Laureate Education, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results are in U.S. dollars. Laureate operates an international higher-education network; continuing operations included 30 institutions, 895,000 students and operations in nine countries. Results exclude businesses classified as discontinued operations following the company’s strategic divestiture program.
Financial results and key metrics
- Q3 revenue: $773.7 million, down 0.6% from $778.3 million. Organic enrollment supported revenue, but foreign exchange reduced it by $20.7 million; pricing, product mix and timing reduced it by $4.9 million.
- Q3 operating income: $45.7 million versus $29.0 million; operating margin was approximately 5.9% versus 3.7%. Adjusted EBITDA, a non-GAAP measure, was $133.8 million, up 9% from $123.2 million.
- Q3 continuing operations: Net loss was $28.5 million versus $40.4 million. Income tax expense was $22.0 million, compared with a $3.7 million benefit a year earlier. Total net loss was $96.8 million, including $27.1 million of discontinued-operations losses and a $41.1 million after-tax loss on discontinued-business sales. Basic and diluted loss per share was $0.43.
- Nine-month revenue: $2.367 billion, down 1.3% from $2.398 billion. Operating income increased to $170.9 million from $149.4 million; operating margin was approximately 7.2% versus 6.2%. Adjusted EBITDA rose 3% to $403.0 million.
- Nine-month earnings: Continuing operations reported a $37.8 million loss, compared with a $36.6 million loss. Net income was $877.1 million, largely reflecting $848.4 million of after-tax gains on discontinued-business sales. Earnings per share was $3.91 basic and diluted; it should not be viewed as representative of recurring operating earnings.
- Segment trends: For the first nine months, Andean revenue rose 3% and Adjusted EBITDA rose 5%; Brazil revenue fell 10% and Adjusted EBITDA fell 40%, primarily amid higher discounts and scholarships and lower participation in the FIES student-loan program. Online & Partnerships revenue fell 4%, while Adjusted EBITDA rose 5%. Foreign exchange materially weighed on reported results, particularly in Brazil and Andean.
- Cash flow: Nine-month operating cash flow was $312.3 million, down from $356.4 million. Investing cash inflow was $1.051 billion, mainly from divestitures; financing cash outflow was $1.588 billion, primarily reflecting debt repayment and share repurchases. Cash and restricted cash totaled $507.7 million at quarter-end.
- Liquidity and debt: Cash and cash equivalents were $323.9 million, of which $183.8 million was restricted cash; $316.9 million of cash was held by foreign subsidiaries. Current assets were $1.124 billion and current liabilities were $1.376 billion. Long-term debt and finance leases totaled $1.346 billion before deferred financing costs, including $800 million of 2025 Senior Notes. Operating lease liabilities were $892.7 million.
Changes, outlook and material developments
- Completed significant divestitures, including St. Augustine, India, Spain and Portugal, and Turkey. Proceeds were used substantially to repay debt; the 2024 Term Loan was fully repaid in 2019. The company recorded $26.4 million of debt-extinguishment loss for the nine months.
- Management said available cash and operating cash flow should be sufficient for current operating requirements for at least the 12 months following issuance of the report. The filing provides no specific full-year revenue or earnings guidance.
- After quarter-end, the revolving credit facility was increased from $385 million to $410 million and its maturity extended to October 2024. The company stated it was not subject to the facility’s leverage covenant at September 30, 2019, and was in compliance with applicable covenants.
- The company repurchased shares for $104.8 million during Q3; the original $150 million authorization was reached in early October. On October 14, the board increased total authorized repurchases to $300 million.
- After quarter-end, Laureate completed the sale of its Panama operations and UniNorte in Brazil. UniNorte generated approximately $46 million of proceeds before estimated closing costs and fees. The NSAD sale agreement provides for a nominal purchase price and potential operating and facility subsidies of up to approximately $5.8 million, subject to closing conditions.
- Chile’s Higher Education Law restrictions on related-party transactions took effect in May 2019. Laureate reported that Chilean universities completed substantially all service-provider bidding and contracting processes, but the company continues to assess whether it can continue consolidating the nonprofit universities.
- Management cited international, regulatory, political, tax and foreign-currency risks, enrollment and pricing pressures, seasonality, and the execution and timing of divestitures. A pending dispute relating to former China operations is subject to an indemnification cap of RMB 400 million, approximately $56 million; the company says it believes the claims are without merit and intends to defend them. It estimated up to $46 million of reasonably possible losses on unrecorded contingencies in Brazil, primarily tax-related.
- Other notable items include a $25 million impairment charge on assets held for sale in Q3 and the expiration, without renewal, of the Saudi Arabia management contract in August 2019. The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future earnings and cash flow come from ongoing education operations versus divestiture gains, and how enrollment, discounts and scholarship levels are trending by segment.
- Whether announced and pending disposals close on expected terms, including NSAD and remaining divestiture assets, and whether sale proceeds continue to reduce debt.
- Cash availability for the parent company given restricted cash, foreign-held funds and VIE cash-use limitations; also monitor liquidity against current liabilities and lease commitments.
- The implications of Chilean regulatory guidance for service contracts and consolidation, and developments in the China indemnification dispute and Brazilian tax contingencies.
- Whether continued share repurchases are consistent with debt reduction, operating investment and the company’s stated liquidity needs.