# LAUREATE EDUCATION, INC. (LAUR) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from LAUREATE EDUCATION, INC.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/912766/000162828023004686/laur-20221231.htm Accession: 0001628280-23-004686 Filing date: 2023-02-23 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/LAUR/ All MD&A years: /company/LAUR/mda/ Previous year: /company/LAUR/mda/fy2021/ (FY 2021) Next year: /company/LAUR/mda/fy2023/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 (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” on page 2 of this Form 10-K. Introduction This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided to assist readers of the financial statements in understanding the results of operations, financial condition and cash flows of Laureate 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 in U.S. dollars (USD) rounded to the nearest thousand, with the amounts in the 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. 30 Overview Our Business We operate a portfolio of degree-granting higher education institutions in Mexico and Peru. Collectively, we have approximately 423,000 students enrolled at five institutions in these two countries. We believe that the higher education markets in Mexico and Peru 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 Mexico and Peru for reporting purposes. Discontinued Operations As a result of the strategic review first announced in January 2020, during the third quarter of 2020, the Company completed a sale of its operations in Chile and signed agreements to sell its operations in Brazil, Australia and New Zealand, as well as Walden University in the United States. These sales were completed during 2020 and 2021. Additionally, prior to 2020, the Company had announced the divestiture of certain other subsidiaries in Europe, Asia and Central America, which has been completed. These announcements represented strategic shifts that had a major effect on the Company’s operations and financial results. Accordingly, all of the divestitures that were part of these strategic shifts were accounted for as Discontinued Operations for all periods presented in accordance with Accounting Standards Codification (ASC) 205-20, “Discontinued Operations” (ASC 205). All planned divestitures have now been completed, and the Company has concluded its strategic review process. The Company’s continuing operations are Mexico and Peru. All other markets have been divested (the Discontinued Operations). The Discontinued Operations are excluded from the segment information for all periods presented, as they do not meet the criteria for a reportable segment under ASC 280, “Segment Reporting.” Unless indicated otherwise, the information in the MD&A relates to continuing operations. See also Note 4, Discontinued Operations and Assets Held for Sale, and Note 5, Dispositions, in our consolidated financial statements included elsewhere in this Form 10-K. 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 utilize campus-based, online and hybrid (a combination of online and in-classroom) courses and programs to deliver their curriculum. The Mexico and Peru 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 in Mexico or Peru. Specifics related to both of our reportable segments are discussed below: •Private education providers in Mexico constitute approximately 36% 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 nationally licensed institutions and is present throughout the country with a footprint of over 35 campuses. 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 approximately 73% of the total higher-education market. Laureate owns three institutions in Peru. 31 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 provides financial, human resource, information technology, insurance, legal and tax compliance services. The Corporate segment also contains the eliminations of inter-segment revenues and expenses. The following information for our reportable segments is presented as of December 31, 2022: [[GREPCENT_TABLE]] [["","","Institutions","Enrollment","2022 Revenues (in millions) (1)","% Contribution to 2022 YTD Revenues"],["Mexico","","2","222,800","","$","613.9","","50","%"],["Peru","","3","200,200","","624.2","","50","%"],["Total (1)","","5","423,000","","$","1,242.3","","100","%"]] [[/GREPCENT_TABLE]] (1) Amounts related to Corporate totaled $4.1 million and are not separately presented. Challenges Our operations are outside of the United States and are subject to complex business, economic, legal, regulatory, political, tax and foreign currency risks, which may be difficult to adequately address. 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 in Mexico and Peru and are subject to complex business, economic, legal, political, tax and foreign currency risks, which risks may be difficult to adequately address.” We plan to grow 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,” and “Item 1—Business—Industry Regulation,” for a detailed discussion of our different regulatory environments and Note 17, 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. Each institution also has a smaller “Secondary Intake” period. Our Peruvian institutions have their Primary Intake during the first calendar quarter and a Secondary Intake during the third calendar quarter. Institutions in our Mexico segment have their Primary Intake during the third calendar quarter and a Secondary Intake during the first calendar quarter. Our institutions in Peru are generally out of 32 session in January, February and July, while institutions in Mexico are generally out of session in May through July. Revenues are recognized when classes are in session. 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 and other discounts, refunds and waivers. In addition to tuition revenues, we generate other revenues from student 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. 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 Foreign Exchange While the USD is our reporting currency, our institutions are located in Mexico and Peru and operate in other functional currencies, namely the Mexican peso and Peruvian nuevo sol. 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 principal foreign exchange exposure is the risk related to the 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 the U.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 any acquisitions, divestitures and other items, as described in the segments results. Seasonality Our institutions 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. Given the geographic diversity of our institutions and differences in timing of summer breaks, our second and fourth quarters are stronger revenue quarters as the majority of 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 that could change the academic calendar at our institutions. See “Item 1A—Risk Factors—Risks Relating to Our Business—We experience seasonal fluctuations in our results of operations.” 