Laureate Education, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also presents fourth-quarter results. Unless stated otherwise, financial results below relate to continuing operations. The 10-K was filed February 28, 2019.
Business context
Laureate operates an international higher-education network. At year-end, continuing operations included 874,800 students at 38 institutions in 10 countries, with principal campus markets in Brazil, Mexico, Chile and Peru, plus online operations. Following a strategic review, the company classified planned divestitures as discontinued operations and is focusing on larger Latin American markets and U.S. online education.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3.350 billion | $3.386 billion |
| Operating income | $291.0 million | $242.0 million |
| Operating margin | 8.7% | 7.1% |
| Adjusted EBITDA | $623.1 million | $615.5 million |
| Adjusted EBITDA margin | 18.6% | 18.2% |
| Income (loss) from continuing operations | $(4.7) million | $20.8 million |
| Net income attributable to Laureate | $370.1 million | $91.5 million |
| Cash provided by operating activities | $396.9 million | $192.2 million |
Net income in 2018 included $296.6 million of after-tax gains on discontinued-operation sales; continuing operations reported a loss. Adjusted EBITDA is a non-GAAP measure defined by the company.
- Revenue declined 1%, principally because foreign-exchange movements reduced revenue by $114.6 million. Higher average enrollment, pricing and program mix partly offset the impact.
- Operating income rose 20%, helped by improved results in Andean and Mexico, a smaller Rest of World operating loss, lower corporate costs and reduced interest expense. Net interest expense fell to $223.4 million from $323.0 million.
- Year-end cash and cash equivalents were $388.5 million; restricted cash was $201.3 million. Net working capital was $27.0 million, versus a deficit of $85.9 million in 2017. Management said cash and operating cash flow should cover current operating requirements for at least 12 months.
- Reported total debt, including amounts due to sellers of acquired companies, was $2.741 billion, down from $3.167 billion. The company repaid $350 million of term-loan principal in 2018. A further $340 million of proceeds from the February 2019 St. Augustine sale was used to repay term-loan borrowings; the remaining proceeds repaid revolver borrowings.
- Capital expenditures for continuing and discontinued operations were $257.9 million. Investing cash flow was positive $115.5 million, mainly reflecting disposition proceeds; financing cash flow was negative $410.1 million.
Fourth-quarter results
For the quarter ended December 31, 2018, revenue was $913.7 million and operating income was $139.8 million. Continuing-operations income was $30.8 million; net income attributable to Laureate was $71.6 million. Results include discontinued operations and disposal-related items, so quarterly earnings are not directly representative of ongoing operations.
Material changes, outlook and risks
- Portfolio sales: Sales of Cyprus, Italy, China, Germany, Morocco and Kendall closed in 2018, contributing to the $296.6 million after-tax disposal gain. The Spain and Portugal sale agreement had a value of €770 million and was expected to close in the first half of 2019, subject to approvals. The Malaysia sale price was reduced to $140 million gross, or an estimated $125.86 million net, with regulatory approval still pending. South Africa was also under a signed sale agreement.
- Enrollment and segments: Total continuing-operations enrollment increased to 874,800 from 865,200. Andean revenue rose 6% and Adjusted EBITDA rose 5%; Brazil revenue fell 15% and Adjusted EBITDA fell 23%, largely reflecting Brazilian-real depreciation. Online & Partnerships revenue fell 4%, with organic enrollment down 6%.
- Management strategy: Management plans to simplify the portfolio, use divestiture proceeds primarily to repay debt, integrate Latin American campus operations on a common operating model, and expand online and hybrid education. No specific consolidated 2019 financial guidance is provided in the supplied filing text.
- U.S. student-aid oversight: U.S. institutions remained provisionally certified for Title IV funding and subject to Heightened Cash Monitoring 1. The Department of Education required a $139.0 million letter of credit and additional reporting after finding Laureate below its financial-responsibility standard. Walden received 76% of 2018 revenue, calculated on a cash basis, from Title IV funds; NewSchool received 36%.
- Regulatory and currency exposure: Chile’s 2018 higher-education law could require changes to related-party arrangements and affect whether Laureate can continue consolidating certain not-for-profit institutions. Management estimated that a 10% adverse currency move, excluding derivatives, would reduce operating income by $25 million and Adjusted EBITDA by $65 million.
- Contingencies and unusual items: The maximum potential Chilean CAE student-loan guarantee exposure was $499 million; the recorded liability was $28.3 million. Management estimated up to $45 million of reasonably possible, unrecorded Brazilian contingencies. Spanish tax assessments and appeals remained outstanding. The filing also reports a $2.6 million compensatory jury award in a USAHS student case; the company expected prior-owner indemnification for substantially all liability. A $41 million out-of-period tax adjustment was recorded in the fourth quarter as part of adopting a tax-accounting standard; management said it was not material.
- Controls: Management and the auditor concluded internal control over financial reporting was effective at year-end; management said all four previously identified material weaknesses had been remediated.
Important facts for investors to verify
- Completion timing, final proceeds and regulatory approvals for the remaining divestitures, especially Spain/Portugal and Malaysia, and whether proceeds are applied to debt as planned.
- Post-divestiture revenue, enrollment and cash-flow trends, particularly in Brazil and Online & Partnerships, and the effect of foreign exchange.
- Debt balances and repayment terms after the 2019 asset-sale repayments, including the availability and conditions of revolving credit and the DOE letter of credit.
- Whether U.S. Title IV certification, cash-monitoring status and state authorizations change, and the resulting effect on student funding and liquidity.
- Implementation of Chile’s higher-education law, related-party contract changes and any resulting change to VIE consolidation or reported results.
- Outcomes of tax audits, litigation and student-loan guarantees, including the recorded provisions, indemnification recoverability and potential cash requirements.