Laureate Education, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results are presented in U.S. dollars. Unless noted, operating comparisons below refer to continuing operations; the company reclassified planned divestitures as discontinued operations for all periods presented.
Business context
Laureate operates an international network of higher-education institutions. Continuing operations included 879,100 students at 38 institutions in 10 countries. The company announced a strategic shift to focus on Brazil, Chile, Mexico and Peru, Online & Partnerships, and institutions in Australia and New Zealand, while divesting other markets.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $787.1 million | $818.6 million | $2,436.5 million | $2,434.7 million |
| Operating income | $25.6 million | $24.9 million | $151.2 million | $101.9 million |
| Adjusted EBITDA (non-GAAP) | $120.5 million | $99.9 million | $394.4 million | $351.5 million |
| Continuing-operations income (loss) | $(43.8) million | $(67.2) million | $(35.5) million | $(150.8) million |
| Net income (loss) | $(96.7) million | $(103.5) million | $298.8 million | $(106.7) million |
| Basic/diluted EPS | $(0.42) | $(1.02) | $1.49 / $1.43 | $(1.77) |
Operating margin was approximately 3.2% in Q3 and 6.2% for the nine-month period, versus 3.0% and 4.2%, respectively, in the comparable periods. Adjusted EBITDA margin was approximately 15.3% in Q3 and 16.2% year to date.
- Cash flow: Nine-month operating cash flow was $356.4 million, investing cash flow was $226.8 million, and financing cash flow was $(486.9) million. Cash, cash equivalents and restricted cash totaled $589.1 million at period end, including $196.8 million of restricted cash; unrestricted cash and cash equivalents were $392.3 million.
- Debt and liquidity: Balance-sheet current and long-term debt totaled approximately $2.610 billion, down from approximately $3.095 billion at December 31, 2017; additional debt associated with businesses held for sale was classified separately. The revolving credit facility had no balance outstanding. Management said available cash and expected operating cash flow should meet current operating requirements for at least 12 months.
- Balance sheet: Total assets were $6.991 billion and total liabilities were $5.006 billion. Current assets of $1.454 billion were below current liabilities of $1.537 billion.
Material changes versus prior periods
- Q3 revenue fell 4% year over year, chiefly because foreign-exchange movements—particularly the weaker Brazilian real—reduced reported revenue by $54.6 million. Higher enrollment and pricing/product mix partly offset the impact. Nine-month revenue was essentially flat, as organic growth was offset by currency effects.
- Q3 operating income increased slightly despite a $10.0 million impairment charge. For the nine months, operating income rose 48%, reflecting stronger Andean and Mexico results and lower corporate expenses, partly offset by weaker Brazil results and the impairment.
- Nine-month net income of $298.8 million was primarily driven by $311.9 million of after-tax gains on sales of discontinued operations; continuing operations still reported a loss. Q3 also included an $18.4 million after-tax loss on sales of discontinued operations.
- Lower average debt and reduced interest rates helped reduce net interest expense: to $54.8 million in Q3 from $65.4 million, and to $172.4 million for nine months from $247.0 million.
- On April 23, 2018, the Series A preferred stock converted into Class A common stock. The conversion and related accounting affected year-to-date earnings available to common shareholders and EPS.
Outlook, commentary, risks and unusual items
- The company gave no quantified earnings or revenue guidance. It expects cash flow from operations and available cash to cover current operating needs for at least the next 12 months.
- Management expects divestiture proceeds to support further debt repayment, but completion, timing and proceeds remain uncertain and may depend on regulatory approvals and other conditions. St. Augustine was under an approximately $400 million sale agreement, with closing expected in late 2018 subject to approvals; the Monash South Africa sale was valued at approximately $23.9 million and expected to close in late 2018 or early 2019.
- Management was evaluating strategic options for Walden University, including exploratory discussions with third parties; it could decide to retain Walden, and no transaction was assured.
- The University of Liverpool partnership will end in April 2021. It stopped accepting new students and began a teach-out; Laureate recorded a $10.0 million impairment. The company also recorded an approximately $24.0 million lease-related liability following the Kendall College sale.
- Disclosure controls and procedures were deemed ineffective because of four previously identified material weaknesses in risk assessment, contract compliance, IT general controls, and key reports/spreadsheets. Remediation work was underway, but controls had not operated long enough to establish that the weaknesses were remediated.
- Key risks include foreign-exchange exposure, execution and separation risks from divestitures, education regulation and student-aid rules, and changes to Chilean and Turkish requirements. Chile’s new higher-education law requires further implementation rules. The company also disclosed a maximum potential exposure of approximately $511 million under Chilean student-loan guarantees, with an estimated recorded liability of $33.9 million.
- Other notable items include an estimated up-to-$39 million aggregate reasonably possible loss on certain unrecorded Brazilian tax contingencies where the company is not indemnified, and pending legal and regulatory matters. Management stated that ordinary-course legal matters were not expected to materially affect results; some cases and assessments remain unresolved.
Important facts for investors to verify
- Whether announced divestitures close on expected terms and timing, and the net proceeds available for debt reduction.
- Underlying continuing-business enrollment, pricing and margins, particularly in Brazil and Online & Partnerships, separately from currency effects and divestiture accounting.
- The recurring earnings and cash-flow profile apart from the $311.9 million of disposal gains and other unusual items.
- Debt repayment progress, availability of cash held in foreign subsidiaries or restricted accounts, and compliance with debt covenants.
- Progress in testing and remediating the four material weaknesses, along with developments in student-aid, Chilean, Turkish and tax matters.