140 |
) |
|
|
(1,306 |
) |
Total
Consolidated Operating Income
|
|
$ |
46,933 |
|
|
$ |
21,786 |
|
|
$ |
80,835 |
|
|
$ |
54,754 |
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
2,892 |
|
|
$ |
1,932 |
|
|
$ |
5,299 |
|
|
$ |
3,370 |
|
Interest
Expense
|
|
|
(98 |
) |
|
|
(1,720 |
) |
|
|
(319 |
) |
|
|
(3,889 |
) |
Net
Interest Income (Expense)
|
|
|
2,794 |
|
|
|
212 |
|
|
|
4,980 |
|
|
|
(519 |
) |
Total
Consolidated Income before Income Taxes
|
|
$ |
49,727 |
|
|
$ |
21,998 |
|
|
$ |
85,815 |
|
|
$ |
54,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Assets:
|
DeVry
University
|
|
$ |
476,413 |
|
|
$ |
414,182 |
|
|
$ |
476,413 |
|
|
$ |
414,182 |
|
Professional
and Training
|
|
|
72,555 |
|
|
|
91,567 |
|
|
|
72,555 |
|
|
|
91,567 |
|
Medical &
Healthcare
|
|
|
427,077 |
|
|
|
390,535 |
|
|
|
427,077 |
|
|
|
390,535 |
|
Corporate
|
|
|
20,287 |
|
|
|
23,517 |
|
|
|
20,287 |
|
|
|
23,517 |
|
Total
Consolidated Assets
|
|
$ |
996,332 |
|
|
$ |
919,801 |
|
|
$ |
996,332 |
|
|
$ |
919,801 |
|
Additions
to Long-lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
7,287 |
|
|
$ |
5,750 |
|
|
$ |
21,439 |
|
|
$ |
9,598 |
|
Professional
and Training
|
|
|
147 |
|
|
|
12 |
|
|
|
161 |
|
|
|
45 |
|
Medical &
Healthcare
|
|
|
2,383 |
|
|
|
2,679 |
|
|
|
6,357 |
|
|
|
6,559 |
|
Total
Consolidated Additions to Long-lived Assets
|
|
$ |
9,817 |
|
|
$ |
8,441 |
|
|
$ |
27,957 |
|
|
$ |
16,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
7,095 |
|
|
$ |
7,436 |
|
|
$ |
13,858 |
|
|
$ |
14,357 |
|
Professional
and Training
|
|
|
103 |
|
|
|
117 |
|
|
|
198 |
|
|
|
260 |
|
Medical &
Healthcare
|
|
|
1,480 |
|
|
|
1,173 |
|
|
|
2,802 |
|
|
|
2,254 |
|
Corporate
|
|
|
180 |
|
|
|
247 |
|
|
|
405 |
|
|
|
494 |
|
Total
Consolidated Depreciation
|
|
$ |
8,858 |
|
|
$ |
8,973 |
|
|
$ |
17,263 |
|
|
$ |
17,365 |
|
Intangible
Asset Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
317 |
|
|
$ |
— |
|
|
$ |
317 |
|
|
$ |
— |
|
Professional
and Training
|
|
|
56 |
|
|
|
63 |
|
|
|
119 |
|
|
|
127 |
|
Medical &
Healthcare
|
|
|
982 |
|
|
|
1,742 |
|
|
|
1,965 |
|
|
|
3,485 |
|
Total
Consolidated Amortization
|
|
$ |
1,355 |
|
|
$ |
1,805 |
|
|
$ |
2,401 |
|
|
$ |
3,612 |
|
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 for the six months ended December 31,
2007.
In
September 2007, DeVry exercised the option under its lease agreement to purchase
its 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 for the six months ended December
31,
2007.
In
September 2006, DeVry sold its facility located in West Hills,
California. In connection with the sale, DeVry recorded a pre-tax
gain of $19.9 million during the first quarter of fiscal year 2007. This
gain is included in operating income of the DeVry University reportable segment
for the six months ended December 31, 2006.
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, 2007 and 2006. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in Thousands)
|
|
Revenues
from Unaffiliated Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$ |
234,375 |
|
|
$ |
200,309 |
|
|
$ |
450,296 |
|
|
$ |
389,146 |
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
36,763 |
|
|
|
31,803 |
|
|
|
68,471 |
|
|
|
59,337 |
|
Other
|
|
|
2,599 |
|
|
|
3,492 |
|
|
|
5,288 |
|
|
|
6,336 |
|
Total
International
|
|
|
39,362 |
|
|
|
35,295 |
|
|
|
73,759 |
|
|
|
65,673 |
|
Consolidated
|
|
$ |
273,737 |
|
|
$ |
235,604 |
|
|
$ |
524,055 |
|
|
$ |
454,819 |
|
Long-lived
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$ |
315,129 |
|
|
$ |
316,875 |
|
|
$ |
315,129 |
|
|
$ |
316,875 |
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
312,612 |
|
|
|
310,196 |
|
|
|
312,612 |
|
|
|
310,196 |
|
Other
|
|
|
334 |
|
|
|
226 |
|
|
|
334 |
|
|
|
226 |
|
Total
International
|
|
|
312,946 |
|
|
|
310,422 |
|
|
|
312,946 |
|
|
|
310,422 |
|
Consolidated
|
|
$ |
628,075 |
|
|
$ |
627,297 |
|
|
$ |
628,075 |
|
|
$ |
627,297 |
|
No
one
customer accounted for more than 10% of DeVry’s consolidated
revenues.
|
ITEM 2 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
Through
its 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 website 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,
2007. DeVry’s Annual Report on Form 10-K includes a description of
critical accounting policies and estimates and assumptions used in the
preparation of DeVry’s financial statements. These include, but are
not limited to, revenue and expense recognition; allowance for uncollectible
accounts; internally developed software; land buildings and equipment;
stock-based compensation; impairment of goodwill and other intangible assets;
impairment of long-lived assets and income tax liabilities.
