LAUR

Business Context and Reporting Period

Company: Laureate Education, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2007
Business Overview: Laureate operates a global network of campus-based and online higher education institutions across three segments: Latin America, Europe, and Laureate Online Education. The company serves over 262,000 students.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 21% ($48.4 million) driven by enrollment growth (13% in Latin America, 10.7% in Europe, 24% in Online), tuition price increases, and acquisitions. Currency translation had a mixed impact, reducing Latin American revenue by $2.9 million but increasing European revenue by $5.3 million.
• Profitability Decline: The company reported an operating loss of $9.7 million compared to a near-breakeven operating loss of $0.1 million in the prior year. This was primarily due to $9.3 million in transaction costs related to a proposed merger and increased general and administrative expenses.
• Accounting Adjustments: A significant non-cash charge of $14.8 million was recorded for the "Effect of Minority Put Arrangements," reducing net loss available to common shareholders. Additionally, the adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) resulted in a $22.4 million charge to retained earnings on January 1, 2007.
• Acquisitions: The company acquired Instituto de Cultura Superior Valle del Bravo de Reynosa (UVB) in Mexico for approximately $35.8 million, contributing to revenue growth.

Guidance, Outlook, and Risks

• Proposed Merger: On January 28, 2007, Laureate entered into a definitive agreement to be acquired by Wengen Alberta, Limited Partnership (a consortium including KKR, Citigroup, and others) for $60.50 per share in cash. Completion is subject to shareholder approval and regulatory conditions. $9.3 million in transaction costs were incurred in Q1 2007.
• Seasonality: The first quarter is historically weaker due to summer breaks in many international locations. The fourth quarter is typically the strongest.
• Tax Risks: The company is under examination by the IRS for the 2003 return and has open audits for 1997-2000. It is also under examination in the Netherlands. It is reasonably possible that tax matters could be resolved within 12 months, potentially reducing the FIN 48 liability by up to $12.0 million.
• Contingent Liabilities: Significant contingent consideration exists for minority share ownership purchase arrangements. If all minority put arrangements were exercisable at March 31, 2007, the company would be obligated to pay approximately $75.4 million.
• Legal Proceedings: Two civil actions have been filed in Maryland challenging the proposed merger. Additionally, the company is involved in a dispute regarding Italian VAT assessments related to the former Wall Street Institute (WSI) business, for which it has deposited $3.0 million but believes a loss is not probable.

Investor Verification Checklist

• Merger Status: Verify the progress of the $60.50/share acquisition by Wengen and the likelihood of shareholder/regulatory approval.
• Minority Put Obligations: Assess the potential cash outflow of $75.4 million if minority shareholders exercise put options, and the impact of accretion on future earnings.
• Tax Exposure: Monitor the outcome of IRS and Dutch tax audits and the potential $12 million reduction in unrecognized tax benefits.
• Latin America Performance: Review the impact of the weakening Mexican Peso on future revenue and earnings, as this region represents 50% of total revenue.
• Debt Covenants: Confirm continued compliance with the 3.5x EBITDA leverage covenant on the $350 million credit facility, especially given the recent operating loss.