Laureate Education, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless noted otherwise, amounts are in U.S. dollars, millions. Results are unaudited and primarily reflect continuing operations.
Business context and reporting period
Laureate operates an international higher-education network, reporting 834,500 students at 29 institutions in nine countries as of June 30. In response to COVID-19, campus-based institutions shifted temporarily to online instruction. The company continued to explore strategic alternatives for its businesses and pursue previously announced divestitures.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $791.7 | $992.4 | $1,320.2 | $1,593.5 |
| Operating income (loss) | $(254.8) | $217.2 | $(371.9) | $125.1 |
| Adjusted EBITDA | $259.0 | $298.8 | $222.2 | $269.2 |
| Net income (loss) attributable to Laureate | $(307.8) | $781.6 | $(208.2) | $972.8 |
| Basic and diluted EPS | $(1.47) | $3.48 | $(1.00) | $4.33 |
| Operating cash flow | Not separately provided for Q2 | $61.4 | $32.5 |
Q2 revenue fell 20% year over year; first-half revenue declined 17%. Management attributed the first-half reduction mainly to foreign exchange ($154.5 million), product mix, pricing and academic-calendar timing ($86.8 million), and lower organic enrollment, partly offset by growth in Rest of World. Q2 revenue was also affected by currency ($113.9 million), calendar and pricing effects, and lower enrollment. Management said COVID-related calendar changes deferred approximately $40 million of Q2 revenue and $80 million for the first half to the second half of 2020.
Q2 operating results included $445.1 million of impairment charges; first-half charges were $448.9 million. These included approximately $418 million for Chilean assets and $27.1 million to write off Brazil E2G software assets, plus a $3.8 million first-quarter impairment. Excluding specified items, Adjusted EBITDA declined 13% in Q2 and 17% in the first half. Adjusted EBITDA is a non-GAAP measure. The 2019 comparisons also included substantial gains on discontinued-operation sales: $641.5 million in Q2 and $889.5 million in the first half.
The first-half income tax benefit was $227.6 million, primarily reflecting a discrete benefit of approximately $222 million from a tax-basis step-up of intellectual property in the Netherlands. First-half interest expense, net of interest income, was $66.2 million, down from $89.7 million.
Financial position, liquidity and debt
- Cash and cash equivalents were $629.6 million at June 30, 2020, versus $339.6 million at year-end 2019. Restricted cash was an additional $185.7 million and is not generally available for operations. Some cash is held by foreign subsidiaries or consolidated VIEs and may be restricted in use.
- Total debt and finance leases were $1.651 billion, compared with $1.445 billion at year-end. This included $409.1 million drawn on the $410 million revolving facility and $800 million of 8.25% senior notes due 2025. The revolver is stated to mature in October 2024. The company fully drew it in March to preserve flexibility during the pandemic.
- Current debt and finance lease obligations were $211.3 million; long-term debt and finance leases, net of current portion, were $1.380 billion. The company reported compliance with its debt and other financial covenants at June 30.
- First-half operating cash flow was $61.4 million; investing cash outflow was $35.0 million and financing cash inflow was $263.4 million. The financing inflow reflected the revolver draw, partly offset by debt repayments and $29.2 million of share repurchases. Cash, cash equivalents and restricted cash increased $288.7 million over the period.
Material changes, outlook and risks
- Adjusted EBITDA decreased across Brazil, Mexico, Andean and Online & Partnerships in the first half; Rest of World increased to $24.5 million from $8.8 million. Andean remained the largest segment by revenue, but its first-half Adjusted EBITDA declined 36% to $98.5 million.
- Management stated that available cash and operating cash flow should meet current requirements for at least 12 months from issuance of the report. It also described expense controls, review of capital spending, and landlord discussions on rent relief. This is not a guarantee; management warned that a prolonged disruption could reduce operating cash flow and access to liquidity, potentially requiring additional financing.
- Malaysia sale agreement: stated purchase price of $140 million, subject to customary conditions including regulatory approval. Australia and New Zealand sale agreement was signed July 29, after quarter-end, for $642.7 million subject to adjustments and approvals; closing was expected by Q1 2021. Neither transaction was completed as of the filing date.
- COVID-19 effects on enrollment, tuition pricing, collections and reopening schedules remained uncertain. Potential future impairments were identified as a risk. Chilean regulatory and political uncertainty, including possible constitutional change, contributed to the Chile impairment; the company also cited potential adverse effects from student-relief legislation and regulatory actions in operating countries.
- Potential obligations include Chilean student-loan guarantees with a maximum exposure of approximately $457 million and a recorded liability of $38.0 million. The company estimated up to approximately $41 million of reasonably possible unrecorded losses for certain contingencies in Brazil. It stated that it did not expect ordinary-course legal matters to have a material financial impact.
Important facts for investors to verify
- Whether enrollment, tuition collections and academic calendars recover as assumed, and whether deferred revenue is recognized in the second half of 2020.
- The cash-flow and liquidity impact of the fully drawn revolver, restricted cash, foreign-held cash and upcoming debt and lease obligations.
- Whether the Malaysia and Australia/New Zealand sales close on stated terms, and how proceeds, adjustments, taxes and transaction costs affect debt and remaining operations.
- Whether Chile’s regulatory environment, valuation assumptions and potential accumulated currency-translation losses lead to further impairment or sale-related losses. Chile had approximately $249 million of accumulated translation losses at June 30.
- The sustainability of Adjusted EBITDA amid lower revenue, cost reductions and ongoing EiP expenses, and the impact of items excluded from this non-GAAP measure.