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Section 1: 10-Q (FORM 10-Q)

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)    
þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 
     
  For the quarterly period ended: December 31, 2017  
     
  OR  
     
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 
     
  For the transition period from _____ to _____  
     
  Commission file number: 1-13988  

 

Adtalem Global Education Inc.

(Exact name of registrant as specified in its charter)

 

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

 

Registrant’s telephone number; including area code:

(630) 515-7700

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
  Emerging growth company ¨

 

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

 

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

 

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

January 25, 2018 — 60,277,000 shares of Common Stock, $0.01 par value 

 

 

 

 

 

ADTALEM GLOBAL EDUCATION INC.

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017

 

TABLE OF CONTENTS

 

 

    Page #
  PART I – FINANCIAL INFORMATION  
Item 1 — Financial Statements (Unaudited)  
  Consolidated Balance Sheets 3
  Consolidated Statements of Income (Loss) 4
  Consolidated Statements of Comprehensive Income (Loss) 5
  Consolidated Statements of Cash Flows 6
  Notes to Consolidated Financial Statements 7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 3 — Quantitative and Qualitative Disclosures About Market Risk 59
Item 4 — Controls and Procedures 59
     
  PART II – OTHER INFORMATION  
Item 1 — Legal Proceedings 60
Item 1A — Risk Factors 60
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds 61
Item 6 — Exhibits 62
     
Signatures   63

 

 2 

 

 

ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    December 31,     June 30,     December 31,  
    2017     2017     2016  
                   
    (in thousands, except share and par value amounts)
ASSETS:                        
Current Assets:                        
Cash and Cash Equivalents   $ 212,239     $ 240,426     $ 197,860  
Marketable Securities and Investments     4,268       4,013       3,844  
Restricted Cash     566       4,759       5,622  
Accounts Receivable, Net     148,638       161,405       127,941  
Prepaid Expenses and Other     75,972       36,988       54,964  
Current Assets Held for Sale     28,126       23,616       37,202  
Total Current Assets     469,809       471,207       427,433  
Land, Building and Equipment:                        
Land     46,918       48,947       48,595  
Building     425,659       443,914       441,271  
Equipment     365,394       352,622       361,608  
Construction in Progress     26,520       22,240       15,380  
      864,491       867,723       866,854  
Accumulated Depreciation     (446,152 )     (416,801 )     (406,295 )
Land, Building and Equipment Held for Sale, Net     -       37,904       39,967  
Land, Building and Equipment, Net     418,339       488,826       500,526  
Other Assets:                        
Deferred Income Taxes, Net     31,090       33,772       26,618  
Intangible Assets, Net     407,000       412,158       419,883  
Goodwill     832,943       829,086       832,642  
Other Assets, Net     38,091       40,696       56,227  
Other Assets Held for Sale     13,450       38,290       38,104  
Total Other Assets     1,322,574       1,354,002       1,373,474  
TOTAL ASSETS   $ 2,210,722     $ 2,314,035     $ 2,301,433  
                         
LIABILITIES:                        
Current Liabilities:                        
Accounts Payable   $ 37,818     $ 46,417     $ 32,119  
Accrued Salaries, Wages and Benefits     63,417       81,661       64,680  
Accrued Liabilities     77,891       90,306       94,938  
Deferred Revenue     81,224       115,770       88,092  
Current Liabilities Held for Sale     36,469       43,173       45,727  
Total Current Liabilities     296,819       377,327       325,556  
Other Liabilities:                        
Revolving Loan     165,000       125,000       225,000  
Deferred Income Taxes, Net     31,745       34,712       32,452  
Deferred Rent and Other     101,232       101,672       106,792  
Income Taxes Payable     88,562       -       -  
Total Other Liabilities     386,539       261,384       364,244  
TOTAL LIABILITIES     683,358       638,711       689,800  
COMMITMENTS AND CONTINGENCIES (NOTE 14)                        
NONCONTROLLING INTEREST     7,405       6,285       6,720  
SHAREHOLDERS’ EQUITY:                        
Common Stock, $0.01 Par Value, 200,000,000 Shares Authorized; 60,295,000, 62,371,000 and 62,776,000 Shares Outstanding at December 31, 2017, June 30, 2017 and December 31, 2016, respectively     787       781       775  
Additional Paid-in Capital     433,855       415,912       395,155  
Retained Earnings     1,812,746       1,881,397       1,797,634  
Accumulated Other Comprehensive Loss     (60,745 )     (59,119 )     (50,828 )
Treasury Stock, at Cost, 18,451,000, 15,691,000 and 14,762,000 Shares at December 31, 2017, June 30, 2017 and December 31, 2016, respectively     (666,684 )     (569,932 )     (537,823 )
TOTAL SHAREHOLDERS’ EQUITY     1,519,959       1,669,039       1,604,913  
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY   $ 2,210,722     $ 2,314,035     $ 2,301,433  

 

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

 

 3 

 

  

ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2017   2016   2017   2016 
                 
   (in thousands, except per share amounts)
REVENUE:                    
Tuition  $302,184   $301,263   $582,207   $588,161 
Other Educational   35,060    32,695    80,315    74,824 
Total Revenue   337,244    333,958    662,522    662,985 
OPERATING COST AND EXPENSE:                    
Cost of Educational Services   178,970    179,148    374,911    366,634 
Student Services and Administrative Expense   100,336    101,167    201,544    204,632 
Restructuring Expense   2,554    2,963    4,941    6,313 
Regulatory Settlements   -    52,150    -    52,150 
Total Operating Cost and Expense   281,860    335,428    581,396    629,729 
Operating Income (Loss) from Continuing Operations   55,384    (1,470)   81,126    33,256 
INTEREST:                    
Interest Income   1,365    988    3,483    2,032 
Interest Expense   (2,481)   (2,300)   (4,397)   (4,415)
Net Interest Expense   (1,116)   (1,312)   (914)   (2,383)
Income (Loss) from Continuing Operations Before Income Taxes   54,268    (2,782)   80,212    30,873 
Income Tax (Provision) Benefit   (109,636)   10,082    (113,232)   2,363 
Equity Method Investment Income (Loss)   6    -    (38)   - 
(Loss) Income from Continuing Operations   (55,362)   7,300    (33,058)   33,236 
DISCONTINUED OPERATIONS (NOTE 2):                    
(Loss) Income from Discontinued Operations Before Income Taxes   (43,873)   6,321    (55,179)   4,716 
Income Tax Benefit   18,453    1,134    20,371    1,952 
(Loss) Income from Discontinued Operations   (25,420)   7,455    (34,808)   6,668 
NET (LOSS) INCOME   (80,782)   14,755    (67,866)   39,904 
Net Income Attributable to Noncontrolling Interest   (374)   (342)   (505)   (339)
NET (LOSS) INCOME ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION  $(81,156)  $14,413   $(68,371)  $39,565 
                     
AMOUNTS ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION:                    
(Loss) Income from Continuing Operations  $(55,736)  $6,958   $(33,563)  $32,897 
(Loss) Income from Discontinued Operations   (25,420)   7,455    (34,808)   6,668 
NET (LOSS) INCOME ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION  $(81,156)  $14,413   $(68,371)  $39,565 
                     
(LOSS) EARNINGS PER COMMON SHARE
ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION SHAREHOLDERS:
                    
Basic:                    
Continuing Operations  $(0.91)  $0.11   $(0.54)  $0.52 
Discontinued Operations  $(0.42)  $0.12   $(0.56)  $0.11 
Total  $(1.33)  $0.23   $(1.10)  $0.62 
Diluted:                    
Continuing Operations  $(0.91)  $0.11   $(0.54)  $0.52 
Discontinued Operations  $(0.42)  $0.12   $(0.56)  $0.10 
Total  $(1.33)  $0.23   $(1.10)  $0.62 
                     
Cash Dividends Declared per Common Share  $-   $0.18   $-   $0.18 

 

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

 

 4 

 

 

ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2017   2016   2017   2016 
                 
    (in thousands)  
NET (LOSS) INCOME  $(80,782)  $14,755   $(67,866)  $39,904 
OTHER COMPREHENSIVE INCOME, NET OF TAX                    
Currency Translation Loss   (25,028)   (1,632)   (1,699)   (8,462)
Change in Fair Value of Available-For-Sale Securities   3    27    73    101 
COMPREHENSIVE (LOSS) INCOME   (105,807)   13,150    (69,492)   31,543 
COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST   147    (313)   (467)   (166)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ADTALEM GLOBAL EDUCATION  $(105,660)  $12,837   $(69,959)  $31,377 

 

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

 

 5 

 

 

ADTALEM GLOBAL EDUCATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended
December 31,
 
   2017   2016 
         
   (in thousands) 
CASH FLOW FROM OPERATING ACTIVITIES:          
Net (Loss) Income  $(67,866)  $39,904 
Loss (Income) from Discontinued Operations   34,808    (6,668)
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities:          
Stock-Based Compensation Expense   8,780    9,333 
Depreciation   24,865    26,043 
Amortization   5,311    6,047 
Provision for Refunds and Uncollectible Accounts   20,305    20,111 
Deferred Income Taxes   1,258    10,730 
Loss on Disposals, Accelerated Depreciation and Adjustments to Land, Building and Equipment   30,201    3,229 
Changes in Assets and Liabilities:          
Accounts Receivable   (7,150)   (9,094)
Prepaid Expenses and Other   (30,810)   (34,805)
Accounts Payable   (2,569)   (8,200)
Accrued Salaries, Wages, Benefits and Liabilities   (28,204)   (993)
Deferred Revenue   (34,570)   (19,255)
Income Taxes Payable, Long-Term   88,562    - 
Net Cash Provided by Operating Activities-Continuing Operations   42,921    36,382 
Net Cash Provided by Operating Activities-Discontinued Operations   6,692    5,096 
NET CASH PROVIDED BY OPERATING ACTIVITIES   49,613    41,478 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Capital Expenditures   (32,594)   (18,771)
Payment for Purchase of Businesses, Net of Cash Acquired   (972)   (330,567)
Marketable Securities Purchased   (136)   (73)
Net Cash Used in Investing Activities-Continuing Operations   (33,702)   (349,411)
Net Cash Provided by (Used in) Investing Activities-Discontinued Operations   8,575    (1,635)
NET CASH USED IN INVESTING ACTIVITIES   (25,127)   (351,046)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from Exercise of Stock Options   9,582    13,784 
Employee Taxes Paid on Withholding Shares   (3,806)   (2,650)
Proceeds from Stock Issued Under Colleague Stock Purchase Plan   391    439 
Repurchase of Common Stock for Treasury   (93,178)   (16,381)
Cash Dividends Paid   -    (11,412)
Payments of Seller Financed Obligations   (7,941)   (3,518)
Borrowings Under Revolving Credit Facility   201,000    405,000 
Repayments Under Revolving Credit Facility   (161,000)   (180,000)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (54,952)   205,262 
Effects of Exchange Rate Differences   (1,043)   (4)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (31,509)   (104,310)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period   251,096    315,347 
Cash, Cash Equivalents and Restricted Cash at End of Period   219,587    211,037 
Less: Cash, Cash Equivalents and Restricted Cash of Discontinued Operations at End of Period   6,782    7,555 
Cash, Cash Equivalents and Restricted Cash at End of Period  $212,805   $203,482 
Non-cash Investing and Financing Activity:          
Increase in Redemption Value of Noncontrolling Interest Put Option  $615   $1,269 

 

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

 

 6 

 

 

ADTALEM GLOBAL EDUCATION INC.

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1: INTERIM FINANCIAL STATEMENTS

 

The interim Consolidated Financial Statements include accounts of Adtalem Global Education Inc. (“Adtalem”) and its wholly-owned and majority-owned subsidiaries. Adtalem’s wholly-owned subsidiaries include:

 

·Chamberlain University (“Chamberlain”)
·American University of the Caribbean School of Medicine (“AUC”)
·Ross University School of Medicine (“RUSM”)
·Ross University School of Veterinary Medicine (“RUSVM”)
·Becker Professional Education (“Becker”)
·Association of Certified Anti-Money Laundering Specialists (“ACAMS”)
·Carrington College (“Carrington”)
·DeVry University, presented as discontinued operations (see “Note 2: Discontinued Operations and Assets Held for Sale”)

 

In addition, Adtalem maintains a 97.9% ownership interest in Adtalem Education of Brazil (“Adtalem Brazil”) and a 34% equity interest in Neev Knowledge Management Private Limited (“Edupristine”).

 

These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition and results of operations of Adtalem.

 

The interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in Adtalem’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 and Adtalem’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, each as filed with the Securities and Exchange Commission (“SEC”).

 

The results of operations for the three and six months ended December 31, 2017 are not necessarily indicative of results to be expected for the entire fiscal year.

 

NOTE 2: DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

 

On December 4, 2017, Adtalem announced the signing of a definitive agreement to divest DeVry University, pursuant to, and subject to the terms and conditions of a stock purchase agreement with Cogswell Education, LLC, with an expected closing date occurring in early fiscal year 2019. The decision to divest was made based on changes in strategic direction for the Adtalem portfolio of institutions. As the potential sale represents a strategic shift that will have a major effect on Adtalem’s operations and financial results, Devry University is now presented in Adtalem’s financial reporting as a discontinued operation. All periods presented disclose the assets and liabilities as held for sale, and operations and cash flows of DeVry University, which was previously a part of the U.S. Traditional Postsecondary reporting segment, as discontinued operations.

 

In the second quarter of fiscal year 2018, asset impairment charges of $47.2 million were recorded to write-down intangible assets, goodwill, and building and equipment to zero based on the fair value market value of the DeVry University operations. During the second quarter of fiscal year 2018, management also completed the sale of the DeVry University and Carrington co-located campus in Pomona, California, for $11.1 million, which was previously recorded on the Consolidated Balance Sheet as held for sale for $11.3 million, resulting in a $0.2 million realized loss on sale of assets. The assets which were previously recorded as held for sale, the unrealized loss on assets held for sale and the loss on sale of assets associated with the Pomona, California, campus have all been classified within discontinued operations.

  

 7 

 

 

The following is a summary of balance sheet information of assets and liabilities reported as discontinued operations (in thousands).

 

   December 31,   June 30,   December 31, 
   2017   2017   2016 
ASSETS:               
Current Assets:               
Cash and Cash Equivalents  $902   $1,553   $2,085 
Restricted Cash   5,880    4,358    5,470 
Accounts Receivable, Net   11,206    11,957    22,296 
Prepaid Expenses and Other   10,138    5,748    7,351 
Total Current Assets Held for Sale   28,126    23,616    37,202 
Land, Building and Equipment Held for Sale, Net   -    37,904    39,967 
Other Assets:               
Intangible Assets   -    1,645    1,645 
Goodwill   -    22,196    22,196 
Perkins Program Fund, Net   13,450    13,450    13,450 
Other Assets, Net   -    999    813 
Total Other Assets Held for Sale   13,450    38,290    38,104 
Total Assets Held for Sale  $41,576   $99,810   $115,273 
                
LIABILITIES:               
Current Liabilities:               
Accounts Payable  $14,713   $17,868   $15,770 
Accrued Salaries, Wages and Benefits   10,223    14,580    14,184 
Accrued Liabilities   7,287    8,937    7,216 
Deferred Revenue   4,246    1,788    8,557 
Total Current Liabilities Held for Sale   36,469    43,173    45,727 
Total Liabilities Held for Sale  $36,469   $43,173   $45,727 

 

The following is a summary of income statement information of operations reported as discontinued operations (in thousands).

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2017   2016   2017   2016 
REVENUE:            
Tuition  $86,172   $118,000   $172,840   $230,130 
Other Educational   4,471    4,390    13,550    13,127 
Total Revenue   90,643    122,390    186,390    243,257 
OPERATING COST AND EXPENSE:                    
Cost of Educational Services   48,221    60,639    100,397    123,826 
Student Services and Administrative Expense   36,624    44,484    85,896    102,084 
Restructuring Expense   2,209    2,087    7,814    3,785 
Asset Impairment Charge - Intangible and Goodwill   23,841    -    23,841    - 
Asset Impairment Charge - Building and Equipment   23,391    -    23,391    - 
Loss on Sale of Assets   230    -    230    - 
Regulatory Settlements   -    4,102    -    4,102 
Loss on Assets Held for Sale   -    4,764    -    4,764 
Total Operating Cost and Expense   134,516    116,076    241,569    238,561 
Operating (Loss) Income from Discontinued Operations   (43,873)   6,314    (55,179)   4,696 
Interest Income   -    7    -    20 
(Loss) Income from Discontinued Operations Before                    
Income Taxes   (43,873)   6,321    (55,179)   4,716 
Income Tax Benefit   18,453    1,134    20,371    1,952 
(Loss) Income from Discontinued Operations  $(25,420)  $7,455   $(34,808)  $6,668 

 

 8 

 

 

NOTE 3: REGULATORY SETTLEMENTS

 

In the second quarter of fiscal year 2017, Adtalem, DeVry University Inc., and DeVry/New York Inc. (collectively, the “Adtalem Parties”) and the Federal Trade Commission (“FTC”) agreed to a Stipulation as to Entry of an Order for Permanent Injunction and Monetary Judgment (the “Agreement”) resolving litigation brought by the FTC regarding DeVry University’s use of employment statistics in former advertising. Under the terms of the Agreement, the Adtalem Parties agreed to pay $49.4 million to be distributed at the sole discretion of the FTC, to forgive $30.4 million of institutional loans issued before September 30, 2015, and to forgive outstanding DeVry University accounts receivable balances by $20.2 million for former students. In addition, the Adtalem Parties agreed that Adtalem institutions marketing to U.S. consumers will maintain specific substantiation to support any future advertising regarding graduate outcomes and educational benefits, and will implement training and other agreed-upon compliance measures. Adtalem chose to settle the FTC litigation after filing an answer denying all allegations of wrongdoing.

