LAUREATE EDUCATION, INC. You should read the following discussion of our results of operations and financial condition with the audited historical consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (or, Form 10-K). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Item 1A. Risk Factors" section of this Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. See "Forward-Looking Statements."
Introduction
This Management's Discussion and Analysis of Financial Condition and Results of Operations (the ''MD&A'') is provided to assist readers of the financial statements in understanding the results of operations, financial condition and cash flows ofLaureate Education, Inc. This MD&A should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K. The consolidated financial statements included elsewhere in this Form 10-K are presented inU.S. dollars (USD) rounded to the nearest thousand, with the amounts in MD&A rounded to the nearest tenth of a million. Therefore, discrepancies in the tables between totals and the sums of the amounts listed may occur due to such rounding. Our MD&A is presented in the following sections:
•Overview;
•Results of Operations; •Liquidity and Capital Resources; •Critical Accounting Policies and Estimates; and •Recently Issued Accounting Standards.
Overview
Our Business
We operate a portfolio of degree-granting higher education institutions inMexico andPeru . Collectively, we have approximately 336,500 students enrolled at five institutions in these two countries, which represent our Continuing Operations as ofDecember 31, 2020 . We believe that the higher education markets inMexico andPeru present an attractive long-term opportunity, primarily because of the large and growing imbalance between the supply and demand for affordable, quality higher education in those markets. We believe that the combination of the projected growth in the middle class, limited government resources dedicated to higher education, and a clear value proposition demonstrated by the higher earnings potential afforded by higher education, creates substantial opportunities for high-quality private institutions to meet this growing and unmet demand. By offering high-quality, outcome-focused education, we believe that we enable students to prosper and thrive in the dynamic and evolving knowledge economy. We have two reportable segments as described below. We group our institutions by geography in: 1)Mexico ; and 2)Peru (formerly Andean) for reporting purposes.
COVID-19
In response to the COVID-19 pandemic, we have temporarily transitioned the
educational delivery method at all of our campus-based institutions to be online
and are leveraging our existing technologies and learning platforms to serve
students outside of the traditional classroom setting.
The outbreak of COVID-19 has caused domestic and global disruption in operations
for institutions of higher education. The long-term effect to the Company of the
COVID-19 pandemic depends on numerous factors, including, but not limited to,
the effect on student enrollment, tuition pricing, and collections in future
periods, which cannot be fully quantified at this time. In addition, regulatory
activity in response to COVID-19 could have an adverse effect on our business
if, for example, legislation was passed to suspend or reduce student tuition
payments in any of the markets in which we operate. As a result, the full impact
of COVID-19 and the scope of any adverse effect on the Company's operations,
including any potential impairments, which could be material, cannot be fully
determined at this time. See also "Item 1A-Risk Factors-An epidemic, pandemic or
other public health emergency, such as the recent outbreak of a novel strain of
coronavirus (COVID-19), could have a material adverse effect on our business,
financial condition, cash flows and results of operations."
60
--------------------------------------------------------------------------------Discontinued Operations
In 2017 and 2018, the Company announced the divestiture of certain subsidiaries located inEurope ,Asia andCentral America , which were included in the following segments:Peru (formerly Andean),Central America (formerlyCentral America &U.S. Campuses), and Rest of World. The goal of the divestitures was to create a more focused and simplified business model and generate proceeds to be used for further repayment of long-term debt. This represented a strategic shift that had a major effect on the Company's operations and financial results. Accordingly, all of the divestitures that were part of this strategic shift, as well as the Company's operations in theKingdom of Saudi Arabia that were managed under a contract that expired onAugust 31, 2019 and was not renewed, were accounted for as discontinued operations for all periods presented in accordance with Accounting Standards Codification (ASC) 205-20, "Discontinued Operations" (ASC 205). OnJanuary 27, 2020 , we announced that our board of directors had authorized the Company to explore strategic alternatives for each of its businesses to unlock shareholder value. As a result of these efforts to explore strategic alternatives, during the third quarter of 2020, the Company announced that it had completed a sale of its operations inChile and had signed agreements to sell its operations inBrazil ,Australia and New Zealand , as well asWalden University , its fully online higher education institution inthe United States . This also represented a strategic shift that had a major effect on the Company's operations and financial results. As such,Chile ,Brazil ,Australia and New Zealand , and Walden also have been accounted for as discontinued operations for all periods presented in accordance with ASC 205. For Laureate's institutions inMexico andPeru , the board decided after a thorough evaluation of all strategic options, including a potential sale, to continue to operate these assets under Laureate management. Accordingly,Mexico andPeru represent our Continuing Operations. The decision to focus on a regional operating model inMexico andPeru at this time does not preclude further engagement with potential buyers for those businesses. Because a number of our subsidiaries are included in Discontinued Operations, they no longer meet the criteria for a reportable segment under ASC 280, "Segment Reporting," and, therefore, are excluded from the segments information for all periods presented. Unless indicated otherwise, the information in the MD&A relates to Continuing Operations. The Company began closing sale transactions in the first quarter of 2018. As noted above, during the third quarter of 2020, we signed agreements to sellWalden University and divest our operations inAustralia and New Zealand , andBrazil . InOctober 2020 , we entered into an agreement to sell our operations inHonduras . The sale ofAustralia and New Zealand was completed onNovember 3, 2020 . We have not yet completed the divestitures ofWalden University or our subsidiaries inHonduras andBrazil . See also Note 4, Discontinued Operations and Assets Held for Sale, and Note 6, Dispositions, in our consolidated financial statements included elsewhere in this Form 10-K. If the Company determines that the estimated fair value of any business is less than its carrying value, the Company will be required to record a charge to write down the carrying value to fair value and the amount of that charge could be material. During 2020, the Company recorded impairment charges for certain subsidiaries while they were still classified as held and used, and also recorded charges on disposal groups classified as held-for-sale. See Note 4, Discontinued Operations and Assets Held for Sale, in our consolidated financial statements included elsewhere in this Form 10-K for discussion of the charges recorded during 2020 for our operations inChile ,Honduras andBrazil . While the Company explores strategic alternatives for its remaining Continuing Operations, and until the held-for-sale criteria are met, the long-lived assets in these businesses continue to be classified as held and used and are evaluated for impairment under that model, based on the cash flows expected to be generated by the use of those asset groups in operations. Should the held-for-sale criteria be met, the long-lived assets will be recorded at the lower of their carrying value or fair value, less cost to sell. Because completing a sale, spin-off, or other transaction may be challenging due to the regulatory environment, market conditions and other factors, the values that may be realized from any potential transactions could be less than if these businesses remained held and used. If the Company decides to sell any of its remaining businesses, the carrying value used to evaluate the business for potential write down and to determine the gain or loss on sale will include any accumulated foreign currency translation (FX) losses associated with that business. In recent years, theU.S. dollar has strengthened against many international currencies, including the Brazilian real and the Mexican peso. As a result, the Company has significant FX losses recorded within stockholders' equity, as a component of accumulated other comprehensive income. As ofDecember 31, 2020 and 2019, the Company's consolidated FX loss totaled approximately$1.0 billion and$1.1 billion , respectively. Upon the sale of a business, any FX loss related to that business would be recognized as part of the gain or loss on sale. In addition, upon classification of a business as held-for-sale, the cumulative translation losses would be included as part of the carrying value of that business when evaluating it for potential write down. 61 --------------------------------------------------------------------------------
Presented in the table below are the Company's businesses, by asset
group/reporting unit, that carry the most significant FX losses:
Foreign Currency Translation Losses As of
(in millions) December 31, 2020 December 31, 2019
Brazil $ 479 $ 407
Mexico 509 461
Total Brazil and Mexico $ 988 $ 868
As discussed in Note 4, Discontinued Operations and Assets Held for Sale, in our
consolidated financial statements included elsewhere in this Form 10-K, the
Company decided to sell its Brazil operations during the third quarter of 2020
and recorded a loss of approximately $190 million to write down the carrying
value of the Brazil disposal group to its estimated fair value less costs to
sell. During the fourth quarter of 2020, the Company recorded an additional loss
of approximately $15 million in order to write down the carrying value of the
Brazil disposal group to its estimated fair value less costs to sell as of
December 31, 2020 . While the Company has not agreed to divest our Mexico
operations, the substantial amounts of FX losses attributable to this business
would have a material effect on the amount of gain or loss that would result
from its sale. Moreover, such FX losses could result in a material loss if the
held-for-sale criteria are met and the carrying value of a held-for-sale
business exceeds its fair value, less cost to sell. To date, the Company has not
identified impairment indicators related to its Mexico asset group/reporting
unit based on the Company's estimates of future cash flows assuming that the
business is held and used. As a result of the considerations highlighted above
and the significant FX losses, the Mexico asset group may be at risk of a
material loss if the Company commits to a plan to sell its interests in this
business. Furthermore, additional loss on the Brazil disposal group could be
required in future periods depending on changes in Brazil's carrying value or
estimated fair value. The Company will continue to monitor for impairment
indicators as additional information becomes known.
