Adtalem Global Education Inc.

we've generated in our financial services segment over the past two years. This has positioned us to unlock significant shareholder value through this transaction. We expect after-tax proceeds from the transaction to be north of $800 million, providing attractive optionality for strengthening our balance sheet and enhancing shareholder value. As you can imagine, we are laser focused on closing the transaction as quickly as we can, and we'll have definitive perspectives on the use of proceeds at that time. In the meantime, you can be assured that any use of proceeds will be tailored to accelerating the organic growth of our core business, improving our balance sheet, and enhancing the value of the enterprise. We remain committed to closing the gap between the intrinsic value of our assets and the market capitalization of the company, and we have no current plans for any large-scale acquisitions. With that, let me highlight a few ongoing initiatives that we believe will enhance our capabilities to serve our students, employer partners, and stakeholders going forward. First, the integration of Walden University is progressing as planned, and we remain confident in delivering our projected cost synergies $60 million of annual run rate savings within two years of completing the transaction. A vital element of that integration process has been the introduction of a new enterprise-wide operating model. Key components of this model include strategic use of shared services to support our institutions, which brings greater efficiency to our business model while enabling our institutions to focus fully on academic delivery and student outcomes. In addition, a redesigned marketing function empowered to enhance the brand positioning of our institutions, optimize our spin, and personalize our customer engagement. And finally, an enhanced customer-focused set of capabilities to provide personalized and differentiated customer experience along the entire student journey, along with predictive student support solutions designed to improve retention, and persistence. As we launch and refine our new operating model, we're aided by the singular focus on healthcare and a portfolio made up of like-minded degree-granting institutions. The relative simplicity of this portfolio lends itself to continuous improvement and scaled efficiencies that will allow us to drive improved enrollment and persistence at incrementally lower delivery costs all while innovating across the student journey. Taken together, we believe these initiatives will drive company-wide improvements in academic, operational, and financial performance for the benefit of all of our stakeholders. At the same time, our commitment to expanding access to high-quality education and driving superior student outcomes remains unchanged. Add Talent's purpose to empower students to achieve their goals, find success, and make inspiring contributions to our community. I am incredibly proud of our consistent and long-standing focus on academic outcomes and student success across all of our institutions. Some recent examples of this focus include Chamberlain exceeding the national average for NCLEX results, and American University of the Caribbean receiving reaccreditation for six years through 2027 by the Accreditation Commission on Colleges of Medicine. We are extremely proud to train the next generation of nurses, doctors, veterinarians, and social workers. Our students are both our customer and our product. And their success in realizing their ambitions and making a positive impact on the world will always be our North Star. Despite the significant progress we're making on our efforts to enhance academic, operational, and financial outcomes, we continue to be negatively impacted by the COVID-related headwinds facing higher education more broadly. The emergence of the Omicron variant forced many healthcare professionals to delay their education plans, resulting in a continued decline in enrollments, particularly in our post-licensure nursing program. The Omicron variant also had an adverse impact on enrollments in our medical programs as some students deferred or delayed returning to campus. As a result, we are lowering our outlook for the rest of the year to reflect these continued headwinds. This revised outlook also reflects the move of financial services to discontinued operations. Bob will elaborate more on the outlook in his remarks, but it's important to reiterate that we believe these headwinds are temporal and in no way dampen or dilute the secular trends our brands and businesses are poised to enjoy. Looking ahead, we remain confident that market demand for highly qualified healthcare professionals will continue to exceed supply, and we don't believe that there is anyone better positioned to address this opportunity than Atala. This has long been the case, But the divestiture of the financial services segment, once complete, brings this into sharp relief. Among other things, the transaction yields a family of degree-granting institutions with remarkably attractive attributes. Market-leading breadth, depth, scale, and reach in healthcare education, a center of gravity in the all-important nursing space, and highly complementary adjacent offerings in the medical sciences and the social and behavioral sciences. The opportunity to expand the customer lifecycle from undergraduate programs to graduate and advanced degrees. Opportunities for market segmentation across leading brands. The ability to engage health systems and other employer partners at scale. And finally, an unyielding commitment to addressing critical talent shortages and advancing diversity equity, and inclusion in healthcare. In closing, I'm extremely optimistic about the opportunities that lie ahead. Our offerings are bound together by our mission to provide global access to knowledge that transforms lives and enables careers. And we will continue to invest in growing our platforms to deliver on our commitments to all of our stakeholders. So thank you, and with that, I'll turn the call over to Bob for discussion of our financial results.