33 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 affect 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 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.” The Organization for Economic Co-operation and Development (OECD) has proposed changes to numerous long-standing tax principles. These proposals, if finalized and adopted by the associated countries, will likely increase tax uncertainty, and may adversely affect our provision for income taxes. The Company will continue to monitor regulatory developments to assess potential impacts to the Company. Results of the Discontinued Operations The results of operations of the Discontinued Operations for the years ended December 31, 2022, 2021, and 2020 were as follows: [[GREPCENT_TABLE]] [["","For the year ended December 31,"],["","2022","","2021","","2020"],["Revenues","$","\u2014","","","$","543.0","","","$","1,674.6"],["Depreciation and amortization expense","\u2014","","","\u2014","","","(60.4)"],["Share-based compensation expense","\u2014","","","(1.3)","","","(3.1)"],["Other direct costs","\u2014","","","(433.1)","","","(1,313.3)"],["Loss on impairment of assets","\u2014","","","(1.3)","","","(438.3)"],["Other non-operating expense","\u2014","","","(22.3)","","","(68.6)"],["Gain on sale of discontinued operations before taxes, net","7.8","","","636.2","","","25.0"],["Pretax income (loss) of discontinued operations","7.8","","","721.2","","","(183.8)"],["Income tax benefit (expense)","0.5","","","(234.3)","","","(114.3)"],["Income (loss) from discontinued operations, net of tax","$","8.3","","","$","486.9","","","$","(298.1)"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2022 The $7.8 million gain in the table above primarily resulted from the transfer of the remaining assets and liabilities that were classified as held for sale as of December 31, 2021, which related to the divestiture of our operations in Chile. This transfer was completed during the second quarter of 2022 and resulted in a gain of approximately $4.3 million. Year Ended December 31, 2021 On March 8, 2021, we sold our operations in Honduras, which resulted in an after-tax loss of $1.7 million, including a working capital adjustment during the second quarter of 2021. On January 25, 2018, we completed the sale of LEI Lie Ying Limited (LEILY). At the closing of the sale, a portion of the total transaction value was paid into an escrow account, to be distributed to the Company pursuant to the terms and conditions of the escrow agreement. In April 2021, the Company received 168.3 million Hong Kong Dollars (approximately $21.7 million at the date of receipt), which represented payment in full for the remainder of the escrow account and resulted in a pretax gain of approximately $13.6 million. During the first quarter of 2021, we recorded a loss of approximately $32.4 million in order to adjust the carrying value of our Brazil disposal group to its estimated fair value less costs to sell as of March 31, 2021. This loss is included in Gain on sale of discontinued operations before taxes, net. On May 28, 2021, we completed the sale of our operations in Brazil, which resulted in a pre-tax gain of $33.0 million, including working capital and purchase price adjustments that were completed during the third and fourth quarters of 2021, and contingent consideration that was recognized during the fourth quarter of 2021. 34 On August 12, 2021, we completed the sale of Walden University, which resulted in a pre-tax gain of $619.4 million, including a working capital settlement completed during the fourth quarter of 2021. In addition, the Company recognized estimated tax expense of approximately $278.0 million. Year Ended December 31, 2020 On January 10, 2020, we sold our operations in Costa Rica, which resulted in a pre-tax loss of approximately $18.6 million. This loss was in addition to a previously recorded loss of approximately $25.0 million that we recognized in 2019 to write down the carrying value of the held-for-sale Costa Rica disposal group to its estimated fair value. On March 6, 2020, we sold the operations of NewSchool of Architecture and Design, LLC (NSAD), which resulted in a pre-tax loss of approximately $5.9 million. 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 the Brazil enrollment to graduation (E2G) software assets. We also recorded a loss of $10.0 million on the held-for-sale Honduras 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 our Brazil operations in order to write down the carrying value of Brazil’s disposal group to its estimated fair value. We also recorded an additional loss of $10.0 million related to our held-for-sale Honduras group, in order to write down its carrying value to the estimated fair value based on the sale agreement that was signed in October 2020. These losses are included in Gain on sale of discontinued operations before taxes, net. On September 10, 2020, we completed the divestiture of our operations in Chile, 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 September 29, 2020, we completed the sale of our operations in Malaysia, which resulted in a pre-tax gain of approximately $47.9 million. In early October 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 in Turkey in August 2019. At the time of the sale, the Company determined that this deferred purchase price would be recognized if collected. On November 3, 2020, we completed the sale of our Australia and New Zealand operations, which resulted in a pre-tax gain of approximately $555.8 million. During the fourth quarter of 2020, we recorded an additional loss of approximately $15.0 million in order to adjust the carrying value of our Brazil’s disposal group to its estimated fair value less costs to sell as of December 31, 2020. This loss is included in Gain on sale of discontinued operations before taxes, net. 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. 35 Summary Comparison of Consolidated Results Discussion of Significant Items Affecting the Consolidated Results for the Years Ended December 31, 2021 and 2020 Year Ended December 31, 2021 In March 2021, the Company decided that, during 2021, it would wind down certain support functions related to the Laureate network and would no longer invest in and support the Laureate tradename beyond 2021. As a result, the Company tested the asset for impairment and estimated the fair value of the tradename asset using the relief-from-royalty method, based on the projected revenues for each business over the estimated remaining useful life of the asset. As a result of the impairment test, the Company concluded that the estimated fair value of the Laureate tradename was less than its carrying value by approximately $51.4 million and recorded an impairment charge for that amount. During the second quarter of 2021, the Company fully repaid the remaining balance outstanding under its Senior Notes due 2025 using a portion of the proceeds received from the sales of its operations in Australia and New Zealand and Brazil. In connection with the debt repayment, the Company recorded a loss on debt extinguishment of $77.9 million, related to the redemption premium paid and the write off of the unamortized deferred financing costs associated with the repaid debt balances. This loss is included in Other non-operating expense in the table below. In November 2020, in connection with the signing of the sale agreement for our Brazil operations, the Company entered into six BRL-to-USD swap agreements to mitigate the risk of foreign currency exposure on the expected proceeds from the sale. The sale of our Brazil operations closed on May 28, 2021. On June 2, 2021, the Company settled the swap agreements, which resulted in a realized loss on derivatives of $24.5 million. This loss is included in Other non-operating expense in the table below. In December 2021, the Company completed a lease termination agreement with the landlord of our Kendall property in Chicago, Illinois. In connection with the lease termination agreement, we recorded a loss of approximately $25.8 million, which is included in Excellence-in-Process (EiP) expenses within Operating (loss) income in the table below. Year Ended December 31, 2020 During the first quarter of 2020, the Company recorded an impairment charge of $3.8 million primarily related to the write-off of capitalized curriculum development costs for a program that the Company decided to stop developing. During the second quarter of 2020, the Company recorded an impairment charge of approximately $23.8 million related to the Brazil enrollment to graduation cycle (E2G) software assets that were recorded on the Corporate segment, as described in Note 7, Goodwill and Other Intangible Assets, in our consolidated financial statements included elsewhere in this Form 10-K. 