Our Segments
Our segments generate revenues by providing an education that emphasizes profession-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines. Our educational offerings are increasingly utilizing online and hybrid (a combination of online and in-classroom) courses and programs to deliver their curriculum. In response to the COVID-19 pandemic, we have temporarily transitioned the educational delivery method at all of our institutions to be online and are leveraging our existing technologies and learning platforms to serve students outside of the traditional classroom setting. TheMexico andPeru markets are characterized by what we believe is a significant imbalance between supply and demand. The demand for higher education is large and growing and is fueled by several demographic and economic factors, including a growing middle class, global growth in services and technology-related industries and recognition of the significant personal and economic benefits gained by graduates of higher education institutions. The target demographics are primarily 18- to 24-year-olds in the countries in which we compete. We compete with other private higher education institutions on the basis of price, educational quality, reputation and location. We believe that we compare favorably with competitors because of our focus on quality, professional-oriented curriculum and the competitive advantages provided by our network. There are a number of private and public institutions in both of the countries in which we operate, and it is difficult to predict how the markets will evolve and how many competitors there will be in the future. We expect competition to increase as the Mexican and Peruvian markets mature. Essentially all of our revenues were generated from private pay sources as there are no material government-sponsored loan programs inMexico orPeru . Specifics related to both of our reportable segments are discussed below: •Private education providers inMexico constitute 35% of the total higher-education market. The private sector plays a meaningful role in higher education, bridging supply and demand imbalances created by a lack of capacity at public universities. Laureate owns two institutions and is present throughout the country with a footprint of over 35 campuses. Each institution inMexico has a national license. Students in our Mexican institutions typically finance their own education. •In Peru, private universities are increasingly providing the capacity to meet growing demand and constitute 72% of the total higher-education market. Laureate owns three institutions inPeru . Corporate is a non-operating business unit whose purpose is to support operations. Its departments are responsible for establishing operational policies and internal control standards; implementing strategic initiatives; and monitoring compliance with policies and controls throughout our operations. Our Corporate segment is an internal source of capital and provides financial, human resource, information technology, insurance, legal and tax compliance services. The Corporate segment also contains the eliminations of intersegment revenues and expenses. 62 -------------------------------------------------------------------------------- The following information for our reportable segments is presented as ofDecember 31, 2020 : 2020 Revenues (in % Contribution to 2020 YTD Institutions Enrollment millions) (1) Revenues Mexico 2 194,000 $ 534.6 53 % Peru 3 142,500 482.9 47 % Total (1) 5 336,500 $ 1,024.9 100 %
(1) Amounts related to Corporate, partially offset by the elimination of
intersegment revenues, totaled
Challenges
Our operations are subject to complex business, economic, legal, regulatory, political, tax and foreign currency risks, which may be difficult to adequately address. The majority of our operations are outsidethe United States . As a result, we face risks that are inherent in international operations, including: fluctuations in exchange rates, possible currency devaluations, inflation and hyper-inflation; price controls and foreign currency exchange restrictions; potential economic and political instability in the countries in which we operate; expropriation of assets by local governments; key political elections and changes in government policies; multiple and possibly overlapping and conflicting tax laws; and compliance with a wide variety of foreign laws. See "Item 1A-Risk Factors-Risks Relating to Our Business-We operate a portfolio of degree-granting higher education institutions inMexico andPeru and are subject to complex business, economic, legal, political, tax and foreign currency risks, which risks may be difficult to adequately address." There are also risks associated with our decision to divest certain operations. See "Item 1A-Risk Factors-Risks Relating to Our Business-Our exploration of strategic alternatives and our activities related to previously announced divestitures may disrupt our ongoing businesses, result in increased expenses and present certain risks to the Company." We plan to grow our Continuing Operations organically by: 1) adding new programs and course offerings; 2) expanding target student demographics; and 3) increasing capacity at existing and new campus locations. Our success in growing our business will depend on the ability to anticipate and effectively manage these and other risks related to operating in various countries. Regulatory Environment and Other Matters Our business is subject to varying laws and regulations based on the requirements of local jurisdictions. These laws and regulations are subject to updates and changes. We cannot predict the form of the rules that ultimately may be adopted in the future or what effects they might have on our business, financial condition, results of operations and cash flows. We will continue to develop and implement necessary changes that enable us to comply with such laws and regulations. See "Item 1A-Risk Factors-Risks Relating to Our Business-Our institutions are subject to uncertain and varying laws and regulations, and any changes to these laws or regulations or their application to us may materially adversely affect our business, financial condition and results of operations," "Risk Factors-Risks Relating toWalden University , which is included in our Discontinued Operations, and the Highly Regulated Higher Education Industry inthe United States ," and "Item 1-Business-Industry Regulation," for a detailed discussion of our different regulatory environments and Note 18, Legal and Regulatory Matters, in our consolidated financial statements included elsewhere in this Form 10-K. Key Business Metric Enrollment Enrollment is our lead revenue indicator and represents our most important non-financial metric. We define "enrollment" as the number of students registered in a course on the last day of the enrollment reporting period. New enrollments provide an indication of future revenue trends. Total enrollment is a function of continuing student enrollments, new student enrollments and enrollments from acquisitions, offset by graduations, attrition and enrollment decreases due to dispositions. Attrition is defined as a student leaving the institution before completion of the program. To minimize attrition, we have implemented programs that involve assisting students in remedial education, mentoring, counseling and student financing. Each of our institutions has an enrollment cycle that varies by geographic region and academic program. Each institution has a "Primary Intake" period during each academic year in which the majority of the enrollment occurs. Most institutions also have one or more smaller "Secondary Intake" periods. Our Peruvian institutions have their Primary Intake during the first calendar quarter and a Secondary Intake during the third calendar quarter. Institutions in ourMexico segment have their Primary Intake during the third calendar quarter and a Secondary Intake during the first calendar quarter. Our institutions inPeru are generally 63 --------------------------------------------------------------------------------
out of session in January, February and July, while institutions in
Principal Components of Income Statement
Revenues
The majority of our revenue is derived from tuition and educational services. The amount of tuition generated in a given period depends on the price per credit hour and the total credit hours or price per program taken by the enrolled student population. The price per credit hour varies by program, by market and by degree level. Additionally, varying levels of discounts and scholarships are offered depending on market-specific dynamics and individual achievements of our students. Revenues are recognized net of scholarships, other discounts, refunds, waivers and the fair value of any guarantees made by Laureate related to student financing programs. In addition to tuition revenues, we generate other revenues from student fees, dormitory/residency fees and other education-related activities. These other revenues are less material to our overall financial results and have a tendency to trend with tuition revenues. The main drivers of changes in revenues between periods are student enrollment and price. We continually monitor market conditions and carefully adjust our tuition rates to meet local demand levels. We proactively seek the best price and content combinations to remain competitive in all the markets in which we operate. Direct Costs Our direct costs include labor and operating costs associated with the delivery of services to our students, including the cost of wages, payroll taxes and benefits, depreciation and amortization, rent, utilities, bad debt expenses, and marketing and promotional costs to grow future enrollments. In general, a significant portion of our direct costs tend to be variable in nature and trend with enrollment, and management continues to monitor and improve the efficiency of instructional delivery. Conversely, as campuses expand, direct costs may grow faster than enrollment growth as infrastructure investments are made in anticipation of future enrollment growth.
General and Administrative Expenses
Our general and administrative expenses primarily consist of costs associated with corporate departments, including executive management, finance, legal, business development and other departments that do not provide direct operational services.
Factors Affecting Comparability
Acquisitions
Our past experiences provide us with the expertise to further our mission of providing high-quality, accessible and affordable higher education to students by expanding into new markets if opportunities arise, primarily through acquisitions. Acquisitions have historically affected the comparability of our financial statements from period to period. Acquisitions completed during one period impact comparability to a prior period in which we did not own the acquired entity. Therefore, changes related to such entities are considered "incremental impact of acquisitions" for the first 12 months of our ownership. We made no acquisitions in 2020 and 2019, and made only a small acquisition in 2018 that had essentially no impact on the comparability of the periods presented for our continued operations.
Dispositions
Any dispositions of our Continuing Operations affect the comparability of our financial statements from period to period. Dispositions completed during one period impact comparability to a prior period in which we owned the divested entity. Therefore, changes related to such entities are considered "incremental impact of dispositions" for the first 12 months subsequent to the disposition. As discussed above, all of the divestitures that are part of the strategic shifts are included in Discontinued Operations for all periods presented.
Foreign Exchange
Institutions in our Continuing Operations are located outsidethe United States . These institutions enter into transactions in currencies other than USD and keep their local financial records in a functional currency other than the USD. We monitor the impact of foreign currency movements and the correlation between the local currency and the USD. Our revenues and expenses are generally denominated in local currency. The USD is our reporting currency and our subsidiaries operate in other functional currencies, namely the Mexican peso and Peruvian nuevo sol. The principal foreign exchange exposure is the risk related to the 64 -------------------------------------------------------------------------------- translation of revenues and expenses incurred in each country from the local currency into USD. See "Item 1A-Risk Factors-Risks Relating to Our Business-Our reported revenues and earnings may be negatively affected by the strengthening of theU.S. dollar and currency exchange rates." In order to provide a framework for assessing how our business performed excluding the effects of foreign currency fluctuations, we present organic constant currency in our segment results, which is calculated using the change from prior-year average foreign exchange rates to current-year average foreign exchange rates, as applied to local-currency operating results for the current year, and then excludes the impact of acquisitions, divestitures and other items, as described in the segments results.
Seasonality
The institutions in our portfolio have a summer break, during which classes are generally not in session and minimal revenues are recognized. In addition to the timing of summer breaks, holidays such as Easter also have an impact on our academic calendar. Operating expenses, however, do not fully correlate to the enrollment and revenue cycles, as the institutions continue to incur expenses during summer breaks. Accordingly, our second and fourth quarters are stronger revenue quarters, as our institutions are in session for most of these respective quarters. Our first and third fiscal quarters are weaker revenue quarters because our institutions have summer breaks for some portion of one of these two quarters. However, our primary enrollment intakes occur during the first and third quarters. Due to this seasonality, revenues and profits in any one quarter are not necessarily indicative of results in subsequent quarters and may not be correlated to new enrollment in any one quarter. Additionally, seasonality may be affected due to other events, such as the COVID-19 pandemic, which changed the academic calendar at many of our institutions. See "Item 1A-Risk Factors-Risks Relating to Our Business-We experience seasonal fluctuations in our results of operations."
Income Tax Expense
Our consolidated income tax provision is derived based on the combined impact of federal, state and foreign income taxes. Also, discrete items can arise in the course of our operations that can further impact the Company's effective tax rate for the period. Our tax rate fluctuates from period to period due to changes in the mix of earnings between our tax-paying entities, our tax-exempt entities and our loss-making entities for which it is not 'more likely than not' that a tax benefit will be realized on the loss. See "Item 1A-Risk Factors-Risks Relating to Our Business-We may have exposure to greater-than-anticipated tax liabilities."
Results of the Discontinued Operations
The results of operations of the Discontinued Operations for the years ended
For the year ended December 31,
2020 2019 2018
Revenues $ 1,674.6 $ 2,540.0 $ 3,075.3
Depreciation and amortization expense (60.4) (111.4) (155.4)
Share-based compensation expense (3.1) (2.7) (4.2)
Other direct costs (1,313.3) (2,026.2) (2,436.4)
Loss on impairment of assets (438.3) (0.7) (13.1)
Other non-operating expense (68.6) (70.7) (91.1)
Gain on sale of discontinued operations before
taxes, net 25.0 793.5 293.1
Pretax (loss) income of discontinued operations (183.8) 1,121.8 668.1
Income tax expense (114.3) (33.7) (105.9)
(Loss) income from discontinued operations, net
of tax $ (298.1) $ 1,088.1 $ 562.2 Enrollments at our Discontinued Operations as of
Year Ended
OnJanuary 10, 2020 , we sold our operations inCosta Rica , which resulted in an additional pre-tax loss of approximately$18.6 million . Together with the 2019 loss described below, the total loss on the sale ofCosta Rica was approximately$43.6 million . 65 --------------------------------------------------------------------------------
On
During the second quarter of 2020, we recorded impairment charges of$418.0 million related to our Chilean operations, in order to write down the carrying value of their assets to their estimated fair value, and$3.3 million related to theBrazil enrollment to graduation (E2G) software assets. We also recorded a loss of$10.0 million on the held-for-saleHonduras disposal group, in order to write down the carrying value of the group to its estimated fair value, which is included in Gain on sale of discontinued operations before taxes, net. During the third quarter of 2020, we recorded a loss of approximately$190.0 million related to ourBrazil operations in order to write down the carrying value ofBrazil's disposal group to its estimated fair value. We also recorded an additional loss of$10.0 million related to our held-for-saleHonduras group, in order to write down its carrying value to the estimated fair value based on the sale agreement that was signed inOctober 2020 . These losses are included in Gain on sale of discontinued operations before taxes, net. OnSeptember 10, 2020 , we completed the divestiture of our operations inChile , resulting in a pre-tax loss of approximately$338.2 million that relates primarily to the accumulated foreign currency translation losses associated with the Chilean operations.
On
In earlyOctober 2020 , we received a payment for$8.4 million , representing a portion of the$15.0 million deferred purchase price related to the sale of our operations inTurkey inAugust 2019 . At the time of the sale, the Company determined that this deferred purchase price would be recognized if collected. Accordingly, the Company recorded the receipt of$8.4 million through a reduction of the loss on sale forTurkey . The remaining deferred purchase price was due inJanuary 2021 and will be recognized when collected.
On
During the fourth quarter of 2020, we recorded an additional loss of
approximately
Year Ended
On
On
On
On
On
On
On
During the third quarter of 2019, we recorded a loss of approximately$25.0 million on the held-for-saleCosta Rica disposal group, in order to write down its carrying value to the estimated fair value. This loss is included in Gain on sale of discontinued operations before taxes, net. The sale of theCosta Rica institutions was completed onJanuary 10, 2020 . 66 -------------------------------------------------------------------------------- In earlyOctober 2019 , we sold Universidad Interamericana de Panamá (UIP), in addition to real estate which served as the campus of UIP, and recognized a gain of approximately$21.0 million .
On
During the fourth quarter of 2019, we recorded a loss of approximately$17.8 million related to the held-for-saleHonduras disposal group, in order to write down its carrying value to the estimated fair value. This loss is included in Gain on sale of discontinued operations before taxes, net.
Year Ended
OnJanuary 11, 2018 , we sold the operations ofEuropean University-Cyprus Ltd (EUC) and Laureate Italy S.r.L. (Laureate Italy), which resulted in a gain on sale of approximately$218.0 million .