Thanks, Steve. Before discussing the financial results, I'd like to highlight that we will be retroactively reporting the financial services segment as of this continued operation, starting with the second quarter of fiscal 2022. Therefore, our updated reporting segments are comprised of continuing operations from Chamberlain, Walden, and Medical and Vet as presented in the 8K filed today. Beginning with the third quarter of fiscal 2022, we'll be making the following two changes to our disclosures. First, in addition to operating income, we will also disclose total and segment level EBITDA, which we believe will provide additional insights into the performance of our businesses. Second, we will transition enrollment data to focus exclusively on total enrollment which we believe is the metric that most closely correlates with future revenue given that it contemplates both new enrollment and student persistence. Let me now provide a summary of our financial performance for the continuing operations during the quarter. Revenue in the second quarter increased 58.4% to $371.2 million compared with the prior year driven by the acquisition of Walden. Consolidated operating income excluding special items in the second quarter was $70.2 million, a 70% increase compared with the prior year due to the addition of Walden. Net income from continuing operations excluding special items was $37.8 million, a 17.3% increase compared with the prior year driven by higher operating income from Walden, which is partially offset by additional interest expense. diluted earnings per share excluding special items for the quarter was 75 cents, an increase of 23% compared with the same period in the prior year. Next, I'll discuss the highlights of the second quarter by segment. The Chamberlain segment reported second quarter revenue of $139.1 million, a decrease of 2% when compared with the prior year, and operating income of $25.5 million versus $32.5 million in the prior year. The decrease in operating income is primarily the result of the decline in revenue, higher costs associated with returned in-person campus instruction, and higher costs of marketing. New and total student enrollment in the November session decreased 0.5% and 2.1%, respectively, compared with the prior year. We believe the decrease in new student enrollment was primarily attributable to COVID-related headwinds in our post-licensure programs as the recent surge further burdened nurses, leading to fewer new starts. However, our pre-licensure programs performed relatively well due to improved persistence. We expect the COVID headwinds to subside over time and believe that demand for nurses will continue to outpace supply over the long term. representing strong growth opportunities for us in the future. Turning to Walden, revenue in the second quarter was $140.6 million. The segment operating loss was $2.4 million, driven primarily by intangible amortization expense. Segment operating income, excluding special items, was $32.4 million. New and total student enrollment during the quarter decreased 18.3%, compared with the prior year. Walden enrollment was disproportionately impacted by COVID-related headwinds in post-licensure programs, which dominate the student mix within the segment. In contrast, Chamberlain has a significant percentage of pre-licensure programs which have not been as negatively impacted by COVID headwinds, and their November enrollment session occurred prior to the Omicron surge. As a result, post-licensure nursing and non-healthcare-focused programs experienced the most significant headwinds, while social and behavioral science programs continued to perform relatively well. Our integration efforts are progressing well, and we remain on track to realize the $60 million of annual run rate cost synergies within the first two years of Walden ownership. In our medical and vet segment, revenue of $91.5 million declined 1% compared with the prior year. Segment operating income increased from $18.8 million to $19.5 million, driven primarily by lower expenses. While performance of this segment has been relatively stable, we remain optimistic that recent leadership changes in our new operating model will accelerate revenue growth and margin expansion. Turning now to cash flow and balance sheet. The second quarter is a seasonably low quarter from a cash flow perspective. Net cash used in continuing operations was $48.5 million. Our capital expenditures for the quarter totaled $8.1 million. As a result, free cash flow used in the second quarter was $56.6 million. As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures. We ended the second quarter with cash and cash equivalents of $275.4 million and outstanding bank borrowings under our existing term loan B and secured senior secured notes of $1.65 billion. Moving to our outlook for the remainder of fiscal 2022. Starting with the top line, we expect adjusted revenue to be within the range $1.35 billion and $1.39 billion and adjusted diluted earnings per share of $2.90 to $3.10 from continuing operations excluding special items. Given the complexity and uncertainty of the markets we serve, it is important to understand the factors and assumptions we took into consideration when developing our guidance range. Our full-year guidance is impacted primarily by two factors. the move of our financial services segment to discontinued operations, and the continued near-term headwinds from COVID resulting in lower enrollments. The impact from COVID-related headwinds on our industry, particularly those associated with the Omicron variant causing record spikes in cases and hospitalizations, is expected to negatively affect enrollments, especially in our post-licensure nursing programs for the remainder of the fiscal year. While we expect these headwinds to subside over time, we believe there will be a lag in enrollment recovery within the healthcare education space as compared to the broader education industry. Next, moving to the expected impact from the pending sale of our financial services segment, net proceeds from the transaction are estimated to be in excess of $800 million. We expect the divestiture to be dilutive to adjusted earnings per share from continuing operations by approximately 90 cents on a full year basis, reflecting the loss of operating income and the retention of corporate overhead previously allocated to the segment. We continue to thoughtfully rationalize our corporate cost structure and drive operating efficiencies across our businesses while transitioning to our enhanced operating model. I also want to emphasize that this dilutive impact on EPS is prior to factoring in any benefit in future years from the use of net proceeds from the sale. We are immensely excited about the optionality this transaction provides in enhancing our financial flexibility towards the deployment of the sale proceeds, and we will provide more details upon closing. We remain highly encouraged in our ability to fully leverage our streamlined healthcare-focused portfolio with the twin goals of driving outstanding student outcomes and maximizing shareholder value. With that, I will now turn the call over to the operator for Q&A. Operator?