 

In the second quarter of fiscal year 2017, Adtalem also recorded charges related to the resolution of an inquiry made by the Office of the Attorney General of the State of New York (“NYAG”) to the Adtalem Parties regarding DeVry University’s use of employment and salary statistics in former advertising. The Adtalem Parties chose to resolve the NYAG inquiry by entering into an Assurance of Discontinuance (the “Assurance”) with the NYAG on January 27, 2017, without admitting or denying the allegations therein. Pursuant to the Assurance, the Adtalem Parties agreed to pay $2.25 million for consumer restitution and $0.5 million in penalties, fees and costs. In addition, the Adtalem Parties agreed that Adtalem institutions marketing to New York consumers will maintain specific substantiation and present certain statistics as prescribed to support any future advertising regarding graduate outcomes and educational benefits, and will implement other agreed-upon compliance measures.

 

Student services and access to federal student loans are not impacted by the Agreement or the Assurance and at no time has the academic quality of a DeVry University education been questioned.

 

The regulatory settlements expense of $56.3 million recorded during the first six months of fiscal year 2017 consists of the $49.4 million cash payment to the FTC, the $4.1 million unreserved and expensed institutional loans and the $2.75 million cash payment to the NYAG. Of these regulatory settlement charges, $4.1 million is recorded within discontinued operations and $52.2 million was allocated to the Adtalem home office which is classified as “Home Office and Other” in “Note 15: Segment Information.”

 

Additionally, in the second quarter of fiscal year 2017, DeVry University reached a settlement agreement with the U.S. Department of Education (“ED”) regarding its January 27, 2016 Notice of Intent to Limit (“Notice”). The Notice related narrowly to a specific graduate employment statistic previously used by DeVry University, calculated since 1975. The settlement includes, among other things, an agreement to no longer use the statistic in question or to make any other representations regarding the graduate employment outcomes of DeVry University graduates from 1975 to October 1980. DeVry University will also refrain from making any future graduate employment representations without possessing graduate-specific information, and, for five years after the effective date of the settlement, to post a letter of credit with ED equal to 10% of DeVry University’s annual Title IV disbursement. A $68.4 million letter of credit was posted in the second quarter of fiscal year 2017 in relation to this requirement. Upon the close of the sale of DeVry University (see “Note 2: Discontinued Operations and Assets Held for Sale”), Adtalem will continue to post this letter of credit on behalf of DeVry University. Also, as a result of the settlement agreement, DeVry University’s participation in Title IV programs will be under provisional certification. The settlement in no way hinders DeVry University’s ability to serve current or future students. DeVry University resolved the Notice in full cooperation with ED. The settlement allows DeVry University to continue communicating its strong student outcomes, while providing assurances regarding the extent of its graduate employment data.

 

 9 

 

 

NOTE 4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

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

 

Equity Method Investment

 

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

 

Cash and Cash Equivalents

 

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

 

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

 

Financial Aid and Restricted Cash

 

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

 

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

 

Revenue Recognition

 

Tuition

 

Chamberlain, Adtalem Brazil higher education and Carrington tuition revenue is recognized on a straight-line basis over their respective applicable academic terms. In addition, AUC, RUSM and RUSVM basic science curriculum revenue is recognized on a straight-line basis over the applicable academic term. The clinical portion of the AUC, RUSM and RUSVM education programs are conducted primarily in U.S. teaching hospitals and veterinary schools under the oversight of the institutions. AUC, RUSM and RUSVM are responsible for the billing and collection of tuition from their students during the period of clinical education. Revenue is recognized on a weekly basis based on actual program attendance during the period of the clinical program. Fees paid to the hospitals and veterinary schools to support the educational infrastructure required to train AUC, RUSM and RUSVM students are charged to expense on the same basis. Becker, ACAMS and Adtalem Brazil’s live classroom test preparation, and Adtalem Brazil’s online tuition revenue is recognized on a straight-line basis over the applicable delivery period. Revenue from conferences and training services, which are generally short-term in duration, is recognized when the conference or training service is provided.

 

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Other Educational

 

Sales of ACAMS subscriptions, membership dues and certifications, along with textbooks, electronic books and other educational products, including Becker and ACAMS self-study sales, are included in Other Educational Revenue in the Consolidated Statements of Income (Loss). Revenue from subscriptions and membership dues is recognized on a straight-line basis over the applicable subscription or membership period. Revenue from certifications is recognized when the certification process is complete. Textbooks, electronic books and other educational products revenue is recognized when the sale occurs. In addition, fees from international licensees of the Becker programs are included in Other Educational Revenue and recognized when confirmation of course delivery is received.

 

Refunds and Provisions

 

Estimates of Adtalem’s expected refunds are determined at the outset of each academic term, based upon actual experience in previous terms. Inputs to this analysis include refunds issued, withdrawal rates and historical amounts owed by students for that portion of a term that was completed. Management reassesses collectability throughout the period revenue is recognized by the Adtalem institutions, on a student-by-student basis. This reassessment is based upon new information and changes in facts and circumstances relevant to a student’s ability to pay. Management also reassesses collectability when a student withdraws from the institution and has unpaid tuition charges. Such unpaid charges do not meet the threshold of reasonably collectible and are recognized as revenue on a cash basis.

 

The provisions for refunds, which are reported as a reduction to Tuition Revenue in the Consolidated Statements of Income (Loss), are recognized in the same ratable fashion as revenue to most appropriately match these costs with the tuition revenue in that term. Provisions for refunds were $4.6 million and $9.1 million for the three and six months ended December 31, 2017, respectively, and $4.0 million and $8.2 million for the three and six months ended December 31, 2016, respectively.

 

Provisions for refunds are monitored and adjusted as necessary within the academic term and adjusted for actual refunds issued and withdrawn student accounts receivable balances at the completion of an academic term. If a student withdraws prior to completing an academic term, federal and state regulations and accreditation criteria permit Adtalem to retain only a set percentage of the total tuition received from such student, which varies with, but generally equals or exceeds, the percentage of the academic term completed by such student. Payment amounts received by Adtalem in excess of such set percentages of tuition are refunded to the student or the appropriate funding source. All refunds are netted against revenue during the applicable academic term. Reserves related to refunds and uncollectible accounts totaled $33.2 million, $30.6 million and $35.0 million at December 31, 2017, June 30, 2017 and December 31, 2016, respectively.

 

The allowance for uncollectible accounts is determined by analyzing the current aging of accounts receivable and historical loss rates on collections of accounts receivable. In addition, management considers projections of future receivable levels and collection loss rates. We monitor the inputs to this analysis periodically throughout the year. Provisions required to maintain the allowance at appropriate levels are charged to expense in each period as required. Provisions for uncollectible accounts, which are included in the Cost of Educational Services in the Consolidated Statements of Income (Loss), were $5.1 million and $11.2 million for the three and six months ended December 31, 2017, respectively, and $6.4 million and $11.9 million for the three and six months ended December 31, 2016, respectively.

 

Internal-Use Software Development Costs

 

Adtalem capitalizes certain internal-use software development costs that are amortized using the straight-line method over the estimated lives of the software, not to exceed seven years. Capitalized costs include external direct costs of equipment, materials and services consumed in developing or obtaining internal-use software and payroll-related costs for employees directly associated with the internal-use software development project. Capitalization of such costs ceases at the point at which the project is substantially complete and ready for its intended purpose. Capitalized internal-use software development costs for projects not yet complete are included as Construction in Progress in the Land, Building and Equipment section of the Consolidated Balance Sheets. As of December 31, 2017, June 30, 2017 and December 31, 2016, the net balance of capitalized internal-use software development costs was $8.6 million, $11.8 million and $15.0 million, respectively.

 

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Impairment of Long-Lived Assets

 

Adtalem evaluates the carrying amount of its significant long-lived assets whenever changes in circumstances or events indicate that the value of such assets may not be fully recoverable. Events that may trigger an impairment analysis could include a decision by management to exit a market or a line of business or to consolidate operating locations. In the second quarter of fiscal year 2018, we recorded impairment charges of $23.4 million to write-down building, building improvements, furniture and equipment to zero based on the fair market value of the DeVry University operations, which is classified within discontinued operations. Additionally, during the first quarter of fiscal year 2018, the campuses of AUC and RUSM were damaged from Hurricanes Irma and Maria, respectively. Based on current estimates, we recorded hurricane-related impairment charges to building, building improvements, furniture and equipment of $19.0 million and $29.9 million in the three and six months ended December 31, 2017, respectively, along with receivables for insurance reimbursements of these amounts, less deductibles, of $20.8 million as of December 31, 2017. The impairment charges are included in Cost of Educational Services in the Consolidated Statements of Income (Loss). For a discussion of the impairment review of goodwill and intangible assets see “Note 10: Intangible Assets.”

 

Foreign Currency Translation

 

The financial position and results of operations of the AUC, RUSM and RUSVM Caribbean operations are measured using the U.S. dollar as the functional currency. As such, there is no translation gain or loss associated with these operations. Adtalem Brazil’s operations and Becker’s and ACAMS’s international operations are measured using the local currency as the functional currency. Assets and liabilities of these entities are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Income and expense items are translated at monthly average exchange rates. The resulting translation adjustments are included in the component of Shareholders’ Equity designated as Accumulated Other Comprehensive Loss. Transaction gains or losses during each of the three-month and six-month periods ended December 31, 2017 and 2016 were not material.

 

Noncontrolling Interest

 

Adtalem currently maintains a 97.9% ownership interest in Adtalem Brazil with the remaining 2.1% owned by members of the current Adtalem Brazil senior management group. The adjustment to increase or decrease the Adtalem Brazil noncontrolling interest each reporting period for its proportionate share of Adtalem Brazil’s profit (loss) flows through the Consolidated Statements of Income (Loss) based on Adtalem’s noncontrolling interest accounting policy.

 

Since July 1, 2015, Adtalem has had the right to exercise a call option and purchase any remaining Adtalem Brazil stock from Adtalem Brazil management. Likewise, Adtalem Brazil management has had the right to exercise a put option and sell its remaining ownership interest in Adtalem Brazil to Adtalem. Since the put option is out of the control of Adtalem, authoritative guidance requires the noncontrolling interest, which includes the value of the put option, to be displayed outside of the equity section of the Consolidated Balance Sheets.

 

The Adtalem Brazil management put option is being accreted to its redemption value in accordance with the terms of the related stock purchase agreement. The adjustment to increase or decrease the put option to its expected redemption value each reporting period is recorded in retained earnings in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).

 

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

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2017   2016   2017   2016 
Balance at Beginning of Period  $6,566   $5,043   $6,285   $5,112 
Net Income Attributable to Noncontrolling Interest   374    342    505    339 
Increase in Redemption Value of Noncontrolling                    
Interest Put Option   465    1,335    615    1,269 
Balance at End of Period  $7,405   $6,720   $7,405   $6,720 

 

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Earnings per Common Share

 

Basic earnings per share is computed by dividing net income attributable to Adtalem by the weighted average number of common shares outstanding during the period plus unvested participating restricted stock units (“RSUs”). Diluted earnings per share is computed by dividing net income attributable to Adtalem by the weighted average number of shares assuming dilution. As required by GAAP, because the three and six months ended December 31, 2017 resulted in a net loss from continuing operations, diluted earnings per share is computed by dividing the net loss attributable to Adtalem by the weighted average number of basic shares. Diluted shares are computed using the Treasury Stock Method and reflect the additional shares that would be outstanding if dilutive stock-based grants were exercised during the period. Excluded from the computations of diluted earnings per share were outstanding stock-based grants representing 1,377,000 and 1,866,000 shares of common stock for the three and six months ended December 31, 2017, respectively, and 2,643,000 and 2,808,000 shares of common stock for the three and six months ended December 31, 2016, respectively. These outstanding stock-based grants were excluded because the exercise prices were greater than the average market price of the common shares or the assumed proceeds upon exercise under the Treasury Stock Method resulted in the repurchase of more shares than would be issued; thus, their effect would be anti-dilutive.

 

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

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2017   2016   2017   2016 
Weighted Average Shares Outstanding   60,529    62,685    61,271    62,639 
Unvested Participating RSUs   705    884    738    855 
Basic Shares   61,234    63,569    62,009    63,494 
Effect of Dilutive Stock Options   789    459    696    377 
Diluted Shares   62,023    64,028    62,705    63,871 

 

Treasury Stock

 

Adtalem’s Board of Directors (the “Board”) has authorized share repurchase programs on ten occasions (see “Note 8: Dividends and Share Repurchase Programs”). The tenth share repurchase program was approved on February 16, 2017 and commenced in February 2017. Shares that are repurchased by Adtalem are recorded as Treasury Stock at cost and result in a reduction of Shareholders’ Equity.

 

From time to time, shares of its common stock are delivered back to Adtalem under a swap arrangement resulting from employees’ exercise of incentive stock options pursuant to the terms of the Adtalem Stock Incentive Plans (see “Note 5: Stock-Based Compensation”). In addition, shares of its common stock are delivered back to Adtalem for payment of withholding taxes from employees for vesting RSUs. These shares are recorded as Treasury Stock at cost and result in a reduction of Shareholders’ Equity.

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenue and expense reported during the period. Actual results could differ from those estimates.

 

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Accumulated Other Comprehensive Loss

 

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

 

The Accumulated Other Comprehensive Loss balance at December 31, 2017, consists of $61.1 million of cumulative translation losses ($59.8 million attributable to Adtalem and $1.3 million attributable to noncontrolling interest) and $0.4 million of unrealized gains on available-for-sale marketable securities, net of tax of $0.2 million and all attributable to Adtalem. At June 30, 2017, this balance consisted of $59.4 million of cumulative translation losses ($58.1 million attributable to Adtalem and $1.3 million attributable to noncontrolling interest) and $0.3 million of unrealized gains on available-for-sale marketable securities, net of tax of $0.2 million and all attributable to Adtalem. At December 31, 2016, this balance consisted of $51.1 million of cumulative translation losses ($50.0 million attributable to Adtalem and $1.1 million attributable to noncontrolling interest) and $0.2 million of unrealized gains on available-for-sale marketable securities, net of tax of $0.1 million and all attributable to Adtalem.

 

Advertising Expense

 

Advertising costs are recognized as expense in the period in which materials are purchased or services are performed. Advertising expense, which is included in Student Services and Administrative Expense in the Consolidated Statements of Income (Loss), was $22.6 million and $49.0 million for the three and six months ended December 31, 2017, respectively, and $24.2 million and $48.5 million for the three and six months ended December 31, 2016, respectively.

 

Hurricane Expense

 

AUC and RUSM were affected by hurricane events occurring in the first quarter of fiscal year 2018. Adtalem recorded expenses of $30.3 million and $44.0 million associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental additional costs of teaching in alternate locations in the three months and six months ended December 31, 2017, respectively. Insurance proceeds and expected proceeds of $30.5 million and $39.8 million were recorded to offset these expenses in the three months and six months ended December 31, 2017, respectively. Based upon preliminary damage assessments of facilities, impairment write-downs of buildings, building improvements, furniture and equipment of $19.0 million and $29.9 million were recorded in the three and six months December 31, 2017, respectively. Expected insurance proceeds of $19.0 million and $20.8 million were recorded to offset these expenses in the three months and six months ended December 31, 2017, respectively. In total, no net expense was recorded in the three months ended December 31, 2017 and $13.4 million of net expense was recorded in Cost of Educational Services in the Consolidated Statement of Income (Loss) for the six months ended December 31, 2017. The expense primarily represented the deductibles under insurance policies.

 

Restructuring Charges

 

Adtalem’s financial statements include charges related to severance and related benefits for reductions in staff. These charges also include early lease termination or cease-of-use costs and accelerated depreciation and gains and losses on disposals of property and equipment related to campus and administrative office consolidations (see “Note 11: Restructuring Charges”).

 

Recent Accounting Pronouncements

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18: “Statement of Cash Flows (Topic 230): Restricted Cash.” This guidance was issued to address the diversity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments will require that the statement of cash flows explain the change during the period in total cash, cash equivalents and restricted cash. Changes in the restricted cash balance will no longer be included as cash provided by or used in operating activities since these balances will now be included in the beginning and ending balances of cash in the statement of cash flows. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. In the fourth quarter of fiscal year 2017, we retrospectively adopted this guidance. See “Reclassifications” section below within this footnote, which discusses the disclosure impact to the Consolidated Statement of Cash Flows.

 

In August 2016, FASB issued ASU No. 2016-15: “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This guidance was issued to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for the financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Management has determined that our current accounting policies align with this guidance. Therefore, this guidance will have no impact on the Consolidated Financial Statements.

 

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

 

In March 2016, FASB issued ASU No. 2016-09: “Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This guidance was issued to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Excess tax benefits and tax deficiencies will no longer be recorded to additional paid-in capital, but rather to income tax expense or benefit in the income statement, which may increase volatility in the income statement. An accounting policy election exists to account for forfeitures as they occur. Also, adoption will require changes to classification of certain stock-based compensation transactions on the statement of cash flows. The cash outflow from employee taxes paid when shares are withheld by the employer will be reclassified from operating activities to financing activities on the statement of cash flows. In the first quarter of fiscal year 2018, we retrospectively adopted this guidance. We elected to account for forfeitures when they occur versus our prior practice of applying a forfeiture rate. The election resulted in a cumulative adjustment to increase retained earnings and decrease additional paid-in-capital, each by $0.6 million and the corresponding tax effect to decrease retained earnings and increase deferred tax assets, each by $0.2 million. See “Reclassifications” section below within this footnote, which discusses the disclosure impact to the Consolidated Statements of Cash Flows.

 

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

 

In January 2016, FASB issued ASU No. 2016-01: “Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This guidance was issued to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The guidance eliminates the classification of equity securities into different categories (that is, trading or available-for-sale) and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This guidance will require Adtalem to record the changes in the fair value of its available-for-sale equity investments through net income. Management anticipates the adoption will not have a significant impact on Adtalem’s Consolidated Financial Statements.

 

In May 2014, FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606).” This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The guidance is effective for the fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Adtalem will implement this guidance effective July 1, 2018 using the retrospective approach. Management is currently assessing Adtalem’s revenue recognition policies and procedures, and based on the analysis performed to date, anticipates the adoption will not have a significant impact on Adtalem’s Consolidated Financial Statements.

 

Reclassifications

 

Beginning in the third quarter of fiscal year 2017, we changed our reportable segments as described in “Note 15: Segment Information.” Prior period amounts have been reclassified to conform to the current reportable segment presentation within the Notes to Consolidated Financial Statements.