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 7, Goodwill and Other Intangible Assets, in our consolidated financial statements included elsewhere in this Form 10-K. In November 2020, Universidad del Valle de Mexico, 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 in Jalisco, 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 $6.1 million. This loss is included in Other non-operating expense in the table below and is part of continuing operations as this entity was not part of the strategic shifts described above in Overview. 36 Comparison of Consolidated Results for the Years Ended December 31, 2022, 2021 and 2020 [[GREPCENT_TABLE]] [["","","","","","","","% Change"],["","","","","","","","Better/(Worse)"],["(in millions)","2022","","2021","","2020","","2022 vs. 2021","","2021 vs. 2020"],["Revenues","$","1,242.3","","","$","1,086.7","","","$","1,024.9","","","14","%","","6","%"],["Direct costs","907.4","","","814.5","","","802.5","","","(11)","%","","(1)","%"],["General and administrative expenses","64.8","","","204.4","","","199.8","","","68","%","","(2)","%"],["Loss on impairment of assets","0.1","","","72.5","","","352.0","","","100","%","","79","%"],["Operating income (loss)","270.0","","","(4.6)","","","(329.3)","","","nm","","99","%"],["Interest expense, net of interest income","(8.9)","","","(41.9)","","","(98.7)","","","79","%","","58","%"],["Other non-operating expense","(15.3)","","","(91.0)","","","(22.8)","","","83","%","","nm"],["Income (loss) from continuing operations before income taxes and equity in net income of affiliates","245.9","","","(137.5)","","","(450.8)","","","nm","","69","%"],["Income tax (expense) benefit","(185.4)","","","(145.6)","","","130.1","","","(27)","%","","nm"],["Equity in net income of affiliates, net of tax","0.3","","","\u2014","","","0.2","","","nm","","(100)","%"],["Income (loss) from continuing operations","60.7","","","(283.1)","","","(320.6)","","","121","%","","12","%"],["Income (loss) from discontinued operations, net of tax","8.3","","","486.9","","","(298.1)","","","(98)","%","","nm"],["Net income (loss)","69.0","","","203.8","","","(618.7)","","","(66)","%","","133","%"],["Net loss (income) attributable to noncontrolling interests","0.6","","","(11.3)","","","5.4","","","(105)","%","","nm"],["Net income (loss) attributable to Laureate Education, Inc.","$","69.6","","","$","192.4","","","$","(613.3)","","","(64)","%","","131","%"]] [[/GREPCENT_TABLE]] 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 December 31, 2022 to the Year Ended December 31, 2021 Revenues increased by $155.6 million to $1,242.3 million for 2022 from $1,086.7 million for 2021. Average total organic enrollment was higher at our institutions, increasing revenues by $111.9 million compared to 2021. The effect of changes in tuition rates and enrollments in programs at varying price points (“product mix”), pricing and timing increased revenues by $30.8 million compared to 2021. In addition, the effect of a net change in foreign currency exchange rates increased revenues by $18.0 million, due to the strengthening of the Peruvian nuevo sol and the Mexican peso against the USD compared to 2021. These increases in revenues were partially offset by other Corporate and Eliminations changes, which accounted for a decrease in revenues of $5.1 million. Direct costs and general and administrative expenses combined decreased by $46.7 million to $972.2 million for 2022 from $1,018.9 million for 2021. This decrease in direct costs and administrative expenses was primarily related to: (1) lower EiP implementation expense of $74.6 million as a result of the completion of our EiP program in 2021; (2) lower depreciation and amortization expense of $42.6 million, mainly driven by the full amortization of the finite-lived tradename in 2021; (3) lower other Corporate and Eliminations expenses, which accounted for a decrease in costs of $42.0 million in 2022, related to cost-reduction efforts; and (4) changes in acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in indemnification assets, which resulted in a year-over-year decrease in costs of $13.1 million. These decreases in direct costs were partially offset by the effect of operational changes, which increased direct costs by $115.6 million compared to 2021, mainly attributable to the effect of higher enrollments at our institutions, as well as return-to-campus expenses. Additionally, the effect of a net change in foreign currency exchange rates increased costs by $10.0 million compared to 2021. Operating income (loss) changed by $274.6 million to income of $270.0 million for 2022 from loss of $(4.6) million for 2021. This increase in operating income was primarily a result of the impairment loss related to the Laureate tradename impairment that was recognized during 2021, combined with higher operating income at our Mexico and Peru segments during 2022. Additionally, cost-reduction efforts resulted in lower operating costs at Corporate in 2022, as compared to 2021. 37 Interest expense, net of interest income decreased by $33.0 million to $8.9 million for 2022 from $41.9 million for 2021. The decrease in interest expense was primarily attributable to lower average debt balances mainly driven by the full repayment of the Senior Notes due 2025 in 2021. Other non-operating expense decreased by $75.7 million to $15.3 million for 2022 from $91.0 million for 2021. This decrease was attributable to: (1) a loss on debt extinguishment of $77.9 million during 2021 in connection with the repayment of the Senior Notes due 2025; (2) a loss on derivative instruments during 2021 of $24.5 million, driven by settlement of foreign currency swap agreements in connection with the sale of our Brazilian operations; (3) a gain on disposal of subsidiaries during 2022, compared to a loss during 2021, for a change of $2.0 million; and (4) other non-operating income during 2022, compared to expense during 2021, for a change of $2.5 million. These decreases in other non-operating expense were partially offset by foreign currency exchange loss in 2022, compared to a gain in 2021, for a change of $31.2 million. Income tax expense increased by $39.8 million to $185.4 million for 2022 from $145.6 million for 2021. This increase was primarily driven by the tax effect of the increase in pretax income in 2022 compared to 2021. Additionally, the Company recognized an income tax reserve related to the application of the high-tax exception to global intangible low-taxed income. The increase was partially offset by a nonrecurring expense attributable to amended returns filed in 2021. Additionally, the increase was partially offset by less tax cost associated with the Netherlands intellectual property restructuring when compared to the prior year. Income