Laureate Education, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. Laureate operated a global higher-education network of 63 institutions in 22 countries, serving approximately 1.07 million students.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $885.3 million | $855.9 million |
| Operating loss | $(27.5) million | $(62.9) million |
| Adjusted EBITDA (non-GAAP) | $47.5 million | $48.6 million |
| Net income (loss) | $171.5 million | $(120.4) million |
| Net income (loss) attributable to Laureate | $168.9 million | $(122.8) million |
| Basic and diluted EPS | $0.59 | $(1.05) |
| Net cash used in operating activities | $(7.1) million | $(36.4) million |
Revenue grew 3%. Operating margin improved to approximately negative 3.1% from negative 7.3%; Adjusted EBITDA margin was approximately 5.4% versus 5.7%. Q1 net income primarily reflects $298.0 million of gains on subsidiary sales, not a comparable improvement in recurring operations. Interest expense was $69.5 million, down from $102.6 million; interest income was $6.1 million.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $479.0 million and restricted cash was $185.0 million. Cash plus restricted cash totaled $664.0 million, down $29.7 million from year-end.
- Total debt was $3.08 billion, including $131.7 million current portion; long-term debt, less current portion, was $2.85 billion. Total debt declined from $3.47 billion at December 31, 2017.
- Investing activities provided $302.7 million, mainly from sale proceeds; financing activities used $369.0 million, including substantial debt repayment. Capital expenditures were $47.6 million.
- Management stated that cash, available liquidity and expected operating cash flow should meet current operating requirements for at least the next 12 months. Restricted cash and cash held by foreign subsidiaries or variable-interest entities may not be freely available for general use.
Changes versus the prior comparable period
- Revenue increased $29.4 million. Currency movements added $31.1 million; enrollment, pricing, product mix and timing added $25.0 million, including approximately $11.5 million of Peruvian revenue shifted from Q1 2017 after weather-related class disruptions. Dispositions reduced revenue by $29.2 million.
- Operating loss narrowed by $35.4 million, supported by improved Brazil and Andean & Iberian results and lower corporate EiP and share-based compensation costs. Adjusted EBITDA was down 2% overall.
- Segment revenue/Adjusted EBITDA: Brazil $122.8 million/$(26.0) million; Mexico $155.9 million/$30.4 million; Andean & Iberian $216.2 million/$(6.9) million; Central America & U.S. Campuses $79.0 million/$17.6 million; EMEAA $147.0 million/$23.3 million; Online & Partnerships $168.0 million/$45.0 million. Online & Partnerships enrollment declined 6%; Mexico Adjusted EBITDA fell 20% and EMEAA fell 22%.
- Debt costs and cash interest declined following prior refinancing and the February 2018 repricing. The company prepaid $350 million of its 2024 term loan and reduced applicable interest margins by 100 basis points.
Outlook, transactions and material risks
- No specific earnings or revenue guidance was provided. Management highlighted seasonality: Q1 and Q3 are generally weaker revenue quarters, and quarterly results may not indicate full-year performance.
- Q1 sales of Cyprus, Italy and China generated a combined $298.0 million gain. Germany and Morocco operations were sold in April 2018. A sale of St. Augustine for $400 million, subject to adjustments and regulatory approvals, was agreed in April and was expected to close in late 2018. These divestitures reduce future institution counts, enrollment and revenue.
- All Series A preferred shares converted into 36.1 million Class A shares on April 23, 2018, after quarter-end. The preferred stock had a $447.9 million carrying value at March 31.
- Chile’s new higher-education law retains restrictions on conflicts of interest and related-party dealings; implementing rules and their effect on Laureate’s university relationships remained uncertain. The company continued consolidating three Chilean nonprofit universities as VIEs, pending further regulatory developments.
- In Turkey, Bilgi University reimbursed payments disallowed by regulators and was considering or pursuing challenges to audit decisions. Spanish tax audits and appeals remain ongoing; Laureate paid approximately $36.8 million to Spanish tax authorities during Q1. Recorded other-than-income-tax contingencies were $76.1 million; management estimated reasonably possible unrecorded losses in Brazil could reach approximately $46 million.
- Potential Chilean student-loan guarantee payments were capped at approximately $545 million under the stated worst-case assumptions; the recorded estimated liability was $33.6 million.
- Disclosure controls were reported ineffective due to four previously disclosed material weaknesses, not yet remediated at March 31, 2018. Management nevertheless stated the financial statements fairly present the company’s results and position.
- Foreign currency, political and regulatory changes, enrollment and tuition trends, student financing, divestiture execution, debt obligations and internal-control remediation are key risks. The filing also anticipates a material balance-sheet impact from lease accounting changes effective in 2019.
Important facts for investors to verify
- How much of reported earnings and cash generation is repeatable after excluding the $298.0 million disposal gain and other non-operating effects?
- Whether organic enrollment and operating performance, particularly in Online & Partnerships and Mexico, improve, and how divestitures affect the continuing business.
- Debt balances, interest costs, covenant headroom and the availability of cash held overseas, restricted, or within VIEs.
- The outcomes and financial effects of Chilean and Turkish regulatory matters, Spanish tax appeals, and student-loan guarantees.
- Progress remediating the four material weaknesses in disclosure controls and the eventual regulatory approval and closing of the St. Augustine sale.