 

Beginning in the second quarter of fiscal year 2018, DeVry University is classified as discontinued operations as discussed in “Note 2: Discontinued Operations and Assets Held for Sale.” Prior period amounts have been revised to conform to the current classification. Certain expenses previously allocated to DeVry University within the U.S. Traditional Postsecondary segment have been reclassified to the Home Office and Other segment based on discontinued operation reporting guidance regarding allocation of corporate overhead. See “Note 15: Segment Information” for additional information.

 

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In the fourth quarter of fiscal year 2017, we retrospectively adopted ASU 2016-18: “Statement of Cash Flows (Topic 230): Restricted Cash.” Under ASU 2016-18, changes in restricted cash is no longer included as cash provided by or used in operating activities since these balances are now included in the beginning and ending balance of cash in the statement of cash flows. In addition, in the first quarter of fiscal year 2018, we retrospectively adopted ASU 2016-09: “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09, cash outflows from employee taxes paid when shares are withheld are classified as a financing activity. Our prior practice classified these amounts as an operating activity in the statement of cash flows. Therefore, we changed line items on the Consolidated Statements of Cash Flows for the six months ended December 31, 2016 based on adopting ASU 2016-09 and 2016-18 as follows (in thousands):

 

Net Cash Provided by Operating Activities:     
Previously Reported  $34,919 
ASU 2016-09 Adjustment   2,650 
ASU 2016-18 Adjustment   3,909 
As Currently Reported  $41,478 
      
Net Cash Provided by Financing Activities:     
Previously Reported  $207,912 
ASU 2016-09 Adjustment   (2,650)
As Currently Reported  $205,262 
      
Net Decrease in Cash, Cash Equivalents and Restricted Cash:     
Previously Reported  $(108,219)
ASU 2016-18 Adjustment   3,909 
As Currently Reported  $(104,310)
      
Cash, Cash Equivalents and Restricted Cash at End of Year:     
Previously Reported  $199,945 
ASU 2016-18 Adjustment   11,092 
As Currently Reported  $211,037 

 

NOTE 5: STOCK-BASED COMPENSATION

 

Adtalem maintains three stock-based incentive plans: the 2003 Stock Incentive Plan, the Amended and Restated Incentive Plan of 2005 and the Fourth Amended and Restated Incentive Plan of 2013. Under these plans, directors, key executives and managerial employees are eligible to receive incentive stock or nonqualified options to purchase shares of Adtalem’s common stock. The Fourth Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 also permit the granting of stock appreciation rights, RSUs, performance-based RSUs and other stock and cash-based compensation. Although options remain outstanding under the 2003 and 2005 incentive plans, no further stock-based grants will be issued from these plans. The Fourth Amended and Restated Incentive Plan of 2013 and the Amended and Restated Incentive Plan of 2005 are administered by the Compensation Committee of the Board. Options are granted for terms of up to ten years and can vest immediately or over periods of up to five years. The requisite service period is equal to the vesting period. The option price under the plans is the fair market value of the shares on the date of the grant.

 

Stock-based compensation expense is measured at the grant date based on the fair value of the award. Adtalem accounts for stock-based compensation granted to retirement eligible employees that fully vests upon an employee’s retirement under the non-substantive vesting period approach. Under this approach, the entire stock-based compensation expense is recognized at the grant date for stock-based grants issued to retirement eligible employees. For non-retirement eligible employees, stock-based compensation expense is recognized as expense over the employee requisite service period. With the adoption of ASU 2016-09 on July 1, 2017, we account for forfeitures of outstanding but unvested grants in the period they occur.

 

At December 31, 2017, 8,797,617 authorized but unissued shares of common stock were reserved for issuance under Adtalem’s stock-based incentive plans.

 

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The following is a summary of options activity for the six months ended December 31, 2017:

 

           Weighted     
       Weighted   Average   Aggregate 
       Average   Remaining   Intrinsic 
   Number of   Exercise   Contractual   Value 
   Options   Price   Life (in Years)   (in thousands) 
Outstanding at July 1, 2017   2,794,850   $34.68           
Options Granted   491,275    33.90           
Options Exercised   (308,805)   31.65           
Options Forfeited   (28,770)   28.31           
Options Expired   (559,349)   46.79           
Outstanding at December 31, 2017   2,389,201    32.20    6.29   $26,675 
Exercisable at December 31, 2017   1,291,547   $35.86    4.12   $11,010 

 

The following is a summary of stock appreciation rights activity for the six months ended December 31, 2017:

 

           Weighted     
   Number of   Weighted   Average   Aggregate 
   Stock   Average   Remaining   Intrinsic 
   Appreciation   Exercise   Contractual   Value 
   Rights   Price   Life (in Years)   (in thousands) 
Outstanding at July 1, 2017   99,500   $45.04           
Rights Exercised   (34,100)   38.71           
Rights Expired   (65,400)   48.34           
Outstanding at December 31, 2017   -    -    -   $- 
Exercisable at December 31, 2017   -   $-    -   $- 

 

The total intrinsic value of options exercised for the six months ended December 31, 2017 and 2016 was $2.3 million and $3.6 million, respectively.

 

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

 

The weighted average estimated grant date fair value of options granted at market price under Adtalem’s stock-based incentive plans during the first six months of fiscal years 2018 and 2017 was $14.63 and $9.09, per share, respectively. The fair value of Adtalem’s stock option grants was estimated assuming the following weighted average assumptions:

 

   Fiscal Year 
   2018   2017 
Expected Life (in Years)   6.68    6.88 
Expected Volatility   41.45%   42.41%
Risk-free Interest Rate   1.95%   1.41%
Dividend Yield   0.00%   1.19%
Pre-vesting Forfeiture Rate   NA    10.00%

 

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The expected life of the options granted is based on the weighted average exercise life with age and salary adjustment factors from historical exercise behavior. Adtalem’s expected volatility is computed by combining and weighting the implied market volatility, the most recent volatility over the expected life of the option grant and Adtalem’s long-term historical volatility. On February 16, 2017, Adtalem discontinued payment of cash dividends, resulting in the elimination of a dividend yield from the assumptions. The pre-vesting stock option forfeiture rate for fiscal year 2017 was based on Adtalem’s historical stock option forfeiture experience. With the adoption of ASU 2016-09 on July 1, 2017, we account for forfeitures as they occur. Therefore, no pre-vesting stock option forfeiture rate applies for fiscal year 2018.

 

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

 

During the first six months of fiscal year 2018, Adtalem granted 493,880 RSUs to selected employees and directors. Of these, 239,290 are performance-based RSUs and 254,590 are non-performance-based RSUs. Performance-based RSUs are earned by the recipients over a three-year period based on achievement of certain mission-based and academic goals, achievement of a minimum level of Adtalem’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) or achievement of a minimum level of return on invested capital (“ROIC”). Non-performance-based RSUs are subject to restrictions which lapse ratably over one, three or four-year periods on the grant anniversary date based on the recipient’s continued service on the Board, employment with Adtalem or upon retirement. During the restriction period, the recipient of the non-performance based RSUs has the right to receive dividend equivalents, if any. This right does not pertain to the performance-based RSUs. The following is a summary of RSU activity for the six months ended December 31, 2017:

 

       Weighted 
       Average 
   Number of   Grant Date 
   RSUs   Fair Value 
Nonvested at July 1, 2017   1,279,667   $26.14 
RSUs Granted   493,880    34.15 
RSUs Vested   (363,831)   31.28 
RSUs Forfeited   (102,563)   28.22 
Nonvested at December 31, 2017   1,307,153   $27.93 

 

The weighted average estimated grant date fair value of RSUs granted at market price under Adtalem’s stock-based incentive plans during the first six months of fiscal years 2018 and 2017 was $34.15 and $23.84, per share, respectively.

 

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

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2017   2016   2017   2016 
Cost of Educational Services  $1,214   $1,147   $2,634   $2,987 
Student Services and Administrative Expense   2,581    2,436    5,598    6,346 
Restructuring Expense   -    -    548    - 
    3,795    3,583    8,780    9,333 
Income Tax Benefit   (1,667)   (1,251)   (4,101)   (3,283)
Net Stock-Based Compensation Expense  $2,128   $2,332   $4,679   $6,050 

 

As of December 31, 2017, $30.3 million of total pre-tax unrecognized stock-based compensation expense related to nonvested grants is expected to be recognized over a weighted average period of 2.7 years. The total fair value of options and RSUs vested during the six months ended December 31, 2017 and 2016 was approximately $14.2 million and $12.8 million, respectively.

 

There was no capitalized stock-based compensation cost at each of December 31, 2017, June 30, 2017 and December 31, 2016.

 

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

 

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NOTE 6: FAIR VALUE MEASUREMENTS

 

Adtalem has elected not to measure any assets or liabilities at fair value other than those required to be measured at fair value on a recurring basis. Assets measured at fair value on a nonrecurring basis include goodwill, intangible assets and assets of businesses where the long-term value of the operations have been impaired.

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The guidance specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The guidance establishes fair value measurement classifications under the following hierarchy:

 

Level 1 Quoted prices for identical instruments in active markets.

 

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

 

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

 

When available, Adtalem uses quoted market prices to determine fair value, and such measurements are classified within Level 1. In some cases where market prices are not available, Adtalem makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates and yield curves. These measurements are classified within Level 3.

 

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

 

Assets measured at fair value on a nonrecurring basis include goodwill and indefinite-lived intangibles arising from a business combination. These assets are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed annually for impairment or more frequently if circumstances arise indicating potential impairment. This impairment review was most recently completed as of May 31, 2017. See “Note 10: Intangible Assets” for further discussion on the impairment review including valuation techniques and assumptions.

 

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

 

   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $212,239   $-   $- 
Available-for-Sale Investments:               
Marketable Securities, short-term   4,268    -    - 
Institutional Loans Receivable, Net   -    44,280    - 
Deferred Acquisition Obligations   -    23,903    - 
FIES Receivable   -    16,087    - 
Total Financial Assets at Fair Value  $216,507   $84,270   $- 

 

The following table presents Adtalem’s assets and liabilities at June 30, 2017, that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands).

 

   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $240,426   $-   $- 
Available-for-Sale Investments:               
Marketable Securities, short-term   4,013    -    - 
Institutional Loans Receivable, Net   -    45,759    - 
Deferred Acquisition Obligations   -    26,590    - 
FIES Receivable   -    22,860    - 
Total Financial Assets at Fair Value  $244,439   $95,209   $- 

 

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The following table presents Adtalem’s assets and liabilities at December 31, 2016, that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands).

 

   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $197,860   $-   $- 
Available-for-Sale Investments:               
Marketable Securities, short-term   3,844    -    - 
Institutional Loans Receivable, Net   -    44,531    - 
Deferred Acquisition Obligations   -    29,499    - 
FIES Long-Term Receivable   -    13,151    - 
Total Financial Assets at Fair Value  $201,704   $87,181   $- 

 

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

 

The fair value of the institutional loans receivable included in Accounts Receivable, Net and Other Assets, Net on the Consolidated Balance Sheets as of December 31, 2017, June 30, 2017 and December 31, 2016 is estimated by discounting the future cash flows using current rates for similar arrangements. See “Note 7: Financing Receivables” for further discussion on these institutional loans receivable.

 

The fair value of the deferred acquisition obligations is estimated by discounting the future cash flows using current rates for similar arrangements. $4.0 million, $14.8 million and $15.1 million was classified as Accrued Liabilities on the Consolidated Balance Sheets at December 31, 2017, June 30, 2017 and December 31, 2016, respectively, and $19.9 million, $11.8 million and $14.4 million was classified as Deferred Rent and Other Liabilities on the Consolidated Balance Sheets at December 31, 2017, June 30, 2017 and December 31, 2016, respectively.

 

The fair value of Adtalem Brazil’s receivable under Brazil’s FIES public loan program included in Accounts Receivable, Net on the Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017, and in Other Assets, Net on the Consolidated Balance Sheet as of December 31, 2016 is estimated by discounting the future cash flows using published market data on Brazilian interest and inflation rates.

 

NOTE 7: FINANCING RECEIVABLES

 

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

 

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

 

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

 

   December 31, 2017   June 30, 2017   December 31, 2016 
Gross Institutional Loans      $57,397       $57,391       $54,070 
Allowance for Credit Losses:                              
Balance at July 1  $(11,632)       $(7,915)       $(7,915)     
Charge-offs and Adjustments   1,024         4,722         3,054      
Recoveries   (148)        (573)        (438)     
Additional Provision   (2,361)        (7,866)        (4,240)     
Balance at End of Period        (13,117)        (11,632)        (9,539)
Net Institutional Loans       $44,280        $45,759        $44,531 

 

Of the net balances above, $20.8 million, $20.1 million and $18.1 million was classified as Accounts Receivable, Net on the Consolidated Balance Sheets at December 31, 2017, June 30, 2017 and December 31, 2016, respectively, and $23.5 million, $25.7 million and $26.4 million, representing amounts due beyond one year, was classified as Other Assets, Net on the Consolidated Balance Sheets at December 31, 2017, June 30, 2017 and December 31, 2016, respectively.

 

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

 

   December 31,   June 30,   December 31, 
   2017   2017   2016 
Institutional Loans:               
Performing  $45,495   $47,072   $46,559 
Nonperforming   11,902    10,319    7,511 
Total Institutional Loans  $57,397   $57,391   $54,070 

 

   1-29 Days
Past Due
   30-59
Days Past
Due
   60-89
Days Past
Due
   Greater
Than 90
Days Past
Due
   Total Past
Due
   Current   Total
Institutional
Loans
 
Institutional Loans:                                   
December 31, 2017  $8,569   $1,021   $1,166   $11,902   $22,658   $34,739   $57,397 
June 30, 2017  $7,162   $2,192   $583   $10,319   $20,256   $37,135   $57,391 
December 31, 2016  $5,657   $2,904   $1,762   $7,511   $17,834   $36,236   $54,070 

 

Loans are considered nonperforming if they are more than 90 days past due. At December 31, 2017, nonperforming loans totaled $11.9 million, of which $11.8 million had a specific allowance for credit losses. At June 30, 2017, nonperforming loans totaled $10.3 million, of which $10.2 million had a specific allowance for credit losses. At December 31, 2016, nonperforming loans totaled $7.5 million, of which $7.4 million had a specific allowance for credit losses.

 

NOTE 8: DIVIDENDS AND SHARE REPURCHASE PROGRAMS

 

Adtalem paid dividends of $11.4 million on December 22, 2016. On February 16, 2017, the Board determined to discontinue cash dividend payments. Future dividends will be at the discretion of the Board.

  

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Adtalem has repurchased shares under the following programs as of December 31, 2017:

 

Date  Shares   Total Cost 
Authorized  Repurchased   (in millions) 
November 15, 2006   908,399   $35.0 
May 13, 2008   1,027,417    50.0 
November 11, 2009   972,205    50.0 
August 11, 2010   1,103,628    50.0 
November 10, 2010   968,105    50.0 
May 20, 2011   2,396,143    100.0 
November 2, 2011   3,478,299    100.0 
August 29, 2012   2,005,317    62.7 
December 15, 2015   1,672,250    36.6 
February 16, 2017   3,460,922    121.2 
Totals   17,992,685   $655.5 

 

On February 16, 2017, the Board authorized Adtalem’s tenth share repurchase program, which allows Adtalem to repurchase up to $300 million of its common stock through December 31, 2020. A total of 2,675,626 shares were repurchased during the six months ended December 31, 2017 under the tenth share repurchase program for an aggregate of $93.2 million. The timing and amount of any repurchase will be determined based on evaluation of market conditions and other factors. These repurchases may be made through the open market, including block purchases, in privately negotiated transactions, or otherwise. The buyback will be funded through available cash balances and/or borrowings and may be suspended or discontinued at any time.

 

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

 

NOTE 9: BUSINESS COMBINATIONS

 

São Judas Tadeu

 

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

 

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

 

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

 

   November 1,
2017
 
Current Assets  $558 
Property and Equipment   16 
Other Long-term Assets   1,838 
Goodwill   4,121 
Total Assets Acquired   6,533 
Liabilities Assumed   569 
Net Assets Acquired  $5,964 

 

Goodwill, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, was all assigned to the Adtalem Brazil reporting unit which is classified within the Technology and Business segment. Factors that contributed to a purchase price resulting in the recognition of goodwill include SJT’s strategic fit into Adtalem’s expanding presence in test preparation and the acquired assembled workforce. None of the goodwill acquired is expected to be deductible for income tax purposes.

 

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

 

Association of Certified Anti-Money Laundering Specialists

 

On July 1, 2016, Becker completed the acquisition of 100% of the stock of ACAMS for $330.6 million, net of cash of $23.5 million. The payment for this purchase was made in the first quarter of fiscal year 2017, and was funded with available domestic cash balances and $175 million in borrowings under Adtalem’s revolving credit facility. ACAMS is an international membership organization dedicated to enhancing the knowledge and skills of anti-money laundering and financial crime prevention professionals. The acquisition furthers Adtalem’s global growth strategy into professional education and enhances Becker’s position as a leading provider of lifelong learning for professionals.

 

The operations of ACAMS are included in Adtalem’s Professional Education segment. The results of ACAMS’s operations have been included in the Consolidated Financial Statements of Adtalem since the date of acquisition.