Operator, can you hear us? Thank you. My apologies. I was muted. At this time, we'll be conducting your question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Jeff Silbert with BMO Capital Markets. Please state your question.

Thank you so much. I just want to make sure I'm getting the math correct. I believe your prior guidance for adjusted EPS for the current year was $4.20 to $4.45. You're now talking about a $2.90 to $3.10 range. It's about a $1.30 difference. Of that $1.30, $0.90 is impacted by the financial services divestiture, and I'm assuming the other $0.40 is impacted by the COVID-related headwinds you're seeing in post-licensure nursing, et cetera. Is that correct?

That's exactly right. The only thing I would add to that is that there are some cost reductions that we're offsetting some of that revenue reduction with, but you're absolutely right with that analysis.

Okay, good. Thank you for clarifying that. So maybe we can talk a little bit about what's going on in the post-licensure programs. I mean, I understand, especially with Omicron, folks' reluctance, and we were seeing that beforehand, but what makes you confident? What are you seeing, if anything, now that this is really more of a temporal impact as you deemed it?

Yeah, we've got the benefit of prior history with the post-licensure programs at Walden. And really, the only cogent explanation for what we're seeing now is the fact that Walden's programs are entirely post-licensure. These are folks that are working nurses. They're currently under tremendous strain because of the spike in infections and what that has done to healthcare delivery more broadly, and none of them are being pushed to continue their education or have any incentive to do so. What we also believe is that the pandemic will end, and even before that, there would be some relief from the Omicron spike, which appears to be diminishing in most areas around the country. It's our expectation that once that population of working students gets relief from the near-term challenges of delivering care, that their incentives for continuing their education will be every bit as strong as they were before the pandemic and every bit as strong as they were in the lull between Delta and Omicron.

Okay, I understand. I also want to just clarify something. I think I heard you said that effective next quarter, you're not going to be providing new enrollment data anymore. Is that correct? That's correct. Can you just help me with that thought process? I just didn't understand why you've made that decision.

Yes, as we look at sort of our historical trends in enrollment, we think the new enrollment number is actually noisily distracting from the overall trend in the business. And we think if we show total enrollment on a rolling basis, that gives us and obviously gives you folks a much more reliable view of the trends in our business without sort of the up and down spikes between new enrollment numbers, which are impacted by a number of things, including the myriad different starts that we have amongst institutions in any given fiscal year. So it's just a clearer picture into where the enrollment trend is headed, and we think it view into the state of the business at any given time.

Okay, fair enough. One more question, and I'll jump back in the queue, and I actually got this from one of your investors, and this is more of a clarification. Given what's been happening in Walden, will you be having to take a goodwill impairment charge, and if so, is that something that you do at year-end, or is that something you do before then?

No, we don't anticipate taking an impairment charge at all.

Okay, great. Thanks for that. Appreciate it.

Thank you. Our next question comes from Jeff Mueller with Baird. Please go ahead.

Yeah, thank you. So I understand the contributing factors in terms of post-licensure, pre-licensure mix between Walden and Chamberlain as well as start timing. Just can you give us any sense of what is non-nursing enrollment doing at Chamberlain? I know nursing is a sizable percentage of the mix, but it's far from all of it. So just trying to make sure it's an isolated issue in nursing.

Yeah, I think there's, as a general proposition, there's downward pressure on enrollment across the board, but they're most acute in nursing and within nursing, most acute in post-licensure. So the overall pressure on enrollments that higher education is seeing more broadly is not something that any of our institutions are immune to. But again, where we see it most pronounced is in nursing and in that category. most pronounced in post licensure.

Okay. And then I'm trying to understand the exact reporting and implications. So did you say that you're reporting FS as Disco Ops starting this quarter you just reported? So Q2 of 22 segment level profitability gets impacted by that reallocation of corporate expenses in this quarter. So when we're looking at the performance this quarter at the segment level and the year-over-year trends, it has that reallocation in it this quarter, but it doesn't have that reallocation in it in the year ago that the year-over-year trends in the presentation are based off of. Hopefully I stated that question correctly.

Yeah, I think what I would say is that we did put out also an 8K that separately does have the first quarter and the four quarters from last year, all on a restated basis so that it's comparable to what you're looking at with the second quarter of this year. And if that doesn't answer, happy to take a follow-up on that.

And that includes the corporate expense reallocation down to the segment levels for those historical quarters? Yes.

Correct. That would be consistent with what we had done in that 8K. Yes.

Okay. Thank you.

Thanks.

Thank you. If there are no further questions at this time, I'll turn it back to management for closing remarks.

Well, we'd just like to thank everyone for participating in the call, and I also thank all of our colleagues at Atalant for all the great work they're doing under what are really challenging and difficult circumstances. So thank you, everyone.

This concludes today's conference on Partisan Disconnect. Have a great day. Thank you and welcome to the Adtelem Global