Adtalem Education (US:ATGE)2024-01-29 16:00Part I Financial Statements Adtalem's unaudited consolidated financial statements for Q4 2023 detail an 8.4% revenue increase, higher net income, and decreased total assets Consolidated Financial Statements The consolidated financial statements highlight revenue growth, increased net income, a decrease in total assets, and improved cash flow from operations Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2023 | Six Months Ended Dec 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $393,242 | $362,834 | $762,087 | $717,103 | | Operating Income | $58,612 | $45,550 | $86,806 | $69,184 | | Net Income | $39,891 | $24,653 | $50,537 | $25,245 | | Diluted EPS | $0.98 | $0.53 | $1.22 | $0.55 | Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $182,894 | $273,689 | | Total Assets | $2,700,925 | $2,810,541 | | Long-term debt | $696,373 | $695,077 | | Total Liabilities | $1,331,526 | $1,353,205 | | Total Shareholders' Equity | $1,369,399 | $1,457,336 | Consolidated Statements of Cash Flows Highlights (Six Months Ended Dec 31, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $92,584 | $41,415 | | Net cash used in investing activities | ($30,200) | ($12,922) | | Net cash used in financing activities | ($151,382) | ($166,420) | Notes to Consolidated Financial Statements Notes to financial statements detail accounting policies, a revenue recognition revision, debt structure, share repurchases, and a $28.5 million lawsuit settlement - Adtalem revised prior period financial statements to correct an error in revenue recognition related to certain scholarships in its Medical and Veterinary segment, now treated as a material right under ASC 606, resulting in revenue deferral to future periods31 - In a lawsuit against Walden University alleging deceptive practices related to its Doctor of Business Administration (DBA) program, the parties agreed to a $28.5 million payment to resolve the issues, for which Adtalem recorded a loss contingency accrual167 Long-Term Debt Composition (in thousands) | Debt Instrument | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Senior Secured Notes due 2028 | $404,950 | $404,950 | | Term Loan B | $303,333 | $303,333 | | Total Principal | $708,283 | $708,283 | | Unamortized debt discount and issuance costs | ($11,910) | ($13,206) | | Long-term debt, net | $696,373 | $695,077 | - Adtalem repurchased 3,509,133 shares for $161.2 million in the six months ended Dec 31, 2023, completing its 13th share repurchase program in January 2024 and authorizing a new $300 million program through January 2027134136 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q2 FY2024 financial performance, highlighting an 8.4% revenue increase, segment growth, regulatory impacts, and liquidity management including share repurchases Second Quarter Highlights Adtalem reported strong Q2 FY2024 results with an 8.4% revenue increase, significant net income growth, positive enrollment trends, and continued share repurchases - Revenue increased by $30.4 million, or 8.4%, in Q2 FY2024 compared to the prior year, driven by growth at Chamberlain, Walden, and Medical and Veterinary segments183 Q2 FY2024 Financial Performance vs. Q2 FY2023 (in millions) | Metric | Q2 FY2024 | Q2 FY2023 | Change | | :--- | :--- | :--- | :--- | | Net Income | $39.9M | $24.7M | +$15.2M | | Diluted EPS | $0.98 | $0.53 | +$0.45 | | Adjusted Net Income | $50.3M | $53.8M | -$3.5M | | Adjusted Diluted EPS | $1.23 | $1.17 | +$0.06 | - Total student enrollment showed positive momentum, with Chamberlain increasing 6.6% for the November 2023 session and Walden increasing 7.9% as of December 31, 2023, compared to the prior year185 Results of Operations Q2 FY2024 consolidated revenue grew 8.4% driven by enrollment, while operating income increased 28.7% but adjusted operating income decreased 3.0% due to higher costs Revenue Growth by Segment (Q2 FY2024 vs Q2 FY2023, in thousands) | Segment | Q2 FY2024 Revenue | Q2 FY2023 Revenue | Growth $ | Growth % | | :--- | :--- | :--- | :--- | :--- | | Chamberlain | $153,553 | $141,396 | $12,157 | 8.6% | | Walden | $146,808 | $131,940 | $14,868 | 11.3% | | Medical and Veterinary | $92,881 | $89,498 | $3,383 | 3.8% | | Consolidated | $393,242 | $362,834 | $30,408 | 8.4% | - Consolidated operating income increased by 28.7% to $58.6 million in Q2 FY2024, primarily due to higher revenue and significant decreases in business integration expense (down $7.9 million) and