Laureate Education, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless noted otherwise, dollar amounts below are in millions. Laureate provides higher education services; after its announced divestitures, continuing operations comprise Mexico and Peru, with 335,600 students enrolled at five institutions at quarter-end. The statements present continuing and discontinued operations separately.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue, continuing operations | $243.5 | $277.3 | $739.7 | $860.2 |
| Operating loss, continuing operations | $(318.2) | $(18.4) | $(366.2) | $(21.3) |
| Loss from continuing operations | $(271.0) | $(86.6) | $(76.5) | $(211.7) |
| Adjusted EBITDA, continuing operations | $50.4 | $30.5 | $115.1 | $104.2 |
| Net income (loss) attributable to Laureate | $(784.4) | $(95.2) | $(992.7) | $877.6 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $221.8 | $312.3 |
Adjusted EBITDA margin was approximately 20.7% in Q3 2020 versus 11.0% in Q3 2019, and 15.6% for the first nine months versus 12.1% a year earlier. These are calculated from the filing’s revenue and non-GAAP Adjusted EBITDA figures.
Financial position and cash flow
- At September 30, cash and cash equivalents were $716.8, with restricted cash of $30.9. Cash held at subsidiaries classified as held for sale, $113.0, is excluded from the $716.8 figure.
- Total long-term debt and finance leases were $1,453.0, up from $1,214.4 at December 31, 2019. This includes $800.0 of 8.25% Senior Notes due 2025 and $409.1 outstanding on the revolving credit facility. Laureate drew the full $410.0 revolver in March to strengthen liquidity during the pandemic.
- Management said cash and expected operating cash flow should cover operating requirements and liquidity needs for at least 12 months from the report’s issuance. The company reported compliance with its debt covenants at September 30.
- Nine-month investing cash outflow was $34.2, versus $1,050.7 of inflow in 2019, primarily reflecting lower sale proceeds. Financing provided $257.4, including the revolver draw. Capital expenditures were $74.3, down 35% year over year.
Changes versus the prior comparable periods
- Continuing revenue fell 12% in Q3 and 14% year to date. Management attributed the year-to-date decline principally to foreign exchange ($61.5 lower revenue), reduced organic enrollment ($36.7), and academic-calendar timing, pricing and product mix ($21.1).
- Q3 Mexico revenue declined 21% and Adjusted EBITDA declined 33%; Peru revenue declined 3%, while Adjusted EBITDA increased 25%, aided by recognition of previously deferred revenue as rescheduled classes took place. For nine months, Mexico revenue and Adjusted EBITDA fell 17% and 27%; Peru fell 10% and 4%, respectively.
- Continuing operating loss includes impairment charges of $323.4 in Q3, chiefly a $320.0 write-down of the Laureate tradename. Nine-month continuing impairment charges totaled $350.9.
- Year-to-date continuing loss narrowed versus 2019 despite lower revenue, aided by lower costs and interest expense and a $293.5 income tax benefit. The 2020 tax benefit included discrete items, including benefits related to Dutch tax treatment of intellectual property, GILTI regulations, and valuation allowances.
- Reported net results were dominated by discontinued operations and disposition accounting: Laureate recorded a Q3 loss on sales of discontinued operations of $343.6 and a nine-month loss of $363.3, compared with a nine-month gain of $848.4 in 2019. Discontinued operations also recorded substantial impairments and operating losses.
Outlook, transactions and risks
- No specific revenue or earnings guidance was provided. Management said the longer-term effect of COVID-19 on enrollment, tuition pricing and collections cannot yet be quantified. The pandemic shifted campus teaching online, changed academic calendars, and deferred about $15 million of Mexico revenue into Q4 2020.
- Laureate’s strategic review is reshaping the company toward Mexico and Peru. Chile was sold in September 2020, producing approximately $195.3 cash proceeds before fees and a $344.5 pretax sale loss, largely from accumulated currency translation losses. Malaysia was sold September 29, generating approximately $116.3 net of cash sold before fees and a $45.2 pretax gain. Australia and New Zealand were sold November 3, after quarter-end, for approximately $650 net of transaction costs.
- After quarter-end, Laureate agreed to sell Brazil to Ânima for an estimated transaction value of approximately $765, including about $660.7 cash consideration and assumption of net indebtedness; closing was targeted for Q2 2021 and remains conditional. The Walden sale agreement provides for $1,480 cash, subject to adjustments and regulatory approvals, with closing expected toward the end of 2021. A Honduras sale was also agreed for approximately $29.8 cash, with the buyer assuming about $30.0 of debt; closing was expected in the first half of 2021.
- Impairment estimates depend on uncertain fair-value assumptions. The filing cites political and regulatory uncertainty in Chile, a Brazil goodwill impairment of approximately $190.0, and the possibility of further impairment if estimates or transaction plans change. Significant accumulated foreign-currency translation losses could also affect future sale accounting, particularly for Mexico.
- COVID-19, foreign exchange, enrollment and collections, regulatory changes, and execution and approval risks for pending divestitures may materially affect results. Walden received a DOJ voluntary information request concerning its nursing program’s practicum component; the filing says it makes no allegation of misconduct, and Laureate could not predict the outcome. The company did not believe the inquiry would materially affect its financial position or results.
- Subsequent capital-allocation actions included a tender offer to buy up to $300.0 of Senior Notes and board authorization for up to $300.0 of share repurchases. These plans should be assessed alongside debt, liquidity needs and pending sales.
Important facts for investors to verify
- Progress, regulatory approvals, closing dates, final proceeds and adjustments for the Walden, Brazil and Honduras transactions; also the final economics of the completed Australia and New Zealand sale.
- Whether enrollment, tuition discounts, student collections and academic calendars recover or remain pressured in Mexico and Peru, and how currency movements affect reported results.
- The assumptions behind the $320.0 tradename impairment, Brazil impairment, and any potential further write-downs or sale losses.
- Cash available for general use versus cash held for sale or restricted, debt repayments and covenant compliance, and the actual use of sale proceeds for debt tender offers or repurchases.
- How much of the $293.5 year-to-date tax benefit is nonrecurring, and whether deferred tax assets and tax positions remain realizable.
- Developments in the DOJ/Higher Learning Commission matter involving Walden and any associated regulatory or transaction implications.