Laureate Education, Inc. — Q3 2021 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2021. Unless noted, amounts below are in U.S. dollars and rounded to millions. Comparisons are with the corresponding 2020 periods.
Business context
Laureate operates five degree-granting institutions in Mexico and Peru, with approximately 390,200 students. These are its continuing operations. The company has classified divested businesses, including Brazil and Walden University, as discontinued operations. Most campus-based instruction remained predominantly online in response to COVID-19.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2021: $267.7; 2020: $243.5 | 2021: $790.0; 2020: $739.7 |
| Operating income (loss), continuing operations | 2021: $35.1; 2020: $(318.2) | 2021: $6.4; 2020: $(366.2) |
| Adjusted EBITDA, continuing operations (non-GAAP) | 2021: $75.9; 2020: $50.4 | 2021: $192.7; 2020: $115.1 |
| Net income (loss) attributable to Laureate | 2021: $360.4; 2020: $(784.4) | 2021: $166.5; 2020: $(992.7) |
| EPS | 2021: $1.94; 2020: $(3.73) | 2021: $0.86; 2020: $(4.72) |
Continuing-operations revenue grew 10% in Q3 and 7% year to date. Q3 growth reflected higher enrollment, especially in Peru, partly offset by foreign exchange, pricing and product mix. Nine-month growth was driven by Peru enrollment and pricing/mix, while Mexico enrollment declined 1%. Adjusted EBITDA increased 51% in Q3 and 67% year to date; its margin was approximately 28.3% and 24.4%, respectively.
Continuing-operations net loss was $10.4 million in Q3 and $290.8 million for the first nine months. The nine-month result included a $67.2 million impairment charge, a $77.9 million debt-extinguishment loss, a $24.5 million derivative loss and $174.2 million of income tax expense. The tax expense included reserve changes and discrete tax adjustments. Net income was substantially supported by discontinued-operation sale gains, including the Walden sale; it should not be read as recurring operating profit.
Cash flow and liquidity: Nine-month operating cash flow was $54.0 million, versus $221.8 million in 2020; investing cash inflow was $2,054.4 million, largely from divestitures; financing cash outflow was $1,284.5 million. Cash and cash equivalents were $1,856.9 million at September 30, plus $105.0 million of restricted cash. Total debt and finance leases were $165.7 million, including $119.2 million of debt and $46.5 million of finance leases. The $410 million revolver was undrawn. Operating lease liabilities were $459.5 million.
Material changes and unusual items
- Walden was sold on August 12, 2021, for approximately $1,397.2 million of net proceeds; Laureate recorded a pretax gain of approximately $615.2 million and estimated tax expense of approximately $278.0 million. Brazil was sold in May for approximately $625.5 million net proceeds. The sales contributed materially to reported cash flow and discontinued-operation earnings.
- The company fully repaid its 8.25% Senior Notes due 2025 during 2021, using divestiture proceeds. The repayment reduced interest expense but generated the $77.9 million extinguishment loss. The Brazil-related currency swaps also resulted in a $24.5 million net loss.
- Laureate accrued a $7.01-per-share special cash distribution, totaling $1,271.8 million, payable to eligible holders. It was paid October 29, 2021, after quarter end. The company also expects approximately $170 million of taxes and fees on prior sales, mostly in Q4 2021.
- Q3 2020 results included a $320.0 million continuing-operations tradename impairment; the first nine months of 2020 also included substantial discontinued-operation impairments. These charges make year-over-year operating comparisons unusually favorable in 2021.
- Laureate recorded a $51.4 million impairment of its tradename in Q1 2021 and said it would stop supporting the Laureate network tradename beyond 2021.
Outlook, risks and contingencies
Management said operating cash flow and available cash should be sufficient for operating requirements and liquidity needs for at least 12 months from the report’s issuance. This assessment is subject to COVID-19 effects on enrollment, tuition, collections and campus reopening; management said the eventual impact cannot be fully quantified and future impairments are possible. No specific revenue or earnings guidance was provided.
Key risks include enrollment and tuition trends, foreign-exchange movements, political, tax and regulatory conditions in Mexico and Peru, competition, seasonality, and COVID-19. A newly highlighted risk is potential Peruvian capital-gains tax on certain transfers of Laureate shares; in specified circumstances, Peruvian subsidiaries could face joint and several liability if tax is unpaid. The Spanish tax-audit appeal remained unresolved, with both sides appealing; management said it did not expect a material financial-statement effect. Management reported disclosure controls were effective and no material internal-control changes during Q3; most IT activities were outsourced effective October 1.
Important facts for investors to verify
- How the post-quarter $1,271.8 million distribution and expected approximately $170 million of taxes and fees affect remaining cash and liquidity.
- Enrollment, pricing, scholarship levels and operating performance in Mexico and Peru, including the sustainability of Peru’s growth and Mexico’s enrollment trends.
- Whether the $74 million Walden escrow and approximately $83.6 million of restricted cash are released as expected, and whether further distributions follow.
- The continuing-operations results separate from disposal gains, impairments, tax adjustments and other unusual items; review the company’s non-GAAP Adjusted EBITDA reconciliation.
- Developments in COVID-19 impacts, the Spanish tax appeal and the disclosed Peruvian shareholder-transfer tax exposure.