intangible amortization expense (down $6.8 million)217219 - Despite higher GAAP operating income, consolidated adjusted operating income fell 3.0% to $75.6 million in Q2 FY2024, reflecting increased operational costs to support growth, higher marketing spend, and increased incentive compensation219221 Liquidity and Capital Resources Adtalem's liquidity, primarily from tuition, saw increased operating cash flow, with major uses including share repurchases and debt prepayments, supported by a revolving credit facility - Net cash provided by operating activities for the first six months of FY2024 was $83.1 million, a substantial increase from $42.3 million in the same period last year, driven by higher income and favorable changes in working capital255 - Significant financing activities in the first six months of FY2024 included the repurchase of $160.5 million of common stock, contrasting with $150.9 million in debt repayments in the prior-year period260 - Subsequent to the quarter end, on January 26, 2024, the company made a $50.0 million prepayment on its Term Loan B, reducing the principal balance to $253.3 million263266 Regulatory Environment Adtalem operates in a highly regulated environment, facing a lowered ED financial responsibility score requiring a $157.9 million letter of credit, while monitoring new Gainful Employment rules - Adtalem was notified by the U.S. Department of Education (ED) that its FY2022 financial responsibility composite score was 0.2, below the required 1.5, an expected outcome of the Walden acquisition240 - As a result of the low composite score, Adtalem's institutions will operate under provisional certification with heightened cash monitoring and were required to post a letter of credit for $157.9 million, completed on November 1, 2023240 - All of Adtalem's proprietary institutions remain in compliance with the 90/10 Rule for fiscal years 2023 and 2022, with the consolidated percentage of revenue from federal financial aid at 75% for FY2023249251 Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposure were reported for the first six months of fiscal year 2024 compared to the prior annual report - There were no material changes to Adtalem's market risk exposure since its last annual report for the fiscal year ended June 30, 2023283 Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that Adtalem's disclosure controls and procedures were effective as of the end of the period, December 31, 2023284 - No material changes to the company's internal control over financial reporting occurred during the second quarter of fiscal year 2024285 Part II Legal Proceedings Legal proceedings refer to Note 17, highlighting a $28.5 million settlement agreement in a class action lawsuit against Walden University - For information regarding legal proceedings, the report directs readers to Note 17 of the Consolidated Financial Statements286 - A key legal development is a $28.5 million settlement agreement reached in a class action lawsuit against Walden University, for which a loss contingency has been accrued167 Risk Factors A new risk factor addresses the potential impact of short-seller reports, including a recent one that adversely affected share price and could lead to legal or regulatory actions - A new risk factor was added regarding the company's potential vulnerability to short-selling strategies, which can drive down the stock price and create negative market momentum287288 - The company specifically mentions a short-seller report published on January 30, 2024, which adversely affected its share price and could lead to costly legal or regulatory actions and distract management289 Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity, with 1,350,735 shares repurchased at an average price of $51.31 during the quarter Issuer Purchases of Equity Securities (Q2 FY2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | 711,096 | $44.60 | | Nov 2023 | 259,045 | $56.39 | | Dec 2023 | 380,594 | $60.38 | | Total | 1,350,735 | $51.31 | Other Information On January 26, 2024, Adtalem amended its Credit Agreement, reducing the Term Loan B interest rate margin and making a $50.0 million prepayment - On January 26, 2024, Adtalem amended its Credit Agreement, resulting in a 0.50% reduction in the interest rate margin for its Term Loan B borrowings295296 - In addition to the repricing, Adtalem repaid $50.0 million of its Term Loan B, reducing the outstanding principal to $253.3 million297