Laureate Education, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 20, 2018. This is an annual report, not a standalone fourth-quarter filing. Laureate operated a global higher-education network of 66 institutions in 24 countries, with approximately 1.068 million students across six reporting segments. Figures below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue | $4.378 billion | $4.244 billion | Up 3%; enrollment, pricing and mix gains, and currency effects more than offset divestitures. |
| Operating income | $356.8 million | $382.9 million | Down 7%; operating margin declined to 8.2% from 9.0%. |
| Adjusted EBITDA | $831.7 million | $765.6 million | Up 9%; margin increased to 19.0% from 18.0%. Non-GAAP measure that excludes specified items. |
| Net income | $93.8 million | $366.2 million | 2016 included $406.6 million of gains on subsidiary sales. |
| Net income attributable to Laureate | $91.5 million | $371.8 million | FY 2017 common-stockholder result was a loss of $207.0 million, principally reflecting $298.5 million of preferred-stock and other redemption-value accretion; basic and diluted loss per share were $1.20. |
| Operating cash flow | $130.8 million | $184.6 million | Down $53.8 million, reflecting refinancing-related cash costs and interest-payment timing. |
| Cash and restricted cash/investments | $468.7 million / $224.9 million | $465.0 million / $189.3 million | Restricted balances include collateral for regulatory and tax-related letters of credit and are not freely available. |
| Total debt | $3.441 billion | $4.019 billion | Down 14%; reported total includes amounts due to sellers of acquired companies. Senior notes were refinanced to $800 million due 2025; senior secured term debt and revolver were refinanced in 2017. |
| Working capital | $(85.9) million | $(324.4) million | Deficit narrowed; current assets were $1.289 billion and current liabilities $1.375 billion. |
Capital expenditures were $293.8 million, up from $256.7 million. Net cash used in investing was $324.5 million, compared with $269.2 million provided in 2016, when major asset-sale proceeds were received. The 2017 net income also benefited from a $66.8 million income-tax benefit, including provisional U.S. tax-reform effects.
Material changes versus the prior comparable period
- Enrollment rose 2.4% to 1.068 million. Revenue growth was led by Brazil and Andean & Iberian, each up 11%; EMEAA revenue fell 12%, primarily reflecting prior divestitures, and Online & Partnerships revenue declined 2%.
- Revenue increased despite $141.9 million of lower revenue from dispositions. Foreign exchange increased reported revenue by $61.6 million; management said currency movements reduced Adjusted EBITDA by approximately $5 million year over year.
- Operating income fell as corporate costs and impairment charges increased. Impairment losses were $40.6 million, mainly related to businesses classified as held for sale; 2016 impairment losses were $23.5 million.
- Net income fell sharply from 2016, which included substantial gains on the sales of Swiss and French operations. Net interest expense declined by $60.1 million after refinancing and lower average debt balances and rates.
- The company completed a $456.4 million IPO and exchanged $250 million principal amount of 2019 notes for 18.7 million Class A shares. At year-end, Class A and Class B shares had unequal voting rights; Class B holders controlled approximately 96% of voting power.
Outlook, management commentary, risks and unusual items
- Efficiency program: Management reported approximately $85 million of annualized savings from EiP Wave 1 and expected a further $15 million by year-end 2018. EiP Wave 2 targets $75–$100 million of annual savings by year-end 2019, with approximately $125 million of one-time severance, restructuring and technology costs; about half had been incurred in 2017. These are targets, not guaranteed results.
- Online strategy: Online courses represented 20% of student credit hours at campus-based institutions in 2017; management targeted 25% by the end of 2019. The filing does not provide formal consolidated revenue or earnings guidance.
- Portfolio changes after year-end: Cyprus and Italy were sold in January 2018 for approximately $275 million gross proceeds. The China sale closed in January, with approximately $130 million described as received at closing net of fees and taxes, plus amounts subject to holdbacks and escrow. Malaysia and Morocco sales were pending; the Kendall transaction was an asset transfer for nominal consideration, with up to $14 million of facility support and regulatory approvals still required. Management said sale proceeds would be used in part to reduce debt.
- Chile regulatory change: A new higher-education law passed Chile’s Congress in January 2018. Laureate expected to lose control and deconsolidate three Chilean nonprofit universities and a real-estate subsidiary, potentially as early as the first quarter of 2018. Management estimated a one-time write-off of approximately $600–$850 million in carrying value, annual revenue reduction of $410–$430 million, and annual operating-income and depreciation-and-amortization decreases of approximately $35 million each. These estimates remained under review.
- U.S. student-aid oversight: Laureate’s U.S. institutions were provisionally certified for Title IV funding and subject to heightened cash monitoring. The Department of Education required a $136.9 million letter of credit, backed by restricted assets, and further reporting. Title IV supplied approximately $498 million of U.S. institution revenue in 2017. One program failed and five were “in the zone” under gainful-employment measures; the failed program was being discontinued.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing four material weaknesses involving risk assessment, contracting/legal compliance, IT general controls, and key reports and spreadsheets. Remediation was in progress. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Turkey matters: An internal investigation into a diverted charitable donation and possible FCPA violations remained ongoing, with DOJ and SEC inquiries. Separately, Turkish regulators demanded repayment of approximately $29 million for services and approximately $8 million in other amounts at Bilgi; the deadlines were extended to April 16, 2018, and the university appealed. Loss of control or deconsolidation of Bilgi could be material.
- Other exposures: Chilean student-loan guarantees had a maximum potential exposure of approximately $527 million; Laureate recorded $27.1 million. The filing also describes Spanish tax disputes, student litigation, foreign-exchange exposure and risks from substantial debt. A 10% adverse currency move was estimated to reduce operating income by $28.6 million and Adjusted EBITDA by $80.2 million, excluding derivative effects.
- Liquidity and debt service: Management expected operating cash flow and available cash to fund current operating requirements for at least 12 months from filing. This assessment should be considered alongside restricted cash, substantial debt, subsidiary cash-transfer constraints and scheduled contractual obligations.
Most important facts for investors to verify
- Progress, timing and actual financial effects of the Chilean law, including the anticipated deconsolidation, write-off and revenue and earnings changes.
- Whether sale proceeds, including China holdbacks and escrow, are received as expected and how much debt is repaid.
- Title IV certification, the $136.9 million letter of credit, heightened cash-monitoring requirements and the status of gainful-employment programs.
- Remediation of all four material weaknesses, including whether controls operate effectively and whether reporting remains timely and reliable.
- Outcomes of the Turkish Bilgi audit and FCPA investigation, and of Spanish tax appeals and significant student litigation.
- Delivery of EiP savings against one-time costs, and enrollment, pricing, scholarship and cash-collection trends—especially in Brazil, Chile and online operations.
- Debt reduction, refinancing terms, interest-rate exposure, and the amount of cash genuinely available after restricted balances and foreign-subsidiary limitations.
- Potential dilution and claims on cash from Series A preferred stock: the filing reported $400.3 million carrying value, compounding dividends and possible conversion into approximately 35.3–40.0 million Class A shares.