The
somewhat seasonal pattern of DeVry’s enrollments and its educational program
starting dates affect the results of operations and the timing of cash
flows. Therefore, management believes that comparisons of its results
of operations should be made to the corresponding period in the preceding
year. Comparisons of financial position should be made to both the
end of the previous fiscal year and to the end of the corresponding quarterly
period in the preceding year.
FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this Quarterly Report on Form 10-Q, including those
that affect DeVry’s expectations or plans, may constitute “forward-looking
statements” subject to the Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can
be
identified by phrases such as DeVry Inc. or its management “anticipates,”
“believes,” “estimates,” “expects,” “forecasts,” “foresees” or other words or
phrases of similar import. Such statements are inherently uncertain
and may involve risks and uncertainties that could cause future results to
differ materially from those projected or implied by these forward-looking
statements. Potential risks and uncertainties that could affect
DeVry’s results are described throughout this Report and in DeVry’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2007 and filed with
the
Securities and Exchange Commission on August 24, 2007 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 2008, DeVry’s net income more than doubled to
$35.8 million driven by record total revenues of $273.7 million and effective
cost management. Operational and financial highlights for the second
quarter of fiscal year 2008 include:
|
·
|
All
three of DeVry’s business segments achieved double digit revenue growth,
due to the impact of investments in marketing and recruiting programs
and
continued demand for DeVry’s high quality educational programs and
offerings.
|
|
·
|
The
fall 2007 term marked DeVry University’s ninth consecutive period of
positive undergraduate new student growth and sixth consecutive period
of
positive total student enrollment growth.
|
|
·
|
On
October 31, 2007, DeVry acquired Advanced Academics Inc., a leading
provider of online secondary education, for $27.5 million in cash.
This
acquisition marks DeVry’s entry into secondary education and is expected
to accelerate growth in DeVry’s online operations.
|
|
·
|
In
November 2007, DeVry’s Board of Directors approved a 20 percent dividend
increase, raising its annual dividend rate from $0.10 to $0.12 per
share.
Payable on a semi-annual basis, the most recent dividend of $0.06
per
share was paid on January 4, 2008.
|
|
·
|
DeVry’s
financial position remained strong as it ended the quarter with no
debt
outstanding and $241 million of cash and marketable securities.
|
The
following table illustrates the effects of the loss/(gain) on the sale of
facilities on DeVry’s earnings. The non-GAAP disclosure of net income
and earnings per share is not preferable to GAAP net income but is shown as
a
supplement to such disclosure for comparability to the year-ago quarter’s
earnings. The following table reconciles these items to the relevant
GAAP information (in thousands, except per share data):
|
|
For
the Six Months
Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net
Income
|
|
$ |
62,648 |
|
|
$ |
37,317 |
|
Earnings
per Share (diluted)
|
|
$ |
0.87 |
|
|
$ |
0.52 |
|
Loss
(Gain)on
Saleof
Assets(net of
tax)
|
|
$ |
2,279 |
|
|
$ |
(11,840 |
) |
Effect
on Earnings per
Share
(diluted)
|
|
$ |
0.03 |
|
|
$ |
(0.16 |
) |
Net
Income
Excluding the Loss (Gain)on
Saleof
Assets
|
|
$ |
64,927 |
|
|
$ |
25,477 |
|
Earnings
per Share Excluding
the Loss (Gain) on Sale of Assets (diluted)
|
|
$ |
0.90 |
|
|
$ |
0.36 |
|
RESULTS
OF
OPERATIONS
The
following table presents information with respect to the relative size to
revenue of each item in the Consolidated Statements of Income for the second
quarter and first six months for both the current and prior fiscal
year. Percents may not add because of rounding.
|
|
For
the Three Months
Ended
December 31,
|
|
|
For
the Six Months
Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of Educational Services
|
|
|
45.3 |
% |
|
|
51.2 |
% |
|
|
46.7 |
% |
|
|
53.0 |
% |
Loss/(Gain)
on Sale of Assets
|
|
|
-- |
|
|
|
-- |
|
|
|
0.7 |
% |
|
|
(4.4 |
%) |
Student
Services & Admin. Exp
|
|
|
37.6 |
% |
|
|
39.6 |
% |
|
|
37.1 |
% |
|
|
39.4 |
% |
Total
Operating Costs and Expenses
|
|
|
82.9 |
% |
|
|
90.8 |
% |
|
|
84.6 |
% |
|
|
88.0 |
% |
Operating
Income
|
|
|
17.1 |
% |
|
|
9.2 |
% |
|
|
15.4 |
% |
|
|
12.0 |
% |
Interest
Income
|
|
|
1.1 |
% |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
0.7 |
% |
Interest
Expense
|
|
|
(0.0 |
%) |
|
|
(0.7 |
%) |
|
|
(0.1 |
%) |
|
|
(0.8 |
%) |
Net
Interest Income (Expenses)
|
|
|
1.1 |
% |
|
|
0.1 |
% |
|
|
0.9 |
% |
|
|
(0.1 |
%) |
Income
Before Income Taxes
|
|
|
18.2 |
% |
|
|
9.3 |
% |
|
|
16.4 |
% |
|
|
11.9 |
% |
Income
Tax Provision
|
|
|
5.1 |
% |
|
|
2.4 |
% |
|
|
4.4 |
% |
|
|
3.7 |
% |
Net
Income
|
|
|
13.1 |
% |
|
|
6.9 |
% |
|
|
12.0 |
% |
|
|
8.2 |
% |
REVENUES
Total
consolidated revenues for the second quarter of fiscal year 2008 of $273.7
million increased 16.2% versus the prior year quarter. For the first
six months of fiscal year 2008, total consolidated revenues of $524.1 million
increased 15.2% versus the same period a year ago. For both the
second quarter and first six months of fiscal year 2008, revenues increased
at
all three of DeVry’s business segments as a result of continued growth in total
student enrollments, improved student retention, and tuition price increases
as
compared to the year ago periods. In addition, revenues increased
because of expanding sales of electronic text books (“eBooks”) and higher sales
of Becker CPA review materials.