On
On
OnApril 13, 2018 , we sold the operations of Laureate Somed, the operator of Université Internationale deCasablanca , a comprehensive campus-based university inCasablanca, Morocco , and recognized a gain on the sale of approximately$17.4 million .
On
In connection with our goodwill impairment testing in the fourth quarter of 2018, we wrote off the remaining goodwill balance of$3.1 million associated with our operations in theKingdom of Saudi Arabia , which are now included in Discontinued Operations. EffectiveSeptember 30, 2018 , theUniversity of Liverpool (Liverpool), an institution in our Online & Partnerships segment, began a teach-out process. As a result, during the third quarter of 2018, we recorded an impairment charge of$10.0 million related to the fixed assets of this entity that were no longer recoverable based on expected future cash flows. As noted, the entire Online & Partnerships segment is now classified in discontinued operations.
Results of Operations
The following discussion of the results of our operations is organized as follows:
•Summary Comparison of Consolidated Results; •Non-GAAP Financial Measure; and •Segment Results.
Summary Comparison of Consolidated Results
Discussion of Significant Items Affecting the Consolidated Results for the Years
Ended
Year Ended
During the first quarter of 2020, the Company recorded an impairment charge of
During the second quarter of 2020, the Company recorded an impairment charge of approximately$23.8 million related to theBrazil E2G software assets that were recorded on the Corporate segment, as described in Note 8,Goodwill and Other Intangible Assets, in our consolidated financial statements included elsewhere in this Form 10-K. 67 -------------------------------------------------------------------------------- During the third quarter of 2020, the Company recognized an impairment charge of$320.0 million on the Laureate tradename, an intangible asset, as described in Note 8,Goodwill and Other Intangible Assets, in our consolidated financial statements included elsewhere in this Form 10-K. InNovember 2020 , Universidad del Valle deMexico , SC, a wholly owned subsidiary of the Company, signed an agreement to sell the land and buildings of Campus Guadalajara Norte, after a decision was made to relocate all students of Campus Guadalajara Norte to the nearby Campus Zapopan inJalisco, Mexico . The total purchase price was approximately$13.9 million , prior to transaction fees. The Company recognized a pre-tax operating gain on the sale of this property and equipment of approximately$5.8 million , which is included in Direct costs in the table below. During the fourth quarter of 2020, the Company dissolved a dormant subsidiary, resulting in the release of accumulated foreign currency translation loss of approximately$6.1 million . This loss is included in Other non-operating (expense) income in the table below and is part of Continuing Operations as this entity was not part of the strategic shifts described above in Overview.
Year Ended
During the first quarter of 2019, we used approximately$340.0 million of the net proceeds from the sale ofSt. Augustine to repay a portion of our term loan that had a maturity date ofApril 2024 (the 2024 Term Loan). In connection with this debt repayment, the Company recorded a loss on debt extinguishment of$6.3 million , primarily related to the write off of a pro-rata portion of the unamortized deferred financing costs associated with the repaid debt balances. This loss is included in Other non-operating (expense) income in the table below. During the second quarter of 2019, we fully repaid the remaining balance outstanding under our 2024 Term Loan, using the proceeds received from the sales of our operations inIndia ,Spain andPortugal . The remaining proceeds were used to repay borrowings outstanding under the senior secured revolving credit facility. In connection with these debt repayments, the Company recorded a loss on debt extinguishment of$15.6 million related to the write off of a pro-rata portion of the unamortized deferred financing costs associated with the repaid debt balances, as well as the debt discount associated with the 2024 Term Loan. This loss is included in Other non-operating (expense) income in the table below. During the third and fourth quarters of 2019, we dissolved several dormant subsidiaries, resulting in the release of accumulated foreign currency translation loss of approximately$37.5 million . This loss is included in Other non-operating (expense) income in the table below and is part of Continuing Operations as these entities were not part of the strategic shifts described above in Overview. Year EndedDecember 31, 2018 OnFebruary 1, 2018 , we amended our Senior Secured Credit Facility to reduce the interest rate on our 2024 Term Loan. In connection with this transaction, we also repaid$350.0 million of the principal balance of the 2024 Term Loan. As a result of this transaction, the Company recorded a$7.5 million loss on debt extinguishment related to the pro-rata write-off of the term loan's remaining deferred financing costs. This loss is included in Other non-operating (expense) income in the table below. 68 -------------------------------------------------------------------------------- Comparison of Consolidated Results for the Years EndedDecember 31, 2020 , 2019 and 2018 % Change Better/(Worse) (in millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenues$ 1,024.9 $ 1,212.1 $ 1,144.6 (15) % 6 % Direct costs 802.5 949.5 904.0 15 % (5) % General and administrative expenses 199.8 226.3 267.4 12 % 15 % Loss on impairment of assets 352.0 0.2 - nm nm Operating (loss) income (329.3) 36.0 (26.8) nm nm Interest expense, net of interest income (98.7) (121.7) (185.6) 19 % 34 % Other non-operating (expense) income (22.8) (33.9) 92.3 33 % (137) % Loss from continuing operations before income taxes and equity in net income of affiliates (450.8) (119.7) (120.1) nm - % Income tax benefit (expense) 130.1 (31.0) (71.2) nm 56 % Equity in net income of affiliates, net of tax 0.2 0.2 - - % nm Loss from continuing operations (320.6) (150.5) (191.3) (113) % 21 % (Loss) income from discontinued operations, net of tax (298.1) 1,088.1 562.2 (127) % 94 % Net (loss) income (618.7) 937.7 370.9 (166) % 153 % Net loss (income) attributable to noncontrolling interests 5.4 0.8 (0.9) nm (189) % Net (loss) income attributable to Laureate Education, Inc.$ (613.3) $ 938.5 $ 370.1 (165) % 154 %
nm - percentage changes not meaningful
For further details on certain discrete items discussed below, see "Discussion of Significant Items Affecting the Consolidated Results."
Comparison of Consolidated Results for the Year Ended
Revenues decreased by$187.2 million to$1,024.9 million for 2020 from$1,212.1 million for 2019. The effect of a net change in foreign currency exchange rates decreased revenues by$81.8 million , due to weakening of the Mexican peso and the Peruvian nuevo sol against the USD. Average total enrollment at a majority of our institutions decreased during 2020, reducing revenues by$62.3 million compared to 2019. The effect of changes in tuition rates and enrollments in programs at varying price points ("product mix"), pricing and timing decreased revenues by$38.0 million , mainly driven by an increase in discounts and scholarships as a percentage of revenues in 2020 compared to 2019. Other Corporate and Eliminations changes accounted for a decrease in revenues of$5.1 million . Direct costs and general and administrative expenses combined decreased by$173.5 million to$1,002.3 million for 2020 from$1,175.8 million for 2019. The effect of a net change in foreign currency exchange rates decreased costs by$61.1 million . The effect of operational changes decreased direct costs by$75.8 million compared to 2019. Other Corporate and Eliminations expenses accounted for a decrease in costs of$50.4 million in 2020, related to cost-reduction efforts. Changes in acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in indemnification assets resulted in a year-over-year decrease in costs of$0.8 million . These decreases in direct costs were partially offset by Excellence-in-Process (EiP) implementation expense, which increased direct costs by$14.6 million . Operating (loss) income changed by$365.3 million to loss of$(329.3) million for 2020 from income of$36.0 million for 2019. This change was primarily a result of the impairment charges of$352.0 million during 2020 and operating loss at ourMexico segment for 2020 compared to operating income for 2019, partially offset by lower 2020 operating expenses at Corporate. Interest expense, net of interest income decreased by$23.0 million to$98.7 million for 2020 from$121.7 million for 2019. The decrease in interest expense was primarily attributable to lower average debt balances. 69 -------------------------------------------------------------------------------- Other non-operating expense decreased by$11.1 million to$22.8 million for 2020, compared to$33.9 million for 2019. This decrease was attributable to: (1) a decrease in loss on debt extinguishment of$22.0 million , primarily related to the repayment of the 2024 Term Loan during 2019; (2) a foreign currency exchange gain for 2020 compared to a loss for 2019, for a change of$21.6 million ; and (3) a decrease in loss on disposal of subsidiaries of$13.2 million . These decreases in other non-operating expense were partially offset by a loss on derivative instruments for 2020 compared to a gain for 2019, for a change of$34.3 million , and other non-operating expense for 2020 compared to income for 2019, for a change of$11.4 million , primarily attributable to non-operating income recorded during 2019 related to the sale of an equity security held at Corporate. Income tax benefit (expense) changed by$161.1 million to a benefit of$130.1 million for 2020 from an expense of$(31.0) million for 2019. This change was primarily attributable to a$75.1 million benefit due to the increase in pretax loss, a tax benefit of approximately$70.9 million related to the Company's election to exclude certain foreign income of foreign corporations from GILTI, and a tax benefit for release of valuation allowances for state deferred tax assets of$32.3 million , partially offset by a tax expense of approximately$32.4 million that was recognized during 2020 related to the tax-basis step up of certain intellectual property that became subject to taxation inthe Netherlands . (Loss) income on sales of discontinued operations, net of tax decreased by$1,386.2 million to a loss of$(298.1) million for 2020 from income of$1,088.1 million for 2019, primarily driven by lower gains upon the completion of divestitures in 2020 as compared to 2019, combined with higher losses recorded during 2020 for discontinued operations due to impairments and charges to write held-for-sale disposal groups down to fair value. See Overview for further detail on results of the Discontinued Operations.
Net loss attributable to noncontrolling interests increased by
Comparison of Consolidated Results for the Year Ended
Revenues increased by$67.5 million to$1,212.1 million for 2019 from$1,144.6 million for 2018. This revenue increase was driven by higher average total enrollment at a majority of our institutions, which increased revenues by$34.7 million ; the effect of product mix, pricing and timing, which increased revenues by$33.4 million ; and other Corporate and Eliminations changes, which accounted for an increase in revenues of$10.4 million . These increases in revenues were partially offset by the effect of a net change in foreign currency exchange rates, which decreased revenues by$11.0 million compared to 2018. Direct costs and general and administrative expenses combined increased by$4.4 million to$1,175.8 million for 2019 from$1,171.4 million for 2018. The direct costs increase was due to the overall higher enrollments and costs related to expanding our Continuing Operations, which increased costs by$30.3 million compared to 2018, and changes in acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in recorded indemnification assets, which increased direct costs by$2.2 million . Partially offsetting these direct costs increases were the effect of a net change in foreign currency exchange rates, which decreased costs by$7.6 million , and other Corporate and Eliminations expenses, which accounted for a decrease in costs of$20.5 million in 2019. Operating income (loss) changed by$62.8 million to income of$36.0 million for 2019 from loss of$(26.8) million for 2018. This change to operating income was primarily the result of increased operating income at ourPeru segment combined with lower 2019 operating expenses at Corporate. Interest expense, net of interest income decreased by$63.9 million to$121.7 million for 2019 from$185.6 million for 2018. The decrease in interest expense was primarily attributable to lower average debt balances as a result of the debt repayments. Other non-operating (expense) income changed by$126.2 million to expense of$(33.9) million for 2019 from income of$92.3 million for 2018. This change was attributable to: (1) a decrease in gain on derivative instruments of$80.2 million , primarily related to a gain recorded in 2018 upon the conversion of the Series A Preferred Stock; (2) a loss on disposal of subsidiaries of$20.4 million in 2019, primarily related to the release of accumulated foreign currency translation upon the dissolution of several dormant subsidiaries; (3) an increase in loss on debt extinguishment of$15.1 million , related to increased debt repayments in 2019; (4) a loss on foreign currency exchange in 2019 compared to a gain in 2018, for a change of$8.8 million ; and (5) a decrease in other non-operating income of$1.7 million . Income tax expense decreased by$40.2 million to$31.0 million for 2019 from$71.2 million for 2018. This decrease was primarily due to a year-over-year reduction in withholding tax expense as a result of the redesignation of certain intercompany loans from permanent to temporary during 2018, which increased withholding tax expense in 2018, in addition to a reduction in 2019 withholding tax expense resulting from changes to tax treaties betweenU.S. and non-U.S. jurisdictions. 70 -------------------------------------------------------------------------------- Income from discontinued operations, net of tax increased by$525.9 million to$1,088.1 million for 2019, from$562.2 million for 2018, primarily related to higher gains upon the completion of divestitures during 2019 as compared to 2018. See Overview for further detail on results of the Discontinued Operations.