from discontinued operations, net of tax decreased by $478.6 million to $8.3 million for 2022 from $486.9 million for 2021. This decrease was primarily attributable to the gain on sale of Walden University during 2021. See Overview for further detail on results of the Discontinued Operations. Net loss (income) attributable to noncontrolling interests changed by $11.9 million to a loss of $0.6 million for 2022 from an income of $(11.3) million for 2021. This change was primarily related to our previous joint venture in Saudi Arabia and the income effect to noncontrolling interests that resulted in 2021 from the settlement of certain intercompany transactions. Comparison of Consolidated Results for the Year Ended December 31, 2021 to the Year Ended December 31, 2020 Revenues increased by $61.8 million to $1,086.7 million for 2021 from $1,024.9 million for 2020. Average total enrollment at a majority of our institutions, mainly in our Peru segment, increased during 2021, increasing revenues by $75.2 million compared to 2020. The increase in average total enrollment in Peru was attributable to a robust primary intake cycle during 2021 and increased retention rates. Additionally, the effect of product mix, pricing and timing increased revenues by $19.6 million compared to 2020. These increases in revenues were partially offset by the effect of a net change in foreign currency exchange rates, which decreased revenues by $34.8 million, due to weakening of the Peruvian nuevo sol against the USD. Other Corporate and Eliminations changes accounted for an increase in revenues of $1.8 million. Direct costs and general and administrative expenses combined increased by $16.6 million to $1,018.9 million for 2021 from $1,002.3 million for 2020. The effect of operational changes increased direct costs by $42.0 million compared to 2020, mainly driven by higher amortization expense at Corporate, mostly related to the amortization of the finite-lived tradename. Changes in acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in indemnification assets resulted in a year-over-year increase in costs of $7.8 million. These increases in direct costs were partially offset by a decrease in EiP implementation expense, which decreased direct costs by $14.2 million, driven by cost-saving initiatives. Additionally, the effect of a net change in foreign currency exchange rates decreased costs by $12.2 million compared to 2020. Other Corporate and Eliminations expenses accounted for a decrease in costs of $6.8 million in 2021, related to cost-reduction efforts. Operating loss decreased by $324.7 million to $4.6 million for 2021 from $329.3 million for 2020. This change was primarily a result of lower impairment charges of $279.5 million, mainly related to the Laureate tradename impairment recognized during 2020. Additionally, operating income at our Peru and Mexico segments increased during 2021 compared to 2020. Interest expense, net of interest income decreased by $56.8 million to $41.9 million for 2021 from $98.7 million for 2020. The decrease in interest expense was primarily attributable to lower average debt balances as a result of debt repayments. Other non-operating expense increased by $68.2 million to $91.0 million for 2021 from $22.8 million for 2020. This increase was attributable to a higher loss on debt extinguishment of $77.3 million, primarily related to the repayment of the Senior Notes due 2025 during 2021. This increase in other non-operating expense was partially offset by: (1) a lower loss on disposal of subsidiaries of $6.7 million; (2) a lower loss on derivative instruments during 2021 of $1.5 million; (3) a decrease in foreign currency exchange gain of $0.3 million; and (4) a decrease in other non-operating expense of $0.6 million. 38 Income tax (expense) benefit changed by $275.7 million to an expense of $(145.6) million for 2021 from a benefit of $130.1 million for 2020. This change was attributable to tax expense recorded in 2021 of approximately $35.7 million related to amended returns filed for the Company's election to exclude certain foreign income of foreign corporations from global intangible low-taxed income (GILTI). In the prior year the company recorded a $70.9 million tax benefit for this item, resulting in a year-over-year change of approximately $106.6 million. In addition, the decrease in pre-tax loss in the current year resulted in $76.9 million of less tax benefit compared to 2020. Additionally, there was a year-over-year increase in state tax expense of $41.3 million and a year-over-year increase in withholding taxes of $30.0 million. Income (loss) from discontinued operations, net of tax changed by $785.0 million to income of $486.9 million for 2021 from a loss of $(298.1) million for 2020. This change was primarily driven by the gain on sale of Walden University during 2021, combined with impairment charges recorded during 2020 and charges recorded during 2020 to write down certain held-for-sale disposal groups to fair value. See Overview for further detail on results of the Discontinued Operations. Net (income) loss attributable to noncontrolling interests changed by $16.7 million to income of $(11.3) million for 2021 from a loss of $5.4 million for 2020. This change was primarily related to our previous joint venture in Saudi Arabia and the income effect to noncontrolling interests that resulted in 2021 from the settlement of certain intercompany transactions. 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 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 our Excellence-in-Process (EiP) initiative. 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. 39 The following table presents Adjusted EBITDA and reconciles income (loss) from continuing operations to Adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020: [[GREPCENT_TABLE]] [["","","","","","","","% Change"],["","","","","","","","Better/(Worse)"],["(in millions)","2022","","2021","","2020","","2022 vs. 2021","","2021 vs. 2020"],["Income (loss) from continuing operations","$","60.7","","","$","(283.1)","","","$","(320.6)","","","121","%","","12","%"],["Plus:"],["Equity in net income of affiliates, net of tax","(0.3)","","","\u2014","","","(0.2)","","","nm","","(100)","%"],["Income tax expense (benefit)","185.4","","","145.6","","","(130.1)","","","(27)","%","","nm"],["Income (loss) from continuing operations before income taxes and equity in net income of affiliates","245.9","","","(137.5)","","","(450.8)","","","nm","","69","%"],["Plus:"],["(Gain) loss on disposal of subsidiaries, net","(1.4)","","","0.6","","","7.3","","","nm","","92","%"],["Foreign currency exchange loss (gain), net","17.4","","","(13.8)","","","(13.5)","","","nm","","2","%"],["Other (income) expense, net","(0.8)","","","1.7","","","2.4","","","147","%","","29","%"],["Loss on derivatives","\u2014","","","24.5","","","26.0","","","100","%","","6","%"],["Loss on debt extinguishment","\u2014","","","77.9","","","0.6","","","100","%","","nm"],["Interest expense","16.4","","","46.3","","","100.9","","","65","%","","54","%"],["Interest income","(7.6)","","","(4.4)","","","(2.2)","","","73","%","","100","%"],["Operating income (loss)","270.0","","","(4.6)","","","(329.3)","","","nm","","99","%"],["Plus:"],["Depreciation and amortization","59.1","","","101.2","","","83.1","","","42","%","","(22)","%"],["EBITDA","329.1","","","96.6","","","(246.2)","","","nm","","139","%"],["Plus:"],["Share-based compensation expense (a)","8.8","","","8.9","","","10.2","","","1","%","","13","%"],["Loss