Business Context and Reporting Period
Company: Laureate Education, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2006
Business Overview: Laureate operates a global network of campus-based and online higher education institutions serving over 240,000 students. Operations are divided into three reportable segments: Latin America (11 institutions), Europe (10 institutions), and Laureate Online Education (Walden, Canter, and Laureate Online Education BV). The company experienced significant seasonality in Q3 due to summer breaks at many campus-based institutions.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Revenues | $260,906 | $799,135 |
| Operating Income | $13,502 | $70,510 |
| Net Income | $11,988 | $49,286 |
| Diluted EPS (Net Income) | $0.23 | $0.93 |
| Cash from Operating Activities | N/A | $134,465 |
| Cash and Cash Equivalents (Sep 30, 2006) | $168,260 | $168,260 |
| Total Debt (Current + Long-term) | $410,873 | $410,873 |
| Effective Tax Rate (Continuing Ops) | 4.2% | 15.9% |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 35% ($67.1 million) in Q3 2006 compared to Q3 2005, and 33% ($199.7 million) for the nine-month period. Growth was driven by enrollment increases, tuition hikes, and acquisitions (specifically UNITEC and UAM in Latin America).
- Profitability: Operating income decreased 13% in Q3 2006 ($13.5M vs $15.4M) despite revenue growth, primarily due to higher direct costs (91% of revenue vs 88% in 2005) and increased general and administrative expenses. However, nine-month operating income increased 14% to $70.5 million.
- Discontinued Operations: The company recorded a $2.2 million gain from the disposal of discontinued operations in Q3 2006 (related to WSI tax adjustments), compared to no such gain in Q3 2005. Net income for the nine months included a $1.3 million gain from disposal.
- Acquisitions: In September 2006, the company completed a step acquisition to purchase the remaining 20% of its Chilean operations (Decon/Desup) for $174.2 million, resulting in 100% consolidation and $92.6 million in additional goodwill.
- Debt Structure: In August 2006, the company entered a new $250 million credit facility with JPMorgan Chase, replacing a prior Bank of America agreement. Total debt increased significantly to fund acquisitions and operations.
Guidance, Outlook, and Risks
- Outlook: Management anticipates that cash flow from operations and existing credit facilities will meet recurring requirements. However, additional liquidity will be required to fund the long-term strategy of expanding locations and entering new markets. The company recently utilized an expansion feature to increase its credit facility to $350 million subsequent to the reporting period.
- Seasonality: The company notes that Q3 is typically a weaker quarter due to summer breaks at campus-based schools. Q4 is historically the strongest quarter.
- Accounting Changes: Effective Jan 1, 2006, the company changed revenue recognition for campus-based tuition from a monthly to a weekly straight-line basis. Prior period financial statements were restated to reflect this change. The company also adopted SFAS 123R (Share-Based Payment) in 2006, increasing equity-based compensation expenses.
- Risks and Contingencies:
- Tax Matters: The company is under IRS examination for tax years 2000, 1997, and 2003. A proposed adjustment for the 2000 return could result in additional taxes of approximately $54.6 million plus penalties, though the company contests this. Additionally, the company is involved in a VAT dispute in Italy regarding the former WSI business, having deposited $3.0 million as a partial payment while appealing.
- Foreign Currency: Approximately 81% of revenues are generated outside the U.S. A hypothetical 10% adverse change in exchange rates would decrease operating income by approximately $11.5 million for the nine-month period.
- Contingent Consideration: The company has various put/call rights and earnout obligations related to acquisitions (e.g., UAM, Cyprus College, IFG) totaling significant potential future cash outflows based on EBITDA and enrollment metrics.
Investor Verification Checklist
- Restated Comparables: Verify that all year-over-year comparisons account for the retrospective restatement of 2005 figures due to the change in revenue recognition policy (Note 2).
- Chilean Acquisition Impact: Review the impact of the 100% consolidation of Chilean operations on minority interest and goodwill (Note 5).
- Tax Liability Exposure: Assess the potential financial impact of the IRS proposed adjustments ($54.6M) and the Italian VAT dispute, noting that no accrual has been made for these specific items as the company believes a loss is not probable.
- Debt Covenants: Confirm compliance with the new JPMorgan Chase credit facility covenants, specifically the net leverage ratio (max 3.5x EBITDA) and interest coverage ratio.
- Discontinued Operations: Distinguish between continuing operations performance and the one-time gains/losses associated with the WSI and IFG Langues disposals.