 

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

 

  

July 1, 2016 

 
Current Assets  $24,895 
Property and Equipment   432 
Other Long-term Assets   3,131 
Intangible Assets   88,600 
Goodwill   274,689 
Total Assets Acquired   391,747 
Liabilities Assumed   37,619 
Net Assets Acquired  $354,128 

 

Goodwill, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, was all assigned to the Becker and ACAMS reporting unit which is classified within the Professional Education segment. Factors that contributed to a purchase price resulting in the recognition of goodwill include ACAMS’s strategic fit into Adtalem’s expanding presence in professional education, the reputation of the ACAMS brand as a leader in the industry and potential future growth opportunity. None of the goodwill acquired is expected to be deductible for income tax purposes. Of the $88.6 million of acquired intangible assets, $39.9 million was assigned to Trade Names, which has been determined not to be subject to amortization. The remaining acquired intangible assets were determined to be subject to amortization with an average useful life of approximately nine years. The values and estimated useful lives by asset type are as follows (in thousands):

 

   July 1, 2016
   Value
Assigned
   Estimated
Useful Life
Customer Relationships  $42,500   10 years
Curriculum   5,000   3 years
Non-compete Agreements   700   1 year
Proprietary Technology   500   4 years

 

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

 

NOTE 10: INTANGIBLE ASSETS

 

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

 

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Intangible assets consist of the following (in thousands):

 

   December 31, 2017    
   Gross
Carrying
Amount
   Accumulated
Amortization
   Weighted Average
Amortization
Period
Amortizable Intangible Assets:             
Student Relationships  $11,049   $(8,999)  5 Years
Customer Relationships   42,900    (7,261)  10 Years
Non-compete Agreements   700    (682)  1 Year
Curriculum/Software   7,143    (3,375)  4 Years
Franchise Contracts   10,597    (1,717)  18 Years
Clinical Agreements   392    (118)  15 Years
Trade Names   1,143    (1,000)  10 Years
Proprietary Technology   500    (187)  4 Years
Total  $74,424   $(23,339)   
Indefinite-Lived Intangible Assets:             
Trade Names  $109,462         
Ross Title IV Eligibility and Accreditations   14,100         
Intellectual Property   13,940         
Chamberlain Title IV Eligibility and Accreditations   1,200         
Carrington Title IV Eligibility and Accreditations   20,200         
AUC Title IV Eligibility and Accreditations   100,000         
Adtalem Brazil Accreditation   97,013         
Total  $355,915         
              
   June 30, 2017    
   Gross
Carrying
Amount
   Accumulated
Amortization
    
Amortizable Intangible Assets:             
Student Relationships  $12,459   $(9,323) 
Customer Relationships   42,900    (4,923)   
Non-compete Agreements   700    (665)   
Curriculum/Software   7,147    (2,329)   
Franchise Contracts   10,615    (1,425)   
Clinical Agreements   393    (104)   
Trade Names   1,145    (945)   
Proprietary Technology   500    (125)   
Total  $75,859   $(19,839)   
Indefinite-Lived Intangible Assets:             
Trade Names  $109,519         
Ross Title IV Eligibility and Accreditations   14,100         
Intellectual Property   13,940         
Chamberlain Title IV Eligibility and Accreditations   1,200         
Carrington Title IV Eligibility and Accreditations   20,200         
AUC Title IV Eligibility and Accreditations   100,000         
Adtalem Brazil Accreditation   97,179         
Total  $356,138         

 

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   December 31, 2016    
   Gross
Carrying
Amount
   Accumulated
Amortization
    
Amortizable Intangible Assets:             
Student Relationships  $12,657   $(8,324) 
Customer Relationships   42,900    (2,547)   
Non-compete Agreements   1,640    (1,226)   
Curriculum/Software   8,143    (2,206)   
Franchise Contracts   10,783    (1,148)   
Clinical Agreements   399    (93)   
Trade Names   1,163    (901)   
Proprietary Technology   500    (63)   
Total  $78,185   $(16,508)   
Indefinite-Lived Intangible Assets:             
Trade Names  $110,048         
Ross Title IV Eligibility and Accreditations   14,100         
Intellectual Property   13,940         
Chamberlain Title IV Eligibility and Accreditations   1,200         
Carrington Title IV Eligibility and Accreditations   20,200         
AUC Title IV Eligibility and Accreditations   100,000         
Adtalem Brazil Accreditation   98,718         
Total  $358,206         

 

Amortization expense for amortized intangible assets was $2.5 million and $5.0 million for the three and six months ended December 31, 2017, respectively, and $2.4 million and $5.7 million for the three and six months ended December 31, 2016, respectively. Estimated amortization expense for amortizable intangible assets for the next five fiscal years ending June 30 and in the aggregate, by reporting unit, is as follows (in thousands):

 

   Becker and   Adtalem     
Fiscal Year  ACAMS   Brazil   Total 
2018  $6,501   $2,861   $9,362 
2019   6,422    2,057    8,479 
2020   4,671    1,448    6,119 
2021   4,440    907    5,347 
2022   4,300    615    4,915 
Thereafter   15,386    6,387    21,773 

 

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

 

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

 

In accordance with GAAP, goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, these assets must be reviewed annually for impairment or more frequently if circumstances arise indicating potential impairment. Adtalem’s annual impairment review was most recently completed during the fourth quarter of fiscal year 2017, at which time, there was no impairment loss associated with recorded goodwill or indefinite-lived intangible assets for any reporting unit.

 

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Adtalem had six reporting units that contained goodwill as of the start of the second quarter of fiscal year 2018. These reporting units constitute components for which discrete financial information is available and regularly reviewed by segment management. If the carrying amount of a reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss to goodwill is recognized. In analyzing the results of operations and business conditions of all the reporting units as of December 31, 2017, it was determined that no triggering event had occurred that would indicate the carrying value of a reporting unit had exceeded its fair value, except at DeVry University. During the quarter, a triggering event did occur within the DeVry University reporting unit which resulted in a write-off of all goodwill balances as of December 31, 2017.

 

On December 4, 2017, Adtalem, entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which Adtalem agreed to sell DeVry University to Cogswell Education, LLC (“Cogswell”). Subject to the terms and conditions of the Purchase Agreement, Adtalem will sell all of the outstanding equity interests of DeVry University, Inc. and DeVry New York Inc. to Cogswell for $1.00. As this sales price indicates a fair value that is less than the carrying value of the DeVry University goodwill and intangible asset balances, both amounts were written down to zero as of December 31, 2017. This resulted in impairment charges for goodwill of $22.2 million and indefinite-lived intangible assets of $1.6 million in the second quarter of fiscal year 2018. These amounts were charged to Discontinued Operations (see “Note 2: Discontinued Operations and Assets Held for Sale”).

 

For indefinite-lived intangible assets at the six reporting units that contained indefinite-lived intangible assets as of December 31, 2017, management first analyzes qualitative factors including results of operations and business conditions, significant changes in cash flows at the individual indefinite-lived intangible asset level, if applicable, as well as how much previously calculated fair values exceed carrying values to determine if it is more likely than not that the intangible assets associated with these reporting units have been impaired. At Carrington, management is executing a plan to increase enrollment and control costs to improve profitability. As a result, as of the end of the second quarter of fiscal year 2018, management does not believe business conditions had deteriorated such that it was more likely than not that the fair value of the Title IV Eligibility and Accreditation indefinite-lived intangible asset had fallen below its carrying value. Should declines in student enrollment at Carrington result in financial performance that is significantly below management expectations, the carrying value of this reporting unit’s indefinite-lived intangible assets could be impaired. This could require a write-off of up to $20.2 million.

 

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

 

These interim triggering event conclusions were based on the fact that the qualitative analysis of Adtalem’s reporting units and indefinite-lived intangible assets resulted in no impairment indicators as of the end of fiscal year 2017, except at the DeVry University reporting unit, and that no interim events or deviations from planned operating results occurred as of December 31, 2017, that would cause management to reassess these conclusions.

 

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

 

At December 31, 2017, intangible assets from business combinations totaled $407.0 million and goodwill totaled $832.9 million. Together, these assets equaled approximately 56% of total assets as of such date, and any impairment could significantly affect future results of operations.

 

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

 

   December 31,   June 30,   December 31, 
Reporting Unit  2017   2017   2016 
Chamberlain  $4,716   $4,716   $4,716 
AUC   68,321    68,321    68,321 
RUSM and RUSVM   237,173    237,173    237,173 
Becker and ACAMS   306,808    306,653    306,382 
Adtalem Brazil   215,925    212,223    216,050 
Total  $832,943   $829,086   $832,642 

 

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

 

   December 31,   June 30,   December 31, 
Reporting Segment  2017   2017   2016 
Medical and Healthcare  $310,210   $310,210   $310,210 
Professional Education   306,808    306,653    306,382 
Technology and Business   215,925    212,223    216,050 
Total  $832,943   $829,086   $832,642 

 

The table below summarizes the changes in the carrying amount of goodwill by reporting segment (in thousands):

 

               U.S. Traditional     
               Postsecondary     
   Medical       Technology       Accumulated     
   and   Professional   and       Impairment     
   Healthcare   Education   Business   Gross   Losses   Total 
Balance at June 30, 2016   310,210    32,043    223,558    185,717    (185,717)   565,811 
Purchase Accounting Adjustments   -    -    (3,122)   -    -    (3,122)
Acquisitions   -    274,620    -    -    -    274,620 
Foreign exchange rate changes   -    (281)   (4,386)   -    -    (4,667)
Balance at December 31, 2016   310,210    306,382    216,050    185,717    (185,717)   832,642 
Purchase Accounting Adjustments   -    69    (481)   -    -    (412)
Foreign exchange rate changes   -    202    (3,346)   -    -    (3,144)
Balance at June 30, 2017   310,210    306,653    212,223    185,717    (185,717)   829,086 
Acquisitions   -    -    4,121    -    -    4,121 
Foreign exchange rate changes   -    155    (419)   -    -    (264)
Balance at December 31, 2017  $310,210   $306,808   $215,925   $185,717   $(185,717)  $832,943 

 

The increase in the goodwill balance from June 30, 2017 in the Professional Education segment is the result of a change in the value of the British Sterling Pound compared to the U.S. dollar. Since Becker’s European subsidiary’s goodwill is recorded in local currency, fluctuations in the value of the British Sterling Pound in relation to the U.S. dollar will cause changes in the balance of this asset. The increase in the goodwill balance from June 30, 2017 in the Technology and Business segment is the result of the addition of $4.1 million with the acquisition of SJT. The increase was partially offset by a change in the value of the Brazilian Real compared to the U.S. dollar. Since Adtalem Brazil goodwill is recorded in local currency, fluctuations in the value of the Brazilian Real in relation to the U.S. dollar will cause changes in the balance of this asset.

 

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

 

   December 31,   June 30,   December 31, 
Reporting Segment  2017   2017   2016 
Medical and Healthcare  $137,500   $137,500   $137,500 
Professional Education   67,812    67,812    67,812 
Technology and Business   130,403    130,626    132,694 
U.S. Traditional Postsecondary   20,200    20,200    20,200 
Total  $355,915   $356,138   $358,206 

 

Total indefinite-lived intangible assets decreased by $0.2 million from June 30, 2017. The decrease is the result of a change in the value of the Brazilian Real as compared to the U.S. dollar. Since Adtalem Brazil intangible assets are recorded in the local currency, fluctuations in the value of the Brazilian Real in relation to the U.S. dollar will cause changes in the balance of these assets.

 

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NOTE 11: RESTRUCTURING CHARGES

 

During the first three and six months of fiscal year 2018, Adtalem recorded restructuring charges primarily related to reductions in force (“RIF”) and real estate consolidations at Carrington and Adtalem’s home office. Termination benefit charges, as a result of reducing Adtalem’s workforce by 98 positions in the first six months of fiscal year 2018, represented severance pay and benefits for these employees. We also recorded a reduction to restructuring charges in the first six months of fiscal year 2018 for an adjustment to previously accrued estimates for real estate consolidations at Adtalem’s home office. During the first three and six months of fiscal year 2017, Adtalem recorded restructuring charges primarily related to real estate consolidations at Carrington and Adtalem’s home office. Adtalem’s home office is classified as “Home Office and Other” in “Note 15: Segment Information” to the Consolidated Financial Statements. Pre-tax restructuring charges by segment were as follows (in thousands):

 

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

Real

Estate

  

Termination

Benefits

   Total  

Real

Estate

  

Termination

Benefits

   Total 
Medical and Healthcare  $-   $-   $-   $26   $86   $112 
U.S. Traditional Postsecondary   830    298    1,128    1,722    656    2,378 
Home Office and Other   160    1,266    1,426    (465)   2,916    2,451 
Total  $990   $1,564   $2,554   $1,283   $3,658   $4,941 

 

   Three Months Ended December 31, 2016   Six Months Ended December 31, 2016 
  

Real

Estate

  

Termination

Benefits

   Total  

Real

Estate

  

Termination

Benefits

   Total 
U.S. Traditional Postsecondary  $2,335   $-   $2,335   $3,703   $-   $3,703 
Home Office and Other   266    362    628    1,929    681    2,610 
Total  $2,601   $362   $2,963   $5,632   $681   $6,313 

 

The following table summarizes the separation and restructuring plan activity for the fiscal years 2018 and 2017, for which cash payments are required (in thousands):

 

Liability balance at June 30, 2016  $48,223 
Increase in liability (separation and other charges)   27,620 
Reduction in liability (payments and adjustments)   (29,728)
Liability balance at June 30, 2017   46,115 
Increase in liability (separation and other charges)   11,954 
Reduction in liability (payments and adjustments)   (16,304)
Liability balance at December 31, 2017  $41,765 

 

Of this liability balance, $16.4 million is recorded as Accrued Liabilities and $25.4 million is recorded as Deferred Rent and Other Liabilities on the Consolidated Balance Sheet at December 31, 2017. These liability balances primarily represent rent accruals and costs for employees that have either not yet separated from Adtalem or their full severance has not yet been paid. All of these remaining costs are expected to be paid over the next 12 months except for rent charges which may be paid out for periods of up to 8 years.

 

NOTE 12: INCOME TAXES

 

Tax expense from continuing operations of $109.6 million was recorded in the second quarter of fiscal year 2018. As discussed below, tax expense from continuing operations includes $101.2 million to record the one-time impact of the Tax Cuts and Jobs Act (the “Tax Act”), and generated effective tax rates on income from continuing operations of 202.0% and 141.2% for the second quarter and first six months of fiscal year 2018, respectively. The effective tax rates on income from continuing operations excluding tax expense related to the Tax Act were 15.6% for the second quarter and 15.0% for the first six months of fiscal year 2018. A tax benefit of $10.1 million was recorded in continuing operations in the second quarter of fiscal year 2017, driven primarily from the settlement costs of various regulatory litigation, and generated effective tax rates on income from continuing operations of 362.0% and -7.6% for the second quarter and first six months of fiscal year 2017. The effective tax rates on income from continuing operations excluding the settlements were 19.4% and 20.8% for the second quarter and first six months of fiscal year 2017. Excluding the one-time impact of the Tax Act and settlements, the decrease in tax rates reflects the decrease in the U.S. tax rate resulting from the Tax Act, as well as an increase in the percentage of earnings from foreign operations, which are taxed at lower rates than domestic earnings.

 

Four of Adtalem’s operating units, AUC, which operates in St. Maarten, RUSM, which operates in Dominica, RUSVM, which operates in St. Kitts, and Adtalem Brazil, which operates in Brazil, all benefit from local tax incentives. AUC’s effective tax rate reflects benefits derived from investment incentives. RUSM and RUSVM each have agreements with their respective domestic governments that exempt them from local income taxation. Both of these agreements have been extended to provide, in the case of RUSM, an indefinite period of exemption and, in the case of RUSVM, exemption until 2037. Adtalem Brazil’s effective tax rate reflects benefits derived from its participation in PROUNI, a Brazilian program for providing scholarships to a portion of its undergraduate students.

 

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Adtalem had not previously recorded a U.S. federal or state tax provision for the undistributed earnings of its international subsidiaries. As a result of the Tax Act, Adtalem has revised its intent to indefinitely reinvest accumulated cash balances, future cash flows and post-acquisition undistributed earnings and profits in foreign operations, and only intends to maintain this position with respect to cash balances, cash flows and accumulated and future earnings in Brazil. In accordance with this plan, cash held by the subsidiaries in Brazil will not be available for general company purposes, and no foreign or state tax has been recorded on such amount. As of December 31, 2017, the cumulative undistributed earnings attributable to operations in Brazil was approximately $91 million.

 

Adtalem’s effective tax rate was impacted by the Tax Act, which was enacted into law on December 22, 2017. Income tax effects resulting from changes in tax laws are required to be accounted for in the period in which the law is enacted, and the effects are recorded as a component of provision for income taxes from continuing operations. As a result, a provision for income tax resulting from the enactment of the Tax Act was recorded in the quarter.

 

The Tax Act includes significant changes to the U.S. corporate income tax system, which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime, which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings. The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 28.1% for the fiscal year ending June 30, 2018. The new taxes for certain foreign-sourced earnings under the Tax Act are effective for Adtalem after the fiscal year ending June 30, 2018.

 

The tax expense recorded in the quarter upon enactment of the Tax Act includes $96.3 million for the one-time transition tax on the deemed repatriation of foreign earnings, payable over eight years; $2.5 million to record the impact of the reduction in tax rates on our net deferred tax asset position; and $2.7 million for state income and foreign withholding taxes on undistributed foreign earnings that are no longer intended to be indefinitely reinvested in foreign operations, partially offset by $0.3 million to reduce tax expense recorded in the first quarter of fiscal year 2018 for the reduction in the U.S. tax rate. As of December 31, 2017, Adtalem had not fully completed its accounting for the tax effects of the enactment of the Tax Act. We are still evaluating various impacts of the enacted legislation and these impacts may materially differ from the estimated impacts recognized in the second quarter of fiscal year 2018 due to future treasury regulations, tax law technical corrections, and other potential guidance, notices, rulings, refined computations and actions we may take as a result of the tax legislation, and other items. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the legislation to finalize the recording of the related tax impacts.

 

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed in general at a 10.5% tax rate. Because of the complexity of these provisions, Adtalem has not completed its analysis on the potential impact to its deferred tax assets and liabilities, or whether to (i) account for GILTI as a component of tax expense in the period in which Adtalem is subject to the rules (the “period cost method”), or (ii) account for GILTI in Adtalem’s measurement of deferred taxes (the “deferred method”).