DeVry
University
DeVry
University segment revenues increased by 14.9% in the second quarter to $213.4
million, and rose by 13.9% to $408.2 million for the first six months of fiscal
year 2008. 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 5.5% from spring 2006 (38,523 students) to spring 2007 (40,637
students); and
|
|
·
|
Increased
by 9.8% from summer 2006 (37,132 students) to summer 2007 (40,774
students); and
|
|
·
|
Increased
by 10.3% from fall 2006 (40,434 students) to fall 2007 (44,594 students).
This was DeVry University’s sixth consecutive period of positive total
undergraduate student enrollment growth.
|
New
undergraduate enrollment by
term:
|
·
|
Increased
by 6.9% from spring 2006 (10,359 students) to spring 2007 (11,075
students); and
|
|
·
|
Increased
by 9.7% from summer 2006 (12,671 students) to summer 2007 (13,906
students);
|
|
·
|
Increased
by 10.7% from fall 2006 (11,930 students) to fall 2007 (13,204 students).
The fall 2007 term was the ninth consecutive term in which new
undergraduate student enrollments increased from the year-ago level.
|
Graduate
coursetaker
enrollment:
The
term
“coursetaker” refers to the number of courses taken by a
student. Thus, one student taking two courses is counted as two
coursetakers.
|
·
|
Increased
by 11.1% from the July 2006 session (12,617 coursetakers) to the
July 2007
session (14,023 coursetakers) and;
|
|
·
|
Increased
by 12.7% from the September 2006 session (14,069 coursetakers) to
the
September 2007 session (15,857 coursetakers) and;
|
|
·
|
Increased
by 12.5% from the November 2006 session (13,920 coursetakers) to
the
November 2007 session (15,657 coursetakers).
|
Tuition
rates:
|
·
|
Undergraduate
program tuition increased by approximately 4.5% in July 2007; and
|
|
·
|
Graduate
school program tuition increased by approximately 0% to 5%, depending
on
location, for the July 2007 session.
|
Management
attributes the increasing undergraduate student enrollments to the impact of
investments in marketing and recruiting, continued strong demand for DeVry
University’s online programs and a heightened focus on the retention of existing
students. Management believes that efforts at Keller to enhance brand
awareness through improved messaging have produced positive enrollment
results. Also contributing to higher total revenues in the DeVry
University segment was an increase in Other Educational Revenues from sales
of
eBooks.
Partly
offsetting the increases in revenue from improved enrollments and higher tuition
rates were an increase in DeVry University scholarships and a growing proportion
of working adult undergraduate students who typically enroll for less than
a
full-time academic load. These students are primarily enrolled in online
programs and in programs offered at DeVry University centers. These part-time
students pay a lesser total average tuition amount each term than do full-time
students at the undergraduate campus locations. Therefore, the higher revenue
per student resulting from tuition increases has been partially offset by a
greater proportion of part-time students. In addition, interest
charges (included in Other Educational
Revenue)
on undergraduate student accounts receivable decreased in both the second
quarter and first six months of fiscal year 2008, as compared to the prior
year
periods. These receivables are generally subject to a monthly
interest charge of one percent under DeVry University’s EDUCARD® proprietary
loan program for financing students’ education. Lower interest
charges are primarily a result of a decrease in the average accounts receivable
balance on enrolled, undergraduate student accounts. The timeliness
of receivable collections improved as compared to the prior year
periods.
Professional
and
Training
Professional
and Training segment revenues rose 21.5% to $17.8 million in the second quarter
and increased by 17.3% to $36.1 million for the first six months of fiscal
year
2008 as compared to the year-ago periods. The primary reasons for the increase
were higher sales of CPA review courses on CD-ROM and increased enrollment
in
Becker Professional Review’s CPA review courses. Management believes
that these increases are being driven by the continued demand for CPAs by
accounting and consulting firms.
Medical
and
Healthcare
Medical
and Healthcare segment revenues increased 20.5% to $42.6 million in the second
quarter and grew 21.2% to $79.8 million for the first six months of fiscal
year
2008 as compared to the year-ago periods. While Ross University
accounted for the majority of the revenue increase in this segment, increasing
enrollments at Chamberlain College of Nursing (“Chamberlain”) also contributed
to segment revenue growth. The two principal factors that influence
revenues are enrollment and tuition rates. Key trends in these two components
are set forth below.
