Business Context and Reporting Period
Company: Laureate Education, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: Laureate operates a global network of accredited campus-based and online higher education institutions serving approximately 228,500 students. Operations are divided into three segments: Campus Based - Latin America, Campus Based - Europe, and Laureate Online Education. The company serves primarily 18-24 year olds in campus segments and working adults in the online segment.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended June 30, 2006 |
Three Months Ended June 30, 2005 |
Six Months Ended June 30, 2006 |
Six Months Ended June 30, 2005 |
|---|---|---|---|---|
| Revenues | $303,119 | $226,969 | $538,229 | $405,646 |
| Operating Income | $56,981 | $44,610 | $57,008 | $46,344 |
| Net Income | $37,973 | $21,562 | $37,298 | $23,502 |
| Diluted EPS (Net Income) | $0.72 | $0.42 | $0.71 | $0.45 |
| Cash from Operations | N/A | N/A | $95,827 | $69,047 |
| Cash and Equivalents | $113,859 | $105,106 | $113,859 | $105,106 |
| Total Debt (Current + Long-term) | $174,170 | $163,041 | $174,170 | $163,041 |
| Effective Tax Rate | 18.0% | 11.2% | 18.4% | 11.2% |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 34% ($76.2 million) for the quarter and 33% ($132.6 million) for the six-month period compared to the prior year. Growth was driven by enrollment increases, acquisitions (specifically UNITEC and UAM in Latin America), and tuition price increases.
- Segment Performance:
- Latin America: Revenue increased 45% (quarter) and 46% (six-months), driven by 14.4% enrollment growth and acquisitions.
- Europe: Revenue increased 14% (quarter) and 10% (six-months), aided by the acquisition of Cyprus College.
- Online Education: Revenue increased 21% (quarter) and 27% (six-months), with improved margins due to scale efficiencies at Walden.
- Unusual Items:
- Gain on Sale: A one-time non-operating gain of $9.322 million was recorded from the sale of Chancery Software, Ltd.
- Discontinued Operations: The company recorded a loss from discontinued operations of $1.504 million (quarter) and $1.673 million (six-months), primarily related to the sale of IFG Langues and WSI.
- Accounting Changes: The company adopted SFAS No. 123R (Share-Based Payment) effective January 1, 2006, resulting in increased equity-based compensation expense. Additionally, revenue recognition for campus-based tuition was changed to a weekly straight-line basis, with prior periods restated.
Guidance, Outlook, Risks, and Contingencies
- Liquidity and Capital Resources: The company anticipates cash flow from operations and existing credit facilities will meet recurring needs. However, it plans to enter a new $250 million Revolving Credit facility to replace its existing $120 million facility and fund contingent consideration obligations.
- Contingent Consideration: Significant potential cash outflows exist for earnouts related to acquisitions:
- UDLA: Estimated earnout of $81.7 million (negotiating) and $18.5 million.
- Laureate Online Education BV: Up to $10 million contingent on EBITDA.
- Tax Contingencies:
- IRS Audit (2000): IRS claims additional taxes of ~$54.6 million plus penalties regarding the sale of Prometric. The company contests this and has not accrued a loss.
- IRS Notice of Deficiency (1997): Disagreement over a break-up fee exclusion. Company paid $8.1 million in assessment and $6.7 million in interest while appealing.
- Italian VAT (WSI): Company deposited ~$3 million regarding a VAT assessment on the former WSI business; outcome remains uncertain.
- Market Risks: Approximately 82% of revenue is generated outside the U.S. A hypothetical 10% adverse change in foreign currency rates would decrease operating income by $9.4 million for the six-month period.
- Internal Controls: Management remediated a material weakness regarding income tax accounting controls identified in the prior year.
Investor Verification Checklist
- Contingent Earnouts: Verify the final negotiated amount for the UDLA earnout, currently estimated at $81.7 million, as this represents a significant potential liability.
- Tax Disputes: Monitor the status of the IRS audit regarding the 2000 Prometric sale ($54.6 million claim) and the Italian VAT dispute, as no accruals have been made for potential losses.
- Debt Covenants: Confirm compliance with the new leverage ratio covenants (3.5x EBITDA) under the proposed $250 million credit facility.
- Revenue Recognition: Review the impact of the change to weekly straight-line revenue recognition on future quarterly comparability.
- Discontinued Operations: Track the final closing of the IFG Langues sale and any remaining liabilities associated with the WSI divestiture.