 

NOTE 13: DEBT

 

Revolving Credit Facility

 

Adtalem entered into a revolving credit facility on March 31, 2015 which expires on March 31, 2020. The revolving credit agreement (as amended, the “Credit Agreement”) provides for a multi-currency revolving credit facility in the amount of $400 million (the “Aggregate Commitment”) with availability in currencies other than U.S. dollars of up to $200 million. Subject to certain conditions set forth in the Credit Agreement, the Aggregate Commitment may be increased up to $550 million. On October 4, 2016, Adtalem entered into a First Amendment to Credit Agreement, which amends the Aggregate Commitment to increase the amount available for letters of credit from $50 million to $100 million. Adtalem may select interest rates for borrowings under the Credit Agreement equal to LIBOR or a LIBOR-equivalent rate for Eurocurrency Rate Loans or a base rate, plus an applicable rate based on Adtalem’s consolidated leverage ratio, as defined in the Credit Agreement. The applicable rate ranges from 2% to 3% for Eurocurrency Rate Loans and from 1% to 2% for Base Rate Loans. As of December 31, 2017, June 30, 2017 and December 31, 2016, Adtalem borrowings under this agreement were $165 million, $125 million and $225 million, respectively, with a weighted average interest rate of 3.42%, 3.18% and 2.73%, respectively. There are no required principal payments under the Credit Agreement and all borrowings and letters of credit mature on March 31, 2020. As a result of the agreement extending beyond one year, the borrowings are classified as long-term with the exception of amounts expected to be repaid in the 12 months subsequent to the balance sheet date, if any. Adtalem letters of credit outstanding under this agreement were $68.5 million as of each of December 31, 2017, June 30, 2017 and December 31, 2016. Of this amount, $68.4 million was posted in the second quarter of fiscal year 2017 in relation to the ED Settlement (see “Note: 3 Regulatory Settlements”). Upon the close of the sale of DeVry University (see “Note 2: Discontinued Operations and Assets Held for Sale”), Adtalem will continue to post this letter of credit on behalf of DeVry University. As of December 31, 2017, Adtalem is charged an annual fee equal to 2.0% of the undrawn face amount of the outstanding letters of credit under the agreement, payable quarterly. The agreement also requires payment of a commitment fee equal to 0.35% of the undrawn portion of the credit facility as of December 31, 2017. The interest rate, letter of credit fees and commitment fees are adjustable quarterly, based upon Adtalem’s achievement of certain financial ratios.

 

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The Credit Agreement contains covenants that, among other things, require maintenance of certain financial ratios, as defined in the agreement. Maintenance of these financial ratios could place restrictions on Adtalem’s ability to pay dividends. These financial ratios include a consolidated fixed charge coverage ratio, a consolidated leverage ratio and a U.S. Department of Education financial responsibility ratio based upon a composite score of an equity ratio, a primary reserve ratio and a net income ratio. Failure to maintain any of these ratios or to comply with other covenants contained in the agreement would constitute an event of default and could result in termination of the agreement and require payment of all outstanding borrowings and replacement of outstanding letters of credit. Adtalem was in compliance with the debt covenants as of December 31, 2017.

 

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

 

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

 

NOTE 14: COMMITMENTS AND CONTINGENCIES

 

Adtalem is subject to lawsuits, administrative proceedings, regulatory reviews and investigations associated with financial assistance programs and other matters arising in the normal conduct of its business. The following is a description of pending legal and regulatory matters that may be considered other than ordinary, routine and incidental to the business. Descriptions of certain matters from prior SEC filings may not be carried forward in this report to the extent we believe such matters no longer are required to be disclosed or there has not been, to our knowledge, significant activity relating to them. The timing or outcome of the following matters, or their possible impact on Adtalem’s business, financial condition or results of operations, cannot be predicted at this time. The continued defense, resolution or settlement of any of the following matters could require us to expend significant resources and could have a material adverse effect on our business, financial condition, results of operations and cash flows and result in the imposition of significant restrictions on us and our ability to operate.

 

On August 28, 2015, DeVry University received a request from the Multi-Regional and Foreign School Participation Division of the Federal Student Aid office of the Department of Education (“ED FSA”) for documents and information regarding published employment outcomes and relative earnings information of DeVry University graduates (the “Inquiry”). The stated purpose of the Inquiry was to permit ED FSA to assess DeVry University’s compliance with applicable regulations under Title IV. On January 27, 2016, DeVry University received a Notice of Intent to Limit from ED FSA (the “ED January 2016 Notice”), based on a portion of the Inquiry, and on October 13, 2016, DeVry University and the U.S. Department of Education (“ED”) reached a negotiated agreement to settle the ED January 2016 Notice (the “ED Settlement”).

 

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

 

 On or about June 21, 2016, T’Lani Robinson and Robby Brown filed an arbitration demand with the American Arbitration Association in Chicago, seeking to represent a putative class of students who received a DeVry University education from January 1, 2008 until April 8, 2016 (the “Putative Class Period”). Following Adtalem’s filing of a declaratory judgment action in the United States District Court for the Northern District of Illinois seeking, among other things, an order declaring that federal court is the appropriate venue for this putative class action, on September 12, 2016, Robinson and Brown voluntarily withdrew their demand for arbitration. On September 20, 2016, Robinson and Brown answered the declaratory judgement action and filed a putative class action counterclaim, individually and on behalf of others similarly situated, against Adtalem Inc., DeVry University, Inc., and DeVry/New York, Inc. in the United States District Court for the Northern District of Illinois. The counterclaim asserted causes of action for breach of contract, misrepresentation, concealment, negligence, violations of the Illinois Uniform Deceptive Trade Practices Act, the Illinois Consumer Fraud and Deceptive Trade Practices Act, and the Illinois Private Business and Vocational Schools Act, conversion, unjust enrichment, and declaratory relief. The plaintiffs sought monetary, declaratory, injunctive, and other unspecified relief. On November 4, 2016, following a stipulated dismissal of the declaratory action, the Adtalem Parties moved to dismiss the counterclaim after which plaintiffs voluntarily withdrew it. On December 2, 2016, Robinson and Brown filed an amended complaint adding two additional named plaintiffs. The amended complaint purports to assert nationwide class claims under the above-referenced Illinois statutes and common law theories on behalf of those who, during the Putative Class Period, (i) enrolled in DeVry University; (ii) financed their education with DeVry University with direct loans administered by ED; or (iii) entered into an enrollment agreement with DeVry University and otherwise paid for a DeVry University education. The amended complaint also seeks to represent a fourth class of individuals residing in, or enrolled in a DeVry University campus located in, California during the Putative Class Period bringing claims under the California Business and Profession Code. In addition to the claims previously asserted as described above, the amended complaint adds a claim for breach of fiduciary duty owed students in administering Title IV funds. The Adtalem Parties moved to dismiss the amended complaint on January 13, 2017.

 

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

 

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

 

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By Order dated November 28, 2016, the district court ordered the Petrizzo and Jara Cases be consolidated under the Petrizzo caption for all further purposes. On December 5, 2016, plaintiffs filed an amended consolidated complaint on behalf of 38 individual plaintiffs and others similarly situated. The amended consolidated complaint seeks to bring claims on behalf of the named individuals and a putative nationwide class of individuals for unjust enrichment and alleged violations of the Illinois Consumer Fraud and Deceptive Practices Act and the Illinois Private Businesses and Vocational Schools Act of 2012. In addition, it purports to assert causes of action on behalf of certain of the named individuals and 15 individual state-specific putative classes for alleged violations of 15 different states’ consumer fraud, unlawful trade practices, and consumer protection laws. Finally, it seeks to bring individual claims under Georgia state law on behalf of certain named plaintiffs. The plaintiffs seek monetary, declaratory, injunctive, and other unspecified relief. The Adtalem Parties moved to dismiss the complaint on February 3, 2017.

 

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

 

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

 

NOTE 15: SEGMENT INFORMATION

 

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

 

Adtalem’s principal business is the provision of educational services. During the third quarter of fiscal year 2017, Adtalem effected a change to reportable segments to align with current strategic priorities and resource allocation. As of the quarter ended March 31, 2017, Adtalem presents four reporting segments: “Medical and Healthcare,” which includes the operations of Chamberlain and the medical and veterinary schools (which include AUC, RUSM and RUSVM); “Professional Education,” which includes the operations of Becker and ACAMS; “Technology and Business,” which includes the operations of Adtalem Brazil; and “U.S. Traditional Postsecondary,” which includes the operations of Carrington. Prior period amounts have been reclassified to conform to the current reportable segment presentation.

 

These segments are consistent with the method by which the Chief Operating Decision Maker (Adtalem’s President and Chief Executive Officer) evaluates performance and allocates resources. Performance evaluations are based, in part, on each segment’s operating income. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers and are eliminated in consolidation. “Home Office and Other” includes activity not allocated to a reporting segment and is included to reconcile segment results to the Consolidated Financial Statements. The accounting policies of the segments are the same as those described in “Note 4: Summary of Significant Accounting Policies.”

 

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

 

   Three Months Ended
December 31,
   Six Months Ended
December 31,
 
   2017   2016   2017   2016 
Revenue:                    
Medical and Healthcare  $203,297   $201,409   $394,582   $401,178 
Professional Education   30,359    27,366    70,401    62,096 
Technology and Business   75,133    73,387    137,572    131,627 
U.S. Traditional Postsecondary   29,033    32,445    61,168    69,431 
Home Office and Other   (578)   (649)   (1,201)   (1,347)
Total Consolidated Revenue  $337,244   $333,958   $662,522   $662,985 
Operating Income (Loss):                    
Medical and Healthcare  $55,047   $52,152   $81,279   $96,016 
Professional Education   2,193    134    12,700    6,191 
Technology and Business   13,991    13,482    15,852    11,506 
U.S. Traditional Postsecondary   (5,779)   (6,281)   (11,293)   (8,301)
Home Office and Other (1)   (10,068)   (60,957)   (17,412)   (72,156)
Total Consolidated Operating Income (Loss)  $55,384   $(1,470)  $81,126   $33,256 
Segment Assets:                    
Medical and Healthcare  $954,114   $956,510   $954,114   $956,510 
Professional Education   444,029    456,824    444,029    456,824 
Technology and Business   610,803    581,355    610,803    581,355 
U.S. Traditional Postsecondary   55,008    57,246    55,008    57,246 
Home Office and Other   105,192    134,225    105,192    134,225 
Discontinued Operations   41,576    115,273    41,576    115,273 
Total Consolidated Assets  $2,210,722   $2,301,433   $2,210,722   $2,301,433 
Additions to Long-Lived Assets:                    
Medical and Healthcare  $8,669   $3,541   $14,336   $6,844 
Professional Education   298    -    1,221    363,658 
Technology and Business   12,407    2,828    15,748    7,613 
U.S. Traditional Postsecondary   360    559    1,121    1,766 
Home Office and Other   2,463    1,315    4,305    2,542 
Total Consolidated Additions to Long-Lived Assets  $24,197   $8,243   $36,731   $382,423 
Reconciliation to Consolidated Financial Statements:                    
Capital Expenditures  $20,060   $8,243   $32,594   $18,771 
Increase in Capital Assets from Acquisitions   16    -    16    4,913 
Increase in Intangible Assets and Goodwill   4,121    -    4,121    358,739 
Total Increase in Consolidated Long-Lived Assets  $24,197   $8,243   $36,731   $382,423 
Depreciation Expense:                    
Medical and Healthcare  $6,332   $6,720   $12,909   $13,198 
Professional Education   289    180    527    347 
Technology and Business   2,477    2,169    5,103    4,110 
U.S. Traditional Postsecondary   1,169    1,201    2,300    2,392 
Home Office and Other   1,853    3,060    4,026    5,996 
Total Consolidated Depreciation Expense  $12,120   $13,330   $24,865   $26,043 
Intangible Asset Amortization Expense:                    
Professional Education  $1,626   $1,884   $3,251   $3,786 
Technology and Business   837    548    1,709    1,909 
Total Consolidated Amortization Expense  $2,463   $2,432   $4,960   $5,695 

 

(1) Home Office and Other Operating Loss includes $52.2 million in charges in the three and six months ended December 31, 2016 for regulatory settlements as described in “Note 3: Regulatory Settlements.”

 

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Adtalem conducts its educational operations in the U.S., Dominica, St. Kitts, St. Maarten, Brazil, Canada, Europe, the Middle East, India, China and the Pacific Rim. Other international revenue, which is derived principally from Europe and the Pacific Rim, was less than 5% of total revenue for each of the three-month and six-month periods ended December 31, 2017 and 2016. Revenue and long-lived assets by geographic area are as follows (in thousands):

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2017   2016   2017   2016 
Revenue from Unaffiliated Customers:                    
Domestic Operations  $173,128   $171,196   $357,288   $352,363 
International Operations:                    
Dominica, St. Kitts and St. Maarten   88,236    88,542    165,614    176,846 
Brazil   75,133    73,387    137,572    131,627 
Other   747    833    2,048    2,149 
Total International   164,116    162,762    305,234    310,622 
Total Consolidated Revenue  $337,244   $333,958   $662,522   $662,985 
Long-Lived Assets:                    
Domestic Operations  $177,562   $

211,319

   $177,562   $

211,319

 
International Operations:                    
Dominica, St. Kitts and St. Maarten   167,841    190,796    167,841    190,796 
Brazil   106,884    111,096    106,884    111,096 
Other   4,143    3,575    4,143    3,575 
Total International   278,868    305,467    278,868    305,467 
Total Consolidated Long-Lived Assets  $456,430   $

516,786

   $456,430   $

516,786

 

 

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

 

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

 

Through its website, Adtalem Global Education Inc. (“Adtalem”) offers its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other reports filed with the Securities and Exchange Commission (“SEC”). Adtalem’s website is http://www.adtalem.com.

 

The following discussion of Adtalem’s results of operations and financial condition should be read in conjunction with Adtalem’s Consolidated Financial Statements and the related Notes thereto in “Item 1 – Financial Statements” in this Quarterly Report on Form 10-Q and Adtalem’s Consolidated Financial Statements and related Notes thereto in “Item 8 – Financial Statements and Supplementary Data” in Adtalem’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. Adtalem’s Annual Report on Form 10-K includes a description of critical accounting policies and estimates and assumptions used in the preparation of Adtalem’s financial statements. These include, but are not limited to, the use of estimates and assumptions that affect the reported amounts of assets and liabilities; revenue and expense recognition; allowance for uncollectible accounts; internal-use developed software; land, building and equipment; stock-based compensation; valuation of goodwill and other intangible assets; valuation of long-lived assets; and income taxes.

 

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

 

As described further below, on December 4, 2017, Adtalem announced the signing of a definitive agreement to divest DeVry University, with an expected closing date occurring in early fiscal year 2019. Accordingly, the results of DeVry University are presented as discontinued operations within this Form 10-Q. Also see “Note 2: Discontinued Operations and Assets Held for Sale” to the Consolidated Financial Statements in Part I, Item 1, for further discussion.

 

Following changes in strategic priorities that were implemented in the third quarter of fiscal year 2017, Adtalem is reporting its financial performance based on four reporting segments (Medical and Healthcare, Professional Education, Technology and Business, and U.S. Traditional Postsecondary). Prior periods are presented in accordance with these changes. Management has determined that these reporting segments align with Adtalem’s current strategic priorities and resource allocation. Adtalem’s Chief Operating Decision Maker, its President and Chief Executive Officer, regularly reviews financial information and evaluates operating and management performance based on these segments. See “Note 15: Segment Information” to the Consolidated Financial Statements in Part I, Item 1, for further discussion.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Quarterly Report on Form 10-Q, including those that affect Adtalem’s expectations or plans, may constitute “forward-looking statements” subject to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Adtalem or its management “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “foresees,” “intends,” “plans” or other words or phrases of similar import. Actual results may differ materially from those projected or implied by these forward-looking statements. Potential risks and uncertainties that could affect Adtalem’s results are described throughout this report, including those in Part I, Item 1, “Note 14: Commitments and Contingencies” to the Consolidated Financial Statements, “Item 1 – Legal Proceedings,” “Item 1A – Risk Factors,” and in Adtalem’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 filed with the SEC on August 24, 2017, including, without limitation, in “Item 1A – Risk Factors” and in the subsections of “Item 1 – Business” entitled “Market Trends and Competition,” “Student Admissions,” “Accreditation,” “Tuition and Fees,” “Financial Aid and Financing Student Education,” “Legislative and Regulatory Requirements,” “Seasonality” and “Employees.”

 

The forward-looking statements should be considered in the context of the risk factors referred to above and discussed elsewhere in this Form 10-Q. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we are not under any obligation to update any forward-looking information whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements.

 

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OVERVIEW

 

Adtalem’s financial results for the second quarter of fiscal year 2018 reflect revenue growth in the Medical and Healthcare, Professional Education and Technology and Business segments. These increases were partially offset by a decrease in revenue in the U.S. Traditional Postsecondary segment (which as of the second quarter of fiscal year 2018 consists of only Carrington College (“Carrington”)). Pre-tax income from continuing operations, excluding regulatory settlements, increased 9.9%, or $4.9 million, from the year-ago quarter primarily as a result of the increased revenue and cost control measures implemented across all Adtalem institutions and home office. Net income in the second quarter of fiscal year 2018 includes an increase in income tax expense of $101.2 million related to tax reform legislation signed into law in December 2017. Operational and financial highlights for the second quarter and first six months of fiscal year 2018 include:

 

·Chamberlain University (“Chamberlain”) revenue grew by 1.9% in the second quarter of fiscal year 2018 compared to the year-ago quarter. For the November 2017 session, new student enrollment increased 5.5% and total student enrollment at Chamberlain increased 5.1% compared to the same term last year. For the January 2018 session, new student enrollment increased 6.9% and total student enrollment increased 5.2%. Chamberlain continues to invest in its programs, student services and campus locations.

 

·Despite the serious business interruptions and property damage caused by Hurricanes Irma and Maria, both American University of the Caribbean School of Medicine (“AUC”) and Ross University School of Medicine (“RUSM”) were able to complete the September 2017 basic science semesters by January 5, 2018 (see “Hurricanes” discussion below). For the January 2018 semester, new student enrollment increased 11.5% and total student enrollment increased 1.3%.

 

·On December 4, 2017, Adtalem, entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which Adtalem agreed to sell DeVry University to Cogswell Education, LLC (“Cogswell”). Subject to the terms and conditions of the Purchase Agreement, Adtalem will sell all of the outstanding equity interests of DeVry University, Inc. and DeVry New York Inc. to Cogswell for de minimis consideration. Divesting this operating segment will reduce the organization’s dependence on government Title IV funds for its revenue, which is a strategic imperative.

 

·Adtalem recorded pre-tax restructuring charges of $2.6 million in the second quarter of fiscal year 2018 related to severance for workforce reductions and real estate consolidations at Carrington and Adtalem’s home office. Adtalem expects to incur additional restructuring charges during the remainder of fiscal year 2018 as we continue to right-size operations to better align with current enrollment levels and the effects of the divestiture of DeVry University.

 

·Adtalem continued its tenth share repurchase program by repurchasing a total of 1,142,769 shares of its common stock at an average cost of $37.46 per share during the second quarter of fiscal year 2018.