on impairment of assets (b)","0.1","","","72.5","","","352.0","","","100","%","","79","%"],["EiP implementation expenses (c)","0.8","","","75.4","","","89.6","","","99","%","","16","%"],["Adjusted EBITDA","$","338.9","","","$","253.4","","","$","205.7","","","34","%","","23","%"]] [[/GREPCENT_TABLE]] 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 Ended December 31, 2021 and 2020.” (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), as well as improvements to the Company's system of internal controls over financial reporting. The EiP initiative also included other back- and mid-office areas, as well as certain student-facing activities, expenses associated with streamlining the organizational structure, an enterprise-wide program aimed at revenue growth, and certain non-recurring costs incurred in connection with the dispositions. The EiP initiative was completed as of December 31, 2021, except for certain EiP expenses related to the run out of programs that began in prior periods. Comparison of Depreciation and Amortization and EiP Implementation Expenses for the Years Ended December 31, 2022 and 2021 Depreciation and amortization decreased by $42.1 million to $59.1 million for 2022 from $101.2 million for 2021. This decrease was primarily attributable to the finite-lived Laureate tradename, which was fully amortized in 2021, combined with a lower depreciable asset base at Corporate following the outsourcing of a majority of our information technology activities to a third-party service provider during 2021. 40 EiP implementation expenses decreased by $74.6 million to $0.8 million for 2022 from $75.4 million for 2021. This decrease resulted from the completion of our EiP program in 2021, with the exception of certain EiP expenses related to the run out of programs that began in prior periods. Comparison of Depreciation and Amortization and EiP Implementation Expenses for the Years Ended December 31, 2021 and 2020 Depreciation and amortization increased by $18.1 million to $101.2 million for 2021 from $83.1 million for 2020. 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 $19.3 million. Partially offsetting this increase was the effect of foreign currency exchange, which decreased depreciation and amortization expense by $1.2 million for 2021, as compared to 2020. EiP implementation expenses decreased by $14.2 million to $75.4 million for 2021 from $89.6 million for 2020. This decrease was primarily attributable to lower costs during 2021 associated with an enterprise-wide program aimed at revenue growth, combined with lower severance costs and lower legal and consulting fees related to our divestiture activity. The decreases in EiP costs were partially offset by the cost associated with the lease buyout for our Kendall property in Chicago, Illinois, and lease termination for our previous Corporate headquarters in 2021. Segment Results We have two reportable segments: Mexico and Peru, as discussed in Overview. For purposes of the following comparison of results discussion, “segment direct costs” represent direct costs incurred by the segment as they are included in Adjusted EBITDA, such that depreciation and amortization expense, loss on impairment of assets, share-based compensation expense and our EiP implementation expenses have been excluded. Organic enrollment is based on average total enrollment for the period. For a further description of our segments, see Overview. The following tables, derived from our consolidated financial statements included elsewhere in this Form 10-K, present selected financial information of our reportable segments: [[GREPCENT_TABLE]] [["(in millions)","","","","","","","% Change"],["","","","","","","","Better/(Worse)"],["For the year ended December 31,","2022","","2021","","2020","","2022 vs. 2021","","2021 vs. 2020"],["Revenues:"],["Mexico","$","613.9","","","$","540.4","","","$","534.6","","","14","%","","1","%"],["Peru","624.2","","","537.1","","","482.9","","","16","%","","11","%"],["Corporate","4.1","","","9.2","","","7.4","","","(55)","%","","24","%"],["Consolidated Total Revenues","$","1,242.3","","","$","1,086.7","","","$","1,024.9","","","14","%","","6","%"],["Adjusted EBITDA:"],["Mexico","$","123.4","","","$","95.8","","","$","112.9","","","29","%","","(15)","%"],["Peru","266.7","","","245.7","","","189.5","","","9","%","","30","%"],["Corporate","(51.2)","","","(88.1)","","","(96.7)","","","42","%","","9","%"],["Consolidated Total Adjusted EBITDA","$","338.9","","","$","253.4","","","$","205.7","","","34","%","","23","%"]] [[/GREPCENT_TABLE]] 41 Mexico Financial Overview Comparison of Mexico Results for the Year Ended December 31, 2022 to the Year Ended December 31, 2021 [[GREPCENT_TABLE]] [["(in millions)","Revenues","","Direct Costs","","Adjusted EBITDA"],["December 31, 2021","$","540.4","","","$","444.6","","","$","95.8"],["Organic enrollment (1)","41.8"],["Product mix, pricing and timing (1)","25.4"],["Organic constant currency","67.2","","","54.8","","","12.4"],["Foreign exchange","6.3","","","4.2","","","2.1"],["Other (2)","\u2014","","","(13.1)","","","13.1"],["December 31, 2022","$","613.9","","","$","490.5","","","$","123.4"]] [[/GREPCENT_TABLE]] (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 $73.5 million, a 14% increase from 2021. •Organic enrollment increased during 2022 by 9%, increasing revenues by $41.8 million. •Revenues from our Mexico segment represented 50% of our consolidated total revenues for both 2022 and 2021. Adjusted EBITDA increased by $27.6 million, a 29% increase from 2021. •The increase in Adjusted EBITDA included a year-over-year benefit from the $13.1 million charge recorded during 2021 related to acquisition-related contingencies. 42 Comparison of Mexico Results for the Year Ended December 31, 2021 to the Year Ended December 31, 2020 [[GREPCENT_TABLE]] [["(in millions)","Revenues","","Direct Costs","","Adjusted EBITDA"],["December 31, 2020","$","534.6","","","$","421.7","","","$","112.9"],["Organic enrollment (1)","\u2014"],["Product mix, pricing and timing (1)","(21.2)"],["Organic constant currency","(21.2)","","","(5.6)","","","(15.6)"],["Foreign exchange","27.0","","","20.6","","","6.4"],["Other (2)","\u2014","","","7.9","","","(7.9)"],["December 31, 2021","$","540.4","","","$","444.6","","","$","95.8"]] [[/GREPCENT_TABLE]] (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 $5.8 million, a 1% increase from 2020. •The Mexican peso strengthened against the USD during 2021 compared to 2020, increasing revenue by $27.0 million. •Organic enrollment during 2021 remained relatively flat compared to 2020. •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 from our Mexico segment represented 50% of our consolidated total revenues for 2021 compared to 53% for 2020. Adjusted EBITDA decreased by $17.1 million, a 15% decrease from 2020. •The decrease in Adjusted EBITDA included a year-over-year effect of a gain of $5.8 million from the sale of land and buildings at one of our campuses in 2020, which is included in Organic constant currency. Peru Financial Overview 43 Comparison of Peru Results for the Year Ended December 31, 2022 to the Year Ended December 31, 2021 [[GREPCENT_TABLE]] [["(in millions)","Revenues","","Direct Costs","","Adjusted EBITDA"],["December 31, 2021","$","537.1","","","$","291.4","","","$","245.7"],["Organic enrollment (1)","70.1"],["Product mix, pricing and timing (1)","5.3"],["Organic constant currency","75.4","","","60.8","","","14.6"],["Foreign