Ross
University total enrollment by
term:
|
·
|
Increased
by 14.8% from January 2006 (3,264 students) to January 2007 (3,747
students);
|
|
·
|
Increased
by 9.9% from May 2006 (3,428 students) to May 2007 (3,767 students);
and
|
|
·
|
Increased
by 4.3% from September 2006 (3,724 students) to September 2007 (3,885
students).
|
Ross
University new student
enrollment by term:
|
·
|
Increased
by 28.2% from January 2006 (387 students) to January 2007 (496 students);
|
|
·
|
Decreased
by 5.2% from May 2006 (439 students) to May 2007 (416 students) as
a
result of a lower number of transfer students in May 2007 as compared
to
the prior year term; and
|
|
·
|
Decreased
by 8.9% from September 2006 (628 students) to September 2007 (572
students) as a result of capacity constraints in the peak September
term
and a lower number of transfer students in September 2007 as compared
to
the prior year term.
|
Chamberlain
College of Nursing total enrollment by term:
|
·
|
Increased
by 83.3% from July 2006 (594 students) to July 2007 (1,089 students).
|
Tuition
rates:
|
·
|
Tuition
and fees for the Ross University beginning basic sciences programs
increased by approximately 5.4% for the September 2006 term and
approximately 6.8% effective with the September 2007 term;
|
|
·
|
Tuition
and fees for the Ross University final clinical portion of the programs
increased by approximately 5.0% for the September 2006 term and
approximately 7.5% effective with the September 2007 term; and
|
|
·
|
Tuition
for Chamberlain increased approximately 5% for the 2006-2007 academic
year
(effective July 2006) and approximately 5% for the 2007-2008 academic
year
(effective July 2007).
|
Management
believes that the increasing enrollments at Ross University for the past several
terms resulted from enhancements made to its marketing and recruiting
functions. In addition, continued demand for medical doctors
and
veterinarians
positively influenced career decisions of new students towards these respective
fields of study. To prepare for increasing student demand, Ross
University is adding faculty, classrooms, and a new student center and
gymnasium.
During
March 2007, Chamberlain began offering associate and bachelor’s degrees in
nursing programs at its campus in Columbus, Ohio. This location is
co-located with DeVry University’s campus in Columbus. The increase
in student enrollments at Chamberlain was attributable to its growing RN to
BSN
online completion program and the opening of its Columbus
campus. Recently, Chamberlain received approval to establish new
campuses in Phoenix, Arizona, and Addison, Illinois, with classes scheduled
to
begin in March 2008 at both locations. In addition, beginning October
2008, Chamberlain will discontinue the online delivery of its Associates of
Science in Nursing Degree program offered through its St. Louis, Missouri
campus. Approximately 70 students will be affected by the
discontinuation of this program.
Revenue
from Other
Sources
Other
Educational Revenue increased by 24.4% to $23.0 million during the second
quarter and grew 22.9% to $43.1 million during the first six months of fiscal
year 2008 as compared to the prior year periods. As discussed above, the primary
drivers for the increase in Other Educational Revenue were strong sales of
eBooks at DeVry University and increased sales of Becker CPA Review course
materials on CD-ROM, partially offset by a decrease in interest charged on
undergraduate student receivables.
COSTS
AND
EXPENSES
Cost
of Educational
Services
The
largest component of Cost of Educational Services is the cost of faculty and
the
staff that supports educational operations. This expense category also includes
the costs of facilities, 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 2.7% to $123.9 million during the second
quarter and grew 1.7% to $244.9 million during the first six months of fiscal
year 2008, as compared to the year-ago periods. Cost increases were
incurred in support of the higher number of DeVry University Centers and
expanding online program enrollments. In addition, cost increases were incurred
at Ross University and Chamberlain to both support increasing student
enrollments and capacity expansion to drive future growth. Partially
offsetting these cost increases were expense savings realized from the voluntary
and involuntary work force reductions taken at DeVry University during the
fourth quarter of fiscal year 2007. In addition, DeVry realized
facility cost reductions from its ongoing real estate optimization
program.
As
a
percent of revenue, Cost of Educational Services decreased to 45.3% in the
second quarter of fiscal year 2008 from 51.2% during the prior year
period. For the first six months of fiscal year 2008, Cost of
Educations Services decreased to 46.7% from 53.0% 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 at all three business
segments. Management anticipates improvements in operating leverage
to continue during the remainder of fiscal year 2008, albeit not at the same
level achieved during the first six months as expenses are expected to increase
based on additional hiring and project spending to support future revenue
growth.
Loss
(Gain) on Sale of
Assets
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 is being 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 under its lease agreement to purchase
its 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
September 2006, DeVry sold its facility located in West Hills, California
for $36.0 million. In connection with the sale, DeVry recorded a pre-tax
gain of $19.9 million during the first quarter of fiscal year
2007. DeVry relocated its West Hills campus operations to a leased
facility in nearby Sherman Oaks, California. This gain is separately
classified in the Consolidated Statements of Income as a component of Total
Operating Costs and Expenses and is also related to the DeVry University
reportable segment.
These
transactions were executed as a part of DeVry’s ongoing real estate optimization
strategy, which involves evaluating DeVry’s current facilities and locations in
order to ensure the optimal mix of large campuses, small campuses and DeVry
University centers to meet the demand of each market that 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 such as Chamberlain College of Nursing at DeVry
University campuses. Future actions under this program could result
in accounting gains and/or losses depending upon real estate market conditions,
whether the facility is owned or leased and other market factors.
Student
Services and
Administrative Expense
This
expense category includes 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. All new student recruitment expenditures are charged to expense
as incurred.