 

·Adtalem financial position remained strong, generating $49.6 million of operating cash flow during the first six months of fiscal year 2018. As of December 31, 2017, cash and cash equivalents totaled $212.2 million and outstanding borrowings totaled $165.0 million.

 

HURRICANES

 

Hurricane Irma

 

On September 6, 2017, Category 5 Hurricane Irma (“Irma”) caused widespread damage to a large section of the islands of the Caribbean Sea. Irma forced the temporary shut-down of basic science academic instruction of AUC and caused significant damage to AUC’s physical property on the island of St. Maarten. All AUC facilities on the island suffered some degree of damage and could not sustain educational operations. The island’s infrastructure was severely incapacitated. Adtalem evacuated all students and faculty, and some staff from the island following the storm. Classes for AUC’s September 2017 semester had not commenced as of the date the hurricane struck St. Maarten. AUC management determined that repairs to its facilities and the island infrastructure could not be completed in time to teach the September 2017 basic science semester in St. Maarten; thus, an alternative teaching site was identified. AUC contracted with the University of Central Lancashire (“UCLAN”), a public university in Preston, United Kingdom to provide classroom facilities, housing and student support for AUC educational operations. All appropriate accreditation and regulatory approvals to teach in Preston were obtained and on September 29, 2017, AUC students began basic science academic instruction on the UCLAN campus.

 

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As of December 31, 2017, AUC recorded expenses of $11.3 million associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental costs of teaching at UCLAN. Based upon preliminary damage assessments of the AUC facilities, impairment write-downs of building, building improvements, furniture and equipment of $15.4 million were recorded as of December 31, 2017. Management estimates that total costs to repair and replace damaged facilities and equipment will be in the range of $20 to $25 million. Costs and damage repairs are expected to be covered under AUC’s insurance policies, subject to deductibles. AUC received insurance proceeds of $10 million in November 2017 and received a commitment to a partial proof of loss in December 2017, authorizing an additional $10 million partial payment of insurance settlements. As of December 31, 2017, insurance proceeds of $9.8 million were recorded as an offset to the $11.3 million of evacuation expenses and incremental instructional costs incurred, less insurance deductibles of $1.5 million. Expected insurance proceeds of $11.6 million were recorded as income to offset the $15.4 million asset write-downs recorded through December 31, 2017, less insurance deductibles of $3.8 million.

 

The effects of starting the semester late in September 2017 reduced revenue in the first quarter of fiscal year 2018 by approximately $3.4 million, $2.0 million of which was recognized in the second quarter of fiscal year 2018, and $0.7 million, which was lost due to student withdrawals. The remaining $0.7 million will be recognized in the third quarter of fiscal year 2018 as AUC completed the September 2017 semester on January 5, 2018. Of the students originally registered for the September 2017 semester, approximately 94% continued the semester in Preston. Management expects that lost fiscal year 2018 revenue for students who decided not to attend AUC as a result of the hurricane will be reimbursable under its insurance policy, subject to deductibles. Beginning with the January 2018 semester, new AUC students, along with students in their second and third semesters will be back on the island of St. Maarten, while those in their fourth and fifth semesters will remain in Preston.

 

The operating results effect of Irma increased revenue by approximately $2.0 million in the second quarter and decreased revenue by approximately $1.4 million for the first six months of fiscal year 2018, compared to the year-ago periods. Operating expenses were not materially changed in the second quarter and increased by $5.3 million for the first six months of fiscal year 2018 compared to the year-ago periods. Management does not believe at this time that AUC has incurred significant uninsured costs associated with hurricane losses.

 

Management does not believe the effects of Irma have created a triggering event, which would require an impairment analysis of AUC’s indefinite-lived intangible assets and goodwill. Damage to physical property will be repaired with the majority of costs expected to be reimbursable by insurance proceeds. The September 2017 semester was completed with minimal lost students and revenue and commencement of future semesters is not in question. Management believes its response to the crisis and its ability to continue providing educational services demonstrates AUC’s ability to generate future revenue and operating results sufficient to maintain fair values of AUC’s assets in excess of their carrying values.

 

Hurricane Maria

 

On September 19, 2017, Category 5 Hurricane Maria (“Maria”) caused widespread damage to a large section of the islands of the Caribbean Sea. Maria forced the temporary shut-down of basic science academic instruction of RUSM and caused significant damage to RUSM’s physical property on the island of Dominica. All RUSM facilities on the island suffered some degree of damage and could not sustain educational operations. The island’s infrastructure was severely incapacitated. Adtalem evacuated all students and most faculty, and some staff from the island following the storm. RUSM basic science students had completed two weeks of classes in the September 2017 semester before the hurricane struck Dominica. Due to the significant damage on the island, repairs to the island infrastructure could not be completed in time to resume teaching the September 2017 semester in Dominica; thus, an alternative teaching site was identified. RUSM contracted with a cruise ship operator to provide a vessel, which was docked off of the island of St. Kitts and used for classroom facilities and housing for RUSM basic science educational operations. All appropriate accreditation and regulatory approvals to teach on the vessel in St. Kitts were obtained and on October 23, 2017, RUSM basic science students began completion of the September 2017 semester instruction on the ship.

 

As of December 31, 2017, RUSM recorded expenses of $32.7 million associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental additional costs of teaching on the ship in St. Kitts. Based upon preliminary damage assessments of the RUSM facilities, impairment write-downs of buildings, building improvements, furniture and equipment of $14.5 million were recorded as of December 31, 2017. Management estimates that total costs to repair and replace damaged facilities and equipment will be in the range of $40 to $50 million. Costs and damage repairs are expected to be covered under RUSM’s insurance policies, subject to deductibles. RUSM received insurance proceeds of $20 million in December 2017 and also received a commitment to a partial proof of loss in December 2017, authorizing an additional $10 million partial payment of insurance settlements. As of December 31, 2017, insurance proceeds of $30 million were recorded as an offset to the $32.7 million of evacuation expenses and incremental instructional costs incurred, less insurance deductibles of $2.7 million. Expected insurance proceeds of $9.2 million were recorded as income to offset the $14.5 million asset write-downs recorded through December 31, 2017, less insurance deductibles of $5.4 million.

 

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The effect of interrupting the September 2017 semester, along with losing some students due to the transition from Dominica to St. Kitts, reduced revenue in the first six months of fiscal year 2018 by approximately $6.8 million. Approximately $4.0 million of this amount is expected to be recognized over the remainder of fiscal year 2018, as the semester was completed on January 5, 2018 and those students who took a leave of absence are expected to return for the January 2018 and May 2018 semesters. Of the students originally registered for the September 2017 semester, approximately 78% continued the semester in St. Kitts. Of those not continuing the September 2017 semester, approximately 89% returned for the January 2018 semester. Management expects that lost fiscal year 2018 revenue for students who decided not to attend RUSM as a result of the hurricane will be reimbursable under its insurance policy, subject to deductibles. Beginning with the January 2018 semester, RUSM students have been temporarily relocated to Knoxville, Tennessee at facilities owned by Lincoln Memorial University (“LMU”) and to a satellite facility on St. Kitts while the Dominica campus is repaired and rebuilt. Regulatory and accreditor approvals are expected to be finalized following a site visit by the Dominica Medical Board in early February 2018. RUSM is using its own medical sciences curriculum and faculty while making use of the LMU teaching and office facilities, including an anatomy lab.

 

The operating results effect of Maria decreased revenue by approximately $2.8 million in the second quarter and decreased revenue by approximately $6.8 million for the first six months of fiscal year 2018, compared to the year-ago periods. Operating expenses were not materially changed in the second quarter and increased by $8.1 million for the first six months of fiscal year 2018 compared to the year-ago periods. Management does not believe at this time that RUSM has incurred significant uninsured costs associated with hurricane losses.

 

Management does not believe the effects of Maria have created a triggering event, which would require an impairment analysis of RUSM’s indefinite-lived intangible assets and goodwill. Damage to physical property will be repaired with the majority of costs expected to be reimbursable by insurance proceeds. The September 2017 semester was completed with minimal lost students and management does not expect future extraordinary revenue loss or delays commencing classes. Management believes its response to the crisis and its ability to continue providing educational services demonstrates RUSM’s ability to generate future revenue and operating results sufficient to maintain fair values of RUSM’s assets in excess of their carrying values.

 

DIVESTITURE OF DEVRY UNIVERSITY

 

On December 4, 2017, Adtalem, entered into a Purchase Agreement, pursuant to which Adtalem agreed to sell DeVry University to Cogswell. Subject to the terms and conditions of the Purchase Agreement, Adtalem will sell all of the outstanding equity interests of DeVry University, Inc. and DeVry New York Inc. to Cogswell for de minimis consideration. To support DeVry University’s future success, Adtalem has committed to transferring DeVry University with a minimum working capital balance of $7.5 million, subject to increase under certain conditions of up to $20.1 million. The Purchase Agreement includes an earn-out entitling Adtalem to payments of up to $20 million paid over a ten-year period based on DeVry University’s free cash flow.

 

DeVry University is an operating segment and was previously included in the U.S. Traditional Postsecondary reporting segment. Subject to the terms and conditions of the Purchase Agreement it will be sold in its entirety. Divesting DeVry University is a strategic shift in the operations of Adtalem. This segment offers principally bachelor’s and master’s degrees in technology and business in the U.S., and Adtalem will be exiting this market with this disposition. Adtalem’s only other operating segment that grants primarily bachelor’s and master’s degrees is Chamberlain University, and these are in nursing and related medical fields. Selling the DeVry University operating segment will reduce the organization’s dependence on government Title IV funds for its revenue, which is a strategic imperative. This operating segment is discussed in depth in the business section of the Adtalem Annual Report on Form 10-K for the year ended June 30, 2017 and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section of all quarterly and annual reports. DeVry University is the legacy business of Adtalem and at one time accounted for the majority of its consolidated revenue and operating income. Disposal of this operating segment will have a significant effect on the operations and financial results of Adtalem. DeVry University employs approximately 1,100 full-time faculty and staff and requires significant home office administrative support, absorbing approximately 30% of all home office administrative costs.

 

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In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we are classifying the DeVry University entity as “Held for Sale” and “Discontinued Operations” as of December 31, 2017. As a result, all financial results, disclosures and discussions of continuing operations in this Quarterly Report on Form 10-Q exclude DeVry University operations.

 

USE OF NON-GAAP FINANCIAL INFORMATION AND SUPPLEMENTAL RECONCILIATION SCHEDULE

 

During the second quarter and first six months of fiscal year 2018, Adtalem classified the operating results of DeVry University as discontinued operations, and recorded special items related to the following:

 

·Restructuring charges primarily related to reductions in force (“RIF”) and real estate consolidations at Carrington and Adtalem’s home office.
·Income tax charges related to implementation of the Tax Cuts and Jobs Act of 2017.

 

During the second quarter and first six months of fiscal year 2017, Adtalem recorded special items related to the following:

 

·Restructuring charges primarily related to real estate consolidations at Carrington and Adtalem’s home office in order to align its cost structure with enrollments.
·Charges arising from the settlement agreements with the Federal Trade Commission (“FTC”) and the Office of the Attorney General of the State of New York (“NYAG”).

 

In addition, in accordance with GAAP, the operating results of DeVry University are reclassified as discontinued operations for the second quarter and first six months of fiscal year 2017.

 

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

  

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2017   2016   2017   2016 
Net (Loss) Income  $(81,156)  $14,413   $(68,371)  $39,565 
(Loss) Earnings per Share (basic-2017, diluted-2016)  $(1.33)  $0.23   $(1.10)  $0.62 
Continuing Operations:                    
Restructuring Expense  $2,554   $2,963   $4,941   $6,313 
Effect on Earnings per Share (diluted)  $0.04   $0.05   $0.08   $0.10 
Tax Cuts and Jobs Act of 2017  $101,196   $-   $101,196   $- 
Effect on Earnings per Share (diluted)  $1.63   $-   $1.61   $- 
Regulatory Settlements  $-   $52,150   $-   $52,150 
Effect on Earnings per Share (diluted)  $-   $0.81   $-   $0.82 
Income Tax Impact on Non-GAAP Adjustments (1)  $(695)  $(20,938)  $(1,284)  $(21,856)
Effect on Earnings per Share (diluted)  $(0.01)  $(0.33)  $(0.02)  $(0.34)
Discontinued Operations, net of tax  $25,420   $(7,455)  $34,808   $(6,668)
Effect on Earnings per Share (diluted)  $0.41   $(0.12)  $0.56   $(0.10)
Net Income from Continuing Operations Excluding                    
Special Items, net of tax  $47,319   $41,133   $71,290   $69,504 
Earnings per Share from Continuing Operations                    
Excluding Special Items (diluted)  $0.76   $0.64   $1.14   $1.09 
Shares used in EPS calculation                    
Basic   61,234    NA    62,009    NA 
Diluted   62,023    64,028    62,705    63,871 

 

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

 

 39 

 

 

RESULTS OF OPERATIONS

 

The following table presents information with respect to the relative size to revenue of each item in the Consolidated Statements of Income (Loss) for the first three and six months of both the current and prior fiscal year. Percentages may not add because of rounding.

 

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
   2017   2016   2017   2016 
Revenue   100.0%   100.0%   100.0%   100.0%
Cost of Educational Services   53.1%   53.6%   56.6%   55.3%
Student Services and Administrative Expense   29.8%   30.3%   30.4%   30.9%
Restructuring Expense   0.8%   0.9%   0.7%   1.0%
Regulatory Settlements   0.0%   15.6%   0.0%   7.9%
Total Operating Cost and Expense   83.6%   100.4%   87.8%   95.0%
Operating Income (Loss) from Continuing Operations   16.4%   (0.4)%   12.2%   5.0%
Net Interest Expense   (0.3)%   (0.4)%   (0.1)%   (0.4)%
Income (Loss) from Continuing Operations Before                    
Income Taxes   16.1%   (0.8)%   12.1%   4.7%
Income Tax (Provision) Benefit   (32.5)%   3.0%   (17.1)%   0.4%
Equity Method Investment Income (Loss)   0.0%   0.0%   (0.0)%   0.0%
(Loss) Income from Continuing Operations   (16.4)%   2.2%   (5.0)%   5.0%
(Loss) Income from Discontinued Operations, Net of Tax   (7.5)%   2.2%   (5.3)%   1.0%
Net (Loss) Income   (24.0)%   4.4%   (10.2)%   6.0%
Net Income Attributable to Noncontrolling Interest   (0.1)%   (0.1)%   (0.1)%   (0.1)%
Net (Loss) Income Attributable to Adtalem Global                    
Education   (24.1)%   4.3%   (10.3)%   6.0%

 

REVENUE

 

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

 

The following tables present revenue by segment detailing the changes from the year-ago comparative periods including disclosures of the effect of Hurricanes Irma and Maria, the effect of acquisitions and changes in the value of the Brazilian Real compared to the U.S. dollar. Total consolidated revenue for the second quarter of fiscal year 2018 of $337.2 million increased 1.0%, or $3.3 million, compared to the year-ago quarter. For the first six months of fiscal year 2018, total consolidated revenue of $662.5 million decreased 0.1%, or $0.5 million, compared to the year-ago period. Revenue results by segment are discussed in more detail in the sections below.

 

 40 

 

 

   Three Months Ended December 31, 2017 
   (in thousands) 
  Medical
and
Healthcare
   Professional
Education
   Technology
and
Business
   U.S.
Traditional
Postsecondary
  

Home Office

and

Other

   Consolidated 
Revenue:                        
Fiscal Year 2017 as Reported  $201,409   $27,366   $73,387   $32,445   $(649)  $333,958 
Organic Growth (Decline)   2,780    2,993    438    (3,412)   71    2,870 
Effect of Acquisitions   -    -    218    -    -    218 
Hurricane Impact   (892)   -    -    -    -    (892)
Effect of Currency Change   -    -    1,090    -    -    1,090 
Fiscal Year 2018 as Reported  $203,297   $30,359   $75,133   $29,033   $(578)  $337,244 
                               
Fiscal Year 2018 % Change:                              
Organic Growth (Decline)   1.4%   10.9%   0.6%   (10.5)%   NM    0.9%
Effect of Acquisitions   -    -    0.3%   -    NM    0.1%
Constant Currency Change   1.4%   10.9%   0.9%   (10.5)%   NM    0.9%
Hurricane Impact   (0.4)%   -    -    -    NM    (0.3)%
Effect of Currency Change   -    -    1.5%   -    NM    0.3%
Fiscal Year 2018 % Change as Reported   0.9%   10.9%   2.4%   (10.5)%   NM    1.0%

 

   Six Months Ended December 31, 2017 
   (in thousands) 
  Medical
and
Healthcare
   Professional
Education
   Technology
and
Business
   U.S.
Traditional
Postsecondary
  

Home Office

and

Other

   Consolidated 
Revenue:                        
Fiscal Year 2017 as Reported  $401,178   $62,096   $131,627   $69,431   $(1,347)  $662,985 
Organic Growth (Decline)   1,640    8,305    2,948    (8,263)   146    4,776 
Effect of Acquisitions   -    -    218    -    -    218 
Hurricane Impact   (8,236)   -    -    -    -    (8,236)
Effect of Currency Change   -    -    2,779    -    -    2,779 
Fiscal Year 2018 as Reported  $394,582   $70,401   $137,572   $61,168   $(1,201)  $662,522 
                               
Fiscal Year 2018 % Change:                              
Organic Growth (Decline)   0.4%   13.4%   2.2%   (11.9)%   NM    0.7%
Effect of Acquisitions   -    -    0.2%   -    NM    0.0%
Constant Currency Change   0.4%   13.4%   2.4%   (11.9)%   NM    0.8%
Hurricane Impact   (2.1)%   -    -    -    NM    (1.2)%
Effect of Currency Change   -    -    2.1%   -    NM    0.4%
Fiscal Year 2018 % Change as Reported   (1.6)%   13.4%   4.5%   (11.9)%   NM    (0.1)%

 

Management expects that for the third quarter of fiscal year 2018, revenue will increase 3 to 4 percent compared to the third quarter of fiscal year 2017. Revenue growth within the Medical and Healthcare, Technology and Business, and Professional Education segments is expected to be partially offset by U.S. Traditional Postsecondary continuing revenue declines resulting from the impact of lower total student enrollment.