exchange","11.7","","","5.3","","","6.4"],["December 31, 2022","$","624.2","","","$","357.5","","","$","266.7"]] [[/GREPCENT_TABLE]] (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 $87.1 million, a 16% increase from 2021. •Organic enrollment increased during 2022 by 14%, increasing revenues by $70.1 million. •Revenues from our Peru segment represented 50% of our consolidated total revenues for both 2022 and 2021. Adjusted EBITDA increased by $21.0 million, a 9% increase from 2021. Comparison of Peru Results for the Year Ended December 31, 2021 to the Year Ended December 31, 2020 [[GREPCENT_TABLE]] [["(in millions)","Revenues","","Direct Costs","","Adjusted EBITDA"],["December 31, 2020","$","482.9","","","$","293.4","","","$","189.5"],["Organic enrollment (1)","75.2"],["Product mix, pricing and timing (1)","40.8"],["Organic constant currency","116.0","","","29.7","","","86.3"],["Foreign exchange","(61.8)","","","(31.6)","","","(30.2)"],["Other (2)","\u2014","","","(0.1)","","","0.1"],["December 31, 2021","$","537.1","","","$","291.4","","","$","245.7"]] [[/GREPCENT_TABLE]] (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 $54.2 million, an 11% increase from 2020. •Organic enrollment increased during 2021 by 16%, increasing revenues by $75.2 million, mainly driven by a robust primary intake cycle during 2021 and increased retention rates. •Revenues from our Peru segment represented 50% of our consolidated total revenues for 2021 compared to 47% for 2020. Adjusted EBITDA increased by $56.2 million, a 30% increase from 2020, primarily driven by higher enrollments. 44 Corporate Corporate revenues primarily include our transition services agreements related to divestitures, which were mostly completed in 2022. Operating results for Corporate for the years ended December 31, 2022, 2021 and 2020 were as follows: [[GREPCENT_TABLE]] [["","","","","","","","% Change"],["","","","","","","","Better/(Worse)"],["(in millions)","2022","","2021","","2020","","2022 vs. 2021","","2021 vs. 2020"],["Revenues","$","4.1","","","$","9.2","","","$","7.4","","","(55)","%","","24","%"],["Expenses","55.3","","","97.3","","","104.1","","","43","%","","7","%"],["Adjusted EBITDA","$","(51.2)","","","$","(88.1)","","","$","(96.7)","","","42","%","","9","%"]] [[/GREPCENT_TABLE]] Comparison of Corporate Results for the Year Ended December 31, 2022 to the Year Ended December 31, 2021 Adjusted EBITDA increased by $36.9 million, a 42% increase from 2021, mainly driven by a decrease in labor costs and other professional fees, related to cost-reduction efforts. Comparison of Corporate Results for the Year Ended December 31, 2021 to the Year Ended December 31, 2020 Adjusted EBITDA increased by $8.6 million, a 9% increase from 2020. •Labor costs and other professional fees decreased expenses by $23.3 million for 2021 compared to 2020, related to cost-reduction efforts. This increase in Adjusted EBITDA was partially offset by other items, which accounted for a decrease in adjusted EBITDA of $14.7 million. 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 for at least the next 12 months from the date of issuance of this report. 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 in Mexico or Peru. We anticipate generating sufficient cash flow from operations in the countries in which 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. As of December 31, 2022, our secondary source of liquidity was cash and cash equivalents of $85.2 million. Our cash accounts are maintained with high-quality financial institutions. The Company also maintains a revolving credit facility (the Senior Secured 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 of October 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. As of December 31, 2022, the Company had borrowed $100.0 million of the $410.0 million of available capacity. In addition to the Senior Secured Credit Facility, our subsidiaries had approximately $63.7 million of available borrowing capacity under lines of credit and short-term borrowing arrangements as of December 31, 2022. If certain conditions are satisfied, the Third Amended and Restated Credit Agreement (the Third A&R Credit Agreement) also provides for incremental revolving and term loan facilities, at the request of the Company, not to exceed (i) the greater of (a) $565.0 million and (b) 100% of the consolidated EBITDA of the Company, plus (ii) 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, plus, (iii) the aggregate amounts of any voluntary repayments of term loans, if any, and aggregate amount of voluntary repayments of revolving credit facilities that are accompanied by a corresponding termination or reduction of revolving credit commitments. 45 Liquidity Restrictions Our liquidity is affected by restricted cash balances, which totaled $8.6 million and $20.8 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, restricted cash consisted of cash equivalents held as assets for a supplemental employment retention agreement for a former executive. Indefinite Reinvestment of Foreign Earnings We earn a significant portion of our income from subsidiaries located in countries outside the United States. As of December 31, 2022, $77.3 million of our total $85.2 million of cash and cash equivalents were held by foreign subsidiaries. As of December 31, 2021, $272.6 million of our total $324.8 million of cash and cash equivalents were held by foreign subsidiaries. As part of our business strategies, we have determined that the undistributed historical earnings of our foreign operations for which we have not already recorded taxes will be deemed indefinitely reinvested outside of the United States. 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. Based on our analysis, we believe we have the ability to indefinitely reinvest our historical foreign earnings. If our expectations change based on future developments such that some or all of the undistributed earnings of our foreign subsidiaries may be remitted to the United States in the foreseeable future, we will be required to recognize deferred tax expense and liabilities and pay additional taxes on any amounts that we are unable to repatriate in a tax-free manner. Liquidity Requirements Our short-term liquidity requirements include: funding for debt service (including finance leases); operating lease obligations; 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 Our debt obligations consisted of $100.0 million of borrowings under the Senior Secured Credit Facility and $86.0 million of other debt as of December 31, 2022. In addition, our finance lease obligations and sale-leaseback financings were $48.2 million. Senior Secured Credit Facility As of December 31, 2022 and 2021, there was $100.0 million and no balance outstanding under our Senior Secured Credit Facility, respectively. During the fourth quarter of 2022, the Company borrowed on our Senior Secured Credit Facility primarily to fund the repurchase of shares in connection with the secondary offering that the Company completed in November 2022. For more detail on the secondary offering, see Note 11, Share-based Compensation and Equity, in our consolidated financial statements included elsewhere in this Form 10-K. Other Debt Other debt includes lines of credit and short-term borrowing arrangements of subsidiaries and notes payable, the significant components of which are described below. As of December 31, 2022 and 2021, the aggregate outstanding balances on our lines of credit were $13.8 million and $10.1 million, respectively. In December 