Student
Services and Administrative Expense increased 10.4% to $102.9 million during
the
second quarter and grew by 8.7% to $194.6 million during the first six months
of
fiscal year 2008 as compared to the year-ago periods. The increase in
expenses primarily represents additional investments in advertising and
recruiting to drive and support future growth in new student
enrollments. Increased new student enrollments, as described above,
at DeVry University, Becker Professional Review and Ross University are believed
to be, in part, attributable to the higher level and effectiveness of this
spending. In addition, cost increases were incurred in information
technology and student services.
Partially
offsetting these increases in student recruiting expense was lower amortization
of finite-lived intangible assets in connection with acquisitions of businesses,
primarily related to Ross University, net of increased amortization of
finite-lived intangible assets resulting from the acquisition of Advanced
Academics on October 31, 2007. Amortization expense is included
entirely in the Student Services and Administrative Expense
category. In addition, expense attributed to stock-based awards
included in Student Services and Administrative Expense decreased during the
second quarter of fiscal year 2008 as DeVry’s annual stock option grant for
fiscal year 2008 occurred during the first quarter of the year. The
fiscal year 2007 annual stock option grants were awarded during the second
quarter of that fiscal year.
OPERATING
INCOME
DeVry
University
DeVry
University segment operating income increased by $21.4 million to $28.2 million
during the second quarter and increased 74.5% to $43.8 million during the first
six months of fiscal year 2008, as compared to the prior year
periods. Revenue increased and gross margin improved significantly
during the second quarter and first six months of fiscal year 2008, which was
partially offset by the loss from sale leaseback transactions. 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. In September 2006,
DeVry sold its facility located in West Hills, California. In
connection with the sale, DeVry recorded a pre-tax gain of $19.9 million
during the first quarter of fiscal 2007. The loss in the current year period
and
gain in the prior year period are included in operating income of the DeVry
University reportable segment. Excluding the impact of the asset
sales in both the current and prior year six month periods, DeVry University
fiscal year operating income of $47.5 million increased $42.3 million from
$5.2
million in the year-ago period.
Professional
and
Training
Professional
and Training segment operating income rose 68.8% to $5.4 million during the
second quarter and increased 37.4% to $13.7 million during the first six months
of fiscal year 2008 as compared to the year-ago periods. The increase
in operating income is the result of higher revenue and improved operating
leverage as discussed earlier.
Medical
and
Healthcare
Medical
and Healthcare segment operating income increased 9.0% to $15.3 million during
the second quarter and grew 9.3% to $26.9 million during the first six months
of
fiscal year 2008 as compared to the prior year periods. Increases in
student enrollments and tuition produced higher revenues and operating income
for the current year periods as compared to the prior year periods even as
faculty, staff and facilities were being added to accommodate future enrollment
growth. The increase was partially offset by an increase in the
allocation of corporate expenses to this business unit, including information
technology, human resources and legal, based upon current usage of such
services.
INTEREST
Interest
income increased 49.7%, to $2.9 million during the second quarter and rose
57.2%
to $5.3 million during the first six months of fiscal year 2008 as compared
to
the prior year periods. The increase was attributable to higher
levels of short-term investments with higher interest rates as compared to
the
prior year periods. The increase in short-term investments was
attributable to improved operating cash flow and proceeds received from the
sale
of assets, as discussed earlier.
Interest
expense decreased 94.3% to $0.1 million during the second quarter and dropped
91.8% to $0.3 million during the first six months of fiscal year 2008 as
compared to the year-ago periods. The decrease in interest expense
was attributable to lower average borrowings and lower amortization of deferred
financing costs. During July and October 2006, DeVry repaid the
remaining Senior Notes totaling $115 million. During January 2007,
DeVry amended its revolving credit agreement to, among other things, reduce
the
spread on applicable interest and fee rates.
INCOME
TAXES
Taxes
on
income were 28.0% of pretax income for the second quarter and 27.0% for the
first six months of fiscal year 2008, compared to 25.5% for the second quarter
and 31.2% for the first six months of the prior year. The higher
effective income tax rate in the second quarter of the current year is
attributable 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 quarter. The decrease in the effective tax rate for the
first six months of fiscal year 2008 is attributable to the gain on the sale
of
the West Hills facility in the first quarter of fiscal year 2007, which carried
a tax rate of 40.4%, partially offset by 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.
Earnings
of Ross University’s international operations are not subject to
U.S. federal or state taxes and also are exempt from income taxes in the
jurisdictions in which the schools operate. The medical and
veterinary schools have agreements with the governments that exempt them from
local taxation through the years 2043 and 2023, respectively. DeVry
intends to indefinitely reinvest Ross University 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 student and family educational loans; other financial aid from
various federal, state and provincial loan and grant programs; and student
and
family financial resources.
The
pattern of cash receipts during the year is somewhat seasonal. DeVry’s accounts
receivable peak immediately after bills are issued each semester. At DeVry
University, the principal undergraduate semesters begin in July, November and
March, but it also offers shorter eight-week session courses that begin six
times per year. These shorter sessions have the effect of somewhat
smoothing the cash flow peaks throughout the year as they represent a new
revenue billing and collection cycle within the longer semester
cycle.
At
December 31, 2007, total accounts receivable, net of related reserves, were
$76.8 million, compared to $60.4 million at December 31, 2006. The
increase is due to the impact on receivables from revenue growth across all
three business segments as compared to the year-ago period, a change in timing
of federal funds receivable and accounts receivable associated with the
acquisition of Advanced Academics on October 31, 2007. These
increases were partially offset by continued improvements in the timeliness
of
collections of receivables across all three of DeVry’s business
segments.
