LAUR

Business Context and Reporting Period

Company: Laureate Education, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2005
Business Overview: Laureate operates a global network of accredited campus-based and online higher education institutions serving over 193,000 students. Operations are divided into three segments: Campus Based - Latin America, Campus Based - Europe, and Laureate Online Education. The business is subject to seasonality due to traditional academic calendars, with the fourth quarter typically being the strongest.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 36% ($53.1 million) for the quarter and 37% ($161.1 million) for the nine-month period compared to 2004. Growth was driven by increased enrollment, acquisitions (including UPC, ULACIT, UNITEC, ECE, and IFG), and favorable currency translation (strengthening of Chilean and Mexican Pesos).
• Segment Performance:
  • Latin America: Revenue up 40% (quarter) and 39% (nine months). Segment profit increased significantly due to enrollment growth and acquisitions.
  • Europe: Revenue up 26% (quarter) and 29% (nine months). However, the segment reported a loss of $7.7 million for the quarter due to seasonality and the acquisition of lower-margin businesses.
  • Laureate Online Education: Revenue up 30% (quarter) and 38% (nine months), driven by a 23% enrollment increase and favorable program mix.
• Discontinued Operations: The company classified a non-strategic European business as discontinued operations in Q3 2005. The sale of the Wall Street Institute (WSI) business closed in Q1 2005. A loss on disposal of discontinued operations of $2.4 million was recorded in the nine-month period.
• Costs: Direct costs increased 39% for the quarter, tracking with revenue growth. Non-cash stock compensation expense decreased for the nine-month period ($2.5 million vs. $3.9 million in 2004) due to the absence of a non-recurring variable stock option charge in 2005.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates that cash flow from operations and existing credit facilities will be sufficient for operating requirements and potential acquisitions. However, significant expansion may require additional debt or equity capital.
• Recent Financing: On October 26, 2005, the company entered into a $120 million, 364-day credit agreement with Bank of America, superseding a prior $30 million facility. The agreement includes a covenant limiting total net debt to 2.5 times consolidated EBITDA.
• Contingent Consideration: Significant potential future payments exist based on the performance of acquired entities. Notably, contingent payments to sellers of Universidad de Las Americas (UDLA) could total approximately $73.5 million if EBIT remains at 2004 levels through 2006.
• Accounting Changes: The company will adopt SFAS 123R (Share-Based Payment) in Q1 2006, which is expected to have a material impact on results of operations by requiring fair value recognition of stock options.
• Risks: Key risks include foreign currency fluctuations (approx. 80% of revenue is foreign), regulatory changes in international markets, and the ability to successfully integrate acquisitions.

Investor Verification Checklist

• Contingent Liabilities: Verify the potential magnitude of earn-out payments for UDLA and other acquisitions, which could significantly impact future cash flows.
• Debt Covenants: Monitor compliance with the new $120 million credit facility's net debt-to-EBITDA ratio (2.5x).
• Discontinued Operations: Review the final settlement of the WSI sale and any remaining tax liabilities or indemnification claims related to the transaction.
• Segment Margins: Analyze the profitability trajectory of the Europe segment, which reported a loss in Q3 2005 despite revenue growth.
• Accounting Impact: Assess the projected impact of SFAS 123R adoption on Q1 2006 earnings and cash flow classification.