Non-GAAP Financial Measure
We define Adjusted EBITDA as income (loss) from continuing operations, before
equity in net (income) loss of affiliates, net of tax, income tax expense
(benefit), (gain) loss on sale or disposal of subsidiaries, net, foreign
currency exchange (gain) loss, net, other (income) expense, net, loss (gain) on
derivatives, loss on debt extinguishment, interest expense and interest income,
plus depreciation and amortization, share-based compensation expense, loss on
impairment of assets and expenses related to implementation of our
Excellence-in-Process (EiP) initiative. When we review Adjusted EBITDA on a
segment basis, we exclude inter-segment revenues and expenses that eliminate in
consolidation. Adjusted EBITDA is used in addition to and in conjunction with
results presented in accordance with GAAP and should not be relied upon to the
exclusion of GAAP financial measures.
Adjusted EBITDA is a key measure used by our management and board of directors
to understand and evaluate our core operating performance and trends, to prepare
and approve our annual budget and to develop short- and long-term operational
plans. In particular, the exclusion of certain expenses in calculating Adjusted
EBITDA can provide a useful measure for period-to-period comparisons of our core
business. Additionally, Adjusted EBITDA is a key financial measure used by the
compensation committee of our board of directors and our Chief Executive Officer
in connection with the payment of incentive compensation to our executive
officers and other members of our management team. Accordingly, we believe that
Adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our
management and board of directors.
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The following table presents Adjusted EBITDA and reconciles loss from continuing
operations to Adjusted EBITDA for the years ended December 31, 2020 , 2019 and
2018:
% Change
Better/(Worse)
(in millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Loss from continuing operations $ (320.6) $ (150.5) $ (191.3) (113) % 21 %
Plus:
Equity in net income of affiliates, net of tax (0.2) (0.2) - - % nm Income tax (benefit) expense (130.1) 31.0 71.2 nm 56 % Loss from continuing operations before income taxes and equity in net income of affiliates (450.8) (119.7) (120.1) nm - %
Plus:
Loss on disposal of subsidiaries, net 7.3 20.4 - 64 % nm Foreign currency exchange (gain) loss, net (13.5) 8.1 (0.7) nm nm Other expense (income), net 2.4 (8.9) (10.6) (127) % (16) % Loss (gain) on derivatives 26.0 (8.3) (88.5) nm (91) % Loss on debt extinguishment 0.6 22.6 7.5 97 % nm Interest expense 100.9 125.0 188.4 19 % 34 % Interest income (2.2) (3.3) (2.8) (33) % 18 % Operating (loss) income (329.3) 36.0 (26.8) nm nm Plus: Depreciation and amortization 83.1 82.0 84.6 (1) % 3 % EBITDA (246.2) 118.0 57.8 nm 104 % Plus: Share-based compensation expense (a) 10.2 10.3 6.6 1 % (56) % Loss on impairment of assets (b) 352.0 0.2 - nm nm EiP implementation expenses (c) 89.6 75.0 75.2 (19) % - % Adjusted EBITDA$ 205.7 $ 203.6 $ 139.6 1 % 46 %
nm - percentage changes not meaningful
(a) Represents non-cash, share-based compensation expense pursuant to the provisions of ASC 718, "Stock Compensation." (b) Represents non-cash charges related to impairments of long-lived assets. For further details on certain impairment items see "Discussion of Significant Items Affecting the Consolidated Results for the Years EndedDecember 31, 2020 , 2019 and 2018." (c) EiP implementation expenses are related to our enterprise-wide initiative to optimize and standardize Laureate's processes, creating vertical integration of procurement, information technology, finance, accounting and human resources. It included the establishment of regional shared services organizations (SSOs) around the world, as well as improvements to the Company's system of internal controls over financial reporting. The EiP initiative also includes other back- and mid-office areas, as well as certain student-facing activities, expenses associated with streamlining the organizational structure and certain non-recurring costs incurred in connection with the planned and completed dispositions. Beginning in 2019, EiP also includes expenses associated with an enterprise-wide program aimed at revenue growth. Comparison of Depreciation and Amortization, Share-based Compensation and EiP Implementation Expenses for the Years EndedDecember 31, 2020 and 2019 Depreciation and amortization increased by$1.1 million to$83.1 million for 2020 from$82.0 million for 2019. This increase was primarily attributable to amortization of Laureate's tradename which, during 2020, changed from being an indefinite-lived intangible asset to being a finite-lived intangible asset. When combined with other items, this increased depreciation and amortization expense by$5.5 million . Partially offsetting this increase was the effect of foreign currency exchange, which decreased depreciation and amortization expense by$4.4 million for 2020, as compared to 2019.
Share-based compensation expense decreased by
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EiP implementation expenses increased by $14.6 million to $89.6 million for 2020
from $75.0 million for 2019. This increase was primarily attributable to higher
legal and consulting fees related to our divestiture activity and the inclusion
in EiP of expenses associated with an enterprise-wide program aimed at revenue
growth.
Comparison of Depreciation and Amortization, Share-based Compensation and EiP
Implementation Expenses for the Years Ended
Depreciation and amortization decreased by
Share-based compensation expense increased by$3.7 million to$10.3 million for 2019 from$6.6 million for 2018. This increase was mostly attributable to the effect of a correction of an immaterial error in the first quarter of 2018, which reduced share-based compensation expense for 2018.
EiP implementation expenses decreased by
Segment Results We have two reportable segments:Mexico andPeru (formerly Andean), as discussed in Overview. For purposes of the following comparison of results discussion, "segment direct costs" represent direct costs by segment as they are included in Adjusted EBITDA, such that depreciation and amortization expense, loss on impairment of assets, share-based compensation expense and our EiP implementation expenses have been excluded. Organic enrollment is based on average total enrollment for the period. For a further description of our segments, see Overview.
The following tables, derived from our consolidated financial statements included elsewhere in this Form 10-K, presents selected financial information of our reportable segments included in Continuing Operations: (in millions)
% Change
Better/(Worse)
For the year ended December 31, 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Revenues:
Mexico $ 534.6 $ 652.8 $ 646.1 (18) % 1 %
Peru 482.9 546.8 496.4 (12) % 10 %
Corporate 7.4 12.5 2.1 (41) % nm
Consolidated Total Revenues $ 1,024.9 $ 1,212.1 $ 1,144.6 (15) % 6 %
Adjusted EBITDA:
Mexico $ 112.9 $ 147.8 $ 143.2 (24) % 3 %
Peru 189.5 197.8 169.2 (4) % 17 %
Corporate (96.7) (142.0) (172.9) 32 % 18 %
Consolidated Total Adjusted EBITDA
139.6 1 % 46 %
nm - percentage change not meaningful
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--------------------------------------------------------------------------------Financial Overview [[Image Removed: laur-20201231_g6.jpg]] [[Image Removed: laur-20201231_g7.jpg]] Comparison of Mexico Results for the Year EndedDecember 31, 2020 to the Year EndedDecember 31, 2019 (in millions) Revenues Direct Costs Adjusted EBITDA December 31, 2019$ 652.8 $ 505.0 $ 147.8 Organic enrollment (1) (28.8) Product mix, pricing and timing (1) (31.0) Organic constant currency (59.8) (38.8) (21.0) Foreign exchange (58.4) (43.7) (14.7) Dispositions - - - Other (2) - (0.8) 0.8 December 31, 2020$ 534.6 $ 421.7 $ 112.9 (1) Organic enrollment and Product mix, pricing and timing are not separable for the calculation of direct costs and therefore are combined and defined as Organic constant currency for the calculation of Adjusted EBITDA. (2) Other is composed of acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in recorded indemnification assets. Revenues decreased by$118.2 million , an 18% decrease from 2019. •Organic enrollment decreased during 2020 by 4%, which decreased revenues by$28.8 million , mainly due to impacts from the COVID-19 pandemic. •The decrease in revenues from product mix, pricing and timing was mainly due to an increase in discounts and scholarships as a percentage of revenues. •Revenues represented 53% of our consolidated total revenues for 2020, compared to 54% for 2019. Adjusted EBITDA decreased by$34.9 million , a 24% decrease from 2019. •The overall decrease in Adjusted EBITDA was partially offset by a gain of$5.8 million from the sale of land and buildings at one of our campuses in 2020. This gain is included in Organic constant currency. 74 -------------------------------------------------------------------------------- Comparison of Mexico Results for the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 (in millions) Revenues Direct Costs Adjusted EBITDA December 31, 2018$ 646.1 $ 502.9 $ 143.2 Organic enrollment (1) (16.0) Product mix, pricing and timing (1) 26.0 Organic constant currency 10.0 1.8 8.2 Foreign exchange (3.3) (1.9) (1.4) Dispositions - - - Other (2) - 2.2 (2.2) December 31, 2019$ 652.8 $ 505.0 $ 147.8 (1) Organic enrollment and Product mix, pricing and timing are not separable for the calculation of direct costs and therefore are combined and defined as Organic constant currency for the calculation of Adjusted EBITDA. (2) Other is composed of acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in recorded indemnification assets. Revenues increased by$6.7 million , a 1% increase from 2018. •The increase in revenues from product mix, pricing and timing was partially offset by a decrease in organic enrollment of 2%, which decreased revenues by$16.0 million . •Revenues represented 54% of our consolidated total revenues for 2019 compared to 57% for 2018.
Adjusted EBITDA increased by
Financial Overview [[Image Removed: laur-20201231_g8.jpg]] [[Image Removed: laur-20201231_g9.jpg]]
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Comparison of Peru Results for the Year Ended December 31, 2020 to the Year
Ended December 31, 2019
(in millions) Revenues Direct Costs Adjusted EBITDA
December 31, 2019 $ 546.8 $ 349.0 $ 197.8
Organic enrollment (1) (33.5)
Product mix, pricing and timing (1) (7.0)
Organic constant currency (40.5) (42.6) 2.1
Foreign exchange (23.4) (13.0) (10.4)
Dispositions - - -
Other - - -
December 31, 2020 $ 482.9 $ 293.4 $ 189.5
(1) Organic enrollment and Product mix, pricing and timing are not separable for
the calculation of direct costs and therefore are combined and defined as
Organic constant currency for the calculation of Adjusted EBITDA.
Revenues decreased by $63.9 million , a 12% decrease from 2019.
•Organic enrollment decreased during 2020 by 7%, decreasing revenues by $33.5
million , mainly due to impacts from the COVID-19 pandemic.
•The decrease in revenues from product mix, pricing and timing was mainly due to
an increase in discounts and scholarships as a percentage of revenues.
•Revenue represented 47% of our consolidated total revenues for 2020 compared to
46% for 2019.
Adjusted EBITDA decreased by
Comparison of Peru Results for the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 (in millions) Revenues Direct Costs Adjusted EBITDA December 31, 2018$ 496.4 $ 327.2 $ 169.2 Organic enrollment (1) 50.7 Product mix, pricing and timing (1) 7.4 Organic constant currency 58.1 27.0 31.1 Foreign exchange (7.7) (5.2) (2.5) Dispositions - - - Other - - - December 31, 2019$ 546.8 $ 349.0 $ 197.8
(1) Organic enrollment and Product mix, pricing and timing are not separable for the calculation of direct costs and therefore are combined and defined as Organic constant currency for the calculation of Adjusted EBITDA.