 

Medical and Healthcare

 

Revenue in the Medical and Healthcare segment increased 0.9%, or $1.9 million, to $203.3 million in the second quarter and decreased 1.6%, or $6.6 million, to $394.6 million for the first six months of fiscal year 2018 compared to the year-ago periods. Revenue decreases at the medical and veterinary schools, principally the result of hurricane related losses, in both the second quarter and first six months of fiscal year 2018 were fully offset in the second quarter and partially offset in first six months of fiscal year 2018 by revenue increases at Chamberlain. Key trends for Chamberlain and the medical and veterinary schools are set forth below.

 

 41 

 

Chamberlain University

 

Chamberlain University Undergraduate and Graduate Student Enrollment:

 

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

 

   Fiscal Year 2017 
Term  July 2016   Sept. 2016   Nov. 2016   Jan. 2017   Mar. 2017   May 2017 
New Students   2,144    5,003    2,660    4,185    2,713    3,779 
% Change from Prior Year   (1.7)%   1.2%   3.2%   (3.0)%   11.7%   4.0%
Total Students   25,229    28,781    28,268    29,789    29,726    28,961 
% Change from Prior Year   15.9%   11.5%   10.2%   6.6%   7.3%   5.7%

 

Chamberlain revenue increased 1.9%, or $2.2 million, to $115.1 million in the second quarter and increased 2.1%, or $4.6 million, to $229.0 million in the first six months of fiscal year 2018 compared to the year-ago periods, driven primarily by total enrollment increases. The improved new student enrollment in the second quarter of fiscal year 2018, was the result of improved execution on recruiting plans, particularly in the Master of Science in Nursing (“MSN”) degree programs, with retention improving as well, although this was partially offset by continued weakness in new student enrollment for the online Registered Nurse to Bachelor of Science in Nursing (“RN-to-BSN”) degree program.

 

The Chamberlain campus in Houston, Texas, was placed on conditional status, effective January 19, 2017, by the Texas Board of Nursing (“TBN”), as a result of falling below the state-required first time pass rate on the National Council of Nursing Licensure Exam (“NCLEX”). Conditional status prohibited the campus from admitting new students to its programs. The Houston campus improved its processes and achieved the required pass rate by the September 30, 2017 deadline. In January 2018, the TBN granted full approval status to the Houston campus. The campus is currently admitting new students for the May 2018 session.

 

Chamberlain currently operates 20 campuses in 14 states and has completed construction of a new campus in New Orleans, Louisiana. After obtaining appropriate regulatory approvals, we anticipate opening the New Orleans campus in May 2018.

 

Tuition Rates:

 

·Effective for sessions beginning in May 2017, tuition is $675 per credit hour for students enrolling in the Bachelor of Science in Nursing (“BSN”) onsite program. This tuition rate is unchanged from the prior year.

 

·Effective for sessions beginning in May 2017, tuition is $590 per credit hour for students enrolled in the RN-to-BSN online degree program. Tuition for students enrolled in the online MSN program is $650 per credit hour. For students enrolled in the Family Nurse Practitioner (“FNP”) track, tuition is $665 per credit hour for the ten FNP specialty courses. Tuition for the online Doctor of Nursing Practice (“DNP”) program is $750 per credit hour. All of these tuition rates are unchanged from the prior year.

 

·Effective for sessions beginning in July 2017, tuition for the Master of Public Health (“MPH”) program is $550 per credit hour. This program was launched in July 2017.

 

These tuition rates do not include the cost of books, supplies, transportation or living expenses.

 

 42 

 

 

Medical and Veterinary Schools

 

Medical and Veterinary Schools Student Enrollment:

 

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

 

   Fiscal Year 2017 
Term  Sept. 2016   Jan. 2017   May 2017 
New Students   806    462    458 
% Change from Prior Year   (18.7)%   (10.8)%   (14.4)%
Total Students   6,168    5,863    5,491 
% Change from Prior Year   (5.8)%   (8.0)%   (6.1)%

 

The medical and veterinary schools revenue decreased 0.3%, or $0.3 million, to $88.2 million in the second quarter and decreased 6.4%, or $11.2 million, to $165.6 million in the first six months of fiscal year 2018 compared to the year-ago periods. The declines were driven primarily by revenue loss of approximately $0.9 million and $8.2 million, for the second quarter and first six months of fiscal year 2018, respectively, due to the effects of Hurricanes Irma and Maria. These events forced temporary shut-downs and postponements of the September 2017 semester basic science academic instruction at AUC and RUSM, along with students withdrawing due to these disruptions. In addition, enrollment declines at AUC and RUSM in the May 2017 semester, which contributed revenue for the first two months of fiscal year 2018, resulted in decreased revenue. These enrollment declines were partially offset by tuition price increases at AUC and RUSM for the September 2017 semester, as well as enrollment increases at Ross University School of Veterinary Medicine (“RUSVM”). Management is executing its plan to differentiate the medical and veterinary schools from the competition, with a core goal of increasing international students, and improving the effectiveness of its marketing strategies by restructuring the marketing organization, and shifting from traditional media and event-driven marketing to greater use of digital and social media channels to drive awareness throughout the year. These strategies were successful in improving recruitment results in the January 2018 semester, in which new and total student enrollment increased.

 

Management believes the demand for medical education remains strong and can support management’s longer-term growth expectations to grow new enrollments in the low-single digit range; however, heightened competition may adversely affect the medical and veterinary schools’ ability to continue to attract qualified students to its programs.

 

Tuition Rates:

 

·Effective for semesters beginning in September 2017, tuition rates for the beginning basic sciences and final clinical rotation portions of AUC’s medical program are $21,695 and $24,272, respectively, per semester. These tuition rates represent a 3.5% increase over the prior academic year.

 

·Effective for semesters beginning in September 2017, tuition rates for the beginning basic sciences and Internal Medicine Foundations/final clinical portion of the programs at RUSM are $22,345 and $24,660, respectively, per semester. These tuition rates represent a 4.8% increase over the prior academic year.

 

·Effective for semesters beginning in September 2017, tuition rates for the basic sciences and final clinical portion of the programs at RUSVM are $18,310 and $22,985, respectively, per semester. These tuition rates are unchanged from the prior academic year.

 

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

 

Professional Education

 

Revenue in the Professional Education segment increased 10.9%, or $3.0 million, to $30.4 million in the second quarter and increased 13.4%, or $8.3 million, to $70.4 million in the first six months of fiscal year 2018 compared to the year-ago periods. The increase is driven by revenue growth at the Association of Certified Anti-Money Laundering Specialists (“ACAMS”), partially offset by a decline in the number of CPA exam candidates taking the Becker Exam Review Course compared to the year-ago periods. ACAMS’s membership has increased to over 60,000 which is an increase of approximately 62% since July 2016, driven by strong growth in the Asia Pacific region as well as expansion in the business-to-business partnerships in Europe.

 

 43 

 

 

Technology and Business

 

Revenue in the Technology and Business segment, which is composed solely of Adtalem Brazil, increased 2.4%, or $1.7 million, to $75.1 million in the second quarter and increased 4.5%, or $5.9 million, to $137.6 million in the first six months of fiscal year 2018 compared to the year-ago periods. The increase in value of the Brazilian Real compared to the U.S. dollar increased reported revenue in the second quarter and first six months of fiscal year 2018 by $1.1 million and $2.8 million, respectively, compared to the year-ago periods. Constant currency calculations assume conversions of local currency amounts at exchange rates in effect in the year-ago period compared to those conversions at exchange rates in effect during the current fiscal year period. On a constant currency basis, revenue increased by 0.9% and 2.4% in the second quarter and first six months of fiscal year 2018, respectively, compared to the year-ago periods. Revenue growth was driven primarily by increased total higher education student enrollment due to increased persistence, partially offset by a decline in the number of students enrolled in law exam test preparation courses. This decline is related to changes in the exam resulting in lower pass rates for the first level of the exam, which lowered demand for preparation courses for the subsequent level.

 

Brazil’s economy continues to present challenges for enrollment growth and is creating pricing pressures in the education sector. Adtalem Brazil’s new student enrollment has been negatively impacted by these conditions as well as reductions in the “Fundo de Financiamento Estudantil” or “Students Financing Fund” (“FIES”) program. Should economic conditions continue to weaken and additional austerity measures be instituted by the Brazilian government, Adtalem Brazil’s ability to grow its student enrollment may be further impacted.

 

Key trends for Adtalem Brazil are set forth below.

 

Adtalem Brazil Student Enrollment:

 

   Fiscal Year
2018
   Fiscal Year 2017 
Term  Sept. 2017   Sept. 2016   Mar. 2017 
New Students   14,507    15,892    22,531 
% Change over Prior Year   (8.7)%   10.4%   (9.0)%
Total Students   78,340    76,862    79,564 
% Change over Prior Year   1.9%   32.9%   0.4%

 

These enrollment figures include students enrolled in degree-granting programs and exclude students enrolled in the test preparation programs at Damásio Educacional (“Damasio”). The effect of acquisitions on the enrollment figures are as follows:

 

·The acquisition of Faculdade de Imperatriz (“Facimp”), which occurred in the fourth quarter of fiscal year 2016, added 622 new student enrollments and 2,050 total student enrollment to the March 2017 semester totals. Excluding the effect of this acquisition, new enrollment decreased 11.5% and total enrollment decreased 2.2% in the March 2017 semester compared to the March 2016 semester.

 

·The acquisitions of Grupo Ibmec Educacional S.A. (“Grupo Ibmec”), which occurred in the second quarter of fiscal year 2016, and Facimp added 3,322 new student enrollments and 16,688 total student enrollment to the September 2016 semester totals. Excluding the effect of these acquisitions, new enrollment decreased 12.7% and total enrollment increased 4.1% in the September 2016 semester compared to the September 2015 semester.

 

 44 

 

 

Adtalem Brazil students are eligible for loans under Brazil’s FIES public loan program, which is financed by the Brazilian government. Management believes the decrease in new student enrollment in the September 2017 semester is the result of changes in the FIES program. As of June 30, 2017, approximately 26% of Adtalem Brazil’s degree-seeking students have obtained financing under the FIES program. This represents approximately 28% of Adtalem Brazil’s revenue. The Brazilian government has stated that it is supportive of the FIES program, which is an important factor in helping to increase the number of college graduates. However, changes enacted in calendar year 2015 to the FIES regulations have added restrictions limiting student eligibility for FIES funding and extended the government’s time to pay participating institutions. These changes included reducing the number of new FIES contracts, decreasing the monthly maximum family income thresholds for students to qualify for a FIES loan and adding minimum required entrance test scores in order to qualify for a FIES loan.

 

Changes in the FIES program have impacted Adtalem Brazil’s growth due to fewer students qualifying for the FIES program. Adtalem Brazil institutions have increased efforts to attract more non-FIES students in order to diversify their payer mix. Also, Adtalem Brazil is working with private lenders to increase funding sources for prospective students. Management believes Adtalem Brazil institutions offer programs of study and operate in areas of the country that the Brazilian government favors in issuing FIES loans.

 

The Brazilian government recently changed regulations on opening and operating distance learning in the country. The approval process for launching online facilities was streamlined, making this segment more economically attractive to larger institutions. Adtalem Brazil will begin offering several bachelor’s and associate degree programs via distance learning in February 2018. These programs will be offered under the Damasio-Unifavip brand. They will be delivered through the Damasio network of over 200 learning centers, which currently have the infrastructure and staff necessary to support distance learning degrees.

 

U.S. Traditional Postsecondary

 

Revenue in the U.S. Traditional Postsecondary segment, which is composed solely of Carrington, decreased 10.5%, or $3.4 million, to $29.0 million in the second quarter and decreased 11.9%, or $8.3 million, to $61.2 million in the first six months of fiscal year 2018 compared to the year-ago periods. Revenue declined as a result of declines in student enrollment at Carrington as it repositions itself to stabilize enrollment. Key trends for Carrington are set forth below.

 

Carrington College

 

Carrington College Student Enrollment:

  

   Fiscal Year 2018 
Term  Sept. 2017   Dec. 2017 
New Students   2,155    1,541 
% Change from Prior Year   (7.8)%   7.2%
Total Students   5,258    5,644 
% Change from Prior Year   (20.8)%   (4.5)%

 

   Fiscal Year 2017 
Term  Sept. 2016   Dec. 2016   Mar. 2017   June 2017 
New Students   2,338    1,437    1,892    1,384 
% Change from Prior Year   (9.5)%   (22.7)%   (8.1)%   (17.7)%
Total Students   6,638    5,910    6,026    5,362 
% Change from Prior Year   (12.2)%   (18.0)%   (16.1)%   (17.1)%

 

To improve enrollment results, management has focused on bringing relevant programs at competitive prices to serve areas of the workforce where supply and demand imbalances exist. These strategies resulted in improved new student enrollment in the latest term, reversing the trend of nine quarters of enrollment declines which were the result of changing demand for career education given low unemployment, rising wages and increased competition.

 

Tuition Rates:

 

On a per credit hour basis, tuition for Carrington programs range from $306 per credit hour to $1,684 per credit hour, with the wide range due to the nature of the programs. General education courses are charged at $335 to $371 per credit hour. Total program tuition ranges from approximately $13,000 to $20,000 for most certificate programs and up to approximately $62,000 for a few advanced programs. These amounts do not include the cost of books, fees, supplies, transportation or living expenses.

 

 45 

 

 

COSTS AND EXPENSES

 

Cost of Educational Services

 

The largest component of Cost of Educational Services is the cost of faculty and staff who support educational operations. This expense category also includes the costs of facilities, adjunct faculty, supplies, bookstore and other educational materials, student education-related support activities and the provision for uncollectible student accounts.

 

   Three Months Ended December 31, 2017 
   (in thousands) 
  Medical
and
Healthcare
   Professional
Education
   Technology
and
Business
   U.S.
Traditional
Postsecondary
  

Home Office

and

Other

   Consolidated 
Cost of Educational
Services:
                        
Fiscal Year 2017 as Reported  $101,735   $5,613   $47,525   $23,293   $982   $179,148 
Cost (Reduction) Investment   (383)   231    (330)   (1,766)   975    (1,273)
Effect of Acquisitions   -    -    141    -    -    141 
Hurricane Impact   245    -    -    -    -    245 
Effect of Currency Change   -    -    709    -    -    709 
Fiscal Year 2018 as Reported  $101,597   $5,844   $48,045   $21,527   $1,957   $178,970 
                               
Fiscal Year 2018 % Change:                              
Cost (Reduction) Investment   (0.4)%   4.1%   (0.7)%   (7.6)%   NM    (0.7)%
Effect of Acquisitions   -    -    0.3%   -    NM    0.1%
Constant Currency Change   (0.4)%   4.1%   (0.4)%   (7.6)%   NM    (0.6)%
Hurricane Impact   0.2%   -    -    -    NM    0.1%
Effect of Currency Change   -    -    1.5%   -    NM    0.4%
Fiscal Year 2018 % Change as Reported   (0.1)%   4.1%   1.1%   (7.6)%   NM    (0.1)%

 

   Six Months Ended December 31, 2017 
   (in thousands) 
  Medical
and
Healthcare
   Professional
Education
   Technology
and
Business
   U.S.
Traditional
Postsecondary
  

Home Office

and

Other

   Consolidated 
Cost of Educational
Services:
                        
Fiscal Year 2017 as Reported  $208,325   $12,805   $95,677   $47,419   $2,408   $366,634 
Cost (Reduction) Investment   (3,631)   459    (2,334)   (3,127)   1,489    (7,144)
Effect of Acquisitions   -    -    141    -    -    141 
Hurricane Impact   13,372    -    -    -    -    13,372 
Effect of Currency Change   -    -    1,908    -    -    1,908 
Fiscal Year 2018 as Reported  $218,066   $13,264   $95,392   $44,292   $3,897   $374,911 
                               
Fiscal Year 2018 % Change:                              
Cost (Reduction) Investment   (1.7)%   3.6%   (2.4)%   (6.6)%   NM    (1.9)%
Effect of Acquisitions   -    -    0.1%   -    NM    0.0%
Constant Currency Change   (1.7)%   3.6%   (2.3)%   (6.6)%   NM    (1.9)%
Hurricane Impact   6.4%   -    -    -    NM    3.6%
Effect of Currency Change   -    -    2.0%   -    NM    0.5%
Fiscal Year 2018 % Change as Reported   4.7%   3.6%   (0.3)%   (6.6)%   NM    2.3%

 

 46 

 

 

Cost of Educational Services decreased 0.1%, or $0.2 million, to $179.0 million in the second quarter and increased 2.3%, or $8.3 million, to $374.9 million in the first six months of fiscal year 2018 compared to the year-ago periods. Excluding the effect of the increase in value of the Brazilian Real compared to the U.S. dollar, total consolidated Cost of Educational Services decreased 0.5%, or $0.9 million, in the second quarter of fiscal year 2018 compared to the year-ago quarter and increased 1.7%, or $6.4 million, in the first six months of fiscal year 2018 compared to the year-ago period. Costs decreased in the second quarter of fiscal year 2018 primarily as a result of cost reduction measures at the medical and veterinary schools, Carrington and Adtalem Brazil. The increase in costs in the first six months of fiscal year 2018 was the result of $13.4 million in charges representing the deductibles under insurance policies, incurred for facility and equipment impairment write-offs and the evacuations of AUC and RUSM students, faculty and staff in the wakes of Hurricanes Irma and Maria. These costs were partially offset by cost savings primarily as a result of cost reduction measures at the medical and veterinary schools, Carrington and Adtalem Brazil. Costs at the Professional Education segment increased in both the second quarter and first six months of fiscal year 2018 to support growth at ACAMS.

 

As a percentage of revenue, Cost of Educational Services was 53.1% and 56.6% in the second quarter and first six months of fiscal year 2018, respectively, compared to 53.6% and 55.3%, respectively, during the year-ago periods. The decrease in the second quarter of fiscal year 2018 was primarily a result of cost reduction efforts at Adtalem Brazil along with operating leverage at ACAMS. The increase in the first six months of fiscal year 2018 was primarily the result of the negative effects on revenue and expense from Hurricanes Irma and Maria.