Financial
Aid
DeVry
is
highly dependent upon the timely receipt of federal financial aid funds. In
fiscal year 2007, approximately 70% of DeVry University undergraduate students’
tuition, book and fee revenues have been financed by federal financial
assistance programs. Keller Graduate School tuition revenues from student
participation in federal loan programs were approximately 65% of revenues.
Ross
University tuition revenues from student participation in federal loan programs
were approximately 80% of revenues at both the medical and veterinary
schools. Chamberlain tuition revenues from student participation in
federal financial aid programs were approximately 70% of revenues.
All
financial aid and assistance programs are subject to political and governmental
budgetary considerations. In the United States, the Higher Education Act (“HEA”)
guides the federal government’s support of postsecondary
education. The HEA was reauthorized in the fall of 1998 to redefine
and extend the numerous financial aid programs then in
existence. Typically, the HEA is amended every five years, but this
process has been delayed. During September 2006, the United States
Congress again extended the HEA, through June 2007, and in July 2007, the HEA
was extended again through October 2007. In October 2007, the United
States Congress extended the HEA through April 2008. As
reauthorization moves forward, there may be proposals for change that could
adversely affect the amount of financial aid available to students. There is
no
assurance that such federal funding will be continued at its present level
or in
its present form.
In
addition, government-funded financial assistance programs are governed by
extensive and complex regulations in both the United States and Canada. Like
any
other educational institution, DeVry’s administration of these programs is
periodically reviewed by various regulatory agencies. Any regulatory violation
could be the basis for disciplinary action, including initiation of a
suspension, limitation or termination proceeding. Previous Department of
Education and state regulatory agency program reviews have not resulted in
material findings or adjustments against DeVry.
Under
the
terms of DeVry’s participation in financial aid programs, certain cash received
from state governments and the U.S. Department of Education is maintained
in restricted bank accounts. DeVry receives these funds either after the
financial aid authorization and disbursement process for the benefit of the
student is completed, or just prior to that authorization. Once the
authorization and disbursement process for a particular student is completed,
the funds may be transferred to unrestricted accounts and become available
for
DeVry to use in current operations. This process generally occurs during the
academic term for which such funds were authorized. At December 31, 2007,
cash in the amount of $9.8 million was held in restricted bank accounts,
compared to $24.1 million at December 31, 2006. The
decrease 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 2008 was
$132.1 million, compared to $94.3 million in the prior year
period. Cash flow from operations increased due to higher net income
(excluding the gain on sale of assets). This increase was
partially offset by an increase in accounts receivable and by a lower source
of
cash compared to the prior year for changes in levels of prepaid expenses,
accounts payable and accrued expenses. Accounts receivable increased
due to a change in timing of federal funds receivable and accounts receivable
associated with the acquisition of Advanced Academics on October 31,
2007. 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.
Cash
from Investing
Activities
Capital
expenditures in the first six months of the current year were $28.0 million
compared to $16.2 million in the year ago period. The increase
in capital expenditures during the current period is primarily due to DeVry’s
exercise of its option to purchase its 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. For the remainder of fiscal 2008, management expects
the pace of capital expenditures to increase in order to support future
growth. Although there are no new large DeVry University campus sites
planned or under construction, there are further facility expansion plans at
the
Ross University medical and veterinary schools and Chamberlain College of
Nursing, and spending to support its real estate optimization
strategy. In addition, spending on information systems is likely to
increase for the remainder of fiscal
year
2008. Other new or expanded operating locations are expected to be in leased
facilities, thus requiring less capital spending.
During
the first six months of fiscal year 2008, DeVry executed sale leaseback
transactions which resulted in the receipt of total sales proceeds of $38.5
million. Included in the total sales proceeds was the receipt of
$11.2 million from the sale leaseback of the Alpharetta Facility, which DeVry
purchased for $11.2 million immediately prior to the leaseback.
Cash
outflows relating to the purchase of businesses was $27.5 million in the
first
six months of fiscal year 2008. On October 31, 2007, DeVry acquired
Advanced Academics Inc., a leading on-line provider of secondary education,
for
$27.5 million in cash.
During
the current year period, DeVry purchased $264.1 million of municipal auction
rate securities and investments in mutual funds all of which are classified
as
available-for-sale securities. During the current year period, DeVry
sold $121.8 million of such securities.
Cash
used in Financing
Activities
During
the first six months of fiscal year 2008, DeVry repurchased, on the open
market,
251,100 shares of its common stock at a total cost of approximately $10.2
million. All of the shares repurchased were related to the
share repurchase program announced on November 15, 2006. The total
remaining authorization under the repurchase program was $14.3 million as
of
December 31, 2007. The expiration date of the repurchase program is
December 31, 2008. Cash dividends paid during the first six months of
the current fiscal year were $3.6 million.
DeVry’s
Board of Directors declared a dividend on November 7, 2007 of $0.06 per share
to
common stockholders of record as of December 14, 2007. The dividend
was paid on January 4, 2008.
Other
Contractual
Arrangements
DeVry’s
only 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, 2007, there were no outstanding
borrowings nor any required payments under DeVry’s revolving credit
agreement.
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, put, call, hedge or non-exchange traded
contracts.
Included
in DeVry’s consolidated cash balances at December 31, 2007 was approximately
$90.5 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 general corporate purposes such as DeVry University
and/or Becker Professional Review.
Management
believes that current balances of unrestricted cash, cash generated from
operations and, if necessary, the revolving loan facility, will be sufficient
to
fund both DeVry’s current operations and current growth plans for the
foreseeable future unless future significant investment opportunities, similar
to the acquisition of Ross University, should arise.