Revenues increased by$50.4 million , a 10% increase from 2018. •Organic enrollment increased during 2019 by 11%, increasing revenues by$50.7 million . •Revenues represented 46% of our consolidated total revenues for 2019 compared to 43% for 2018.
Adjusted EBITDA increased by
76
--------------------------------------------------------------------------------Corporate
Corporate revenues represent amounts from our consolidated joint venture with theUniversity of Liverpool and revenues from transition services agreements related to divestitures, as well as centralized IT costs charged to other business units, partially offset by the elimination of intersegment revenues. Operating results for Corporate for the years endedDecember 31, 2020 , 2019 and 2018 were as follows: % Change Better/(Worse) (in millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenues$ 7.4 $ 12.5 $ 2.1 (41) % nm Expenses 104.1 154.5 175.0 33 % 12 % Adjusted EBITDA$ (96.7) $ (142.0) $ (172.9) 32 % 18 %
nm - percentage change not meaningful
Comparison of Corporate Results for the Year Ended
Adjusted EBITDA increased by$45.3 million , a 32% increase from 2019. •Labor costs and other professional fees decreased expenses by$55.5 million for 2020 compared to 2019, related to cost-reduction efforts. •Other items accounted for a decrease in Adjusted EBITDA of$10.2 million , primarily related to a reduction in revenues from the joint venture with theUniversity of Liverpool .
Comparison of Corporate Results for the Year Ended
Adjusted EBITDA increased by$30.9 million , an 18% increase from 2018. •Labor costs and other professional fees decreased expenses by$42.4 million for 2019 compared to 2018, related to cost-reduction efforts. •Other items accounted for a decrease in Adjusted EBITDA of$11.5 million , primarily attributable to the year-over-year impact of the resolution of an earnout liability during 2018 that was related to the 2014 acquisition of MonashSouth Africa ; the reversal of the earnout liability increased Adjusted EBITDA for 2018.
Liquidity and Capital Resources
Liquidity Sources
We anticipate that cash flow from operations and available cash will be sufficient to meet our current operating requirements and manage our liquidity needs, including any effects on the Company's business operations that arise from the COVID-19 pandemic, for at least the next 12 months from the date of issuance of this report. As the impact of the COVID-19 pandemic on the economy and our operations continues to evolve, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to liquidity sources, particularly our cash flows from operations, as well as our financial condition and capitalization. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions, such as obtaining additional financing. The Company will continue to evaluate its financial position in light of future developments, particularly those relating to the COVID-19 pandemic. Our primary source of cash is revenue from tuition charged to students in connection with our various education program offerings. Essentially all of our revenues are generated from private pay sources as there are no material government-sponsored loan programs inMexico orPeru . We anticipate generating sufficient cash flow from operations in the majority of countries where we operate to satisfy the working capital and financing needs of our organic growth plans for each country. If our educational institutions within one country were unable to maintain sufficient liquidity, we would consider using internal cash resources or reasonable short-term working capital facilities to accommodate any short- to medium-term shortfalls. 77 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , our secondary source of liquidity was cash and cash equivalents of$750.1 million , which does not include$270.2 million of cash recorded at subsidiaries that are classified as held for sale atDecember 31, 2020 . Our cash accounts are maintained with high-quality financial institutions with no significant concentration in any one institution. The Company also maintains a revolving credit facility with a syndicate of financial institutions as a source of liquidity. The revolving credit facility provides for borrowings of$410.0 million and has a maturity date ofOctober 7, 2024 . From time to time, we draw down on the revolver, and, in accordance with the terms of the credit agreement, any proceeds drawn on the revolving credit facility may be used for general corporate purposes. InMarch 2020 , we fully drew down our$410.0 million revolving credit facility in order to increase our cash position and preserve financial flexibility in light of the COVID-19 pandemic. During the fourth quarter of 2020, following the sale of our operations inAustralia and New Zealand , the company fully repaid the outstanding balance of the revolving credit facility. If certain conditions are satisfied, the Third Amended and Restated Credit Agreement (the Third A&R Credit Agreement) also provides for an incremental revolving and term loan facilities not to exceed$565.0 million plus additional amounts so long as both immediately before and after giving effect to such incremental facilities the Company's Consolidated Senior Secured Debt to Consolidated EBITDA ratio, as defined in the Third A&R Credit Agreement, on a pro forma basis, does not exceed 2.75x.
Completed Sale Transactions
OnJanuary 10, 2020 , we completed the sale of ourCosta Rica operations and received net proceeds of approximately$15.0 million . The proceeds received net of cash sold, transaction fees and the working capital adjustment completed during the second quarter of 2020, were approximately$1.8 million . The Company will also receive up to$5.0 million within two years after the sale if LaureateCosta Rica meets certain performance metrics. OnMarch 6, 2020 , we completed the sale of NSAD, a higher education institution located inCalifornia . At closing, the Company paid subsidies to the buyers of approximately$4.5 million . Under the terms of the sale agreement, the Company will pay additional subsidies to the buyers of approximately$2.8 million ratably on a quarterly basis over the next four years, beginning onMarch 31, 2020 . OnJanuary 25, 2018 , the Company completed the sale of its operations inChina , and, at the closing of the sale, a portion of the total transaction value was paid into an escrow account. As ofDecember 31, 2019 , the Company had recorded a receivable of approximately$25.9 million for the portion of the escrowed amount that we expected to receive. InJune 2020 , we received141.6 million Hong Kong Dollars (approximately$18.3 million at the date of receipt) from the escrow, which was offset against the receivable recorded. Under the terms of the agreement, the remaining escrow receivable amount was due in lateJanuary 2021 . The Company is pursuing collection and considers the net receivable remaining to be fully collectable. OnSeptember 11, 2020 , we completed the divestiture of our operations inChile through the transfer of control of our not-for-profit institutions and the sale of our for-profit operations. The cash proceeds received at closing, prior to transaction fees, were approximately$195.3 million . In addition, the purchase price included a note receivable of approximately$21.5 million that is payable one year from the date of divestiture. At the closing date, the Chilean operations had a cash balance (cash sold) of approximately$288.0 million that was transferred to the buyer as part of the transaction. OnSeptember 29, 2020 , we completed the sale of our operations inMalaysia and received proceeds of$116.3 million , net of cash sold, but prior to transaction fees. The cash proceeds included a deposit of$5.0 million that we received from the buyer inFebruary 2020 . In connection with the sale, onOctober 1, 2020 , we made a payment of$13.7 million to the minority owner ofInti Holdings for their 10.10% interest. OnNovember 3, 2020 , we completed the sale of our operations inAustralia and New Zealand and received proceeds of approximately$624.2 million , net of cash sold and transaction costs. InNovember 2020 , one of the Company's subsidiaries inMexico sold land and buildings for a total purchase price of approximately$13.9 million , prior to transaction fees. As ofDecember 31, 2020 , the Company received approximately$7.0 million of the total purchase price, with the outstanding amount of approximately$6.9 million to be paid before the one-year anniversary of the signing of the agreement. 78 --------------------------------------------------------------------------------
Pending Sale Transactions
OnSeptember 11, 2020 , the Company entered into a sale agreement to sell its operation ofWalden University, LLC , (Walden University ) for a purchase price of$1,480.0 million in cash, subject to certain adjustments set forth in the sale agreement. The closing of this transaction is expected to occur toward the end of 2021 and is subject to customary closing conditions, including regulatory approval by theU.S. Department of Education and theHigher Learning Commission and required antitrust approvals. Under certain specified circumstances, the purchaser may be required to pay the Company a termination fee of$88.0 million , including if the purchaser terminates the sale agreement as a result of the imposition by theU.S. Department of Education of certain specified restrictions, or if Laureate terminates the sale agreement as a result of the purchaser's failure to consummate the transaction upon satisfaction of the closing conditions. Upon completion of the sale, the restricted cash that is held at a corporate entity to collateralize the letters of credit in favor of theDOE will be released and reclassified to cash and cash equivalents. See also Overview-Regulatory Environment and Other Matters-Department of Justice Voluntary Information Request for Walden University . OnOctober 13, 2020 , the Company entered into a definitive agreement with Fundación Nasser, a not-for-profit foundation inHonduras , to transfer control of its operations inHonduras for total cash consideration of approximately$29.8 million , prior to closing costs. The buyer will also assume indebtedness which, as ofDecember 31, 2020 , was approximately$29.5 million . The transaction is subject to certain closing conditions, including regulatory approval, and is expected to be completed in the first half of 2021. OnNovember 2, 2020 , the Company entered into a definitive agreement with ÂnimaHolding S.A. , one of the largest private higher education organizations inBrazil , for the sale of its Brazilian operations. The transaction value is approximately4,400.0 million Brazilian Reals (or approximately$765.0 million at the time of signing), including3,800.0 million Brazilian Reals (or approximately$660.7 million at the time of signing) in cash consideration, which is subject to certain adjustments, and assumption of net indebtedness. Pursuant to the agreement, the Company will be entitled to receive up to203.0 million Brazilian Reals (or approximately$35.3 million at the time of signing) in additional cash consideration if certain metrics are achieved following the closing. The transaction is targeted to close by the end of the second quarter of 2021 and is subject to certain specified closing conditions.
Liquidity Restrictions
Our liquidity is affected by restricted cash balances, which totaled
Restricted cash consists of cash equivalents held to collateralize a standby letter of credit in favor of theDOE . This letter of credit was required by theDOE in order to allow Walden and, in 2019, NSAD, to participate in the Title IV program. As ofDecember 31, 2020 and 2019, we had approximately$83.6 million and$127.3 million , respectively, posted as a letter of credit in favor of theDOE . As ofDecember 31, 2020 , the restricted cash used to collateralize this letter of credit was held by a corporate entity. As ofDecember 31, 2019 , the restricted cash used to collateralize the letter of credit was primarily held by Walden. Because Walden is classified as a discontinued operation, its restricted cash balances were included in Current assets held for sale on the Consolidated Balance Sheets. As ofDecember 31, 2020 and 2019, we hadEUR 9.4 million (approximately$11.5 million atDecember 31, 2020 ) andEUR 5.0 million (approximately$5.5 million atDecember 31, 2019 ), respectively, posted as cash-collateral for LOCs related to the Spain Tax Audits. As part of our normal operations, our insurers issue surety bonds on our behalf, as required by various state education authorities inthe United States . We are obligated to reimburse our insurers for any payments made by the insurers under the surety bonds. As ofDecember 31, 2020 and 2019, the total face amount of these surety bonds was$17.1 million and$25.6 million , respectively. As ofDecember 31, 2019 , approximately$17 million of these surety bonds were held at a corporate entity; however, during 2020, all of the surety bonds were transferred to Walden and were held at Walden atDecember 31, 2020 .
Indefinite Reinvestment of Foreign Earnings
We earn a significant portion of our income from subsidiaries located in countries outsidethe United States . As part of our business strategies, we have determined that, except for one of our institutions inPeru , all earnings from our foreign continuing operations will be deemed indefinitely reinvested outside ofthe United States . As ofDecember 31, 2020 ,$127.7 million of our total$750.1 million of cash and cash equivalents were held by foreign subsidiaries. These amounts above do not include$270.2 79 -------------------------------------------------------------------------------- million of cash recorded at subsidiaries that are classified as held for sale atDecember 31, 2020 , of which$66.4 million was held by foreign subsidiaries. As ofDecember 31, 2019 ,$55.8 million of our total$61.6 million of cash and cash equivalents were held by foreign subsidiaries. These amounts above do not include$333.5 million of cash recorded at subsidiaries that are classified as held for sale atDecember 31, 2019 , of which$269.3 million was held by foreign subsidiaries. Our plans to indefinitely reinvest certain earnings are supported by projected working capital and long-term capital requirements in each foreign subsidiary location in which the earnings are generated. We have analyzed our domestic operation's cash repatriation strategies, projected cash flows, projected working capital and liquidity, and the expected availability within the debt or equity markets to provide funds for our domestic needs. As a result, we rely on payments from contractual arrangements, such as intellectual property royalty, network fee and management services agreements, as well as repayments of intercompany loans to meet any of our existing or future debt service and other obligations, a substantial portion of which are denominated in USD. Based on our analysis, we believe we have the ability to indefinitely reinvest these foreign earnings. If our expectations change based on future developments, including as a result of the announcement onJanuary 27, 2020 to explore strategic alternatives, such that some or all of the undistributed earnings of our foreign subsidiaries may be remitted tothe United States in the foreseeable future, we will be required to recognize deferred tax expense and liabilities on those amounts and pay additional taxes. ForPeru , we have recognized deferred tax liabilities of approximately$0.1 million for the portion of the undistributed foreign earnings that are not expected to be indefinitely reinvested outsidethe United States . Liquidity Requirements
Our short-term liquidity requirements include: funding for debt service (including finance leases); operating lease obligations; payments due to shareholders of acquired companies (seller notes); payments of deferred compensation; working capital; operating expenses; capital expenditures; and business development activities.