 

Student Services and Administrative Expense

 

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

 

   Three Months Ended December 31, 2017 
   (in thousands) 
  Medical
and
Healthcare
   Professional
Education
   Technology
and
Business
   U.S.
Traditional
Postsecondary
  

Home Office

and

Other

   Consolidated 
Student Services and
Administrative Expense:
                        
Fiscal Year 2017 as Reported  $47,522   $21,618   $12,380   $13,099   $6,548   $101,167 
Cost (Reduction) Investment   (870)   704    566    (942)   (440)   (982)
Effect of Acquisitions   -    -    10    -    -    10 
Effect of Currency Change   -    -    141    -    -    141 
Fiscal Year 2018 as Reported  $46,652   $22,322   $13,097   $12,157   $6,108   $100,336 
                               
Fiscal Year 2018 % Change:                              
Cost (Reduction) Investment   (1.8)%   3.3%   4.6%   (7.2)%   NM    (1.0)%
Effect of Acquisitions   -    -    0.1%   -    NM    0.0%
Constant Currency Change   (1.8)%   3.3%   4.7%   (7.2)%   NM    (1.0)%
Effect of Currency Change   -    -    1.1%   -    NM    0.1%
Fiscal Year 2018 % Change as Reported   (1.8)%   3.3%   5.8%   (7.2)%   NM    (0.8)%

 

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   Six Months Ended December 31, 2017 
   (in thousands) 
  Medical
and
Healthcare
   Professional
Education
   Technology
and
Business
   U.S.
Traditional
Postsecondary
  

Home Office

and

Other

   Consolidated 
Student Services and
Administrative Expense:
                        
Fiscal Year 2017 as Reported  $96,838   $43,100   $24,443   $26,609   $13,642   $204,632 
Cost (Reduction) Investment   (1,714)   1,337    1,470    (817)   (3,780)   (3,504)
Effect of Acquisitions   -    -    10    -    -    10 
Effect of Currency Change   -    -    406    -    -    406 
Fiscal Year 2018 as Reported  $95,124   $44,437   $26,329   $25,792   $9,862   $201,544 
                               
Fiscal Year 2018 % Change:                              
Cost (Reduction) Investment   (1.8)%   3.1%   6.0%   (3.1)%   NM    (1.7)%
Effect of Acquisitions   -    -    0.0%   -    NM    0.0%
Constant Currency Change   (1.8)%   3.1%   6.1%   (3.1)%   NM    (1.7)%
Effect of Currency Change   -    -    1.7%   -    NM    0.2%
Fiscal Year 2018 % Change as Reported   (1.8)%   3.1%   7.7%   (3.1)%   NM    (1.5)%

 

Student Services and Administrative Expense decreased 0.8%, or $0.8 million, to $100.3 million in the second quarter and decreased 1.5%, or $3.1 million, to $201.5 million in the first six months of fiscal year 2018 compared to the year-ago periods. Excluding the effect of the increase in value of the Brazilian Real compared to the U.S. dollar, total consolidated Student Services and Administrative Expense decreased 1.0%, or $1.0 million, in the second quarter of fiscal year 2018 compared to the year-ago quarter and decreased 1.7%, or $3.5 million, in the first six months of fiscal year 2018 compared to the year-ago period. The decrease was primarily the result of cost reduction measures. Over the past several years, Adtalem has reduced costs through staffing adjustments primarily at the medical and veterinary schools, Carrington and Adtalem’s home office while maintaining services that drive successful student outcomes. Also, management is finding ways to be more efficient in marketing and recruiting efforts. The cost reductions were partially offset with cost increases to support growth at ACAMS and Adtalem Brazil. Amortization of finite-lived intangible assets was unchanged in the second quarter and decreased by $0.7 million during the first six months of fiscal year 2018 compared to the year-ago periods. Amortization expense is included entirely in the Student Services and Administrative Expense category.

 

As a percentage of revenue, Student Services and Administrative Expense decreased to 29.8% and 30.4% in the second quarter and first six months of fiscal year 2018, respectively, compared to 30.3% and 30.9%, respectively, during the year-ago periods. These decreases were primarily a result of the cost reduction measures noted above.

 

Management expects that for the third quarter of fiscal year 2018, total operating costs will increase 1 to 2 percent compared to the third quarter of fiscal year 2017, driven by investments in growth at the Medical and Healthcare, Professional Education and Technology and Business segments, partially offset by the impact of savings from Adtalem’s continued cost reduction measures. Adtalem’s outlook excludes potential charges related to restructuring plans and the pending sale of DeVry University, as well as impacts from the timing of the receipt of insurance reimbursements for the hurricane-related expenses.

 

Restructuring Expense

 

During the first three and six months of fiscal year 2018, Adtalem recorded restructuring charges primarily related to reductions in force (“RIF”) and real estate consolidations at Carrington and Adtalem’s home office. Termination benefit charges, as a result of reducing Adtalem’s workforce by 98 positions in the first six months of fiscal year 2018, represented severance pay and benefits for these employees. We also recorded a reduction to restructuring charges in the first six months of fiscal year 2018 for an adjustment to previously accrued estimates for real estate consolidations at Adtalem’s home office. During the first three and six months of fiscal year 2017, Adtalem recorded restructuring charges primarily related to real estate consolidations at Carrington and Adtalem’s home office. Adtalem’s home office is classified as “Home Office and Other” in Part I, Item 1, “Note 15: Segment Information” to the Consolidated Financial Statements. Pre-tax restructuring charges by segment were as follows (in thousands):

 

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

Real

Estate

  

Termination

Benefits

   Total  

Real

Estate

  

Termination

Benefits

   Total 
Medical and Healthcare  $-   $-   $-   $26   $86   $112 
U.S. Traditional Postsecondary   830    298    1,128    1,722    656    2,378 
Home Office and Other   160    1,266    1,426    (465)   2,916    2,451 
Total  $990   $1,564   $2,554   $1,283   $3,658   $4,941 

 

   Three Months Ended December 31, 2016   Six Months Ended December 31, 2016 
  

Real

Estate

  

Termination

Benefits

   Total  

Real

Estate

  

Termination

Benefits

   Total 
U.S. Traditional Postsecondary  $2,335   $-   $2,335   $3,703   $-   $3,703 
Home Office and Other   266    362    628    1,929    681    2,610 
Total  $2,601   $362   $2,963   $5,632   $681   $6,313 

 

Cash payments for restructuring charges were $16.3 million in the first six months of fiscal year 2018. The remaining accrual for these charges is $41.8 million as of December 31, 2017. The balance is expected to be paid within the next 12 months except for rent charges which may be paid out for periods of up to 8 years. Additional restructuring expense is expected to be recorded in the remainder of fiscal year 2018 as Adtalem continues to reduce cost where enrollment levels necessitate such realignment of expense.

 

Regulatory Settlements

 

In the second quarter of fiscal year 2017, Adtalem, DeVry University, Inc. and DeVry/New York Inc. (collectively, the “Adtalem Parties”) and the FTC agreed to a Stipulation as to Entry of an Order for Permanent Injunction and Monetary Judgment (the “Agreement”) resolving litigation brought by the FTC regarding DeVry University’s use of employment statistics in former advertising. Under the terms of the Agreement, the Adtalem Parties agreed to pay $49.4 million to be distributed at the sole discretion of the FTC, to forgive $30.4 million of institutional loans issued before September 30, 2015, and to forgive outstanding DeVry University accounts receivable balances by $20.2 million for former students. In addition, the Adtalem Parties agreed that Adtalem institutions marketing to U.S. consumers will maintain specific substantiation to support any future advertising regarding graduate outcomes and educational benefits, and will implement training and other agreed-upon compliance measures. Adtalem chose to settle the FTC litigation after filing an answer denying all allegations of wrongdoing.

 

In the second quarter of fiscal year 2017, Adtalem also recorded charges related to the resolution of an inquiry made by the NYAG to the Adtalem Parties regarding DeVry University’s use of employment and salary statistics in former advertising. The Adtalem Parties chose to resolve the NYAG inquiry by entering into an Assurance of Discontinuance (the “Assurance”) with the NYAG on January 27, 2017, without admitting or denying the allegations therein. Pursuant to the Assurance, the Adtalem Parties agreed to pay $2.25 million for consumer restitution and $0.5 million in penalties, fees and costs. In addition, the Adtalem Parties agreed that Adtalem institutions marketing to New York consumers will maintain specific substantiation and present certain statistics as prescribed to support any future advertising regarding graduate outcomes and educational benefits, and will implement other agreed-upon compliance measures.

 

Student services and access to federal student loans are not impacted by the Agreement or the Assurance, and at no time has the academic quality of a DeVry University education been questioned. See “Note 3: Regulatory Settlements” to the Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q for further discussion.

 

The regulatory settlements expense of $56.3 million recorded during the first six months of fiscal year 2017 consists of the $49.4 million cash payment to the FTC, the $4.1 million unreserved and expensed institutional loans and the $2.75 million cash payment to the NYAG. Of these regulatory settlement charges, $4.1 million is recorded within discontinued operations and $52.2 million was allocated to the Adtalem home office which is classified as “Home Office and Other” in “Note 15: Segment Information” to the Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q.

 

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OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS

 

Total consolidated operating income from continuing operations increased to $55.4 million in the second quarter of fiscal year 2018 compared to a loss of $1.5 million in the year-ago quarter, and increased 143.9%, or $47.9 million, to $81.1 million in the first six months of fiscal year 2018 compared to the year-ago period. Excluding the regulatory settlements expense recorded in the second quarter of fiscal year 2017, total consolidated operating income from continuing operations increased 9.3%, or $4.7 million, in the second quarter and decreased 5.0%, or $4.3 million, in the first six months of fiscal year 2018 compared to the year-ago periods. The primary drivers of the increase in operating income from continuing operations in the second quarter of fiscal year 2018 were cost reduction efforts across Adtalem and revenue growth in the Professional Education segment. The primary driver of the decrease in operating income from continuing operations in the first six months of fiscal year 2018, were $21.6 million in reduced revenue and additional costs incurred due to the impacts of Hurricanes Irma and Maria in the first six months of fiscal year 2018. Excluding the effects of the hurricanes and the regulatory settlements expense, consolidated operating income from continuing operations increased 20.3%, or $17.3 million, in the first six months of fiscal year 2018 compared to the year-ago period. Cost reduction efforts across Adtalem and revenue growth in the Professional Education and Technology and Business segments more than offset the effect on operating income from continuing operations of the revenue declines at Carrington.

 

Medical and Healthcare

 

Medical and Healthcare segment operating income increased 5.6%, or $2.9 million, to $55.0 million in the second quarter and decreased 15.3%, or $14.7 million, to $81.3 million in the first six months of fiscal year 2018 compared to the year-ago periods. The primary driver of the decrease in operating income in the first six months was $21.6 million in reduced revenue and additional costs incurred due to the impacts of Hurricanes Irma and Maria. Excluding the effects of the hurricanes, segment operating income increased 7.2%, or $6.9 million, to $102.9 million in the first six months of fiscal year 2018 compared to the year-ago period, primarily driven by revenue increases at Chamberlain and cost control across all institutions.

 

Professional Education

 

Professional Education segment operating income increased to $2.2 million in the second quarter of fiscal year 2018 compared to operating income of $134,000 in the year-ago quarter, and increased 105.1%, or $6.5 million, to $12.7 million in the first six months of fiscal year 2018 compared to the year-ago period. The increased operating income is the result of revenue growth at ACAMS.

 

Technology and Business

 

Technology and Business segment operating income increased 3.8%, or $0.5 million, to $14.0 million in the second quarter and increased 37.8%, or $4.3 million, to $15.9 million in the first six months of fiscal year 2018 compared to the year-ago periods. Included in operating income in the second quarter and first six months of fiscal year 2018 was $0.2 million and $0.5 million, respectively, from the effect of exchange rates. The increased operating income was primarily driven by higher education revenue growth at Adtalem Brazil.

 

U.S. Traditional Postsecondary

 

U.S. Traditional Postsecondary segment operating losses were $5.8 million and $11.3 million in the second quarter and first six months of fiscal year 2018, respectively, compared to operating losses of $6.3 million and $8.3 million in the second quarter and first six months of fiscal year 2017, respectively. Excluding $1.1 million of restructuring expense, which decreased from $2.3 million in the year-ago quarter, the segment operating loss was $4.7 million in the second quarter of fiscal year 2018 compared to a loss of $3.9 million in the year-ago quarter. Excluding $2.4 million of restructuring expense, which decreased from $3.7 million in the year-ago period, the segment operating loss was $8.9 million in the first six months of fiscal year 2018 compared to a loss of $4.6 million in the year-ago period. These decreases were the result of a decline in revenue resulting from the impact of lower total student enrollments, partially offset by cost savings. Total segment expense in the second quarter and first six months of fiscal year 2018, excluding special charges, decreased $2.7 million, or 7.4%, and $3.9 million, or 5.3%, respectively, compared to the year-ago periods. These expense reductions at Carrington offset approximately 79% and 48% of the lower revenue in the second quarter and first six months of fiscal year 2018, respectively. Management continues to adjust costs to better align with current enrollment levels.

 

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NET INTEREST EXPENSE

 

Net interest expense in the second quarter and first six months of fiscal year 2018 was $1.1 million and $0.9 million, respectively, compared to net interest expense of $1.3 million and $2.4 million, respectively, in the year-ago periods. The net interest expense decrease was primarily the result of increased interest income from higher invested cash balances at Adtalem Brazil.

 

INCOME TAXES

 

Tax expense from continuing operations of $109.6 million was recorded in the second quarter of fiscal year 2018. Tax expense from continuing operations includes $101.2 million to record the one-time impact of the Tax Cuts and Jobs Act (the “Tax Act”), and generated effective tax rates on income from continuing operations of 202.0% and 141.2% for the second quarter and first six months of fiscal year 2018, respectively. The effective tax rates on income from continuing operations excluding tax expense related to the Tax Act were 15.6% for the second quarter and 15.0% for the first six months of fiscal year 2018. A tax benefit of $10.1 million was recorded in continuing operations in the second quarter of fiscal year 2017, driven primarily from the settlement costs of various regulatory litigation, and generated effective tax rates on income from continuing operations of 362.0% and -7.6% for the second quarter and first six months of fiscal year 2017. The effective tax rates on income from continuing operations excluding the settlements were 19.4% and 20.8% for the second quarter and first six months of fiscal year 2017. Excluding the one-time impact of the Tax Act and settlements, the decrease in tax rates reflects the decrease in the U.S. tax rate resulting from the Tax Act, as well as an increase in the percentage of earnings from foreign operations, which are taxed at lower rates than domestic earnings.

 

Four of Adtalem’s operating units, AUC, which operates in St. Maarten, RUSM, which operates in Dominica, RUSVM, which operates in St. Kitts, and Adtalem Brazil, which operates in Brazil, all benefit from local tax incentives. AUC’s effective tax rate reflects benefits derived from investment incentives. RUSM and RUSVM each have agreements with their respective domestic governments that exempt them from local income taxation. Both of these agreements have been extended to provide, in the case of RUSM, an indefinite period of exemption and, in the case of RUSVM, exemption until 2037. Adtalem Brazil’s effective tax rate reflects benefits derived from its participation in PROUNI, a Brazilian program for providing scholarships to a portion of its undergraduate students.

 

Adtalem had not previously recorded a U.S. federal or state tax provision for the undistributed earnings of its international subsidiaries. As a result of the Tax Act, Adtalem has revised its intent to indefinitely reinvest accumulated cash balances, future cash flows and post-acquisition undistributed earnings and profits in foreign operations, and only intends to maintain this position with respect to cash balances, cash flows and accumulated and future earnings in Brazil. In accordance with this plan, cash held by the subsidiaries in Brazil will not be available for general company purposes, and no foreign or state tax has been recorded on such amount. As of December 31, 2017, the cumulative undistributed earnings attributable to operations in Brazil was approximately $91 million.

 

Adtalem’s effective tax rate was impacted by the Tax Act, which was enacted into law on December 22, 2017. Income tax effects resulting from changes in tax laws are required to be accounted for in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. As a result, an additional provision for income tax of $101.2 million resulting from the enactment of the Tax Act was recorded in the quarter. For additional information on the impact of the Tax Act, see “Note 12: Income Taxes” to the Consolidated Financial Statements in Part I, Item 1, of this Form 10-Q.

 

DISCONTINUED OPERATIONS

 

Beginning in the second quarter of fiscal year 2018, DeVry University operations is classified as discontinued operations as discussed in “Note 2: Discontinued Operations and Assets Held for Sale” to the Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q. Management will continue to disclose and discuss DeVry University operations in its public filings until the period the sale closes as these operations continue to have an effect on Adtalem’s reported net income (loss).

 

Revenue at DeVry University decreased 25.9%, or $31.7 million, to $90.6 million in the second quarter and decreased 23.4%, or $56.9 million, to $186.4 million for the first six months of fiscal year 2018 compared to the year-ago periods driven by decreases in undergraduate and graduate enrollment. Management believes the decreases in enrollment and the resulting continued decline in revenue have been due to several internal and external factors, which have resulted in a reduction in interest and lower demand for DeVry University’s programs. Enrollment declines at DeVry University are expected to continue through fiscal year 2018, which will result in lower revenue. Key trends for DeVry University are set forth below.

 

 51 

 

 

DeVry University

 

DeVry University Undergraduate Student Enrollment:

 

   Fiscal Year 2018 
Term  July 2017   Sept. 2017   Nov. 2017   Jan. 2018 
New Students   2,616    2,825    2,359    2,439 
% Change over Prior Year   (11.4)%   (17.7)%   (23.7)%   (3.5)%
Total Students   18,853    19,287    18,385    17,859 
% Change over Prior Year   (22.1)%   (21.4)%   (23.4)%   (22.3)%

  

   Fiscal Year 2017 
Term  July 2016   Sept. 2016   Nov. 2016   Jan. 2017   Mar. 2017   May 2017 
New Students   2,953    3,432    3,092    2,528    2,545    2,406 
% Change over Prior Year   (26.2)%   14.3%   7.2%   (16.7)%   (14.3)%   (19.3)%
Total Students   24,213    24,540    24,015    22,994    22,192    20,691 
% Change over Prior Year   (22.6)%   (22.9)%   (20.3)%   (21.6)%   (20.9)%