Laureate Education, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Laureate operates an international higher-education network. At quarter-end, it reported approximately 1.085 million students across 70 institutions in 25 countries. The quarter included the February 6 IPO; the company received $456.9 million in net proceeds.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $855.9 million | $906.5 million; down 6% |
| Operating loss | $62.9 million | $11.2 million loss |
| Net loss attributable to Laureate | $122.8 million | $103.2 million loss |
| Net loss available to common stockholders | $161.7 million | $101.7 million loss |
| Basic and diluted loss per share | $1.05 | $0.76 |
| Adjusted EBITDA (non-GAAP) | $48.6 million | $74.0 million; down 34% |
| Operating cash flow | $(39.8) million | $(89.3) million |
| Capital expenditures | $40.6 million | $43.4 million |
Revenue fell mainly because of 2016 business dispositions, which reduced Q1 revenue by $75.1 million, partly offset by enrollment growth. Operating margin was approximately negative 7.3%, versus negative 1.2% a year earlier; Adjusted EBITDA margin was approximately 5.7%, versus 8.2%. The filing does not present a gross-profit margin.
Cash and cash equivalents were $856.3 million at March 31, 2017, including $195.8 million of restricted cash and investments reported separately. Total debt, including current debt and capital leases, was approximately $3.85 billion; cash less total debt was approximately $3.0 billion, before considering restrictions and cash held by foreign subsidiaries or VIEs. Current assets of $1.78 billion were slightly below current liabilities of $1.79 billion. Management stated that cash, available resources and expected operating cash flow should meet requirements for at least 12 months.
Q1 operating cash use improved year over year, with deferred revenue and student deposits contributing to working capital. Financing provided $464.1 million, principally from IPO proceeds and preferred-stock issuance; ending cash increased by $391.3 million.
Material changes and segment performance
- LatAm: Revenue increased 4% to $421.4 million, but Adjusted EBITDA worsened to a $35.8 million loss from a $20.2 million loss. Higher costs and currency translation weighed on results. Heavy rains and flooding disrupted classes in Peru, reducing revenue by about $11.5 million; classes resumed and were expected to be completed by the end of Q3.
- EMEAA: Revenue declined 7% to $227.2 million, primarily due to dispositions and unfavorable currency translation; organic enrollment excluding dispositions grew 6%. Adjusted EBITDA decreased 2% to $53.4 million.
- GPS: Revenue declined 20% to $208.3 million, mostly due to dispositions; organic enrollment excluding dispositions fell 5%. Adjusted EBITDA declined 9% to $63.6 million.
Reported results also reflected increased share-based compensation, including $14.6 million of expense for CEO options that vested upon the IPO, and $24.6 million of Excellence-in-Process (EiP) costs, up from $11.8 million. A $27.1 million income tax benefit included an approximately $30 million discrete benefit from redesignating certain intercompany loans. Preferred-stock accretion reduced income available to common stockholders by $39.3 million.
Outlook, risks and unusual items
- Debt refinancing after quarter-end: On April 26, 2017, Laureate issued $800 million of 8.25% senior notes due 2025 and established a $385 million revolving facility due 2022 and a $1.6 billion term loan due 2024. The company planned to use proceeds, IPO cash and facility proceeds to redeem most 2019 notes, repay existing term loans and FMU seller notes, and pay related costs. It elected to redeem $1.125 billion principal amount of 2019 notes for an aggregate payment of approximately $1.206 billion; $250 million of exchanged notes would remain outstanding.
- Turkey/Bilgi: In an April 18, 2017 audit result, Turkey’s higher-education regulator required Bilgi to reduce new-student quotas for 2017–2018 and reimburse approximately $29 million for services, with additional demands involving about $8 million. Laureate and Bilgi intended to appeal. Potential loss of contractual economics could require deconsolidation; Bilgi generated about $106 million of Laureate revenue and $26 million of operating income in 2016.
- Regulatory and operating risks: A proposed Chilean higher-education bill could affect governance, related-party transactions and operations; its outcome was uncertain. The company also cited foreign-exchange, political, regulatory, enrollment, competition and seasonality risks.
- Contingencies: Chilean student-loan guarantees had a maximum potential exposure of approximately $497 million; the recorded long-term guarantee liability was $27.8 million. Tax and legal matters were also disclosed; management said ordinary-course legal matters were adequately defended, insured or accrued.
- Controls: Management concluded disclosure controls were ineffective at March 31, 2017 because four previously disclosed material weaknesses had not been fully remediated. Remediation was underway.
- Accounting outlook: The company anticipated that the new lease standard would materially increase balance-sheet assets and liabilities. It planned to adopt the new revenue standard in 2018 and was still assessing its impact beyond tuition revenue.
Investor verification points
- Track enrollment, organic performance and margin trends separately from the effects of dispositions, currency and seasonality; assess LatAm cost growth and the Peru disruption.
- Follow the Bilgi appeal, student-admission restrictions, reimbursement demands and any change to consolidation or service arrangements.
- Verify completion and cash cost of the refinancing and note redemption, resulting debt maturities, interest burden and covenant compliance.
- Assess cash availability after restricted funds and foreign/VIE cash constraints, alongside operating cash conversion and working-capital swings.
- Monitor remediation of the four material weaknesses and the potential effects of proposed Chilean regulation.
- Evaluate the preferred stock’s redemption, conversion and accretion terms, and resulting dilution or effects on common-stockholder returns.