2017, one of our subsidiaries in 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 in June 2024 and carries a variable interest rate, plus an applicable margin, which is established based on the ratio of debt to EBITDA, as defined in the agreement (12.26% as of December 31, 2022). The current quarterly payments on the loan total MXN 72.3 million ($3.7 million at December 31, 2022) 46 and increase over the remaining term of the loan to MXN 76.5 million ($3.9 million at December 31, 2022), with a balloon payment of MXN 425.0 million ($21.9 million at December 31, 2022) due at maturity. As of December 31, 2022 and 2021, the outstanding balance of this loan was $41.4 million and $52.5 million, respectively. In December 2017, one of our subsidiaries in Peru entered into an agreement to borrow PEN 247.5 million (approximately $76.0 million at the agreement date). The loan bears interest at a fixed rate of 6.62% per annum and matures in December 2023. Over the remaining term of the loan, quarterly payments of PEN 14.4 million ($3.8 million at December 31, 2022) are due. As of December 31, 2022 and 2021, this loan had a balance of $15.1 million and $29.0 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 that applies only to the revolving credit facility (a leverage ratio covenant), as defined in the Third A&R Credit Agreement, unless certain conditions are satisfied. As of December 31, 2022, 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 ending December 31, 2019 and thereafter. In addition, indebtedness at some of our locations contain financial maintenance covenants. We were in compliance with these covenants as of December 31, 2022. Leases We conduct a significant portion of our operations from leased facilities, including many of our higher education facilities and other office locations. As discussed in Note 9, 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 of December 31, 2022 and 2021, the present value of operating lease liabilities was $415.9 million and $415.3 million, respectively. Based on the leases outstanding at December 31, 2022, $83.6 million of minimum lease payments will be required during 2023. Capital Expenditures Capital expenditures primarily consist of purchases of property and equipment. 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; and (3) information technology to increase efficiency and controls. 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 $53.1 million, $56.3 million and $89.2 million during 2022, 2021 and 2020, respectively. The 6% decrease in capital expenditures for 2022 compared to 2021 was primarily due to the year-over-year effect of divestitures completed in 2021 combined with lower spending in Peru and Corporate, partially offset by higher spending in health science programs in Mexico. The 37% decrease in capital expenditures for 2021 compared to 2020 was primarily due to the completed divestitures. Cash Flows In the consolidated statements of cash flows, the changes in operating assets and liabilities are presented excluding the effects of exchange rate changes and reclassifications, as these effects do not represent operating cash flows. Accordingly, the amounts in the consolidated statements of cash flows do not agree with the changes of the operating assets and liabilities as presented in the consolidated balance sheets. The effects of exchange rate changes on cash are presented separately in the consolidated statements of cash flows. 47 The following table summarizes our cash flows from operating, investing, and financing activities for each of the past three fiscal years: [[GREPCENT_TABLE]] [["(in millions)","2022","","2021","","2020"],["Cash provided by (used in):"],["Operating activities","$","178.2","","","$","(156.1)","","","$","259.6"],["Investing activities","30.3","","","2,044.2","","","587.4"],["Financing activities","(461.6)","","","(2,683.2)","","","(272.7)"],["Effects of exchange rate changes on cash","1.2","","","(14.7)","","","(0.5)"],["Change in cash included in current assets held for sale","\u2014","","","288.1","","","195.8"],["Net change in cash and cash equivalents and restricted cash","$","(251.8)","","","$","(521.7)","","","$","769.5"]] [[/GREPCENT_TABLE]] Comparison of Cash Flows for the Year Ended December 31, 2022 to the Year Ended December 31, 2021 Operating activities Cash flows from operating activities changed by $334.3 million to a cash inflow of $178.2 million for 2022, compared to a cash outflow of $(156.1) million for 2021. This increase in operating cash flows was attributable to: (1) increased operating income combined with the net effect of changes in operating assets and liabilities, which increased operating cash by $143.8 million compared to 2021; (2) lower cash paid for taxes of $97.3 million, from $251.1 million in 2021 to $153.8 million in 2022, a decrease primarily driven by the payment of estimated taxes related to the sale of Walden University in 2021 and payment of withholding taxes for intercompany loans that were capitalized during 2021; (3) the year-over-year effect of $46.8 million of payments for lease termination agreements in 2021; and (4) a decrease in cash paid for interest of $46.4 million, from $63.2 million in 2021 to $16.8 million in 2022, attributable to lower average debt balances. Investing activities Cash provided by investing activities decreased by $2,013.9 million to $30.3 million for 2022 from $2,044.2 million in 2021. This decrease was primarily attributable to lower cash receipts from the sales of discontinued operations of $2,067.4 million, from $2,150.8 million, net, in 2021 (primarily for the sale of Walden University, our operations in Honduras and Brazil, the receipt of the note receivable related to the 2020 divestiture of our Chilean operations, and the receipt of a portion of the purchase prices that were withheld in connection to the 2018 sale of our China operations and the 2020 sale of our Malaysia operations) to $83.4 million, net, in 2022 (primarily related to the receipt of the escrow receivable related the 2021 sale of Walden University, and the collection of certain receivables from the sale of our Brazilian operations). This decrease in investing cash flows was partially offset by the year-over-year effect of $50.3 million of payments made in 2021 for derivative instruments related to foreign exchange swap agreements associated with the sale of our Brazil operations. Additionally, cash used for capital expenditures decreased by $3.2 million compared to 2021. Financing activities Cash used in financing activities decreased by $2,221.6 million to $461.6 million for 2022 from $2,683.2 million for 2021. This decrease in financing cash outflows was attributable to: (1) lower cash distributions to shareholders of $1,121.7 million, from $1,374.9 million in 2021 following the sale of Walden University, to $253.2 million in 2022; (2) net proceeds from issuance of long-term debt in 2022 as compared to net payments of long-term debt in 2021, primarily related to the repayment in full of the balance outstanding under the Senior Notes due 2025, for a change of $958.1 million; (3) lower year-over-year payments to repurchase shares of our common stock of $98.3 million; (4) the year-over-year effect of $33.0 million in payments made in 2021 for call premiums associated with the redemption of the Senior Notes due 2025; and (5) higher proceeds from the exercises of common stock options of $9.8 million during 2022, as compared to 2021. Other items accounted for the remaining