RECENT
ACCOUNTING
PRONOUNCEMENTS
SFAS 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines and
establishes a framework for measuring fair value. In addition, SFAS
157 expands disclosures about fair value measurements. For DeVry,
SFAS 157 is effective beginning in fiscal year 2009. DeVry does not
expect that the adoption of SFAS 157 will have a material impact on its
consolidated financial statements.
SFAS 159
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Liabilities, Including an
Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
assets and liabilities at fair value, with changes in fair value recorded in
earnings. Under SFAS 159, the decision to measure items at fair value
is made at specified election dates on an instrument-by-instrument basis and
is
irrevocable. For DeVry, SFAS 159 is effective beginning in fiscal
year 2009. DeVry is currently evaluating the impact of SFAS
159.
SFAS 141R
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141R, “Business Combinations” (“SFAS 141R”). SFAS 141R 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 141R
also retains the guidance in SFAS 141 for identifying and recognizing intangible
assets separately from goodwill. The new accounting requirements of
SFAS 141R 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 141R is effective beginning in fiscal year
2010 and will impact the accounting for any acquisitions DeVry may complete
beginning in that fiscal year.
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.
ITEM 3 —
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DeVry
is
not dependent upon the price levels, nor affected by fluctuations in pricing,
of
any particular commodity or group of commodities. However, more than 50% of
DeVry’s costs are in the form of employee wages and benefits. Changes in
employment market conditions or escalations in employee benefit costs could
cause DeVry to experience cost increases at levels beyond what it has
historically experienced.
The
financial position and results of operations of Ross University’s Caribbean
operations are measured using the U.S. dollar as the functional currency.
Substantially all Ross University financial transactions are denominated in
the
U.S. dollar.
The
financial position and results of operations of DeVry’s Canadian educational
programs are measured using the Canadian dollar as the functional currency.
The
Canadian operations have not entered into any material long-term contracts
to
purchase or sell goods and services, other than the lease agreement on a
teaching facility. DeVry does not have any foreign exchange contracts or
derivative financial instruments designed to mitigate changes in the value
of
the Canadian dollar. Because Canada-based assets constitute approximately 3.0%
of DeVry’s overall assets, and its Canadian liabilities constitute a similarly
small percentage of overall liabilities, changes in the value of Canada’s
currency at rates experienced during the past several years are unlikely to
have
a material effect on DeVry’s results of operations or financial position. Based
upon the current value of the net assets in the Canadian operations, a change
of
$0.01 in the value of the Canadian dollar relative to the U.S. dollar would
result in a translation adjustment of less than $100,000.
DeVry’s
customers are principally individual students enrolled in its various
educational programs. Accordingly, concentration of accounts receivable credit
risk is small relative to total revenues or accounts receivable.
DeVry’s
cash is held in accounts at various large, financially secure depository
institutions. Although the amount on deposit at a given institution typically
will exceed amounts subject to guarantee, DeVry has not experienced any deposit
losses to date, nor does management expect to incur such losses in the
future.
The
interest rate on DeVry’s debt is based upon Eurodollar interest rates for
periods typically ranging from one to three months. Based upon borrowings of
$50.0 million, a 1.0% increase in short-term interest rates would result in
approximately
$0.5 million
of additional annual interest expense. At December 31, 2007, DeVry had no
outstanding borrowings. However, future investment opportunities and
cash flow generated from operations may affect the level of outstanding
borrowings and the effect of a change in interest rates.
ITEM 4 —
CONTROLS
AND PROCEDURES
Principal
Executive and
Principal Financial Officer Certificates
The
required compliance certificates signed by the DeVry’s CEO and CFO are included
as Exhibits 31 and 32 of this Quarterly Report on
Form 10-Q.
Disclosure
Controls and
Procedures
Disclosure
controls and procedures are designed to help ensure that all the information
required to be disclosed in DeVry’s reports filed with the SEC is recorded,
processed, summarized and reported within the time periods specified by the
applicable rules.
Evaluations
required by Rule 13a — 15 of the Securities Exchange Act of 1934 of
the effectiveness of DeVry’s disclosure controls and procedures as of the end of
the period covered by this Report have been carried out under the supervision
and with the participation of its management, including its Chief Executive
Officer and its Chief Financial Officer. Based upon these evaluations, the
Chief
Executive Officer and Chief Financial Officer have concluded that DeVry’s
disclosure controls and procedures were effective as required, and have attested
to this in Exhibit 31 of this Report.
Changes
in Internal Control
Over Financial Reporting
There
were no changes in internal control over financial reporting that occurred
during the second quarter of fiscal year 2008 that materially affected, or
are
reasonably likely to materially affect, DeVry’s internal control over financial
reporting.
PART II
–
Other
Information
ITEM
1 – LEGAL
PROCEEDINGS
DeVry
is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
associated with financial assistance programs and other claims arising in the
normal conduct of its business. The following is a description of pending
litigation that may be considered other than ordinary and routine litigation
that is incidental to the business.
On
August
25, 2005, DeVry filed a complaint in the Superior Court of California, County
of
Alameda, against Sierra Bay Contractors, Inc., the general contractor
responsible for the construction of a dormitory facility on the DeVry
University, Fremont, California campus. DeVry's complaint sought monetary
damages arising out of Sierra Bay's failure to keep the project free from liens
filed by subcontractors, and indemnification against subcontractor claims.
Sierra Bay filed a counterclaim in December 2005, asserting that DeVry owed
approximately $3 million for work allegedly performed on the project.
