Business context and reporting period
Laureate Education, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. It operates higher-education institutions, primarily in Latin America, and reported approximately 875,100 students across 29 institutions in nine countries in continuing operations. Unless noted, financial figures below are for continuing operations; the filing presents annual results, with selected fourth-quarter figures included separately.
The company classified announced divestitures and its expired Saudi Arabia management contract as discontinued operations for all periods presented. In January 2020, the board authorized a review of strategic alternatives, including sales, spin-offs and business combinations, and the company began sale processes for its Peru, Mexico and Australia/New Zealand businesses.
Financial performance and position
Dollar figures are in millions, except per-share data. Margins below are calculated from reported figures.
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Revenue | $3,250.3 | $3,290.2 | Down 1%; adverse foreign exchange reduced 2019 revenue by $135.4 |
| Operating income | $326.1 | $283.9 | Up 15%; operating margin approximately 10.0% vs. 8.6% |
| Adjusted EBITDA | $646.6 | $610.2 | Up 6%; margin approximately 19.9% vs. 18.5%. Non-GAAP measure |
| Income (loss) from continuing operations | $14.0 | $(10.5) | Improved, but included $80.7 of income tax expense in 2019 |
| Net income attributable to Laureate | $938.5 | $370.1 | Includes $869.8 of after-tax gains on discontinued-operation sales in 2019 |
| Diluted EPS | $4.22 | $1.73 | Continuing-operations diluted EPS was $0.06 in 2019 vs. $(0.06) in 2018 |
| Cash from operating activities | $339.8 | $396.9 | Down $57.1 |
| Cash and cash equivalents | $339.6 | $387.8 | Excludes restricted cash and cash held by subsidiaries classified as held for sale |
| Restricted cash | $186.9 | $195.8 | Includes cash collateral for regulatory and tax letters of credit |
| Total debt, including amounts due to acquired-company shareholders | $1,400.7 | $2,739.3 | Selected financial data; debt repayments funded substantially by divestitures |
| Net working capital | $(127.9) | $27.0 | Current assets less current liabilities |
Other debt details: year-end senior and other debt was $1,345.1, plus $100.1 of finance lease obligations and sale-leaseback financings, before unamortized financing costs and current-portion presentation. The $800.0 of 8.25% senior notes mature in May 2025. The $410.0 revolving facility matures in October 2024, with $202.4 drawn at year-end. The company reported compliance with its 3.50x maximum senior secured leverage covenant. A 1 percentage-point increase in variable rates would add an estimated $4.4 of annual interest expense.
Investing activities generated $1,116.8 of cash, largely from divestiture proceeds; financing activities used $1,674.0, including debt repayments and $264.1 of share repurchases. Cash flow from operations was lower year over year, in part due to working-capital movements and derivative settlements. Operating lease liabilities were $883.9 at year-end, following adoption of the new lease accounting standard; total undiscounted operating lease payments were $1,310.2.
Fourth-quarter results
For the quarter ended December 31, 2019, revenue was $883.2, down from $892.5 in the prior-year quarter. Operating income was $155.3, compared with $134.5. Income from continuing operations was $51.7 versus $26.1, and net income attributable to Laureate was $60.9 versus $71.6. Fourth-quarter results included a $21.4 after-tax gain on sales of discontinued operations, compared with a $15.3 loss in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue declined modestly despite higher enrollment at many institutions; currency translation, particularly the Brazilian real and Chilean peso, was a significant headwind. Total continuing-operations enrollment increased to 875,100 from 870,000.
- Operating income and Adjusted EBITDA rose, supported by stronger Andean and Rest of World results and lower corporate expenses. Brazil Adjusted EBITDA fell 21% to $82.3; Andean rose 8% to $343.3; Mexico rose 3% to $147.8; Online & Partnerships declined 2% to $190.9.
- Net interest expense fell to $155.1 from $223.4, primarily due to lower average debt after repayment of the 2024 term loan. The company recorded $28.3 of debt-extinguishment losses in 2019, compared with $7.5 in 2018.