Long-term liquidity requirements include: payments on long-term debt (including finance leases); operating lease obligations; payments of deferred compensation; and payments of other third-party obligations.
Debt
OnApril 26, 2017 , we completed an offering of$800.0 million aggregate principal amount of 8.250% Senior Notes due 2025 (the Senior Notes due 2025).The Senior Notes due 2025 were issued at par and will mature onMay 1, 2025 . Interest on the Senior Notes due 2025 is payable semi-annually onMay 1 andNovember 1 , and the first interest payment date wasNovember 1, 2017 . During the fourth quarter of 2020, following the expiration of two cash tender offers, the Company purchased a total of$1.3 million aggregate principal amount of the Senior Notes due 2025, at a purchase price of 100% of the principal amount thereof plus accrued and unpaid interest to, but not including, the purchase dates. Substantially concurrently with the issuance of the Senior Notes due 2025, we consummated a refinancing of our Senior Secured Credit Facility by means of an amendment and restatement of the existing amended and restated credit agreement (the Second Amended and Restated Credit Agreement) to provide a new revolving credit facility that had an original borrowing capacity of$385.0 million and originally matured inApril 2022 (the Revolving Credit Facility), as well as a syndicated term loan of$1,600.0 million that had a maturity date ofApril 26, 2024 (the 2024 Term Loan). As previously noted, the 2024 Term Loan was fully repaid in 2019. The Company entered into the Third A&R Credit Agreement onOctober 7, 2019 . Among other things, the Third A&R Credit Agreement increased the borrowing capacity of our revolving credit facility from$385.0 million to$410.0 million and extended the maturity date fromApril 26, 2022 toOctober 7, 2024 . As ofDecember 31, 2020 , senior long-term borrowings totaled$798.7 million , which consisted entirely of the balance outstanding under our Senior Notes due 2025.
As of
Approximately$171.5 million of long-term debt and seller notes, including the current portion, is included in the held-for-sale liabilities recorded on the consolidated balance sheet as ofDecember 31, 2020 . For further description of the held-for-sale amounts see Note 4, Discontinued Operations and Assets Held for Sale in our consolidated financial statements included elsewhere in this Form 10-K. 80 --------------------------------------------------------------------------------
Senior Secured Credit Facility
As described above, during the fourth quarter of 2020, the Company fully repaid the outstanding balance of our$410.0 million revolving credit facility, following the sale of ourAustralia and New Zealand operations. The revolving credit facility provides for borrowings of$410.0 million and has a maturity date ofOctober 7, 2024 . As ofDecember 31, 2019 , the outstanding balance under our senior credit facility was$202.4 million , which consisted entirely of balances outstanding under our$410.0 million revolving credit facility. Senior Notes As ofDecember 31, 2020 and 2019, the outstanding balance under our Senior Notes due 2025 was$798.7 million and$800.0 million , respectively.
Covenants
Under the Third A&R Credit Agreement, we are subject to a Consolidated Senior Secured Debt to Consolidated EBITDA financial maintenance covenant (a leverage ratio covenant), as defined in the Third A&R Credit Agreement, unless certain conditions are satisfied. As ofDecember 31, 2020 , these conditions were satisfied and, therefore, we were not subject to the leverage ratio. The maximum ratio, as defined, is 3.50x as of the last day of each quarter commencing with the quarter endingDecember 31, 2019 and thereafter. In addition, indebtedness at some of our locations contain financial maintenance covenants. We were in compliance with these covenants as ofDecember 31, 2020 .
Other Debt
Other debt includes lines of credit and short-term borrowing arrangements of subsidiaries, mortgages payable, and notes payable.
As of
InDecember 2017 , UVM Mexico entered into an agreement with a bank for a loan of MXN 1,700.0 million (approximately$89.0 million at the time of the loan). The loan matures inJune 2024 and carries a variable interest rate based on TIIE, plus an applicable margin, which is established based on the ratio of debt to EBITDA, as defined in the agreement (5.98% as ofDecember 31, 2020 ). Payments on the loan were deferred untilDecember 2018 , at which time quarterly principal payments were due, beginning at MXN 42.5 million ($2.1 million atDecember 31, 2020 ) and increasing to MXN 76.5 million ($3.9 million atDecember 31, 2020 ), with a balloon payment of MXN 425.0 million ($21.4 million atDecember 31, 2020 ) due at maturity. In 2019, this loan was reassigned to another wholly owned subsidiary of the Company inMexico . As ofDecember 31, 2020 and 2019, the outstanding balance of this loan was$68.0 million and$77.6 million , respectively. The Company obtained financing to fund the construction of two new campuses at one of our institutions inPeru , Universidad Peruana de Ciencias Aplicadas. In 2019, the Company repaid the loans except for one, which carries an interest rate of 7.93% and is scheduled to mature inOctober 2023 . Principal payments, plus accrued and unpaid interest, are made semi-annually in April and October. As ofDecember 31, 2020 and 2019, the outstanding balance on the loan was$13.4 million and$14.5 million , respectively.
We have outstanding notes payable at Universidad Privada del Norte (UPN), one of
our institutions in
InDecember 2017 , one of our subsidiaries inPeru entered into an agreement to borrow PEN 247.5 million (approximately$76.0 million at the agreement date). The loan matures inDecember 2023 . Quarterly payments in the amount of PEN 9.3 million ($2.6 million atDecember 31, 2020 ) were due fromMarch 2018 throughDecember 2019 . The quarterly payments increased to PEN 14.4 million ($4.0 million atDecember 31, 2020 ) inMarch 2020 through the loan's maturity inDecember 2023 . InJune 2020 , during the COVID-19 pandemic, the quarterly principal payments were suspended untilJune 2021 . As ofDecember 31, 2020 and 2019, this loan had a balance of$44.0 million and$52.3 million , respectively. OnDecember 20, 2017 , one of our subsidiaries inBrazil entered into an agreement to borrowBRL 360.0 million (approximately$110.0 million at the time of the loan). The loan was scheduled to mature onDecember 25, 2022 . In 2020, during the COVID-19 pandemic, quarterly payments were deferred from June toDecember 2020 and the loan maturity was 81 -------------------------------------------------------------------------------- extended toJuly 25, 2023 . Following the deferral of the quarterly payments in 2020, the loan requires total principal payments ofBRL 99.0 million ($19.1 million atDecember 31, 2020 ) in 2021,BRL 108.0 million ($20.9 million atDecember 31, 2020 ) in 2022, andBRL 76.5 million ($14.8 million atDecember 31, 2020 ) in 2023. As ofDecember 31, 2020 and 2019, the loan had a balance of$54.7 million and$75.0 million , respectively. In addition to this loan, the same Laureate subsidiary inBrazil entered into two additional loans during the year endedDecember 31, 2019 totalingBRL 190.0 million (approximately$47.5 million at the time of loan). These loans have maturity dates ofApril 2021 andNovember 2021 . As ofDecember 31, 2020 and 2019, the outstanding balance on these loans was$33.8 million and$46.6 million , respectively.
Leases
We conduct a significant portion of our operations from leased facilities. These facilities include our corporate headquarters, other office locations, and many of our higher education facilities. As discussed in Note 10, Leases, in our consolidated financial statements included elsewhere in this Form 10-K, we have significant operating lease liabilities recorded related to our leased facilities, which will require future cash payments. As ofDecember 31, 2020 and 2019, the present value of operating lease liabilities was$519.1 million and$559.0 million , respectively. These amounts exclude operating lease liabilities for our discontinued operations of$151.4 million and$388.2 million as ofDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , the minimum lease payments required during 2021 for our Continuing Operations is$91.5 million .
Due to Shareholders of Acquired Companies
One method of payment for past acquisitions was the use of promissory notes
payable to the sellers of the acquired companies. As of
Capital Expenditures
Capital expenditures consist of purchases of property and equipment and expenditures for deferred costs. Our capital expenditure program is a component of our liquidity and capital management strategy. This program includes discretionary spending, which we can adjust in response to economic and other changes in our business environment, to grow our network through the following: (1) capacity expansion at institutions to support enrollment growth; (2) new campuses for institutions in our existing markets; (3) information technology to increase efficiency and controls; and (4) online content development. Our non-discretionary spending includes the maintenance of existing facilities. We typically fund our capital expenditures through cash flow from operations and external financing. In the event that we are unable to obtain the necessary funding for capital expenditures, our long-term growth strategy could be significantly affected. We believe that our internal sources of cash and our ability to obtain additional third-party financing, subject to market conditions, will be sufficient to fund our investing activities. Our total capital expenditures for our continuing and discontinued operations, excluding receipts from the sale of subsidiaries and property and equipment, were$89.2 million ,$173.3 million and$257.9 million during 2020, 2019 and 2018, respectively. The 49% decrease in capital expenditures for 2020 compared to 2019 was primarily due to a targeted reduction and deferral across all business lines to preserve cash amid the COVID-19 pandemic, as well as a result of the executed divestitures. The 33% decrease in capital expenditures for 2019 compared to 2018 was driven mainly by reduced capital expenditures as a result of divestitures, as well as lower spending inCosta Rica ,Peru andBrazil due to significant capital expenditures made in prior periods to launch several new campuses in these geographies, and reduced accreditation/regulatory expenditures inBrazil .
Laureate maintains a deferred compensation plan to provide certain executive employees and members of our Board of Directors with the opportunity to defer their salaries, bonuses, and Board of Directors' retainers and fees in order to accumulate funds for retirement on a pre-tax basis. Participants are 100% vested in their respective deferrals and the earnings thereon. Laureate does not make contributions to the plan or guarantee returns on the investments. Although plan investments and participant deferrals are kept in a separate trust account, the assets remain Laureate's property and are subject to claims of general creditors. As ofDecember 31, 2020 and 2019, plan assets included in Other assets in our Consolidated Balance Sheets were$3.1 million and$4.5 million , respectively. As ofDecember 31, 2020 and 2019, the plan liabilities reported in our Consolidated Balance Sheets were$6.2 million and$6.8 million , respectively. As ofDecember 31, 2020 and 2019,$1.2 million and$1.8 million , 82 --------------------------------------------------------------------------------
respectively, of the total plan liability was classified as a current liability; the remainder was noncurrent and recorded in Other long-term liabilities.
Stock Repurchase Program
OnNovember 5, 2020 , Laureate's board of directors approved a new stock repurchase program to acquire up to$300 million of the Company's Class A common stock. The Company's proposed repurchases may be made from time to time on the open market at prevailing market prices, in privately negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Repurchases may be effected pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Exchange Act. The Company's board of directors will review the share repurchase program periodically and may authorize adjustment of its terms and size or suspend or discontinue the program. The Company intends to finance the repurchases with free cash flow and excess cash and liquidity on-hand. As ofDecember 31, 2020 , the approximate dollar value of shares yet to be purchased under this stock repurchase program is$235.1 million . Cash Flows In the consolidated statements of cash flows, the changes in operating assets and liabilities are presented excluding the effects of exchange rate changes, acquisitions, and reclassifications, as these effects do not represent operating cash flows. Accordingly, the amounts in the consolidated statements of cash flows do not agree with the changes of the operating assets and liabilities as presented in the consolidated balance sheets. The effects of exchange rate changes on cash are presented separately in the consolidated statements of cash flows.