difference of $0.7 million. Comparison of Cash Flows for the Year Ended December 31, 2021 to the Year Ended December 31, 2020 Operating activities Cash flows from operating activities changed by $415.7 million to cash outflow of $(156.1) million for 2021, compared to a cash inflow $259.6 million for 2020. This decrease in operating cash was primarily attributable to: (1) changes in working capital and divestitures of subsidiaries that contributed positive operating cash flows during 2020, which accounted for $266.6 48 million of the decrease; (2) higher cash paid for taxes of $159.7 million, from $91.4 million in 2020 to $251.1 million in 2021, primarily due to the payment of estimated taxes related to the sale of Walden University in 2021 and payment of withholding taxes for intercompany loans that were capitalized during 2021; and (3) payments of $46.8 million for lease termination agreements in 2021. These decreases in operating cash flow were partially offset by a decrease in cash paid for interest of $57.4 million, prior to interest income, from $120.6 million in 2020 to $63.2 million in 2021, attributable to lower average debt balances. Investing activities Cash provided by investing activities increased by $1,456.8 million to $2,044.2 million for 2021 from $587.4 million in 2020. This increase was primarily attributable to higher cash receipts from the sales of discontinued operations of $1,474.2 million, from $676.6 million in 2020 (for the net effect of the sales of NSAD and our operations in Costa 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 our China operations) to $2,150.8 million, net, in 2021 (primarily for the sale of Walden University, our operations in Honduras and Brazil, the receipt of the note receivable related to the 2020 divestiture of our Chilean operations, and the receipt of a portion of the purchase prices that were withheld in connection to the 2018 sale of our China operations and the 2020 sale of our Malaysia operations). In addition, cash used for capital expenditures decreased by $32.9 million compared to 2020. These increases in investing cash were partially offset by payments of $50.3 million for derivative instruments related to foreign exchange swap agreements associated with the sale of our Brazil operations. Financing activities Cash used in financing activities increased by $2,410.5 million to $2,683.2 million for 2021 from $272.7 million for 2020. This increase in financing cash outflows was primarily attributable to: (1) payments of special cash distributions to shareholders in 2021 of $1,374.9 million following the sale of Walden University; (2) higher net payments of long-term debt in 2021 as compared to 2020 of $718.6 million, primarily related to the 2021 repayment in full of the balance outstanding under the Senior Notes due 2025; (3) higher payments in 2021 of $281.0 million to repurchase shares of our common stock under our stock repurchase program; (4) higher payments of call premiums and debt issuance costs of $32.2 million, mainly the call premiums associated with the redemption of the Senior Notes due 2025 during 2021; and (5) lower proceeds from stock option exercises of $22.3 million during 2021, as compared to 2020. These increases in financing cash outflows were partially offset by the year-over-year effect of a $13.7 million payment in 2020 to the minority owner of our Malaysia operations in connection with the sale of those operations and $5.7 million of deferred purchase price payments in 2020 related to acquisitions. Other items accounted for the remaining difference of $0.9 million. 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. Goodwill and Indefinite-lived Intangible Assets We perform annual impairment tests of indefinite-lived intangible assets, including goodwill and tradenames, as of October 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 the Chile 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. 49 Goodwill On January 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. Our valuation approach to estimate the fair value of a reporting unit has historically utilized 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. If we perform a quantitative impairment test, 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. We have determined that neither of our reporting units with material goodwill were at risk of failing the goodwill impairment test as of December 31, 2022. We completed our initial public offering (IPO) on February 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. In 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 remaining Laureate tradename asset no longer had an indefinite life. 50 During the first quarter of 2021, the Company decided that, during 2021, it would wind down certain support functions related to the Laureate network and would no longer invest in and support the Laureate tradename, a finite-lived intangible asset, beyond 2021. As a result, the Company tested the asset for impairment and estimated the fair value of the tradename asset using the relief-from-royalty method, based on the projected revenues for each business over the estimated remaining useful life of the asset. As a result of the impairment test, the Company concluded that the estimated fair value of the Laureate tradename was less than its carrying value by approximately $51.4 million and recorded an impairment charge for that amount. The remaining carrying value of the tradename asset was fully amortized as of December 31, 2021. Long-Lived Assets We evaluate our long-lived assets, including property and equipment, 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 change in business plans; or •an adverse change in anticipated cash flows. 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 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. See Note 7, Goodwill and Other Intangible Assets, in our consolidated financial statements included elsewhere in this Form 10-K for further details on impairments. 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 13, Income Taxes, in our consolidated financial statements included elsewhere in this Form 10-K for details of our deferred taxes and tax contingencies. 51 Indefinite Reinvestment of Foreign Earnings We earn substantially all of our income from subsidiaries located in countries outside the United States. Deferred tax liabilities have not been recognized for undistributed historical foreign earnings because management believes that the historical retained earnings will be indefinitely reinvested outside the United States under the Company's planned tax-neutral methods. 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, such that some or all of the undistributed earnings of our foreign subsidiaries may be remitted to the United States in the foreseeable future, we will be required to recognize deferred tax expense and liabilities on any amounts that we are unable to repatriate in a tax-free manner. Revenue Recognition Our revenues primarily consist of tuition and educational service revenues. We also generate other revenues from student 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 and waivers. 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. 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 common stock on the grant date. Because we have only been publicly traded since February 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 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 11, 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.