Laureate Education, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited; amounts below are in U.S. dollars. The company operates a global network of higher-education institutions and reported more than 1.08 million students across 68 institutions in 25 countries.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $983.4 million | $929.9 million | $3,116.8 million | $3,068.3 million |
| Operating income (loss) | $(5.7) million | $12.5 million | $175.3 million | $211.9 million |
| Net income (loss) | $(103.5) million | $80.9 million | $(106.7) million | $327.7 million |
| Net income (loss) attributable to Laureate | $(98.0) million | $86.3 million | $(104.4) million | $330.5 million |
| Net income (loss) available to common stockholders | $(182.0) million | $88.5 million | $(296.5) million | $333.8 million |
| Basic and diluted EPS | $(1.02) | $0.66 | $(1.77) basic; $(1.77) diluted | $2.50 basic; $2.49 diluted |
| Adjusted EBITDA (non-GAAP) | $86.5 million | $98.5 million | $477.0 million | $480.7 million |
- Q3 revenue grew 6%, but operating results fell to a loss; nine-month revenue grew 2% while operating income declined 17%. Approximate operating margins were negative 0.6% versus 1.3% in Q3, and 5.6% versus 6.9% for the nine-month periods.
- Adjusted EBITDA declined 12% in Q3 and 1% for the nine months. Approximate Adjusted EBITDA margins were 8.8% versus 10.6% in Q3 and 15.3% versus 15.7% for the nine months. Adjusted EBITDA is a non-GAAP measure.
- Q3 net loss included a $19.9 million derivative loss, principally from remeasurement of Series A preferred-stock redemption features. The prior-year quarter included a $155.2 million gain on subsidiary sales. For the nine months, 2016 included $398.4 million in net subsidiary-sale gains; 2017 did not.
- Accretion on Series A preferred stock and other redeemable interests reduced common-stockholder earnings by $84.1 million in Q3 and $192.1 million for the nine months. This helps explain why common-stockholder losses exceeded Laureate-attributable net losses.
- Cash flow: Nine-month operating cash flow was $144.8 million, down from $196.0 million. Investing used $150.2 million versus $392.3 million provided in 2016, when subsidiary-sale proceeds were substantial. Financing provided $53.8 million versus $572.7 million used in 2016. Cash and cash equivalents ended at $505.0 million.
- Liquidity and debt: Current assets were $1.560 billion and current liabilities $1.895 billion (current ratio approximately 0.82). Restricted cash and investments totaled $199.3 million. Balance-sheet current and long-term debt totaled approximately $3.210 billion; the debt note reports $3.316 billion of total long-term debt before deferred financing costs, including capital leases and sale-leasebacks. The $385 million revolving facility had no borrowings at quarter-end.
Material changes and operating drivers
- Q3 revenue growth reflected enrollment, pricing/product mix and favorable foreign exchange. The Mexico City earthquake disrupted classes: approximately $11.7 million of Mexico revenue was deferred to Q4, and about $2.7 million of repair and maintenance costs contributed to a sharp decline in Mexico Adjusted EBITDA. Management expected the deferred classes and revenue to be completed/recognized in Q4.
- For the nine months, enrollment added revenue, but 2016 asset sales reduced year-over-year comparison revenue by $141.9 million. Foreign exchange increased reported revenue by $31.3 million. EMEAA revenue fell 20%, largely reflecting dispositions; Online & Partnerships revenue declined 2%, including a 6% decrease in organic enrollment.
- Andean & Iberian performed relatively strongly: nine-month revenue rose 11% and Adjusted EBITDA rose 34%. Brazil revenue increased 14%, while Adjusted EBITDA declined 3%. Mexico revenue was down 1% and Adjusted EBITDA down 12% for the nine months.
- The company refinanced debt in Q2: issued $800 million of 8.25% senior notes due 2025 and put in place a $1.6 billion term loan due 2024 and a $385 million revolving facility due 2022. The refinancing lowered reported interest expense, but involved redemption premiums, fees and modification costs. The remaining 2019 notes were exchanged in August for 18.7 million Class A shares. Laureate completed its IPO in February, raising $456.4 million net.
- As of September 30, assets held for sale included $279.8 million of assets and $231.5 million of liabilities. The company expected final offers in Q4 2017 and sales to begin closing in Q1 2018. No formal revenue or earnings guidance is provided in the filing.
Outlook, risks and unusual matters
- Management stated that operating cash flow and available cash were expected to meet current operating requirements for at least the next 12 months. Much of cash is held abroad: $490.5 million of $505.0 million was at foreign subsidiaries, including $265.5 million at VIEs generally restricted to those entities’ operations.
- The U.S. Department of Education notified Laureate that it failed financial-responsibility standards for 2016. The company chose to increase its Title IV letter of credit to $136.9 million and remain provisionally certified for up to three award years, with additional reporting requirements; it was obtaining the additional LOCs. Existing posted LOCs were $105.6 million.
- Bilgi University in Turkey faced an adverse regulator audit requiring reduced new-student quotas and repayment of approximately $29 million for service payments, plus other amounts of approximately $8 million. Bilgi’s appeal was rejected by the regulator and the matter was appealed to Turkish courts. Potential loss of consolidation could materially affect results; Bilgi reported approximately $134 million of assets and $117 million of liabilities at quarter-end.
- A proposed Chilean higher-education bill had passed the lower house and was before the Senate, with constitutional challenges anticipated. If adopted substantially as drafted, management estimated annual consolidated Adjusted EBITDA could fall by approximately $50 million and net revenue by approximately $350 million after a two-to-three-year implementation period. These are scenario estimates, not company guidance.
- Management disclosed four unremediated material weaknesses in internal control over financial reporting; disclosure controls and procedures were therefore deemed ineffective. Management nevertheless stated that the interim financial statements fairly presented the company’s position and results in all material respects.
- Other exposures include Chilean student-loan guarantees with a maximum potential payment of approximately $515 million and a recorded liability of $27.9 million; income-tax contingencies of $110.5 million; and other-than-income-tax contingencies of $58.0 million. Management said ordinary-course legal matters were adequately defended, insured, or accrued, but outcomes remain uncertain.
- Other changes include a revised six-segment structure effective August 1, with 2016 comparatives recast, and increased nine-month corporate and EiP costs. Share-based compensation rose to $44.0 million from $28.9 million, including $14.6 million for CEO options that vested at the IPO.
Important facts for investors to verify
- Whether Mexico’s deferred classes and revenue were completed and recognized in Q4 as expected, and whether earthquake-related costs continued.
- Progress on the $136.9 million Department of Education LOC requirement, provisional Title IV certification, and any impact on student funding or enrollment.
- Developments in the Bilgi regulator and court proceedings, including any repayment, enrollment restrictions, or change in consolidation status.
- The final form and implementation of Chilean higher-education legislation, including effects on related-party arrangements, student financing, revenue and consolidation.
- Remediation of the four material weaknesses, and whether operating cash flow, debt covenants and available liquidity remain adequate.
- Completion, timing and proceeds of planned asset sales, and how proceeds or lost earnings affect leverage and ongoing results.