The following table summarizes our cash flows from operating, investing, and financing activities for each of the past three fiscal years: (in millions)
2020 2019 2018
Cash provided by (used in):
Operating activities$ 259.6 $
339.8
Investing activities 587.4 1,116.8 115.5 Financing activities (272.7) (1,674.0) (410.1) Effects of exchange rates changes on cash (0.5) 5.1 9.0
Change in cash included in current assets held for sale
195.8 184.6 (109.5)
Net change in cash and cash equivalents and
restricted cash $ 769.5 $ (27.8) $ 1.7 Comparison of Cash Flows for the Year Ended
Operating activities Cash provided by operating activities decreased by$80.2 million to$259.6 million for 2020, compared to$339.8 million for 2019. This decrease in operating cash was primarily attributable to changes in working capital, as well as the year-over-year effect of the divestitures that occurred, as certain of the divested institutions contributed positive operating cash flows during 2019 prior to divestiture. These factors accounted for a decrease in operating cash flows of approximately$184.7 million . This decrease was partially offset by: (1) a decrease in cash paid for interest of$68.1 million , prior to interest income, that is attributable to the lower average debt balances, from$188.7 million of cash paid for interest in 2019 to$120.6 million in 2020; (2) a decrease in cash paid for taxes of$28.3 million , from$119.7 million in 2019 to$91.4 million in 2020; and (3) a positive year-over-year effect to operating cash of$8.1 million primarily related to a cash payment in 2019 to settle cross currency and interest rate swaps inChile .
Investing activities
Cash provided by investing activities decreased by$529.4 million , to$587.4 million for 2020 from$1,116.8 million in 2019. This decrease was primarily attributable to: (1) lower cash receipts from the sales of discontinued operations of$589.4 million , from$1,266.0 million in 2019 (for the sales ofSt. Augustine and ourThailand ,South Africa ,India ,Spain ,Portugal ,Turkey ,Panama , and UniNorte operations) to$676.6 million , net, in 2020 (for the net effect of the sales of NSAD and our operations inCosta Rica ,Chile ,Malaysia ,Australia and New Zealand , net of cash sold, and the receipt of a portion of the escrow receivable balance related to the 2018 sale of ourChina operations); (2) the year-over-year negative effect of cash receipt from derivative 83 -------------------------------------------------------------------------------- settlements of$12.9 million , related to the foreign exchange swap agreements associated with the sale of theSpain andPortugal institutions in 2019; and (3) the year-over-year effect of proceeds of$11.5 million in 2019 from the sale of shares of a preferred stock investment in a private education company. These decreases in investing cash were partially offset by a decrease in capital expenditures of$84.2 million , and the year-over-year effect of a payment of$1.2 million in 2019 for a small acquisition inBrazil . Other items accounted for the remaining change of$1.0 million .
Financing activities
Cash used in financing activities decreased by$1,401.3 million to$272.7 million for 2020 from$1,674.0 million for 2019. This decrease in financing cash outflows was primarily attributable to: (1) higher net payments of long-term debt in 2019 as compared to 2020 of$1,207.6 million , primarily related to the use of divestiture proceeds for debt repayment; (2) lower payments in 2020 of$164.6 million to repurchase shares of our Class A common stock under our stock repurchase program; (3) lower payments of deferred purchase price for acquisitions of$14.5 million , due primarily to the full repayment of the St. Augustine seller note in 2019; (4) higher proceeds from stock option exercises of$11.7 million during 2020, as compared to 2019; and (5) lower payments for debt issuance costs and redemption and call premiums of$8.3 million , mostly related to a debt repayment inChile in 2019. These decreases in financing cash outflows were partially offset by higher year-over-year payments to purchase noncontrolling interests of$7.9 million , from a$5.8 million payment in 2019 to acquire the remaining noncontrolling interest of one of our operations inIndia , immediately prior to the sale of those operations, to a$13.7 million payment in 2020 to the minority owner of ourMalaysia operations in connection with the sale of those operations. Other items accounted for the remaining difference of$2.5 million .
Comparison of Cash Flows for the Year Ended
Operating activities Cash provided by operating activities decreased by$57.1 million to$339.8 million for 2019, compared to$396.9 million for 2018. This decrease in operating cash flows during 2019 was primarily due to the following: (1) changes in operating assets and liabilities and other working capital, which decreased operating cash by$102.9 million , due largely to the year-over-year effect of cash received during the fall intake cycle of 2018 for entities that were subsequently divested in 2019; and (2) proceeds from the settlement of derivative contracts were$22.9 million higher in 2018 than in 2019 due to the fact that, in 2018, we received$14.1 million in cash from the settlement of interest rate swaps whereas, in 2019, we made a cash payment of$8.8 million in order to settle certain cross currency and interest swaps, primarily inChile . Partially offsetting these operating cash decreases were increases in operating cash flows resulting from: (1) a$45.4 million decrease in cash paid for interest, prior to interest income, that is attributable to the lower average debt balances as a result of the debt repayments, from$234.1 million of cash paid for interest in 2018 to$188.7 million in 2019; and (2) a decrease in cash paid for taxes of$23.3 million , from$143.0 million in 2018, which included approximately$34.5 million of payments to the Spanish Tax Authorities, to$119.7 million in 2019.
Investing activities
Cash flows from investing activities increased by$1,001.3 million to$1,116.8 million for 2019 from$115.5 million in 2018. This increase is primarily attributable to: (1) higher cash receipts from the sales of discontinued operations of$890.2 million , from$375.8 million in 2018 (for the sales of Kendall and our operations inCyprus ,Italy ,China ,Germany , andMorocco ) to$1,266.0 million in 2019 (for the sales ofSt. Augustine and ourThailand ,South Africa ,India ,Spain ,Portugal ,Turkey ,Panama , and UniNorte operations); (2) a decrease in capital expenditures of$84.6 million ; (3) a year-over-year increase in cash from derivative settlements of$22.9 million , related to the foreign exchange swap agreements associated with the sale of theCyprus andItaly institutions in 2018 and theSpain andPortugal institutions in 2019, as well as the settlement of the net investment hedges in 2019; (4) a year-over-year decrease in cash paid for acquisitions of$15.8 million ; and (5) proceeds of$11.5 million in the 2019 fiscal period from the sale of shares of a preferred stock investment in a private education company. Partially offsetting these increases in investing cash flows was the effect of proceeds received from corporate-owned life insurance policies in 2018, resulting in a year-over-year decrease of$26.6 million . Other items accounted for the remaining change of$2.9 million . 84 --------------------------------------------------------------------------------
Financing activities
Cash used in financing activities increased by$1,263.9 million to$1,674.0 million for 2019 from$410.1 million for 2018. The increased financing cash outflows were primarily attributable to: (1) higher net payments of long-term debt in 2019 as compared to 2018 of$1,002.2 million , related to the use of divestiture proceeds for debt repayment; (2) payments of$264.1 million made during the third and fourth quarters of 2019 to repurchase shares of our Class A common stock under our stock repurchase program; (3) higher payments for debt issuance costs and redemption and call premiums during 2019 of$8.5 million , which was mostly related to a debt repayment inChile ; (4) higher payments to purchase noncontrolling interests of$5.6 million , primarily attributable to the payment made during 2019 to acquire the remaining 10% noncontrolling interest of one of our operations inIndia , immediately prior to the sale of those operations; and (5) higher payments of deferred purchase price for acquisitions of$6.5 million , due primarily to the full repayment of the St. Augustine seller note in 2019. These increases in financing cash outflows were partially offset by: (1) an$11.1 million reduction in dividend payments for the Series A Preferred Stock (no further dividend payments were required following theApril 2018 conversion of the Series A Preferred Stock into Class A common stock); and (2) proceeds from stock option exercises during 2019 of$14.0 million . Other items accounted for the remaining difference of$2.1 million . 85 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, in our consolidated financial statements included elsewhere in this Form 10-K. Our critical accounting policies require the most significant judgments and estimates about the effect of matters that are inherently uncertain. As a result, these accounting policies and estimates could materially affect our financial statements and are critical to the understanding of our results of operations and financial condition. Management has discussed the selection of these critical accounting policies and estimates with the audit committee of the board of directors.
Business Combinations
We apply the purchase accounting standards under ASC 805, "Business Combinations," to acquisitions. The purchase price of an acquisition is allocated, for accounting purposes, to individual tangible and identifiable intangible assets acquired, liabilities assumed, and noncontrolling interests based on their estimated fair values on the acquisition date. Any excess purchase price over the assigned values of net assets acquired is recorded as goodwill. The acquisition date is the date on which control is obtained by the acquiring company. Any non-monetary consideration transferred and any previously held noncontrolling interests that are part of the purchase consideration are remeasured at fair value on the acquisition date, with any resulting gain or loss recognized in earnings. The preliminary allocations of the purchase price are subject to revision in subsequent periods based on the final determination of fair values, which must be finalized no later than the first anniversary of the date of the acquisition. Transaction costs are expensed as incurred. See Note 5, Acquisitions, in our consolidated financial statements included elsewhere in this Form 10-K for details of our business combinations.
We perform annual impairment tests of indefinite-lived intangible assets, including goodwill and tradenames, as ofOctober 1st each year. We also evaluate these assets on an interim basis if events or changes in circumstances between annual tests indicate that the assets may be impaired. For example, during the second quarter of 2020, we recorded an impairment of the indefinite-lived intangible assets that were part of theChile reporting unit. We have not made material changes to the methodology used to assess impairment loss on indefinite-lived tradenames during the past three fiscal years. If the estimates and related assumptions used in assessing the recoverability of our goodwill and indefinite-lived tradenames decline, we may be required to record impairment charges for those assets. We base our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain. Actual results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
OnJanuary 1, 2020 , the Company adopted Accounting Standards Update (ASU) No. 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This ASU requires entities to calculate goodwill impairment as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the updated guidance, the Company continues to have the option of first performing a qualitative goodwill impairment assessment (i.e., step zero) in order to determine if the quantitative impairment test is necessary. The requirement to perform a qualitative assessment for a reporting unit with a zero or negative carrying amount is eliminated. A reporting unit is defined as a component of an operating segment for which discrete financial information is available and regularly reviewed by management of the segment. Based on the qualitative assessment, if we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the quantitative impairment test is not required. If we do not perform the qualitative assessment for a reporting unit or determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value-based test is performed. We estimate the fair value of each reporting unit, and, if the carrying amount of the reporting unit is less than the reporting unit's estimated fair value, then there is no goodwill impairment. If the carrying amount of the reporting unit exceeds its estimated fair value, then goodwill is impaired and the difference between the reporting unit's carrying amount and its fair value is recognized as a loss on impairment of assets in the consolidated statements of operations. We completed our annual impairment testing, and no impairments of goodwill were identified. 86 -------------------------------------------------------------------------------- Our valuation approach to estimate the fair value of a reporting unit utilizes a weighted combination of a discounted cash flow analysis and a market multiples analysis. The discounted cash flow analysis relies on historical data and internal estimates, which are developed as a part of our long-range plan process, and includes an estimate of terminal value based on these expected cash flows using the generally accepted Gordon Dividend Growth formula, which derives a valuation using an assumed perpetual annuity based on the reporting unit's residual cash flows. The discount rate is based on the generally accepted Weighted Average Cost of Capital methodology, and is derived using a cost of equity based on the generally accepted Capital Asset Pricing Model and a cost of debt based on the typical rate paid by market participants. The market multiples analysis utilizes multiples of business enterprise value to revenues, operating income and earnings before interest, taxes, depreciation and amortization of comparable publicly traded companies and multiples based on fair value transactions where public information is available. Significant assumptions used in estimating the fair value of each reporting unit include: (1) the revenue and profitability growth rates and (2) the discount rate. We also evaluate the sensitivity of a change in assumptions related to goodwill impairment, assessing whether a 10% reduction in our estimates of revenue or a 1% increase in our estimated discount rates would result in impairment of goodwill. Using the current estimated cash flows and discount rates, each reporting unit's estimated fair value exceeds its carrying value by at least 15% in instances where we performed fair value-based impairment testing. We have determined that none of our reporting units with material goodwill were at risk of failing the goodwill impairment test as ofDecember 31, 2020 . We completed our IPO onFebruary 6, 2017 at an initial public offering price that was below the expected range, and since then our stock price at times has traded below the initial public offering price. While our market capitalization is currently in excess of the carrying value of our stockholders' equity, a significant decline in our stock price for an extended period of time could be considered an impairment indicator that would cause us to perform an interim impairment test that could result in additional impairments of goodwill or other intangible assets.