- Net income rose sharply, but primarily because of divestiture gains: after-tax gains on discontinued-operation sales were $869.8 in 2019 versus $296.6 in 2018. These gains are not representative of recurring continuing-operations earnings.
- Cash from operations decreased, while sale proceeds boosted investing cash flow. The company used divestiture proceeds to repay debt and repurchased $264.1 of shares in 2019; the $300.0 repurchase authorization was fully used in January 2020.
Outlook, risks, contingencies and unusual items
Management stated that cash flow from operations and available cash were expected to meet current operating requirements for at least 12 months from the report’s issuance. The filing provides no quantified earnings, revenue or cash-flow guidance. Strategic alternatives and planned divestitures remain uncertain; the company cautioned that transactions may not occur, may take time, and could create costs, disruption, tax liabilities or impairment charges.
- U.S. student-aid oversight: Walden and NewSchool were provisionally certified for Title IV programs. Based on Laureate’s 2018 composite score, the Department of Education required a $125.8 letter of credit and continued Heightened Cash Monitoring 1, with additional reporting. Walden received approximately 76% of 2019 revenue, calculated on a cash basis, from Title IV funds. Loss or restriction of eligibility could materially affect liquidity and enrollment.
- Foreign exchange: Approximately 81% of 2019 revenue originated outside the United States. A hypothetical 10% adverse currency move, excluding derivatives, would have reduced operating income by $24.7 and Adjusted EBITDA by $63.2.
- Brazil student financing: Approximately 6.7% of Brazil students participated in FIES, representing about 13% of Brazil net revenue. Brazil revenue also faced pressure from lower FIES participation and greater discounts, partly offset by distance-learning enrollment growth.
- Chile regulation and VIE consolidation: New rules restrict related-party transactions involving non-profit universities. Laureate changed service arrangements and said it was continuing to evaluate whether it could continue consolidating Chilean non-profit institutions.
- Tax matters: Spanish tax assessments remain under appeal, including an assessment of approximately EUR 4.3 million for 2014–2015 received in January 2020. The company estimated up to $49 million of reasonably possible unrecorded losses on certain Brazilian contingencies if all outcomes were unfavorable. It also reported $90.1 of unrecognized tax benefits, interest and penalties, with settlement timing unclear.
- Student-loan guarantees: Chilean institutions’ maximum potential CAE guarantee payments were approximately $474.0; the recorded estimated liability was $30.9. The maximum assumes all covered students fail to graduate and default.
- Asset and accounting items: Goodwill and tradenames totaled approximately $2.82 billion, and no impairment was recorded in the 2019 annual test. The 2019 adoption of lease accounting added $861.9 of right-of-use assets and $883.9 of operating lease liabilities. The auditor issued unqualified opinions on the financial statements and internal controls; Brazil goodwill/tradename valuation and lease-payment discount rates were identified as critical audit matters.
- Legal and governance: A former chief accounting officer’s whistleblower case proceeded to a scheduled September 2020 hearing after OSHA dismissed the complaint; the company disputed the allegations. The Costa Rica sale closed in January 2020 for $15.0 at closing plus up to $7.0 contingent consideration and involved a related party. The company has a dual-class structure, with Class B shares carrying ten votes each; Class B holders had approximately 89% of voting power as of February 14, 2020.
Most important facts for investors to verify
- Separate recurring continuing-operations performance from divestiture gains: 2019 reported net income included $869.8 of after-tax sale gains, while continuing-operations income was $14.0.
- Track completion, timing, net proceeds, taxes and stranded costs from remaining divestitures and the strategic-alternatives review.
- Monitor U.S. Department of Education composite-score determinations, required letters of credit, cash-monitoring status and Walden’s Title IV revenue concentration.
- Assess whether organic enrollment and pricing can offset currency pressure, discounts and weaker results in Brazil and Online & Partnerships.
- Verify liquidity available to the parent, given negative working capital, restricted cash, foreign-held cash and limits on distributions from certain subsidiaries and VIEs.
- Monitor Spanish tax appeals, Brazilian contingencies, Chilean regulatory developments and the resulting effect on VIE consolidation and cash repatriation.