Laureate Education, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. Amounts below are in U.S. dollars. Unless noted, financial results refer to continuing operations; reported net income also includes discontinued operations and divestiture gains.
Business context
Laureate operates an international higher-education network. Continuing operations had 921,500 students across 38 institutions in 10 countries. The company is pursuing a strategic shift toward Brazil, Chile, Mexico, Peru, Online & Partnerships, and institutions in Australia and New Zealand; announced divestitures are generally reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue, continuing operations | $621.8m | $632.2m |
| Operating loss | $(84.5)m | $(92.6)m |
| Operating margin | (13.6)% | (14.6)% |
| Adjusted EBITDA, non-GAAP | $(21.6)m | $(29.7)m |
| Loss from continuing operations | $(110.3)m | $(165.6)m |
| Net income attributable to Laureate | $191.2m | $168.9m |
| Basic and diluted EPS | $0.85 | $0.59 |
| Operating cash flow | $45.0m | $(7.1)m |
EPS included a continuing-operations loss of $0.50 per share in 2019, offset by discontinued-operations income, including divestiture gains. Net income attributable to Laureate included a $248.0m after-tax gain on sales of discontinued operations; the comparable 2018 gain was $318.3m.
Revenue fell 2%, principally due to a $35.5m foreign-exchange headwind, partly offset by higher organic enrollment ($11.5m) and pricing, product mix and timing ($11.3m). Direct and G&A costs together declined $18.5m. Operating loss improved, while Adjusted EBITDA remained negative. Interest expense, net of interest income, declined to $51.1m from $60.1m, mainly reflecting lower average debt.
Operating cash flow improved by $52.1m year over year, supported by working-capital movements and lower cash taxes. Investing cash flow was $294.1m, including proceeds from asset sales; financing cash outflow was $449.6m, mainly reflecting debt repayments. Cash and restricted cash totaled $482.4m at quarter-end, down from $589.8m at December 31, 2018; unrestricted cash and cash equivalents were $278.8m, with $203.6m restricted.
At March 31, senior and other debt totaled $2.255bn; finance lease obligations were $69.4m. The company used approximately $340m of St. Augustine sale proceeds to repay term-loan and revolving-credit borrowings. It reported that the conditions to be exempt from its revolving-credit leverage covenant were met at quarter-end. Operating lease liabilities of $969.1m were recognized following adoption of the new lease standard.
Material changes and management commentary
- Segment revenue trends varied: Brazil declined 10% to $110.0m; Mexico was approximately flat at $156.5m; Andean rose 3% to $138.9m; Rest of World rose 4% to $54.2m; and Online & Partnerships declined 4% to $161.8m.
- Adjusted EBITDA improved in Andean, Rest of World, Online & Partnerships and Corporate, but declined in Brazil and Mexico. Brazil cited higher discounts and scholarships as FIES participation continued to decline following student graduations.
- Laureate completed the St. Augustine and Thailand sales during the quarter and recognized related gains. It also reversed a previously accrued China-sale contingency after settlement of a legal matter with no cost to the company.
- Management stated that available cash and expected operating cash flow should be sufficient for current operating requirements for at least 12 months from issuance of the report. No numerical full-year earnings or revenue guidance is provided in the filing text.
- After quarter-end, Laureate completed the South Africa sale on April 8, 2019, and signed an agreement to sell UniNorte in Brazil on April 16, with closing expected in the second half of 2019, subject to conditions including regulatory approval.
Risks, contingencies and unusual items
- Foreign-currency movements, international political and economic conditions, competition, enrollment and tuition trends, seasonality, and regulatory changes may affect results. Management highlighted uncertainty around Chile’s new higher-education law, effective May 29, 2019, including whether certain Chilean nonprofit universities can continue to be consolidated.
- Chile’s student-financing program guarantees had a maximum potential exposure of approximately $509m; the recorded estimated guarantee liability was $37.4m. The maximum assumes all covered students default and do not graduate.
- Management estimated up to approximately $42m of reasonably possible loss on unrecorded contingencies in Brazil if all unfavorable outcomes occur. Recorded tax and other contingencies are also disclosed in the filing.
- The filing describes ongoing legal matters, including appeals in China concerning claims against former affiliates; Laureate has provided the buyer an indemnity subject to an aggregate cap of RMB 400m (approximately $60m at quarter-end). Management stated it did not expect ordinary-course legal matters to have a material financial impact.
- Q1 results include nonrecurring divestiture gains, a $10.6m debt-extinguishment loss, derivative gains, and foreign-exchange losses. Q1 is seasonally a weaker revenue quarter; quarterly results may not indicate full-year performance.
Important facts for investors to verify
- Whether planned divestitures close on expected terms and timing, and how proceeds are applied to debt.
- Underlying enrollment, retention, pricing, scholarship levels and segment profitability, especially in Brazil and Online & Partnerships.
- Debt reduction, covenant headroom, cash availability across jurisdictions, and the use restrictions on restricted cash and VIE cash.
- The outcome and accounting implications of Chile’s new law, including the continuing consolidation assessment for nonprofit universities.
- Potential cash requirements from student-loan guarantees, tax exposures, legal claims and other contingencies.