DeVry filed additional complaints against the architect, the project manager
and
an engineering firm, and the Court subsequently consolidated all claims relating
to the project, including those of the subcontractors, into the principal case
filed by DeVry against Sierra Bay. All claims relating to this matter were
settled in December 2007.
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 denied all of Daghlian’s allegations and removed
the action to the U.S. District Court for the Central District of
California. On June 11, 2007, the District Court issued an Order
certifying a class under the UCL, comprised of students who enrolled and paid
tuition at a California DeVry school in the four years prior to the date when
the suit was filed. In two Orders dated October 9, 2007, and December 31,
2007, the District Court entered judgment dismissing all
of plaintiffs ’ class and individual claims, dismissed the case,
and awarded DeVry its costs of suit. On January 8, 2008, plaintiffs
filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth
Circuit. DeVry intends to vigorously defend itself with respect to
this claim.
DeVry
is
also subject from time to time to claims, administrative proceedings, regulatory
reviews and lawsuits incidental to its business. Although the ultimate outcome
of pending 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.
ITEM 1A —
RISK
FACTORS
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, 2007, which could materially affect
DeVry’s business, financial condition or future results, should be carefully
considered. The risks described in DeVry’s Form 10-K are not the only
risks facing the company. Additional risks and uncertainties not currently
known to DeVry or that management currently deems to be immaterial also may
materially adversely affect its business, financial condition and/or operating
results.
ITEM 2 —
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
November 6, 2007, DeVry sold 3,455 shares of its Common Stock to two employees
of Advanced Academics Inc., for a total of $179,955 in cash, representing a
10%
discount from the then-current market value of the stock. No
underwriting discounts or commissions were paid in connection with this sale.
These sales, which were made pursuant to an agreement entered into in connection
with DeVry’s acquisition of Advanced Academics Inc., and were made without
registration under the Securities Act of 1933 (the "Act") in reliance upon
the
exemptions contained in Sections 3(b) and 4(2) of the Act and the regulations
promulgated there under.
Issuer
Purchases of Equity
Securities
|
|
Total
Number of
|
|
Average
Price Paid
|
|
Total
Number of Shares Purchased as part of Publicly Announced
Plans
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
|
Period
|
|
Shares
Purchased
|
|
per
Share
|
|
or
Programs1
|
|
Programs1
|
October
2007
|
|
34,500
|
|
$41.27
|
|
34,500
|
|
$17,639,706
|
November
2007
|
|
31,500
|
|
$54.02
|
|
31,500
|
|
15,938,067
|
December
2007
|
|
30,000
|
|
$55.27
|
|
30,000
|
|
14,279,892
|
Total
|
|
96,000
|
|
|
|
96,000
|
|
$14,279,892
|
1On
November 15, 2006, the Board of Directors approved a stock repurchase program,
pursuant to which up to $35 million of DeVry common stock may be repurchased
within the next two years. This program was announced in a press
release filed as an exhibit to DeVry’s Current Report on Form 8-K, which was
filed on November 15, 2006. The total remaining authorization under
the repurchase program was $14,279,892 as of December 31, 2007. The
expiration date of the repurchase program is December 31, 2008.
Other
Purchases of Equity
Securities
|
|
Total
Number of
|
|
Average
Price Paid
|
|
Total
Number of Shares Purchased as part of Publicly Announced
Plans
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
|
Period
|
|
Shares Purchased2
|
|
per
Share
|
|
or
Programs
|
|
Programs
|
October
2007
|
|
9,285
|
|
$53.18
|
|
N/A
|
|
N/A
|
November
2007
|
|
1,824
|
|
$51.14
|
|
N/A
|
|
N/A
|
December
2007
|
|
126
|
|
$55.35
|
|
N/A
|
|
N/A
|
Total
|
|
11,235
|
|
$52.88
|
|
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.
ITEM
4 – SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
(a)
|
DeVry
held its Annual Meeting of Stockholders on November 7, 2007.
|
(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:
|
An
amendment of Article Seventh of DeVry’s Restated Certificate of Incorporation to
change the maximum number of directors that DeVry may have was
approved.
Affirmative
Votes
|
Votes
Against
|
Abstain
|
64,572,133
|
2,998,114
|
63,206
|
Five
nominees were elected as Class I Directors to serve until the 2010 Annual
Meeting of Stockholders or until their successors are elected and
qualified.
Director
|
Affirmative
Votes
|
Votes
Withheld
|
Connie
R. Curran
|
67,310,814
|
322,640
|
Daniel
Hamburger
|
67,243,694
|
389,760
|
Lyle
Logan
|
67,086,977
|
546,477
|
Harold
T. Shapiro
|
67,342,756
|
290,698
|
Ronald
L. Taylor
|
65,127,218
|
2,506,236
|
The
selection of PricewaterhouseCoopers LLP as the independent registered public
accounting firm for DeVry for fiscal year 2008 was ratified.
Affirmative
Votes
|
Votes
Against
|
Abstain
|
66,746,701
|
877,242
|
9,510
|
ITEM 6 —
EXHIBITS
Exhibit
31
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.
|
Exhibit
32
|
Certification
Pursuant to Title 18 of the United States Code Section
1350
|
SIGNATURES
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 7,
2008
By /s/ Daniel
M.
Hamburger
Daniel
M.
Hamburger
Chief
Executive
Officer
Date:
February 7,
2008 By /s/ Richard
M.
Gunst
Richard
M.
Gunst
Senior
Vice President
and Chief Financial Officer