Indefinite-lived Intangible Assets
The impairment test for indefinite-lived intangible assets, such as indefinite-lived tradenames, generally requires a new determination of the fair value of the intangible asset using the relief-from-royalty method. This method estimates the amount of royalty expense that we would expect to incur if the assets were licensed from a third party. We use publicly available information in determining certain assumptions to assist us in estimating fair value using market participant assumptions. If the fair value of the intangible asset is less than its carrying value, the intangible asset is adjusted to its new estimated fair value, and an impairment loss is recognized. Significant assumptions used in estimating the fair value of indefinite-lived tradenames include: (1) the revenue growth rates; (2) the discount rates; and (3) the estimated royalty rates. During the third quarter of 2020, following the reclassification of several of our subsidiaries as held-for-sale, the Company tested the Laureate tradename for impairment and concluded that the estimated fair value of the Laureate tradename was less than its carrying value. As a result, the Company recognized an impairment charge of$320.0 million , in accordance with ASC 350-30-35-17. Additionally, the Company determined that the useful life of the remaining Laureate tradename asset was no longer indefinite and would be amortized over five years, its estimated useful life.
Long-Lived Assets and Finite-Lived Intangible Assets
We evaluate our long-lived assets, including property and equipment and finite-lived intangible assets, to determine whether events or changes in circumstances indicate that the remaining estimated useful lives of such assets may warrant revision or that their carrying values may not be fully recoverable.
Indicators of impairment include, but are not limited to:
•a significant deterioration of operating results;
•a change in regulatory environment;
•a significant change in the use of an asset, its physical condition, or a
change in management's intended use of the asset;
•an adverse change in anticipated cash flows; or
•a significant decrease in the market price of an asset.
If an impairment indicator is present, we evaluate recoverability by a
comparison of the carrying amount of the assets to future undiscounted net cash
flows expected to result from the use and eventual disposition of the assets. If
the assets are determined
87
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to be impaired, the impairment recognized is the excess of the carrying amount
over the fair value of the assets. Fair value is generally determined by the
discounted cash flow method. The discount rate used in any estimate of
discounted cash flows is the rate commensurate with a similar investment of
similar risk. We use judgment in determining whether a triggering event has
occurred and in estimating future cash flows and fair value. Changes in our
judgments could result in impairments in future periods.
We recorded impairment losses on long-lived assets for the years ended
December 31, 2020 , and 2019. See Note 8, Goodwill and Other Intangible Assets,
in our consolidated financial statements included elsewhere in this Form 10-K
for further details.
Deferred Costs
Deferred costs on the Consolidated Balance Sheets consist primarily of direct
costs associated with online course development, accreditation and costs to
obtain a contract. Deferred costs associated with the development of online
educational programs are capitalized after technological feasibility has been
established. Deferred online course development costs are amortized to direct
costs on a straight-line basis over the estimated period that the associated
products are expected to generate revenues. Deferred online course development
costs are evaluated on a quarterly basis through review of the corresponding
course catalog. If a course is no longer listed or offered in the current course
catalog, then the costs associated with its development are written off. As of
December 31, 2020 and 2019, the unamortized balances of online course
development costs were $15.3 million and $22.3 million , respectively. We defer
direct and incremental third-party costs incurred for obtaining initial
accreditation and for the renewal of accreditations. These accreditation costs
are amortized to direct costs over the life of the accreditation on a
straight-line basis. As of December 31, 2020 and 2019, the unamortized balances
of accreditation costs were $0.2 million and $0.3 million , respectively.
Laureate also defers certain commissions and bonuses earned by third party
agents and our employees that are considered incremental and recoverable costs
of obtaining a contract with a customer. These costs are amortized over the
period of benefit, which ranges from two to four years. As of both December 31,
2020 and 2019, the unamortized balances of contract costs were $2.1 million .
At December 31, 2020 and 2019, our total deferred costs were $33.4 million and
$39.5 million , respectively, with accumulated amortization of $(15.7) million
and $(14.8) million , respectively.
Income Taxes
We record the amount of income taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the expected future tax consequences of events that we have recognized in our consolidated financial statements or tax returns. We exercise judgment in assessing future profitability and the likely future tax consequences of these events. Deferred Taxes Estimates of deferred tax assets and liabilities are based on current tax laws, rates and interpretations, and, in certain cases, business plans and other expectations about future outcomes. We develop estimates of future profitability based upon historical data and experience, industry projections, forecasts of general economic conditions, and our own expectations. Our accounting for deferred tax consequences represents management's best estimate of future events that can be appropriately reflected in our accounting estimates. Changes in existing tax laws and rates, their related interpretations, as well as the uncertainty generated by the current economic environment, may impact the amounts of deferred tax liabilities or the valuations of deferred tax assets.
Tax Contingencies
We are subject to regular review and audit by both domestic and foreign tax authorities. We apply a more-likely-than-not threshold for tax positions, under which we must conclude that a tax position is more likely than not to be sustained in order for us to continue to recognize the benefit. This assumes that the position will be examined by the appropriate taxing authority and that full knowledge of all relevant information is available. In determining the provision for income taxes, judgment is used, reflecting estimates and assumptions, in applying the more-likely-than-not threshold. A change in the assessment of the outcome of a tax review or audit could materially adversely affect our consolidated financial statements.
See Note 14, Income Taxes, in our consolidated financial statements included elsewhere in this Form 10-K for details of our deferred taxes and tax contingencies.
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--------------------------------------------------------------------------------Indefinite Reinvestment of Foreign Earnings
We earn a significant portion of our income from subsidiaries located in countries outsidethe United States . Except for one of our institutions inPeru , deferred tax liabilities have not been recognized for undistributed foreign earnings of Continuing Operations because management believes that the earnings will be indefinitely reinvested outsidethe United States under the Company's planned tax-neutral methods. ASC 740, "Income Taxes," requires that we evaluate our circumstances to determine whether or not there is sufficient evidence to support the assertion that we will reinvest undistributed foreign earnings indefinitely. Our assertion that earnings from our foreign operations will be indefinitely reinvested is supported by projected working capital and long-term capital plans in each foreign subsidiary location in which the earnings are generated. Additionally, we believe that we have the ability to indefinitely reinvest foreign earnings based on our domestic operation's cash repatriation strategies, projected cash flows, projected working capital and liquidity, and the expected availability of capital within the debt or equity markets. If our expectations change based on future developments, including as a result of the announcement onJanuary 27, 2020 to explore strategic alternatives, such that some or all of the undistributed earnings of our foreign subsidiaries may be remitted tothe United States in the foreseeable future, we will be required to recognize deferred tax expense and liabilities on those amounts.
Revenue Recognition
Laureate's revenues primarily consist of tuition and educational service
revenues. We also generate other revenues from student fees, dormitory/residency
fees and other education-related activities. These other revenues are less
material to our overall financial results and have a tendency to trend with
tuition revenues. Revenues are recognized when control of the promised goods or
services is transferred to our customers, in an amount that reflects the
consideration we expect to be entitled to in exchange for those goods or
services. These revenues are recognized net of scholarships and other discounts,
refunds, waivers and the fair value of any guarantees made by Laureate related
to student financing programs. For further description, see also Note 3,
Revenue, in our consolidated financial statements included elsewhere in this
Form 10-K.
Allowance for Doubtful Accounts
Receivables are deemed to be uncollectible when they have been outstanding for
two years, or earlier when collection efforts have ceased, at which time they
are written off. Prior to that, we record an allowance for doubtful accounts to
reduce our receivables to their net realizable value. Our allowance estimation
methodology is based on the age of the receivables, the status of past-due
amounts, historical collection trends, current economic conditions and student
enrollment status. In the event that current collection trends differ from
historical trends, an adjustment is made to the allowance account and bad debt
expense.
Derivatives
In the normal course of business, our operations have significant exposure to
fluctuations in foreign currency values and interest rate changes. Accordingly,
we mitigate a portion of these risks through a risk-management program that
includes the use of derivative financial instruments (derivatives). Laureate
selectively enters into foreign exchange forward contracts to reduce the
earnings impact related to receivables and payables that are denominated in
foreign currencies. In addition, in certain cases Laureate uses interest rate
swaps to mitigate certain risks associated with floating-rate debt arrangements.
We do not engage in speculative or leveraged transactions, nor do we hold or
issue derivatives for trading purposes.
We report all derivatives on the consolidated balance sheets at fair value. The
values are derived using valuation models commonly used for derivatives. These
valuation models require a variety of inputs, including contractual terms,
market prices, forward-price yield curves, notional quantities, measures of
volatility and correlations of such inputs. Our fair value models incorporate
the measurement of our own nonperformance risk into our calculations. Our
derivatives expose us to credit risk to the extent that the counterparty may
possibly fail to perform its contractual obligation when we are in a net gain
position. As a result, our valuation models reflect measurements for
counterparty credit risk. We also actively monitor counterparty credit ratings
for any significant changes that could impact the nonperformance risk
calculation for our fair value. We value derivatives using management's best
estimate of inputs we believe market participants would use in pricing the asset
or liability at the measurement date. Derivative and hedge accounting requires
judgment in the use of estimates that are inherently uncertain and that may
change in subsequent periods. External factors, such as economic conditions,
will impact the inputs to the valuation model over time. The effect of changes
in assumptions and estimates could materially impact our financial statements.
See Note 13, Derivative Instruments, in our consolidated financial statements
included elsewhere in this Form 10-K for details of our derivatives.
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--------------------------------------------------------------------------------Share-Based Compensation
We use the Black-Scholes-Merton option pricing model to calculate the fair value of stock options. This option valuation model requires the use of subjective assumptions, including the estimated fair value of the underlying common stock, the expected stock price volatility, and the expected term of the option. Prior to the IPO, the estimated fair value of the underlying common stock was based on third-party valuations. After our IPO, the estimated fair value of the underlying common stock is based on the closing price of our Class A common stock on the grant date. Because we have only been publicly traded sinceFebruary 2017 , our volatility estimates are based on an average of: (1) a peer group of companies and (2) Laureate's historical volatility. We estimate the expected term of awards to be the weighted average mid-point between the vesting date and the end of the contractual term. We use this method to estimate the expected term because we do not have sufficient historical exercise data. We have granted restricted stock, restricted stock units, stock options, and performance awards for which the vesting is based on our annual performance metrics. For interim periods, we use our year-to-date actual results, financial forecasts, and other available information to estimate the probability of the award vesting based on the performance metrics. The related compensation expense recognized is affected by our estimates of the vesting probability of these performance awards. See Note 12, Share-based Compensation and Equity, in our consolidated financial statements included elsewhere in this Form 10-K for further discussion of these arrangements.
Recently Issued Accounting Standards
Refer to Note 2, Significant Accounting Policies, in our consolidated financial
statements included elsewhere in this Form 10-K for recently issued accounting
standards.
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